In reviewing
Robert Brenner’s theories, Mick Brooks looks at the causes of capitalist crisis
and delves into such questions as the tendency for the rate of profit to fall
and overproduction. This article is to be considered as a contribution to the
debate among Marxists on the causes of capitalist crisis.
The Marxist historian Robert Brenner has written a survey on the world economy
since the Second World War which in the process of becoming the most
influential left wing economic analysis for more than a decade. His work is in
a special issue (no. 229/1998) of New Left Review entitled ‘The economics of
global turbulence’. It is updated in a book ‘The boom and the bubble’ published
in 2002. In future these two sources will be cited as B1 and B2 in this review
article.
Brenner’s survey is seen
as important – Perry Anderson in his 1998 introduction ludicrously praises him
by declaring that ‘Marx’s enterprise has certainly found its successor’. But
the articles will come over to any objective observer as exceptionally well
researched and authoritative. His conclusions are challenging. We need to take
them seriously.
Against ‘profits
squeeze’ theory
Brenner begins well.
"Between 1970 and 1990, the manufacturing rate of profit for the G-7
economies taken together" (this refers to the biggest capitalist powers)
"was, on average, about 40 per cent lower than between 1950 and
1970." (B1 p.7) And this fact is seen as central. "the radical decline in the profit rate has been the
basic cause of the parallel, major decline in the rate of growth of investment
– along with that of output itself – is, I shall argue, the primary source of
the decline in the rate of growth of productivity, as well as a major
determinant of the increase of unemployment." (B1 p.7)
This is surely right. If
capitalism is a system based on production for profit, movements in the rate of
profit are the heartbeat of that system. And the facts support that interpretation.
Brenner goes on to take
a pop at what he calls ‘supply-side explanations’. His terminology is a little
confusing. Brenner is actually referring to a trend in academic Marxism that
came to the fore in the 1960s and has been influential ever since. They are
better described as the ‘profits squeeze’ theorists. These observers noted the
decline of the rate of profit throughout the 1950s and 1960s, which led to
world crisis in the 1970s. In fact it announced the end of a period (1948-1973)
which we now see to have been a golden age for world capitalism. These
theorists did not believe this fall in the actual profit rate was caused by
Marx’s tendency for the rate of profit to fall, which we discuss later. They
saw the profit rate, and the share of profit in the economy which is easier to
work out from national income accounts, as being caused by the rising share of
wages. We don’t want to misrepresent the advocates of profits squeeze as
arguing rising real wages came out of a clear blue sky to cause the crisis of
capitalism. Books such as Andrew Glyn’s ‘British capitalism, workers and the
profits squeeze’ 1972 put forward a notion of ‘over-accumulation of capital’ as
the basic problem. But in the context of relatively full employment in the
advanced capitalist countries they believed worker militancy on wage demands
could be the trigger that pushed the system over the edge. In this they agreed
with the representatives of the capitalist class!
The notion of
over-accumulation is borrowed from a few scattered remarks by Marx.
"Overproduction of capital, not of individual commodities – although
overproduction of capital always includes overproduction of commodities – is
therefore simply over-accumulation of capital. To appreciate what this
over-accumulation is one would only
assume it to be absolute. There would be
absolute overproduction of capital as soon as additional capital for purposes
of capitalist production = 0. The purpose of capitalist production, however, is
self-expansion of capital, i.e. appropriation of surplus labour, production of
surplus value of profit at a point
therefore when the increased capital produced just as much, or even less,
surplus value than it did before its increase, there would be absolute
overproduction of capital. In both cases
there would be a steep and sudden fall in the general rate of profit, but this
time due to a change in the composition of capital not caused by the
development of the productive forces, but rather by a rise in the money-value
of the variable capital (because of increased wages)." (Capital Vol. 3
p.251, all references are to the Progress Publishers, Moscow edition of
Capital) This conjecture by Marx of a crisis triggered by rising wages is in
the nature of a ‘thought experiment’. In our view a hundred and forty years
later, that is still its status – a theoretical possibility, but not something
that has ever happened in the real world.
