The Rate of Profit and The Problem of Stagnant

Historical Materialism 17 (2009) 66100
brill.nl/hima
The Rate of Prot and the Problem of Stagnant Investment: A Structural Analysis of Barriers to Accumulation and the Spectre of Protracted Crisis*
Karl Beitel
American Federation of Teachers kbeitel@earthlink.net
Abstract This paper situates the subprime crisis in the context of the performance of the American economy over the last twenty-ve years. The restructuring of the US economy is briey reviewed, followed by an examination of some of the contradictions of the neoliberal model. Particular emphasis is placed on understanding the reasons behind stagnant investment, and how the US nance-led accumulation-rgime has become dependent upon, and threatened by, credit-creation delinked from the nancing of xed-capital formation. I argue that while the defeat of the remnants of the New-Deal/Civil-Rights liberal-democratic coalition has provided the political context for the bold re-assertion of the prerogatives of capitalist owners, the neoliberal model has not provided a path out of problems of stagnation and growing debtdependency that presently plague the US (and global) economy. Further, I argue that evidence suggests that the post-1982 restoration of protability that underpinned the relative improvement of US economic performance has peaked, and that compelling historical and theoretical reasons exist to expect that the prot-rate will decline in the coming decade. This will introduce additional stresses on the current debt-structure of the US economy, triggering a period of prolonged crisis and economic dislocation. The conclusion is that the US economy faces the spectre of a protracted crisis associated with the reassertion of the falling rate of prot. Keywords nancial crisis, subprime crisis, Marxist theory of the prot rate, long waves, nancialisation
* The author would like to thank anonymous reviewers for their helpful comments on an earlier version of this paper. The views expressed here are those of the author, and do not reect the positions of the American Federation of Teachers.
Koninklijke Brill NV, Leiden, 2009 DOI: 10.1163/146544609X12469428108501
K. Beitel / Historical Materialism 17 (2009) 66100
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Introduction This essay situates the recent nancial crisis in a review of the performance of the American economy over the last twenty-ve years. Factors governing movements in the rate of prot are reviewed, followed by an examination of some of the contradictions of the US neoliberal model that developed over the 19822006 period. Particular emphasis is placed on understanding how the nance-led accumulation-rgime is both dependent upon, and potentially threatened by, the enormous growth of debt that has characterised the developmental trajectory of US capitalism over the last three decades. The assessment oered is mixed. It is impossible to deny that the years since 1982 have seen signicant improvement in US economic performance along a range of key indicators. Productivity-growth has been restored to levels approaching those of the Golden Age of the post-WWII period. Technological innovation and new product-applications have re-established US leadership or at very least parity with other major capitalist economies in cutting-edge industrial sectors such as computing and informationtechnology. The vast network of US multinationals continues to provide the structural underpinnings of the dollars role as the worlds pre-eminent international reserve-currency, and Wall Street still reigns supreme in the world of international nance. Domestically, US capital today presides over a largely quiescent and demobilised working class. Union-density is at its lowest rate in over seventy years, and few restrictions exist upon capitals ability to hire and re workers at will. Americas exible labour-markets are the envy of many European business-leaders, and are regularly touted, however incorrectly, as the reason for higher rates of US productivity-growth over the last decade. Nor has the massive US trade-decit as yet induced a crisis in the dollar, due to the sheer size of the American economy and the role of the US household as global consumer of last resort. Most signicantly, the US prot-rate underwent a steady and signicant improvement that began in 1982 and continued unabated through 1997. This indicates that US capital was able to partially overcome the supply-side barriers to protability that undermined the coherence of the Keynesian-Fordist rgime. At the same time, the improvement in protability has not translated into a corollary increase in the level of private investment-demand. In the absence of the restoration of a higher rate of accumulation, insuring an adequate rate of growth of eective demand has become dependent on borrowing by the governmental and household sectors to nance current consumption. As a result, debt-obligations have risen at a rate that far exceeds the growth of real
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income or the rate of accumulation. This was the source of the structural vulnerability that erupted in the subprime crisis. The short-to-medium term fate of the US and global economy is bound to the ability of the monetary authorities to engineer a partial unwinding of over-leveraged investmentpositions and controlled destruction of nancial claims. Over the longer term, I argue that rate of prot is the critical variable regulating systemperformance. Reduced to its essentials, the argument is that the ability to manage the crisis depends upon maintaining a stable or rising rate of return on tangible capital-investments. The problem is that the favourable protrate conjuncture of the last two decades is unlikely to persist. The conclusion is that there are reasonable grounds to suppose that the US economy is on the precipice of a protracted crisis taking the form of nancial-asset deation (in real terms) and, over the longer term, a reassertion of a falling rate of prot and spiralling ination. Falling protability will, in turn, require a prolonged period of debt and equity-deation to correct the structural imbalances that have built up over the course of the prior prot-rate upswing, with an uncertain long-term outcome. The paper is organised as follows. In the rst section, I review historical data on movements in the rate of prot since 1947 to place the post-1982 recovery in some historical perspective. I discuss and subject to critique the work of Robert Brenner in order to situate and distinguish the analysis that follows. The prot-rate is decomposed and its various determining factors are analysed to isolate various causal eects that explain periods of falling and rising protability in the post-WWII period. I then turn to a discussion of some of the internal contradictions of this debt-fuelled rgime. The paper concludes with some comments on the future of neoliberalism and why I believe a renewed period of crisis is inevitable given US capitalisms current trajectory.
Explaining the prot recovery Figure 1 shows the rate of prot in the US economy over the period 1947 2007. Following standard practice, the rate is calculated by subtracting total wages and salary-compensation from net national income and then dividing the dierence by the net capital-stock valued at replacement-cost. Between 1947 and 1959 the prot-rate shows evidence of a slight downward trend. Protability then boomed between 1960 and 1966, driven in part by US entry into the Vietnam War in what would prove to be the nal hurrah of the Keynesian-Fordist era. In 1967, the rate of prot entered a period of decline
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Figure 1. US rate of prot, 19972007

