I’ve been pondering whether it is possible to reconcile a number of notions within the same economic story about long-run growth and accumulation:
- An accelerator-type determination of private investment;
- A possible tendency, under laissez-faire capitalism, for profitability to fall as accumulation proceeds;
- Capitalism as prone to financial instability;
- A state able either to attenuate crisis tendencies or, cajoled by democratic pressure from below, push the system beyond capitalism;
- A capitalist state able to “manage”, to a degree, the rate of profit.
It is possibly a tall order. The following is intended as just a rough sketch of what I have in mind. I might go deeper into some aspects of the argument in future posts, as it raises various questions, but think it would be better to catch any glaring faults now before carrying the exercise further.
1. Accelerator. Empirically, the evidence appears to suggest that private investment in the long run is induced by the level of economic activity. This fits with the accelerator principle, which states that private investment is largely an attempt to adjust capacity to demand, where the level of demand is determined by autonomous expenditures and their multiplier effects on income and induced consumption. If demand is insufficient to sustain a high level of capacity utilization, investment will not be justified. But if demand persistently tests the limits of capacity, there will be an impetus to install additional capacity through investment. (Matias Vernengo has an excellent series of posts discussing this perspective: here, here, here and here.)
The main alternative proposition, that investment is driven by profits, seems somewhat difficult to square with the principle of effective demand found in the contributions of Keynes and Kalecki, and arguably in Marx as well (e.g., volume 2 of Capital). In a sense, the profit-driven explanation of investment seems akin to a dynamic version of Say’s Law in which mere potential for profit in production is sufficient to induce investment. It is not clear why a high rate of profit in production will necessarily induce investment if the levels of demand and economic activity are weak. The surplus created in production will simply mount in the form of unsold inventories. Conversely, not to expand capacity in the face of persistently strong demand, due to low profitability, would be to forgo profit and relinquish market share to competitors.
An implication of adopting the accelerator perspective is that weak investment will reflect weak demand but not necessarily falling profitability, at least directly. To be clear, capitalists at the micro level are still envisaged to be searching out the most profitable opportunities. It is just that a higher economy-wide rate of profit in itself will not induce them to invest while demand remains weak.
2. Profitability. For those who attach significance to Marx’s tendency for the rate of profit to fall, the accelerator view of investment may seem problematic. I do think, however, that it is possible to reconcile the existence of such a tendency with the accelerator principle, even if it turns out that a falling profit rate itself is not the fundamental cause of crisis.
In the traditional ‘simultaneist dual-system interpretation’ of Marx’s theory, there is no such tendency (due to the Okishio theorem). However, if the ‘temporal single-system interpretation’ is adopted, the tendency is present. A somewhat comparable tendency is also implicit in Kalecki’s analysis, though in terms of the realized rate of profit (see here).
In terms of Marx’s theory, the idea is simple enough to describe. The economy-wide rate of profit, r, is the ratio of surplus value, s, to total capital invested. The total capital invested comprises the sum of constant capital, c, and variable capital, v. Constant capital is the amount invested in fixed capital and raw materials. Variable capital is the amount invested in employing labor. The rate of profit is therefore:
By dividing numerator and denominator by v, this can be expressed as:
As accumulation occurs, Marx argued that outlays on constant capital rise in proportion to outlays on variable capital. The effect is to increase the organic composition of capital, c/v. For a given rate of surplus value, s/v, there will be a decline in the rate of profit over time. That is, a rise in c/v, other factors remaining equal, increases the denominator of r while leaving the numerator unaffected. The process continues until crisis brings about a collapse in the prices of the elements of constant capital. This reduces c/v and is meant to revive the rate of profit. For those adhering to a profit-led view of the economy, the revival of profitability will revive private investment.
If we accept the accelerator explanation of investment, we get a somewhat different picture. From this perspective, any tendency in the rate of profit to fall would seem, rather than being fundamental, to be symptomatic of an accumulation process that is induced by demand. In this view, when demand collapses and crisis hits, there will be no tendency for private investment to pick up, even if the prices of the components of constant capital also collapse. It is not clear that there will be any impetus for recovery in the absence of an injection of autonomous demand, the primary candidates being government expenditure or exports. If the crisis is global, then for the world economy as a whole, government expenditure becomes critical.
However, if we take this view, it raises another question. An advantage of the falling rate of profit theory is that it brings with it a possible explanation of crisis. In this view, it is the decline in profitability that is the fundamental cause of crisis. In rejecting this as the fundamental cause of crisis (without necessarily rejecting a tendency toward a falling rate of profit over a period of accumulation), we are left with the question of what causes the turnaround in activity and crisis. While accumulation proceeded, demand was rising. Then it suddenly collapsed. There is a need to explain this turnaround.