With the passage of
thirty years after their first writings, we are not interested in accusing the
profits squeeze Marxists of ‘blaming the workers for the crisis’. We just want
to show that this theory does not explain what has happened since. It is a
false analysis. Brenner agrees. His critique of the profits squeeze theory is
excellent.
First he develops the
argument of the left Keynesian economist Kalecki that in a boom capitalists
make more money. They do so because their factories are working flat out. By
using capacity to the full, they reduce costs and increase profits. They do so
even as real wages rise. In a boom more is produced, so both capitalists and
workers can be better off. Under such conditions militant class struggle is
unlikely to develop.
Secondly, Brenner
argues, as wages rise capitalists substitute capital for labour to put the lid
on their wages bill. Improved living standards for workers are a stimulus to
technological innovation on the shop floor that tilts bargaining power back in
favour of the bosses.
Finally, faced with a
threat, capital can migrate. While capital is leaving, immigrant labour can be
drawn in to reduce the bargaining power of the working class as a whole.
Later on Brenner
highlights his main points.
‘The universality
of the long downturn’. "none of the advanced capitalist economies was able to
escape the long downturn. Neither the weakest economies with the strongest
labour movements, like Great Britain, nor the strongest economies with the
weakest labour movements, like Japan, remained immune." (B1 p.22)
Second ‘the
simultaneity of the onset and various phases’. "The advanced
capitalist economies experienced the onset of the long downturn at the same
moment – between 1965 and 1973. These economies have, moreover, experienced the
successive stages of the long downturn more or less in lock step, sustaining
simultaneous recessions in 1970-1, 1974-75, 1979-82 and from 1990-91." (B1
p.22) How is it possible, Brenner asks, for the different course of the class
struggle in different countries to produce these global trends?
Last, ‘the length of
the downturn’. "Finally, the fact that the downturn has gone on for so
very long would seem to be fatal for the supply-side approach." "it is almost impossible to believe that the
assertion of workers’ power has been both so effective and so unyielding as to
have caused the downturn to continue over a period of close to a quarter
century." (B1 p.22)
These are trenchant
arguments. They are arguments in the spirit of Marx himself, who explained that
the movement of wages in the boom-slump cycle was ‘the dependent, not the
independent variable.’ Marx realized that workers were in a stronger bargaining
position with relatively full employment and could push wages up. They were
under the cosh in a recession, with hundreds prepared to take their job for
less pay if the alternative was unemployment. But the ups and downs of wages
mirror the ups and downs of capitalism, they do not cause them.
So there is a crisis in
profits and it is not caused by ‘greedy’ workers. Brenner goes on to reject our
alternative, that the rate of profit is falling for reasons outlined by Marx
himself. "Fundamentalist Marxist theory, which sees the economy’s tendency
to increase productivity by relying to an ever greater extent on indirect relative
to direct labour as leading inexorably to a fall in the rate of profit.
Paradoxically, this theory, too also posits a
decline in profitability as resulting from declining productivity." (B1
p.11)
Now this is just not
true. Outlining the tendency for the rate of profit to fall in Capital Vol. 3,
(p.212:) Marx explains, "It is likewise just another expression for the
progressive development of the social productivity of labour, which is
demonstrated precisely that the same number of labourers, in the same time,
i.e. with less labour, convert an ever-increasing quantity of raw and auxiliary
materials into products, thanks to the growing application of machinery and
fixed capital in general." So for Marx the rate of profit tends to fall
not because productivity growth slows but because it doesn’t. This is a simple
misunderstanding of Marx’s position. But before we look at more detail at
Brenner’s critique, we’ll try to explain Marx’s theory.
Dynamics of
capitalism
Marxists believes that
capitalism is a system based on profit. Profit is nothing other than the unpaid
labour of the working class. Marx looks at the value added by the worker in the
production process. He divides this added value in any piece of work, or in any
period of time the worker puts in, into two parts. Paid labour is the work done
that is returned to the worker in the form of wages. The workers are not paid
for the labour they put in, but for their labour-power (literally their ability
to work). In other words they are paid for their keep at whatever is
established as the norm for workers in the time and place they live. Workers
are exploited in the strictly scientific sense that they produce more value
than what they are paid in the form of wages. So there’s also unpaid labour
going to the employing capitalist, or to other sections of the capitalist
class. Rent, interest and profit is the classical formula for the way the
surplus produced by the worker is divided up, though there are other hangers on
as well.