0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0
Source: National Income and Product Accounts, Table 1.1.5, Table 6.3; Net Fixed Assets, Table 4.1
that, by the early 1980s, had plunged the US and global economy into their deepest economic recession since the Great Depression. Contrary to expectations, however, the contraction of 19802 marked a turning point in the fortunes of US capital. The prot-rate rose sharply between 1982 and 1986, and would continue to improve through 1995. The prot-rate fell between 1996 and 2000, largely due to a rise in the wage-share of national income brought about by low rates of unemployment during the dot.com boom. This decline has been reversed in the years since, although there is evidence of a renewed reassertion of a downward trend. I will return to this point at some length below. Much recent debate over the causes of the protability-crisis and the subsequent performance of the US economy in the post-1979 period has been framed by the publication of Robert Brenners 1998 book-length essay The Economics of Global Turbulence in the New Left Review.1 Brenners work spurred a welcome renewal of interest in the macro-dynamics of accumulation and crisis amongst radical political economists, despite the signicant theoretical and empirical problems with his account. Given the extensive response his work
1. Brenner 1998.
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has received, I will here summarise Brenners account to draw out the contrast with the approach developed below that, despite some supercial points of overlap, is founded on dierent methodical and theoretical presuppositions. Reduced to its essentials, Brenners argument is that the decline in the rate of prot that began in 1967 was the result of the entry of newer, lowercost producers that placed a downward pressure on prices and hence the prots of established rms particularly those in the core-industries of the US Fordist economy. As Europe and Japan recovered from WWII and began to rebuild their productive base, US producers in particular found themselves competing against lower-cost and, in many cases, more technologically ecient competitors. Because these new entrants into the global manufacturing markets set output-prices at levels that would allow them to realise the prevailing average rate of prot, this lowered the prot-margins of older, less ecient rms. However, rather than shutting down these costlier, less technologically ecient plants, US rms and older producers in Europe kept existing plants in operation. Brenner suggests several reasons for this refusal to exit from existing branches of production in which rms had large capital-investments the development of sector-specic technological expertise, the formation of extensive networks of businessrelations and customer-contacts that could not be transferred to new branches of production, the accumulation of goodwill and reputation, and the fact that rms had already recovered the value of older stocks through depreciation. This last factor is highly signicant in Brenners account. It meant that, even as prices fell, producers that had already depreciated the value of xed stocks could continue to realise at least the average rate of prot on their circulating variable and constant capital. For all these reasons, older capitals refused to readily withdraw from existing branches of production. The result was a condition of too much entry and not enough exit resulting in overcompetition and overcapacity that placed a sustained downward pressure on prices and prots. The protability-crisis is thus explained as the result of excessive competition and a failure of the market to eectively co-ordinate and orchestrate sucient exit from overinvested sectors leading to a fall in the rate of prot. Lower rates of prot in turn discouraged new investment. This lowered the rate of productivity-growth and placed additional pressures on rms prot-margins. The eventual result was a generalised crisis characterised by plummeting investment, rising unemployment, and pervasive overcapacity and overproduction throughout the productive circuit. In subsequent writings, Brenner has sought (unsuccessfully in my view) to reconcile his 1998 account of the fall in the (global) rate of prot with the
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apparent paradox of the post-1982 recovery in the prot-rate that co-exists with a declining trend in the rate of net investment. Without making any overt declaration to this eect, Brenner essentially shifts from a supply-side approach to a demand-based explanation rooted in an insucient level of eective demand. In various contributions, Brenner locates the origins of persistent stagnation in scal monetary policies that have failed to provide sucient economic stimulus, wage-repression leading to a chronic problem of insucient growth of demand, and still ongoing problems of overcapacity in global manufacturing that acts as a barrier to investment although this latter relationship is never fully explained, but apparently is due to the persistence of insucient exit that continues to result in overinvestment.2 Brenners work has undergone extensive critique.3 As such, I will not here rehearse the full litany of aws pointed out by his critics but will conne myself to issues most relevant to distinguishing his account from the analysis that follows. For one, Brenner asserts that lower-cost entrants set prices at levels that will earn them the prevailing average rate of prot. This is a curious assertion, given that the entire motive driving cost-reducing technological innovation is to allow those deploying the new production-methods to achieve a higher rate of prot by undercutting their less ecient rivals. To motivate his argument, Brenner must impose the assumption that innovating rms set prices at levels that realise the prevailing average prot-rate. At no point does Brenner demonstrate that this assumption corresponds to the actual pricing behaviour of rms. More problematic still, as Zacharias has shown, technological change along lines indicated by Benner can just as easily cause the prot-rate to rise. It all depends on the level at which innovating rms set prices.4 Further, if Brenner was correct in his assumptions regarding the pricing practices of rms, it is easy to show that, for a given rate of cost-reducing technological change, the rate of prot would converge over time to a constant level, and that the faster the rate of cost-reducing technical change, the lower would be the prot-rate towards which the system eventually converges. Brenners analytical frame thus encounters problems in explaining how periods of accelerated technical change such as what occurred after the Volcker shock of the early 1980s can correspond to a rising prot-rate.
2. Brenner 2000, 2001, 2004. 3. Of particular note, see Shaikh 1999; Dumnil and Levy 2002b; Fine, Lapavitas, and Milonakis 1999; Freeman 1999; and Zacharias 2002. 4. Zacharias 2002. If rms lower prices, these will reduce the cost of inputs; hence the eect on the overall aggregate rate of prot is unclear.
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This explains the highly ad hoc and non-systemic character of Brenners subsequent accounts of the post-1982 period. Second, there are signicant problems with the timing in Brenners linking of intensied international competition to downward pressure on prices and prots. As Brenner notes, increased international pressure to expand markets, by placing pressure on output prices, should lead to either a fall in prices or, at the very least, should cause the rate of annual ination to decline (deation). This follows directly from Brenners assertion that the entry of lower-cost producers will undercut the pricing power of established rms and impose a downward pressure on prots via falling prices. The problem is that the decline in the prot-rate after 1967 is correlated with a higher, not lower, ination-rate. The only way the phenomenon of higher ination can be reconciled with Brenners formulation is by reference to external non-endogenous shocks such as the OPEC oil-price embargo and excessively lax scal and monetary policy that increased nominal demand faster than the growth of real output. While oil-prices where certainly a factor in higher ination, empirical research suggests that less than 15 per cent of the rise in prices observed in the 1970s can be directly attributed to the OPEC embargo. Nor does the timing of the downturn in the prot-rate (19657) correspond to the point at which international competition in manufacturing began to ramp up, as most of the major inroads into US markets by foreign rms occurred after 1970. Taken in tandem, problems concerning timing and the inability to explain the inationary form assumed by the crisis raise serious questions about the validity of an approach that explains falling prot-rates as an outcome of a competition-induced fall in prices. Interestingly, none of Brenners critics have made much of this point, which seems critical to me: namely, that the crisis did not manifest itself in the form a deationary spiral, but, rather, took the form of price-wage ination.5 Third, Brenners horizontalist account, that explains falling protability as the outcome of excessive competition, cannot oer a compelling explanation of why the rate of decline was ubiquitous across all economic sectors, not just in manufacturing or sectors directly exposed for intensied international competition. Brenner himself acknowledges the problem, particularly in the case of non-manufacturing rms and services. Given that these rms did not experience intensied international price- and prot5. This is not a peripheral issue. Any account of the crisis must be able to account for both the underlying origins of the fall in the rate of prot, and the phenomenal form through which this decline is manifest. Why falling prots corresponded with a rise in the ination rate is a central fact that any account of the 196782 crisis must explain.
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competition, and given the presumed fall in prices of manufactured goods relative to services, this would imply that the prot-rate in these sectors would be rising. To get around this problem, and reconcile his manufacturingcentred account with the generalised nature of the fall in the prot-rate, Brenner ends up surreptitiously re-introducing the very wage-squeeze argument that he had previously gone to great lengths to debunk for example, by claiming that wages rose faster than prices in many nonmanufacturing sectors, thus placing a wage-induced squeeze on prots.6 Problems are compounded by empirical work by Dumnil and Lvy that has shown that, once certain extremely capital-intensive sectors are excluded from the calculation (mining, utilities, and heavy transportation), the decline of the rate of prot in the manufacturing and non-manufacturing sectors is roughly equivalent.7 This undermines Brenners claim that overcapacity and excess-competition (due to insucient exit) is at the root of the fall in the prot-rate.8 Finally, Brenners reliance on overcompetition and lack of capital-exit cannot readily explain persistent stagnation in the rate of net investment. Once older capitals were retired following the wave of industrial shakeouts that occurred in the years 19825, pressures on prices and prots due to excess-competition and overproduction should have worked their way through the industrial system. Hence, the problem of overcapacity and stagnation should be a transitory phenomenon in Brenners framework. Yet, as I show below, and as Brenner himself notes, declining rates of net investment have persisted despite the post-1982 recovery in the prot-rate. Given his inability to reconcile persistent investment-stagnation with his account of the crisis of the 196582 period, Brenners subsequent writings treat the lack of adequate investment-outlets as a problem of insucient levels of eective demand. As such, his post-1998 contributions veer towards a left-Keynesian position that ascribes sub-par investment and growth to the mismatch between the growth of wages relative to the increase
6. Shaikh 1999. 7. Dumnil and Lvy 2002b. 8. Much of Brenners problem seems to derive from his inability to see that one cannot explain movements in the prot-rate through the pricing behaviour of individual rms. Priceformation is governed, over the long term, by underlying factors such as the output/capital ratio and the prot-share that regulate the aggregate rate of prot. Pricing practices of rms will reect movements of these underlying determinants of the prot-rate, and hence cannot be used to develop a coherent account of the determinants of longer-term changes in the rate of prot. In part, Brenners problem on this count derives from the undercurrent of methodological individualism that pervades his account, as that leads him to seek to derive the prot-rate as the aggregated outcome of a multitude of uncoordinated individual decisions.
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in worker-output. Recourse to lack of eective demand due to inadequate growth of wages involves an explicit repudiation of his prior theoretical framework according to which changes in the rate of prot govern the rate of net investment. The sum result is a highly eclectic and increasingly incoherent account that must continually introduce a host of contingent and transitory factors to explain the problem of stagnant investment. This is not surprising, given that Brenners prior framework, already deeply awed to begin with, cannot oer any compelling explanation or account of why investment has failed to respond to the improvement in the rate of prot. In the end, we are left with a highly ad hoc and empiricist treatment of the post-1982 period that lacks any rigorous or unifying theoretical basis. Providing a more theoretical coherent account of the apparent contradiction between the post-1982 recovery of the prot-rate concurrent with a long-term decline in the rate of net investment is one of the chief objectives of this paper. In the following section, I decompose the rate of prot calculated from the National Income and Product Accounts (NIPA) into some of its component factors in order to isolate various forces at work that explain observed movements in the price-rate of prot. The method utilised has signicant overlap with prior work by Wol, Dumnil and Lvy, and Moseley.9 While the results of this section are generally congruent with these prior analyses, there are some dierences in the relative emphasis placed on various forces operating on protability, particularly movements in the output-to-capital ratio and the timing of changes in the prot-share. Where I part company with these prior analyses is in my treatment of the factors governing longer-term changes in the rate of investment. Drawing on one strand in the work of the monopoly-capital school, I argue that the maturation of the US and global industrial system has imposed barriers to accumulation that appear to have largely oset any stimulus due to the improvement in the prot-rate. Barriers to investment have been exacerbated by a phenomenon of disaccumulation occurring within the productive circuit, due to an improvement in the output-to-capital ratio that has allowed rms to meet output-targets with a lower rate of net investment. I further argue that barriers to a renewal of a higher rate of accumulation and growth have been compounded by the increased appropriation of surplus-value
9. Wol 1992 and 2002; Dumnil and Lvy 2002a, 2002b and 2004; Moseley 1997 and 1999.
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(prots) by the owners of nancial assets that has siphoned o funds that would otherwise be available for productive investment. The sum result has been a situation where in higher prot-rates co-exist with a persistent underaccumulation of capital within the productive circuit. This has required that other means be found to guarantee the expansion of the market, primarily through a phenomenal expansion of household- and public-sector debt. While this has provided a provisional means of overcoming problems of stagnant investment, the ight into the future evidenced in expansion of credit has insurmountable limits. I conclude with a discussion of the conditions that have facilitated the Federal Reserves ability to underwrite speculative credit, and the conditions under which this form of systemic management will no longer serve to overcome problems of stagnant investment.
Analysis of the prot-rate The prot-rate can be decomposed into the product of the ratio of prots to the total national product and the ratio of total output to the net capital-stock as follows: Prot-rate = [(prots)/(GDP)]*[(GDP)/(Capital-stock)] The rate of prot rises when either the output-to-capital ratio or the protshare of national income rises, holding the other factor constant. Figure 2 graphs movements in the output/capital ratio and the prot-rate over the years 19472006. Changes in the rate of prot are highly correlated with changes in output per unit of net capital-investment, measured at current replacement-cost. Both the output/capital ratio and the rate of prot rise during the boom of 19606, and then begin a long and precipitous fall. The turning point occurs in 1982, following the worst recession in the US since the Great Depression. The output-to-capital ratio rises sharply from 1982 5, and continues to improve, albeit at a slower annual rate, until 1995. The output/capital ratio then attens out, before entering what appears to be a period of renewed decline beginning in 2003. We can decompose the nominal output/capital ratio into a real and pricecomponent. Figure 3 shows the real output-to-capital ratio derived by deating both output and the current cost of the net capital-stock by price-indexes for GDP and capital-goods (the PPI), respectively. What is particularly striking is not only that the ratio of real output per unit of real capital-investment shows
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Figure 2. Rate of prot and output/capital ratio