3. Financial Instability. One possible explanation of crisis might be found in the unbalanced nature of the accumulation process under laissez-faire capitalism. During the expansionary phase of capitalist development, private investment is trending in line with economic activity, but this activity, in general, will not be expanding in a balanced or controlled way.
A key imbalance is in the distribution of income. Deregulated labor markets and other anti-worker legislation give employers the upper hand in negotiations over pay and conditions. Deliberate maintenance of significant levels of unemployment, even during periods of strong accumulation, reinforce this tilting of the power balance toward employers. As a result, wages fail to keep pace with productivity. When, in spite of this, private demand is maintained, it is likely to be through an unsustainable accumulation of private household debt. This will be so, for the global economy as a whole, unless capitalists happen to take up the slack by lifting their own consumption. In view of the different propensities to consume of low and high income cohorts, this is unlikely.
In an environment of deregulated financial markets, the growth in demand for private credit will be accommodated not only when income generation is expected (perhaps incorrectly) to be sufficient to service the debt but also when excessive risk can be deceptively and even corruptly passed onto others. In this context, the private credit creation process can go far beyond any socially beneficial level. The process reaches its limit when a critical subset of households becomes overextended and can’t repay the debt. The marked increase in debt stress and bankruptcies sets off a chain of further bankruptcies and a collapse in demand.
There is another key imbalance likely to be emerging during the accumulation process that occurs at the sectoral level. Growth that is primarily reliant on private sources of demand has a tendency to push the domestic private sector increasingly toward, and then into, deficit (see here). This tendency at the sectoral level, pushing the domestic private sector as a whole into deficit, interacts with the distributive imbalance brought about through deregulation of labor and financial markets. The greater the income inequality, the more likely it becomes (for any given domestic private sector deficit) that a significant proportion of households will fall into debt stress, precipitating crisis.
It may seem that this explanation is not as deep as the falling profit rate explanation. The latter explains crisis as an inexorable consequence of capitalist social relations, whereas the former seems to deal with phenomena closer to the surface of reality. However, I think a case can be made that the current explanation also depicts crisis as inherent to capitalism. In this respect, I would make a couple of observations.
The first is that the imbalances to which crisis in this explanation are being attributed emerge as a consequence of the core social relation of capitalism. It is the compulsion of the members of one class to sell their labor power to another class that sets up the conflictual nature of the tussle over distribution. The desire of capitalists for a high rate of profit drives the conflict, in both the industrial and political spheres, and successful actions to repress remuneration of workers and increase the profit share in income are what generate the distributive imbalance in which workers’ wage income fails to keep pace with improvements in productivity.
The second observation, related to the first, is that the macro accounting relationships — which dictate that one sector can only be in surplus if another is in deficit, and that private demand-led growth will increasingly push the domestic private sector toward deficit — mean that growth is only likely to be sustained for an extended period by inducing households into more and more debt. This not only enables, for a time, high demand alongside low wages but reinforces the compulsion on the dominated class to sell its labor power to capitalists in exchange for a wage.
The implications of this social relation go well beyond merely a struggle over distribution. The attempt by capitalists and the capitalist state to maintain strong profitability has far-reaching ramifications for every aspect of social life. Not-for-profit activity, whether in the public or cooperative sector, will be strongly opposed by capitalists. Anything that can be commodified, privatized and turned into profit will be, if capitalists get their way. But, of course, they might not. This is contested terrain. Marx’s analysis of profit and the rate of profit offers strong insights into this struggle, which will be returned to briefly below. For now, suffice to say that even if a tendency toward falling profitability is not the fundamental cause of crisis, it may nonetheless be significant in intensifying the social conflict stemming from the capitalist social relation.
4. The State and Social Possibilities Within and Beyond Capitalism. The state, especially if a currency sovereign, is in a position to attenuate the tendency toward crisis in a monetary production economy. But to do so in anything other than a minimalist way, it would need to move well beyond laissez-faire capitalism, and possibly to socialism or some other form of cooperative economy.
Through an effective regulatory regime, including perhaps centralized wage determination, the state could maintain wages growth in line with productivity. At the same time, fiscal policy could be used to underpin demand in a manner that enabled ongoing financial surpluses for the domestic private sector. Additional profit income generated by the government’s deficit spending could be taxed away to make room for reduced taxes on low and middle-income households. Rents from natural resource exploitation could be taxed away, or the production processes themselves nationalized. There could be a strong role for public banking. A zero interest-rate policy on risk-free financial assets would also help to reduce the income of rentiers and maximize the share of industrial capital in any profit income that was allowed to remain in the system.