For Marx, commodities
are on average sold at prices proportional to their values, in terms of the
labour time embodied in their production. We divide the working time into two
parts – paid and unpaid labour. But the value of a commodity also consists of
the indirect labour involved in its production. In the case of a Kit Kat, for
instance, the price is not just some money which goes back to the workers as
wages and the surplus value (as Marx calls it) shared out among the different
sections of the capitalist class. It also consists of the price of chocolate
the capitalist pays for the workers to pour over the biscuit bars. And it
consists of the depreciation on the machinery the workers use in their task,
and on the building where they work. All these things Marx calls constant
capital (c) because they pass their value unchanged to the final product.
The element that the capitalist lays out on wages is called variable capital
(v), because only by putting workers to work can the bosses make a surplus.
Finally there is the surplus value (s). So the value of a commodity can
be resolved into constant capital, variable capital and surplus value.
Marx believed the
fundamental tendency in capitalism was what he called the accumulation of
capital. This means that rather than just guzzling the surplus value produced
by workers, capitalists are forced to plough back most of it into production.
Why? Capitalists are competing with each other. The best way to sell more than
a rival is to sell cheaper. The best way to sell cheaper is to make the goods
cheaper, that is in less time. Historically, the progressive task of capitalism
has been to raise the productivity of labour through the application of science
and machinery to the production process. In Marxist terms, this process is
bound up with the extraction of relative surplus value. Let us explain.
In Marx’s view
capitalists do not innovate in order to reduce costs (though that may be the
result of innovation), contrary to Okishio’s theorem (see below). They innovate
in order to raise the rate and/or mass of surplus value. The outcome is not
‘willed’ by anyone but is a result of forces of which individual actors are
unaware. The first capitalist who introduces a new technique which raises the
productivity of labour may sell the goods at the old price corresponding to the
old value – the socially necessary labour time formerly necessary to deliver
the product. Alternatively he or she may drop the price a fraction in order to
realise the greater mass of goods produced as a result of reaping scale
economies in an improved production process. In either case the innovating
capitalist sells above the individual value, the new amount of socially
necessary labour time to produce with the new technology. And in either case
the capitalist makes a super profit. That is probably their intention. So far,
so good.
Where does this super
profit come from? If we assume, as Marx did at this level of abstraction, then
it must represent a redistribution of surplus from other capitalists. The
alternative explanation seems to be that it comes out of thin air.
As the innovation
becomes generalised the super profit disappears and the commodity is sold at a
price corresponding to its new, lower value. The production of relative surplus
value is therefore a process of progressively cheapening commodities. That is
its result – that is not what anyone wills. This is important to bear in mind
when we look at Okishio’s theorem and when we come to Brenner’s own analysis
which is based on it.
This accumulation
process is associated with increasing the amount of machinery behind the elbow
of each worker. This means direct labour (v) being increasingly replaced with
indirect labour (c) as a proportion of the values in the product. We are
simplifying, but we will deal with Marx’s dialectical method a little later.
Accumulation, then, is associated with what Marx called an increase in the
organic composition of capital, that is an increase in the proportion of
capital devoted to constant as against variable capital.
Constant capital may
make the worker more productive, but it passes its value unchanged to the final
product. For the capitalist, it is just a cost and, over time, an
ever-increasing cost.
So accumulating capital
means the boss can exploit the worker more, but it is likely to cost more. That
poses the possibility of a tendency for the rate of profit to fall
The tendency for
the rate of profit to fall and capitalist crisis
"This is in every
respect the most important law of modern political economy, and the most
essential for understanding the most difficult relations. It is the most
important law from the historical standpoint. It is a law which, despite its
simplicity, has never before been grasped and even less consciously
articulated." This is how Marx announced his discovery of the tendency for
the rate of profit to fall in the Grundrisse (at p.748). Why is this tendency
so important? What does it do to the capitalist system? And what is its
relationship to capitalist crisis? One of the great services of Brenner’s
analysis is to put the falling rate of profit centre stage in the progress of
post war world capitalism. Brenner proves chapter and verse that the crisis of
the world economy is essentially a crisis of profitability.