1.2 0.5 0.45 1 0.4 0.35 0.8 0.3 0.6 Output/Capital Rate of Prot 0.4 0.15 0.1 0.2 0.05 0
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evidence of a steady long-term secular decline, but the sheer magnitude of the decline, falling from a peak of 1.64 in 1965 to 0.81 in 2006. This implies that, in real terms, the capital-stock is only half as productive today as it was forty years ago.10 Figure 4 plots the ratio of the price index for GDP (the GDP deator) to the price-index for producer-goods (the PPI deator). The ratio rises rapidly between 1982 and 1985, followed by another increase between 1993 and 2003. When this ratio is rising, the values (measured in socially-necessary labour-time), hence the prices of capital-goods are falling relative to the values, hence the prices of the goods and services that compose nal output. Given that capital-stocks are composed of manufactured goods, and nal output is
10. One must treat these numbers with some caution. While NIPA chain-weighted pricedeation attempts to provide a means for rigorously accounting for technical change, it is not clear we can compare real output to capital-measures over an extended period of time due to fundamental qualitative change in the composition of both the means of production and output. Let me here note that the decline in the real output-to-capital ratio has coincided with a marked shift in the composition of the capital-stock. The ratio of the stock of capital accumulated in nancial and real-estate trading activities has risen relative to the capital invested in manufacturing, transportation, and utilities. As I will argue below, this pattern is congruent with the decline observed in Figure 3, as capital invested in FIRE is non-productive in both Marxian (value) and real terms protestations to the contrary, bond-traders and real-estate agents do not themselves produce any real output, but are primarily engaged in the speculative reshuing of ownershipclaims over both real and ctitious capital-assets.
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Figure 3. Real output/capital ratio, 19472007

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Figure 4. Ratio of (GDP deator) / (PPI deator), 19472007

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composed of a mix of goods and services, a rise in this ratio indicates that productivity-gains in manufacturing exceed those of services, and, secondarily, that productivity-gains by manufacturing rms in Department I likely exceed those in Department II. What Figures 3 and 4 show is that the rise in the nominal output-tocapital ratio is entirely due to the cheapening of the prices of capital-goods relative to the price composite of goods and services that enter directly into GDP. Given that movements in the output/capital ratio tends to dominate movements in the rate of prot, it follows that the most signicant factor underlying the improvement in protability since 1982 is the decline in the prices of capital-goods relative to the prices of all capital- and consumergoods that compose the gross domestic product. The other principal factor that enters into the determination of the protrate is the prot-share, or the share of the total value-product appropriated in the form of prots (retained prots, interest, and dividends). Following standard practice, I calculate the prot-share by subtracting the total annual wage- and salary-compensation paid to employees from the estimate of the
Figure 5. Prot-share, 19472007