In a sovereign currency system, the distinction between capitalism and alternative systems could increasingly become blurred if the state engaged in more broad-ranging public investment, extensively expanded the commons, fostered cooperative activities that were not for profit, and acted to claw back private rents and profit income. Ultimately, there could be a complete abandonment of capitalism, given the political will, through progressive developments in that direction.
5. The Rate of Profit and the Capitalist State. Capitalists, no doubt, will strongly oppose any move toward a more progressive economic system. If Marx’s tendency for the rate of profit to fall as accumulation proceeds is accepted, it might seem that the tendency must eventually cause a problem for capitalists, even if the system is managed effectively in terms of the levels and compositions of demand, output and employment, and generates and reproduces a balanced distribution of income. Although, under these circumstances, low profitability need not pose a problem to the capitalist system itself, it would pose a problem for capitalists, simply because they prefer high to low profits.
It seems to me that a capitalist state could, if it were the political will (though it is not mine), attenuate any tendency for the rate of profit to fall, at least up to a point. In the past, I’ve discussed this possibility only in terms of the realized rate of profit (for example, here). But, on reflection, similar reasoning seems to hold in the case of the value rate of profit.
Consider, again, one of the expressions for the rate of profit:
There seem to be three main avenues through which the state can influence this rate.
First, whenever there is excess capacity, which is the normal situation under capitalism, a change in fiscal policy designed to lift private-sector employment will boost v relative to c, and so reduce c/v. This will occur because, although the cost of raw materials (a component of c) will rise more or less in proportion to v and s, the amount of fixed capital tied up in production will be unaffected. That is, a more intensive utilization of capacity can occur without a proportionate rise in capital costs. For a given rate of surplus value, s/v, the reduction in c/v will imply a higher rate of profit. This policy reaches its limit at full capacity utilization.
The classic struggle over the length of the working day is also relevant here in that the attempt by capitalists and the capitalist state to extend working hours can be viewed as an effort to increase v (and of course s) relative to c whenever there is excess capacity.
Second, the state can attempt to boost the rate of profit through policies that increase the rate of exploitation s/v. Here, there can be a conflict with the first policy channel. Strong employment conditions (which within capacity limits help to reduce c/v) can undermine attempts to increase s/v by empowering workers, although regulation to suppress wages growth in excess of productivity improvements could be designed to address that. The capitalist state’s appetite for privatization of any potentially profitable service can be seen partly in relation to the aim of increasing s/v. Privatization results in an increase in private-sector employment without increasing overall employment and pressure on wages. The capitalist state’s appetite for cutting benefit payments is also related to s/v. These actions undermine the bargaining power of workers by raising the cost of joblessness, leading to fewer demands over pay and conditions. Although benefit cuts have a contractionary effect on private-sector employment, reducing v and increasing c/v, capitalists can lobby for other forms of stimulus less empowering to workers. Similar considerations arise in relation to a job guarantee. Capitalists can be expected to oppose such a program because it would expand employment outside the private sector and give workers more bargaining power.
At the same time, these considerations may point to a line of effective activism for progressives. If capitalists oppose a shortening of the working day and the expansion of activities outside the private sector – particularly not-for-profit public-sector production of social services or free goods, guaranteed employment, extension of the commons, and cooperative production and exchange – then these are precisely the kinds of transformative changes that activists can demand or seek to bring about through the formation of their own social networks and monetary circuits independent of the capitalist sector. Dmytri Kleiner is one person exploring some interesting ideas in this direction (see, for example, here and here).
A third avenue through which the state can influence the rate of profit acts upon c. The state can use fiscal policy to reduce the prices of the elements of constant capital. State investment in public infrastructure, investment subsidies and other measures reduce c relative to v and s. Although some of these measures involve public-sector employment, the infrastructure that results is essentially a gift to capitalists to the extent that it exceeds their tax payments. In some cases, subsequent privatization transfers the wealth into private hands at cheap prices. Alan Freeman has argued that this process occurred on a massive scale in the post-war US economy. In a sense, the transition of the Soviet economy to capitalism involved much the same process. Assets produced over decades in the public sector were then privatized, resulting in massive windfall gains for oligarchs.
In closing, it is perhaps worth reiterating that, even when capitalist states pursue a pro-capitalist agenda, the financial sustainability of accumulation will still depend on the degree to which distribution and financial regulations are conducive to balanced growth. Of course, it may be that in reality capitalist states hold to no such objective. To the contrary, the intention may be deliberately to use crisis, austerity and financial manipulation as a means of continuing the massive upward transfer of wealth to a tiny elite and the impoverishment of low and middle-income households.