Overproduction?
It is often stated that
the crisis of capitalism is basically a problem of overproduction. This does
not mean that too much is produced in absolute terms; it means that more is
produced than can be sold to the working class. And how can this be possible?
It is possible only because capitalism is a system of production for profit.
The system only exists because it does not pay workers ‘the full fruits of
their labour’.
Marx did not deny this.
"The conditions of direct exploitation, and those of realizing it, are not
identical. They diverge not only in place and time, but also logically. The
first are only limited by the productive power of society, the latter by the
proportional relation of the various branches of production and the consumer
power of society. But this last-named is not determined either by the absolute
productive power, or by the absolute power, but by the consumer power based on
antagonistic conditions of distribution, which reduce the consumption of the
bulk of society to a minimum varying within more or less narrow limits. It is
furthermore restricted by the tendency to accumulate, the drive to expand
capital and produce surplus value on an extended scale" (Capital Vol. 3
p.249). This passage is part of Marx’s discussion of the tendency for the rate
of profit to fall. In other words the drive for profit and the same tendencies
that produce a tendential fall in profit rates are responsible for the problems
confronted by capitalists of how to realise their surplus value (by selling the
goods). The difficulties in realising surplus value which has already been
produced is what we call overproduction. So is overproduction, which Brenner
rightly sees as a fact in the crisis-ridden phase of the post war world
economy, unimportant? Not at all. Overproduction is the form of appearance
of a profits crisis, as Marx makes clear.
It is also said that
capitalism goes into crisis because the workers cannot buy back all the goods
they produce. Of course they can’t. Workers can buy as much as their wages
allow them to. But they spend the rest of their working time producing surplus
value. The bosses have a choice as to what to do with this surplus value. They
can consume it by buying ‘luxury’ goods. In doing so they provide a market for
capitalists producing Rolls Royces, Rolex watches and caviar. These capitalists
never expected to find workers among their customers. They also devote a
sizeable proportion of national income on ‘collective luxury spending’, such as
arms. These products do not enter into the standard of living of the workers.
They are not wage goods.
Or bosses can invest
part of their surplus value. The capitalists who produce fork lift trucks,
lathes and mainframe computers do not expect to sell them to the working class.
The market for capital goods is found from the surplus value capitalised
(invested) by other capitalists. Of course, by ploughing back a large part of
the surplus value produced by the working class, capitalism makes them still
more productive and widens the gap between what workers produce and what they
can afford to consume. That is a contradiction of capitalism.
Here is Marx’s view on
the subject of ‘underconsumption’: "It is pure tautology to say that
crises are provoked by a lack of effective demand or effective consumers that commodities are unsaleable means only that no
effective purchasers have been found for them. But if one were to attempt to give this tautology the semblance of a
profounder justification, by the statement that the working class receives too
small a portion of its own product one could only
remark that crises are always prepared precisely by a period in which wages
rise generally, and the working class actually gets a larger part of the annual
product which is destined for consumption." (Capital Vol. 2 p.414-5)
As to the argument that
‘capitalism restricts the market’, Lenin spent a great deal of his early
political career arguing the opposite. His adversaries in the movement against
autocracy were the Narodniks, a sort of utopian socialist grouping. They argued
that capitalism would not be able to develop in Russia because it restricted
the market. Lenin and the other pioneer Marxists argued that capitalism
actually creates the market. In a series of works culminating in ‘The
development of capitalism in Russia’, Lenin argued that the coming of capitalism
destroyed the self-sufficient lifestyle of the peasants, forcing them to buy
and sell to make a living. And capitalism separated producers from the means of
production, forcing them to work for wages. Hence the Marxists saw the new
working class created by these processes as the vanguard fighters against
Tsarism.