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GDP reported in the National Income and Product Accounts.11 Figure 5 shows the prot-share over the years 19472006. Between 1947 and 1971, we observe a pattern of (uneven) decline that is particularly pronounced between 194752 and then again during the boom of 196571. The prot-share then undergoes a secular rise continuing through 1995. The high-tech/dot.com boom of 19962000 drove down unemployment and temporarily eroded capitalists income-share. This decline was reversed in 2001, with the prot-share recovering to levels approaching the peak reached at the beginning of the 1990s high-tech boom. Variations in the prot-share will reect relative changes in real wages and real output per hour of labour-time expended. If real wages rise faster than output per hour, the prot-share falls. Conversely, if output per unit of labour-input exceeds the increase in real wages, the prot-share rises. Figure 6 shows real wages and real output per worker over the 19472006 period with each series normalised to one for the year 1948 to facilitate comparison. In periods during which the prot-share falls real-wage growth exceeds the growth of productivity (for example, in 196671 and 19952000 the slope of the incline in the former exceeds that of the latter), and vice-versa when the prot-share is rising. The rise in the prot-share since 1971 is indicative of several longer-term trends that have fundamentally recomposed the relative balance of class-power in favour of capitalist owners. For one, structural unemployment began to rise in 1969 and continued to rise for over a decade thereafter due to the combination of slower accumulation and increased mechanisation. This weakened the position of organised labour and broke the link established under Fordism between increases in labour-productivity and the growth of real wages for workers in the manufacturing core. Second, the rise in the prot-share after 1971 reects an ongoing recomposition of labour-markets and employment-relations that was occurring along a variety of dimensions. Key aspects of this structural recomposition include the following: declining rates of unionisation; the growing absorption of labour into lower-wage
11. This ratio functions as a crude but useful proxy for what Marx termed the rate of exploitation, or the total share of new value created by (abstract) labour in excess of the value advanced in the form of wages. The rate of surplus-value is calculated by dividing unpaid by paid labour-time. Realised prots that can be calculated from the NIPA are the dierence between total national income and the total outlay of wage- and salary-expenditure. The latter includes what Marx termed unproductive labour for example, work that may perform a necessary function in the reproduction of the capital-ratio yet that does not constitute a direct source of new value and surplus-value. This would include, for instance, workers employed in advertising, sales, and nance.
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Figure 6. Labour-productivity and real wage, 19482007, all workers

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service- and retail-sectors; the individualisation of the wage-contract in a manner that favours employers (with the exception of some groups of highly skilled workers who have been able to command higher wages); the prevalence of disguised unemployment in the form of a reduction in labour-force participation (particularly amongst African-American males); unreported joblessness and involuntary part-time employment; reductions in the real value of the federal minimum-wage; worries over impending job-loss due to the eects of corporate restructuring and layos; the rise of contract-and contingent employment; the inux of cheap immigrant-labour that has driven down wages in many service-sectors; the greater threat of capital-mobility that serves as a weapon through which to discipline labour; the growing exposure of US manufacturing workers to lower-cost foreign competitors (via WalMart); and the growth of household-debt that has served as a mechanism for inculcating acceptance of free-market values within the working class. All these processes were underway to varying degrees at the time when Volcker took over as Chair of the Federal Reserve. The often-noted eects of the Volcker shock that gure prominently in many accounts of neoliberalism must be interpreted within this context.12 Volckers decisions to jack unemployment to record post-WWII levels amounted to a brutal hit upon an already weakened US working class. Similar considerations apply to Reagans summary ring of the striking federal PATCO
12. See Harvey 2005; Panitch and Gindin 2005.
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workers in 1981 and his stacking of the National Labor Relation board with anti-labour appointments. What was decisive about the Volcker-Reagan era is that it marked the watershed moment in the ideological consolidation of a political-economic rgime predicated upon an ethos of market-fundamentalism and the construction of a new class-alliance between certain highly-skilled sectors of the white-collar salariat and corporate management. It was not, however, the decisive turning point in boosting the prot-share, which had been ongoing during the previous ten years. To sum up, movements in the output-to-capital ratio dominated the behaviour of the rate of prot between 196596.13 While the fall in the protshare was a signicant factor contributing to the initial downturn in 1965, the rise in the prot-share after 1971 proved insucient to reverse the decline in the rate of prot brought about and sustained by the decline in the output/ capital ratio. The onset and duration of the crisis of the Keynesian-Fordist rgime cannot be primarily attributed to the rising power of organised labour or a major shift in the relative balance of class-power. On the contrary, the duration and extent of the crisis is largely explained by the fall in the output/ capital ratio. This trend reversed itself following the sharp contraction of the 19802 period. Falling prot-rates and Volckers decision to jack interest-rates to record-levels plunged the US and global economy into its deepest recession since the Great Depression. The crisis had a salutary eect on the rate of prot. The sharp contraction in domestic demand and the sky-rocketing price of the dollar undermined the competitive position of large portions of US capital. Plant-closures destroyed massive sums of capital-value amongst rms no longer able to conrm to new international cost-standards imposed by more ecient foreign producers. This purged the US manufacturing base of its older, less technologically-advanced xed capital. The defeat imposed on US labour was decisive in clearing the path for the accelerated restructuring of rms xed capital and the introduction of labour-process transformations associated with lean production. As new methods and labour-process innovations were disseminated, productivity-growth in manufacturing rose. Firms that survived the shakeout of the 197985 period began to recapitalise their xed stock through rationalising forms of investment that sought to economise on both capital and labour. The sharp upturn in labour-productivity in the capital-goods sector reduced the prices of capital-stocks relative to the prices of nal output. The combination of the rise in the prot-share and the decline in the relative price of capital-goods
13. This analysis is congruent with historical studies by Dumnil and Lvy that have argued that the output/capital ratio is the primary factor governing movements in the prot-rate. Dumnil and Lvy 1993.
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in tandem laid the basis for the post-1982 recovery in the prot-rate. The crisis and post-1982 recovery arms one of Marxs central contentions, namely that crisis is both the expression of the maturation of capitalisms internal contradictions and the means through which barriers to protability are forcibly resolved.
Some contradictions of the neoliberal rgime One of the puzzles of the performance of the US economy over the last several decades is the failure of the improvement in protability to translate into a higher rate of net investment. When we inspect the rate of net accumulation shown in Figure 7, calculated by dividing net investment (gross investment minus depreciation-charges) by the total net private non-residential stock, we observe a declining trend over the period from 19672006 that is overlaid by a pattern of cyclical oscillation. This co-existence of a higher rate of prot and a downward trend in the rate of net investment is surprising and appears to confound expectations. Marxian theory, as well as neoclassical economics, predicts that higher rates of expected prots should trigger a higher rate of investment. This is so for the straightforward reason that rms will nance the acquisition of new technologies if doing so promises to cut per-unit costs and thereby improve
Figure 7. Rate of net investment, 19472007

0.06
0.05
0.04
0.03
0.02
0.01
0
19 47 19 49 19 51 19 53 19 55 19 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07
Source: National Income and Product Accounts, Table 5.2.5, Net Fixed Assets, Table 4.1
83
their competitive position. Techniques that achieve major reduction in perunit costs should, therefore, stimulate an upsurge in new investment as rms rush to capture technological rents and above-average prots accruing to those capitals that succeed in being the rst to bring these new methods into operation. It follows that a steady stream of cost-reducing innovations should be correlated with a sustained upturn in the rate of accumulation. Three factors explain the breakdown of the expected prot-investment relation. In the most general sense, the delinking of the rate of investment from the prot-rate reects the fact that, in a mature industrial economy such as the US (this is also true for most of Europe and Japan), a diminishing share of investment is tied to the development of entirely new industrial sectors, including services. Once such a stage of maturity is reached, the prior stimulus to accumulation provided by the impetus to develop and build up the basic branches of industry is progressively exhausted. A point is eventually reached wherein investment in a growing number of sectors occurs primarily to replace worn-out or technologically obsolete stocks funded out of capital-consumption allowances. The result is a tendency for the system to drift towards a lower rate of investment absent the appearance of major capital-absorbing technological innovations that drive recapitalisation of existing branches of industry and spur the emergence of entirely new industrial sectors. For all the hype surrounding the New Economy, the evidence suggests that the digital revolution has failed to provide a stimulus to accumulation on a scale comparable to that provided by the railroad and the auto.14 This stagnationist tendency that overlays the entire neoliberal period has been exacerbated by the fact that the rise in the output/capital ratio has allowed capitalists to be able to meet output-targets with a smaller proportionate amount of net investment. The basic logic can be illustrated with a simple example. Suppose that rms expect market-demand in a given line of industry to grow at a rate of 3 per cent per annum. If capital is becoming more ecient in money-terms for example, if a higher level of output can be achieved from each additional unit of new investment this means that rms will increase planned investment at a slower rate, say at a rate of 2 per cent per annum, than the expected rate of growth of market-demand (both measured in monetary terms). In other words, the rise in the nominal output/capital ratio means that capitalists as a whole can meet any expected rate of growth of market-demand with a proportionately smaller outlay on new plants and equipment.
14. The claim that industrial maturity will act as a drag on the rate of net accumulation has a long pedigree in neo-Marxist theory dating back to the seminal work of Michal Kalecki 1954 and as developed in the subsequent writings of authors such as Steindl 1952 and Baran and Sweezy 1966.
84
In sectors characterised by advanced maturity, where demand can be met with existing capacity, new investment may well occur at levels below replacement-value. In this case, investment-expenditures do not even manage to absorb capital-consumption allowances. This highlights the paradox of rising capital-productivity in the current neoliberal context. The rise in productivity, rather than serving as a stimulus to invest, can just as easily place a downward pressure on accumulation as rms nd they can do more with less.15 The result is that a growing portion of funds recovered through amortisation are released back into active circulation, where they are used either for speculative purposes or disposed of through an increase in capitalists personal consumption.16 This brings us to a third factor exerting a depressive eect on the rate of accumulation, namely the rising share of total prots paid out to nancial owners in the form of dividends and interest. As seen in Figure 8, interest and dividends rose as a share of total prots from an average of 47 per cent the years 19708 to 68 per cent for the period 19792003. The major jump in rentier income-share occurred between 1978 and 1982, as rising interestrates and structural shifts in the relative power welded by nancial markets over productive enterprise eected a massive reallocation of prot from production to nance. Over time, the structure of rentier-income has changed from primarily loan-based interest-income to greater weighting of equitybased returns.17 The interest-share, while showing signicant variation over the course of the business-cycle, shifts to a higher overall level in the 1980s, followed by a decline in the years since 1991, albeit with a major spike during the 2001 recession. Conversely, net dividends have tended to rise as a share of booked prots over the entire period between 1979 and 2002, and appear to have remained at high levels in all years since, except for 2005.18
15. To avoid potential confusion, note that this investment-depressing eect has been due entirely to the shift in relative prices that has reduced the value (hence the relative price) of the elements composing the xed stock of productive capital relative to the aggregated value of the gross output of nal goods and services. This point needs to be borne in mind when discussing the question of the rate of accumulation, which refers to a monetary, as opposed to a use-value phenomenon. Capitalists accumulate things as vehicles for the accumulation of value; if value (hence relative price) is falling, a greater mass of use-values purchased can be associated with a smaller sum of value. Hence, use-values may be augmented at a higher rate while the rate of augmentation of capital value is falling. 16. This argument is one of the core propositions of the monopoly-capitalist theory found in the work of Steindl 1952, pp. 10755; Baran and Sweezy 1966, pp. 5278; Sweezy and Magdo 1987; Foster 1989; and Haveli and Lucarelli 2002. 17. Note also that the relative share of rentier-income, particularly in the form of interestpayments, shows a pronounced cyclical eect. This is because debt payments on long-term debt obligations are xed in nominal terms, and thus rise/fall as a share of total prots in response to a cyclical decline/increase in the monetary rate of prot. 18. The reader might note that the net interest- and dividend-share exceeds 100% of NFC
85
Figure 8. Net dividend and interest as share of NFC booked prots, 19602007
160.00%
140.00%
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
19
19
19
19
19
19
19
19
19
19
19
19
19
19
Source: National Income and Product Acounts, Table 7.10, Table 7.11, Table 6.16
This reallocation of prots from production to nance marks the reassertion of the power and prerogatives of capitalist owners in particular, that sector of the capitalist class that controls the origination and allocation of credit and nance. Beginning in the late 1970s, and then exploding with the ascension of Volcker-Reagan, a market for corporate control developed in the form of leveraged buy-out operations and private-equity acquisitions. Entire enterprises were transformed into objects of speculation. Buyout-specialists and privateequity rms found ways to load up on debt, buy out existing shareholders, and take the company private. A ruthless round of cost-cutting would follow. The restructured rms could then be re-sold on the public-equity market at a handsome prot or, alternatively, held as a privately-owned proprietary enterprise. Private-equity rms and buyout-specialists have used this process to leverage higher returns on their paid-in equity-investments. At the same time, this process has had an impact on decisions regarding capital-allocation and rms
prots at several points. This indicates that nancial payments are cannibalising the productive sector through a process of productive disinvestment. This would conrm the overall account presented in this article. However, some caution must be exercised in evaluating the exact levels shown in the National Income and Product Accounts, given certain accounting complexities that factor into how the prots of NFCs are actually recorded. What is most important for our present purposes is the overall trend.
19
88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06
60
62
64
66
68
70
72
74
76
78
80
82
84
86
86
propensity to invest. Internal cash-ows have increasingly been siphoned o through debt-repayments, as opposed to being utilised to nance tangible investments in new plants and equipment. Surpluses remaining after debtservicing are then returned to private owners or distributed through dividendpayments to equity-holders. Lacking protable investment-outlets in the productive sectors, these funds are funnelled back into the capital-markets where they are deployed for largely speculative purposes. The post-1980 development of a market for corporate control and increased shareholder-activism similarly transformed the environment within which top-tier management presently operate. CEOs have been transformed into rentier-capitalists by having their compensation tied to stock-options and dividend-payments. The rapacious scrutiny by the capital-markets for undervalued corporate assets has compelled them to manage their rms and distribute prots with a constant eye towards warding o the spectre of shareholder-revolt and leveraged buyouts. Under such circumstances, management is far more inclined to dispose of nancial surpluses through increases in quarterly dividend-payouts stock-buybacks that articially inate stock-prices or by nancing mergers and acquisitions that create paper capital-gains without any actual augmentation of the value of the underlying tangible capital from which equity-valuations are (in principle) derived.19 Meeting rentiers rapacious demands for higher dividend-payments and capital-gains requires that rms try to squeeze more output from their existing stock. To the extent that rms can meet production- and outputtargets with a lower per-unit rate of net investment, nancial surpluses that might otherwise have been dedicated to expanding plants and equipment are siphoned o in the form of dividend-payments. This exacerbates problems of stagnant investment.20