The Narodniks saw,
correctly, that capitalism impoverishes the small producers. From this they
argued, wrongly, that it shrinks the market. Actually capitalism creates a
market, but a very unequal market.
How are we to foresee
the movement of capitalism into crisis? It’s no good looking for ‘the reduced
consumption of the bulk of society’. That is a permanent condition of
capitalism, without which the system could not exist. In fact we know wages
tend to rise towards the end of a boom as full employment draws closer. And
it’s pointless to go looking for signs of overproduction. All that shows is
that the crisis is already underway. To say that capitalist crisis is caused by
overproduction has no explanatory power.
But what causes the
appearance of overproduction is the decline of the profit rate, and that can be
analysed and predicted. "The rate of profit is the motive power of
capitalist production. Things are produced only so long as they can be produced
with a profit." (Capital Vol. 3 p.259)
As we have seen, Marx
discussed overproduction and over-accumulation (overproduction of capital) in
his writings. He did so in the context of the tendency for the rate of profit
to fall, in his writings in Capital Vol. III on that subject. Marx saw
over-accumulation as a possibility only because the rate of profit is the
reason for existence of capitalist production. From the quote from Marx we used
earlier we saw that over-accumulation was a possibility only because adding
more capital might not increase profits – indeed it might actually reduce them.
Competition
between capitalists?
In exactly the same way
competition between capitalists is important. But it is important as the
executor of the laws of motion of the system. "Competition can permanently
depress the rate of profit in all branches of industry, i.e. the average rate
of profit, only if and so far as a general and permanent fall of the rate of
profit, having the force of law, is conceivable prior to competition and
regardless of competition. Competition executes the inner laws of capital;
makes them into compulsory laws towards the individual capital, but it does not
invent them. To try to explain them simply as results of competition therefore
means to concede that one does not understand them." (Grundrisse p.752)
Countervailing
tendencies
Marx deals with the
counteracting forces on the tendency for the rate of profit to fall in three
chapters in Capital Vol. 3. The first chapter is ‘The law as such.’
The second is entitled ‘Counteracting influences’. The final chapter is ‘Exposition
of the internal contradictions of the law.’ We can see at once that the
‘law’ does not mean that the rate of profit will always fall. It is not a
prediction. The tendency for the rate of profit to fall is a force
operating on the capitalist system. This force actually unleashes contradictory
forces that may tend to drag the rate of profit up.
Let’s look in more
detail at the three main counteracting forces mentioned by Marx. First is increasing
intensity of exploitation. If the capitalist can get his work force to
produce double the quantity of products in a given time, then each commodity
will contain less labour and will tend to cost less. If these commodities are
part of the basket of goods the workers take as part of their standard of
living (‘wage goods’) then the workers will need to spend less time on
producing the elements of their own wage and more time will be ‘freed’ up to
produce surplus value. This is the process of the production of relative
surplus value mentioned earlier. Obviously if the price of Kit Kats fall you
don’t feel materially much better off, but this raising of productivity is
assumed to be going on all over. Marx assumes at this stage that workers’ real
wages (in terms of purchasing power) will remain unchanged. The end result of
raising the productivity of labour is thus to increase the rate of surplus
value (rate of exploitation). This is achieved by reducing the number of hours
the worker has to spend on reproducing the elements of their labour power and
thus increasing the time they can devote to producing surplus value for the
boss.
Second Marx assumes that
on average commodities are sold at their value for the purposes of his
analysis. He was well aware that this is not always the case. In fact, he was
by far the finest and most systematic chronicler of his time of the abuses of
the capitalist system. He knew that the value of labour power was established
by class struggle and had ‘a historical and moral element’. Therefore in
practice depression of wages below the value of labour-power is
important in practice in raising the rate of profit, not this time by making
workers produce more but by paying them less.