19. Financialisation has eected a growing rentierisation of top management by tying CEO compensation to the performance of a companys share-price through stock-options. This results in the creation of incentive-structures that directly tie CEO compensation to short-term stockprice and added incentives if rms exceed certain performance benchmarks. Stock-options and other forms of equity-linked compensation-packages have created powerful incentives for CEOs to manage enterprises in view of maximising short-term stock-performance, and have been used to resolve the principal-agent problem inherent in the system of joint-stock ownership by eectively fusing the incentives of wealthy shareholders (owners) and top management. 20. For various accounts, see Lazonick and OSullivan 2000; Dumnil and Lvy 2002; Crotty 2003; and Kalecki 1954, pp. 145161. Orhangazi 2008 presents econometric evidence regarding the eect of nancialisation on the capital-expenditures by non-nancial corporations that conrms claims regarding the depressive eect of higher payments to rentiers on the long-term allocation of prots to xed investment.
87
This combination of factors explains the neoliberal paradox of robust and rising prots co-existing with subpar investment. The result is that sustaining the ability to convert the surplus-product into realised monetary prots has become increasingly dependent on the growing indebtedness of the US government and, particularly over the last decade, on the growth in the debtencumbrance of the working class. It can be shown within a Marxian-Kaleckian model of the capital-circuit that the greater the dierence between the rate of prot (rising since 1982) and the rate of accumulation (falling over the same period), the greater the rate of growth of household- and government-debt that is required in order for rms to convert their imposed mark-ups into realised prots.21 It can further be shown that the total amount of rms retained prots is equal to the amount of debt-nanced household- and government-expenditure, adjusted for leakages due to the trade-decit. Because these retained prots are not oset by an equivalent amount of debtnanced capital-investment, rms are not required to allocate these prots to retire short-term bank-credits used to nance their initial investment. The result is that the growth of government- and household- debt-nanced consumption necessary to sustain demand and realise prots creates a massive pool of unattached prots that are distributed either to capitalist households via higher dividend-payments or placed directly into the capital-markets. Retained prots are in this manner recycled back into the nancial markets where they are transformed via purchases of yield-bearing nancial assets (securities) into claims on future wages and prots. The circuit of securitised credit is, in this sense, self-nanced.22 The recycling of this massive pool of distributed prots back through the secondary capital-markets introduces a long-term inationary bias into assetprices. Higher asset-prices in turn lie at the core of how the crisis of insucient real investment has been deferred over recent decades. Particularly during the last decade, growth has become dependent on the so-called wealth-eect. This refers to a dynamic whereby rising asset-prices lead households to feel more secure about their economic prospects. Buttressed by higher portfoliovalues and rising home-prices, households decide to reduce their rate of saving
21. See Rochon 1999; Seccareccia 1996. 22. The relation between debt-nanced expenditure and realised prots originates in the work of Michal Kalecki, who demonstrated how capitalists actually-realised collective prots were exactly equivalent to their own outlays on consumption and investment. Either capitalists consumption out of prots, or debt-nanced investment generates revenue on the income side of the aggregated balance-sheet of the private sector for which there is no osetting factor-cost. Similarly, when working-class households go into debt to nance consumption, this generates a ow of sales-revenue for which there is no osetting cost and hence enters into the total global prots (surplus-value) realised by the capitalist class. See Kalecki 1954, pp. 4569.
88
and increase their issue IOUs to boost consumption-spending. Through the process described above, this debt-funded expenditure leads to the formation of prots distributed to capitalist households that are subsequently recycled back into the nancial markets. This dynamic of debt-nanced consumption is what essentially drove prot-formation during the dot.com boom and the housing bubble.23 Monetary interventions of the Federal Reserve over recent decades, particularly during the Greenspan years, have been driven by the need to manage the contradictions internal to a system in which growth and protcreation has become inextricably tied to credit-fuelled asset-bubbles and borrowing secured against appreciating property- and equity-collateral. Interest-rate reductions allow indebted yet functional solvent entities to renance their existing liabilities. This reduces the share of current income absorbed by payments of principal and interest, raising the manageable debtto-income ratio of already over-leveraged nancial rms and households. Lower interest-rates, in turn, induce an inationary dynamic into asset-prices, both through increasing viable debt-loads and by increasing the rate at which future income-streams are capitalised into the current prices paid for nancial assets on the secondary market. The subsequent emergence of nancial excess and asset-overvaluation could be partially slowed and deated by raising interest-rates. Because prots were generally robust, higher interest-rates did not impose excessive strains on private non-nancial corporations. Once the requisite albeit partial purging of the prior periods excess was complete, the Federal Reserve would again lower interest-rates. This created the basis for the next credit-fuelled rise in asset-prices leading to higher levels of consumption and output. The ability of the Federal Reserve to use aggressive interest-rate reductions to avert a potentially destabilising meltdown of asset-prices without having to worry about triggering excessive ination reects the favourable prot-ination trade-o that has prevailed over the last two decades. Although this point is often overlooked in discussions of neoliberalism, it is essential to understanding both the capacity and the limits of the Federal Reserves ability to manage these contradictions.
23. By some estimates, over the course of the boom of 19962000, each dollar-increase in share-values gave rise to a corresponding increase in consumption-expenditure of between 5 and 15 cent. Similarly, the boost to housing prices provided by the sequence of interest-rate reductions implemented by the Federal Reserve between 20015 was critical in supporting higher levels of consumer-demand and averting a deep and prolonged recession following the collapse of the dot.com boom. For insightful analyses of the contradictions of this nance-led rgime of accumulation, see OHara 2001 and 2002.
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In an economic system dominated by large oligopolistic corporations, there will typically be an inverse correlation between changes in the rate of prot and ination. Oligopolistic rms set prices at levels such that, for a normal level of capacity-utilisation, total revenues will cover total per-unit costs plus administrative overheads plus debt-servicing costs, with a net prot-margin left over that may be used for internally funded investment or distributed through dividend-payment.24 When prot-rates are stable or rising, rms can meet their retained earning targets at (more or less) constant prices. Conversely, when prot-rates are falling, rms may seek to increase their mark-ups and may be forced to increase borrowing, often on an involuntary basis, to acquire sucient funds to cover ongoing investment-projects. Hence, periods of strong (and rising) protability will typically be associated with lower rates of ination and a decline in rms debt-to-equity ratio. Conversely, when protability is falling, both price- and debt-to-equity ratios tend to rise.25 The favourable prot-ination trade-o since the mid-1980s allowed the Federal Reserve ample latitude in setting the price of credit and pumping massive amounts of liquidity into the system as needed without having to worry about igniting a price-wage inationary dynamic. Monetary policy was elevated to an increasingly prominent role in the management of the historically anomalous combination of a higher rate of prot and stagnant investment, overlaid by a massive expansion of the debt-loads of households and government. Interest-rate adjustments were the means through which the Federal Reserve sought to permanently defer the point of ultimate settlement.
24. See Lipietz 1985, pp. 10733; Lee 1998; and Godfrey and Lavoie 2007. Arguing that large corporations administer prices does not imply that rms can set prices at any desired level. The actual mark-up on per-unit costs will vary with the level of concentration, the homogeneity of the product, the degree of inter-rm competition, and the rate at which technological leaders are achieving reductions in per-unit costs. Where some left analysts err is in assuming that the restoration of international competition has caused rms to lose any eective control over the determination of prices. In my view, this claim is vastly overstated. The majority of oligopolistic sectors are not characterised by falling prices or frequent pricing wars. Sectors with some variant of mark-up or full-cost pricing include almost all major capital-goods producers: aerospace; all private military contractors; private hospitals; the pharmaceutical industry; medical equipment; medical services; the hospitality industry; big box retail; the fast-food industry; most media products; commercial construction; apparel and textiles; and nancial and producer-services. Exceptions are manufacturing sectors exposed to foreign competition. However, if GM no longer determines prices, then Toyota (or some global corporation) does. In doing so, Toyota imposes a mark-up on costs, or some variant of full-cost pricing. 25. Empirical support is seen in the correlation between prot-rates and ination over the entire post-WWII period, and the inverse movement of prot-rates, rms debt-to-equity ratio, and the share of interest-payments as a percentage of net prots.
90
Figure 9. Percentage change in GDP, 19502007

10
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92 94
96
98
00
02
04
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
-2
-4
Source: National Income and Product Accounts, Table 1.1.1
Evidence suggests that the Federal Reserves ability to use interest-rate reductions to re-ate asset-prices and underwrite counter-cyclical creditcreation contributed to the reduction in the volatility of the real business-cycle over the 19822006 period. As seen in Figure 9, the decline in average per annum growth-rates in each decade since the 19609 boom co-exists with a pattern of dampened cyclical uctuations.
The subprime crisis and beyond These considerations allow us to place the present crisis in a larger perspective.26 Every time the Federal Reserve succeeded in deferring the point of nal settlement, the result was to generate a further expansion of nancial liabilities far in excess of the rate at which capital was being accumulated within the productive circuit. As history reminds us, every nancial-boom-turned-bubble eventually crashes once the expansion of credit runs too far in advance of the underlying growth of prots and wages. Crisis is, in this sense, a perfectly normal and recurrent aspect of the accumulation-process. As noted by Marx
26. I will not here review the dynamics that generated the current crisis in any detail. For various accounts see Blackburn 2008 and Beitel 2008.
20
06
91
throughout his voluminous writings on economics, crises are required to periodically destroy overvalued ctitious capital whose prices no longer conform to the underlying rates of return on productive investments. Crisis simultaneously purges technologically obsolete capital from the productive circuits. The salutatory eect for capital as a whole is to rid the system of excess (for example, non-redeemable) debt-overhang and to annihilate sub-par capitals that no longer conform to prevailing technological standards. This process of debt-deation and destruction of technologicallyobsolete capital is the necessary precursor to the restoration of a higher rate of prot. This is, in turn, a necessary albeit not sucient condition for the restoration of a higher rate of accumulation. The anomaly of the subprime crisis is that both the origins of the initial distress and the initial phase of asset-destruction were almost entirely conned within the household- and nancial sector. By contrast, the non-nancial corporate sector entered the crisis with a relatively low debt-to-equity ratio as compared to prior decades and high returns on xed capital (Figure 1). As a result, the immediate problem confronting managers of the US system is not how to engineer a massive destruction of technologically-obsolete productive capital, as was the case in 1979, but how to sustain the monetisation of prots in the wake of the collapse of the housing bubble. The solution, in one sense, is quite obvious. To the extent that the immediate impacts of the crisis were located primarily in the sphere of the realisation of value, the remedy is to reate the real economy, hence prots, through a massive increase in government-decit expenditure to oset prot-destruction tied to the creditcontraction transpiring in the household-sector. We should not conclude, however, that a robust dose of Keynesian scal stimulus tax-cuts and increased decit-spending by the federal government can provide a longer-term solution to the problem of the secular decline in the rate of net investment and reset the economy back on a self-sustaining growthpath. Decit-spending can, at best, provide a temporary means for deferring a realisation-crisis by allowing rms to continue to convert their imposed markups into realised money-prots. However, decit-expenditure is far less eective as a longer-term counter-measure for osetting a renewed decline in the rate of prot. Here is where the Keynesian stimulus-measures reveal their limits. The question, therefore, is whether we are at a turning-point in the prot-rate cycle. Or whether, on the contrary, neoliberalism and the digital revolution have annulled the falling rate of prot as a law of motion governing the evolutionary trajectory of capital. I believe the evidence suggests that the system is at a turning point in the longer-period oscillation in the prot-rate. For one, the output/capital ratio began falling in 2003. The attening of the relative-price ratio (Figure 4)
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suggests that the ability of manufacturing rms (capital-goods producers in particular) to realise higher productivity-gains from post-Fordist practices is exhausted.27 If so, this suspends the primary factor counter-acting the fall in the rate of prot brought about by the decline in the (real) output/capital ratio. Faced with falling prots, capitalists will respond (as always) by increasing their substitution of xed capital for living labour. This will reduce the labour-to-capital ratio. If the fall is not oset by a sucient increase in real output per worker-hour, this will lower the real output-to-capital ratio. In order to avoid a decline in the monetary measure of the output/ capital ratio, the value, hence the prices, of capital-goods must fall at a sucient rate relative to the value, hence the prices, of aggregate output. While productivity-growth in manufacturing remains higher than in services, the attening of the relative-price ratio suggests that this dierential rate is declining. If the trend continues, this will impose a sharp downward pressure on the prot-rate. Second, after rising at an impressive clip between 1996 and 2003, productivity-growth appears to be slowing. Full explication of factors impacting productivity-growth is beyond the scope of this paper. For now let me simply note that the overall pattern observed in Figure 6 shows evidence of a long-term cyclical pattern that cannot be explained as an eect of cyclical oscillations in the business-cycle. The rate of growth increases at a (more or less) constant rate between 194770, 19826, and 19962004. By contrast, productivity rises, but at a slower rate during the slowdown of 197180, the years 198792, and in the years since 2004. Any secular decline in the rate of productivity-growth will impose limits on the ability to oset the fall in the output-to-capital ratio by recourse to relative surplus-value i.e. by reducing the portion of the working day required to reproduce the value equivalent of workers money-wages. This will compel rms to attempt to increase the rate of exploitation through the extraction of surplus-value in its absolute form for example, by reducing wages, increasing labour-intensity, and extracting longer working hours without a corresponding increase in pay. The problem is that even in the US, minimum-wage laws and last-ditch social safety-nets provide some minimal oor below which living standards cannot fall. Furthermore, maintaining the loyalties of salaried cadre charged with oversight of the dayto-day operations of the corporate apparatus requires the redistribution of a
27. Post-Fordist methods include just-in-time inventory-management, dissemination of Japanese-style managerial techniques to wring slack out of the assembly-line, acceleration of the product-cycle through the rational organisation of knowledge creation, and more ecient systems of large-scale transport to reduce turnover-time.
93
signicant share of the social surplus to this administrative-managerial stratum. Social limits thus exist on the ability to impose a sucient intensication of the rate of surplus-value in absolute form to oset the decline in the output/ capital ratio. In combination with the productivity-slowdown, the result will be the imposition of barriers to achieving a sucient increase in the rate of surplus-value to oset the decline in the output/capital ratio. If recent trends are in fact indicative of a structural shift in productivity-growth, this indicates that US capitalism may be poised at the edge of the precipice of the next great secular downturn in the prot-rate. To these factors must be added the looming spectre of peak oil. While much dispute remains over the exact state of the global oil-supply, what is certain is that, at some point in the next ve to fteen years, we will probably witness the end of abundant access to cheap, readily available fossil-fuels. This will lead to increases in the costs of energy and raw materials. Rising input-costs will place additional pressure on prots, triggering ination as rms impose higher mark-ups in an attempt to protect their (nominal) prots. The result will be the return of cost-push ination. Over the longer term (twenty-ve years and out), the outcome is far less certain. However, it is not a far-fetched scenario to surmise that the exhaustion of cheap fossilfuels will require either a signicant reduction in aggregate consumption, marking the end of an economic rgime predicated on unlimited growth and accumulation; or some technological x that at present is nowhere on the historical horizon.28 Falling prot-rates and resurgent cost-push ination will put the Federal Reserve (and the other major Central Banks) between a rock and a hard place. In the short term, the ongoing unwinding of over-leveraged positions in what have proved to be badly placed bets on non-redeemable mortgage-debt will continue to have an impact on liquidity-conditions in the inter-bank capitalmarket and cause major lenders to ration credit.29 For some, this has raised
28. Work in Marxist ecology has been slow to recognise the realities of impending exhaustion of cheap sources of fossil-fuel. The argument regarding peak oil is well established and was powerfully conrmed in the case of the post-1972 decline in production in the contiguous US, as predicted by Hubbert in the late 1950s. The question is not whether world oil-production will eventually hit a peak, but how soon, and how the capitalist system will adjust. For accounts of the peak-oil phenomenon, see Hubbert 1957; Goodstein 2004; Deeyes 2001; and Campbell and Laherrere 1998. 29. The subprime crisis unleashed a powerful set of self-reinforcing dynamics that has plunged the US into a potentially protracted recession. Falling housing prices lead to negative net equity for households that increases incentives to default. As foreclosures rise, lenders freeze new lines of credit. Banks dump repossessed houses on the secondary markets, and prices plummet. Falling prices create even stronger incentives to default on loans, many of which have reset at higher
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concerns over the emergence of deationary pressures, with a fall in demand putting downward pressure on prices. Such a deationary scenario could easily engender a self-reinforcing downward spiral, as the fall in prices would increase the real debt-to-income ratio leading to a greater share of prots and wages being dedicated to debt-repayments. Defaults would increase and credit would contract, leading to a further shrinking of demand and prices, and so on, in a self-sustaining deationary dynamic. This would plunge the US and the global system into a prolonged and potentially catastrophic deationary spiral leading to a massive destruction of both real and nancial capital. While such an outcome is possible, I believe a more likely medium-tolong-term scenario is a return of stagation as rising costs and falling prots lead rms to increase their mark-ups on costs in a desperate attempt to defend their accustomed rate of prots. The return to a stagationary environment will leave the Federal Reserve with limited options. If the Federal Reserve accommodates rising prices by supplying reserves as needed to allow banks to monetise the demanded prots of rms, this would induce an inationary devaluation of nancial assets. While this is certainly a far less painful way to deal with the looming spectre of massive debt-repudiation than deation, nance-capitalists would ercely resist such action. Conversely, if the Federal Reserve attempts to control ination by increasing interestrates, this threatens to induce further debt- and equity-deation. Hence, there will be no obvious course of action open to the Federal Reserve to address the problem of stagation. Nor is it clear that imposing a sharp increase in interest-rates to control ination and impose a massive capitaldevalorisation would prove an attractive option. In 1979, the total mass of outstanding nancial obligations relative to GDP was nowhere near its current level. No one knows how this highly complex and interlocking system of nancial obligations built up over the last several decades would perform under the stress of higher interest-rates. Given the sheer magnitude of the outstanding debt, if faltering prot-rates and resource-constraints place sustained cost-push pressure on prices, controlling inationary pressures through the Volcker option could induce a potentially catastrophic implosion.
rates and now impose growing strains on household budgets. The result is a massive write-down of overvalued housing assets and loss of wealth in the household-sector that will have long-term negative eect on (leveraged) consumption.
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Conclusion: neoliberalisms limits and the end of the present rgime The preceding analysis allows us to identify some of the insurmountable contradictions, hence the ultimate limits, of this nance-dependent growthdynamic. Sustaining the growth of credit, and hence the expansion of rentiers claims on present and future labour, requires periodic Federal Reserve intervention to avert a debt-deation once credit-creation runs too far in advance of real accumulation. However, because chronic underinvestment limits the ability of the system to pump value and surplus-value out of living labour at the rate required to insure eventual settlement, this leaves the Central Bank with no choice other than to attempt to permanently defer the point of nal payment. If prot-rates are stable, the long fallout from the subprime crisis can be probably managed through a controlled destruction of overvalued nancial assets combined with scal decits that will put some oor under aggregate demand and continue to allow NFCs to continue to monetise their demanded prots. The result is that the system will avert a total collapse, while remaining mired in slow growth, stagnant investment and higher levels of structural unemployment. The problem with the long-term perpetuation of this scenario of managed deation of nancial assets is that the favourable prot-rate conjuncture is unlikely to persist. While radical economists have not as yet developed a broadly shared consensus concerning why the rate of prot declines, we know that long-term movements of the rate of prot follow a cyclical pattern of rising and then falling protability closely tied to movements in the output/ capital ratio. Historical research is unequivocal in this regard: every study of the longer-term secular movement of the prot-rate has conrmed that the capitalist system, in the course of its evolutionary development, passes through periods of rising and falling protability, with each phase lasting two to three decades.30 There are no theoretical reasons to suppose that neoliberalism has suspended this law of motion. Any prolonged decline in the output/capital ratio will require an intensication of the rate of exploitation to oset the eect on the rate of prot. The problem, as argued above, is that any slowdown in the rate of growth of labour-productivity will impose limits on capitalists ability to boost the extraction of surplus-value in its relative form. Nor will recourse to surplus-value in its absolute form (for example, via wage-reductions) provide a viable long-term solution given the massive
30. Dumnil and Lvy 1993; Freeman 1999; Mandel 1975, pp. 10846.
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indebtedness of the US working class, as this would worsen and prolong the current nancial crisis. Viewed from the vantage-point of a longer-term historical perspective, therefore, it does not appear that the neoliberal rgime can guarantee either the necessary rate of accumulation or an indenite increase in the rate of exploitation sucient to prevent the return of a phase of generalised crisis and the advent of a prolonged phase of debt- and equity-deation. This implies that nanciers will have to accept lower returns on investments and a long-term reversal of their prior capital-gains. It is unlikely that nancecapital will accept such an outcome without a protracted struggle to divest this sector of the income and power acquired in the post-Volcker period. This is why it is dicult indeed impossible to predict exactly how events will unfold. What we do know, however, is that the next major system-wide protability-crisis, if it does in fact transpire, will occur in a historical context for which no real precedent exists. In contrast to the conditions that existed at the cusp of the last major downturn in the prot-rate in the late 1960s, the present conjuncture is characterised by a thirty-year build-up of nonproductive debt. If rising energy-prices and falling rates of prot trigger higher ination, and if the Federal Reserve attempts to assert control over prices by jacking up interest-rates, this would trigger a protracted asset-deation, with knock-on eects transmitting the fall in asset-prices via negative wealth-eects into lower rates of debt-nanced consumption. The stage is then set for a prolonged contraction. This reminds us, once again, that however much the dazzling world of contemporary high nance makes it appear otherwise, the productive appropriation of labour remains the basis out of which higher rentier income-shares and capital-gains growth must ultimately be maintained. Capital cannot escape its dependence on labour, and no amount of nancial engineering can suspend this inner relation. Faced with a renewed phase of falling protability, capitalist class-instincts will inevitably lead them to intensify their assault on labour and the remaining institutions of the welfare-state. This is why the imposition of a more overtly authoritarian solution to the unfolding of a protracted crisis cannot be ruled out. The period ahead therefore poses enormous challenges and may, at the same time, provide a renewed opening for forces on the Left. Despite the current absence of mass-based struggle in the US, the fact remains that crisis always involves some degree of rupture in the established order. If we are correct in presuming that the longer-term cyclical pattern in the rate of prot has not been suspended, then the inevitable return of a renewed phase of faltering protability will once again place the question of alternatives to capitalist society, or at the very least to its neoliberal variant,
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back on the historical horizon. To seize this potential opening, it is incumbent upon the Left to develop real alternatives that can provide answers to the hardships the impending phase of intensied crisis will inevitably inict upon vast sectors of the US (and global) working class.
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Appendix
Note on Data Used from National Income and Product Accounts Gross Domestic Product (GDP): NIPA, Table 1.1.5, Line 1 Total Wages and Salaries (W): NIPA, Table 6.3, A, B, C, Line 1 Capital-consumption allowance (dK): NIPA, Table 7.5, Line 1 Net private non-residential stock (K): Fixed Asset Tables, Table 4.1, Line 1 GDP deator (gdp): NIPA, Table 1.1.9, Line 1 Producer Price-Index (ppi): NIPA, Table 5.3.4, Line 2 Total Hours worked, all employees (L): NIPA, Table 6.9 B, C, and D, Line 1 Net investment (I): NIPA, Table 5.2.5, Line 12 Percent change in GDP (dGDP/GDP): NIPA, Table 1.1.1, Line 1 Net Interest: NIPA, Table 7.11, Lines 7 and 29 Net Dividends: NIPA, Table 7.10, Lines 4 and 9 Figures Figure 1: Rate of prot = (GDP W dK)/K Figure 2: Output/Capital ratio = GDP/K Figure 3: Real Capital/Real Output ratio = (GDP/gdp)/(K/ppi) Figure 4: Relative-price ratio = gdp/ppi Figure 5: Prot-share = (GDP W dK)/(GDP dK) Figure 6: Real wage and real output per worker Real wage = (W/gdp)/L Real output = (GDP/gdp)/L Figure 7: rate of net investment = I/K Figure 8: Interest and dividend-share = (net dividends of NFCs + net interest of NFCs)/ (Prots of NFC) Figure 9: Change in GDP = dGDP/GDP
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References
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Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 1. US rate of prot, 19972007

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 2. Rate of prot and output/capital ratio

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 3. Real output/capital ratio, 19472007

Figure 4. Ratio of (GDP deator) / (PPI deator), 19472007

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 5. Prot-share, 19472007

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 6. Labour-productivity and real wage, 19482007, all workers

3 real wage real output per hour 2.5

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 7. Rate of net investment, 19472007

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

Figure 9. Percentage change in GDP, 19502007

Source: National Income and Product Accounts, Table 1.1.1

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

K. Beitel / Historical Materialism 17 (2009) 66100

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