Third there is cheapening
of elements of constant capital. Just as the elements of variable can be
made cheaper through raising the productivity of labour, so can the elements of
constant capital. So, though there may be a much greater mass of machinery
behind the elbow of each worker, each unit of capital may cost less. Though the
labourer is working up more and more raw materials over a given period of time,
each piece costs less because it takes less time to produce. "The
foregoing (cheapening of elements of constant capital) is bound up with the
depreciation of existing capital (that is of its material elements), which
occurs with the development of industry. This is another continually operating
factor which checks the fall of the rate of profit, although it may under
circumstances encroach on the mass of profit by reducing the mass of capital
yielding a profit. This again shows that the same influences which tend to make
the rate of profit fall, also moderate the effects of this tendency."
(Capital Vol. 3 p.236)
How the tendency
works in practice
Marx’s analysis is
actually more subtle than Brenner gives it credit for. "There is a
possibility for the mass of profit to grow even though the rate of profit may
fall at the same time." "We have
shown how the same causes that bring about a tendency for the rate of profit to
fall necessitate an accelerated accumulation of capital and, consequently, an
increase in the�total mass of the
surplus labour (surplus value, profit) appropriated by it" (Capital Vol. 3
p.224-5). In Volume 3 of Capital, Marx even referred to the law as a
"double-edged law of a decrease in the rate of profit and a
simultaneous increase in the absolute mass of profit arising from the
same causes." (p.220)
Second "a given
quantity of newly added labour materializes in a larger quantity of
commodities. Considered abstractly the rate of profit may remain the same, even
though the price of the individual commodity may fall as a result of the
greater productiveness of labour and a simultaneous increase in the number of
this cheaper commodity if, for instance, the increase of the productiveness of
labour acts uniformly and simultaneously on all the elements of the commodity,
so that its total price in the same proportion in which the productivity of
labour increases while, on the other hand, the mutual relations of the
different elements of the price of the commodity remain the same."
(Capital Vol. 3 p.230)
So the rate of profit
can fall, and usually does fall, while the mass of profit available to the
capitalist class rises. In addition the mass of profit is expressed in a
greater and greater quantity of use-values (‘wealth’), each of which involves
less and less labour time to produce, and so each has less value congealed within
itself.
Okishio’s theorem
What’s the matter with
Marx’s analysis, according to Brenner? His entire confrontation with Marxist
theory is contained in a long footnote on pp.11-12 of B1. "For if, as Marx
himself seemed to have taken for granted total cost
(labour plus capital, or direct and indirect labour) per commodity, it seems
intuitively obvious that the ultimate result of their innovation, when it is
generally adopted in their line, can be only to reduce the value of the goods
produced in their line and thus, directly or indirectly, to reduce the exchange
value of the wage, and thus to raise the average rate of profit. It certainly cannot be to reduce the rate of profit.
Formal proof of this result can be found in N. Okishio" capitalists are assumed, in response to competition, to adopt technical
changes that raise their own rate of profit by reducing their
That’s all there is!
Brenner cites the offsetting effects mentioned by Marx and referred to by us
earlier, that raising the productivity of labour will make goods cheaper. This
in turn will reduce someone else’s costs, for in the circular flow of national
income, one capitalist’s outputs are another’s inputs. Whereas Marx believed
there was a tendency for the rate of profit to fall, Brenner seems to believe
in a tendency for the rate of profit to rise without limit, this time without
any countervailing tendencies. Brenner’s proof? He airily refers us to the
formal (mathematical) paper by Okishio.
In one line Okishio’s
theorem may be stated as ‘willingly introduced techniques must raise the rate
of profit’. Here’s how. An innovation will only be introduced by a capitalist
if it reduces costs overall. Since profit is the difference between revenue and
costs, costs must have gone down while revenue has remained the same. After
all, why should it change? So profits must have gone up. If one capitalist’s
profits are higher while the others are unchanged, profits overall in the
economy must have increased.
The alternative is that
the innovating capitalist passes on his or her cost reduction in the form of a
fall in prices. Since one firm’s output is another firm’s input, again costs
have fallen while revenue is the same. So profits once more must have gone up,
according to the theorem. Marx is adamant that cost-cutting is not the
motivation. "No capitalist ever voluntarily introduces a new method of
production, no matter how much more productive it may be, and how much it
increases the rate of surplus value, so long as it reduces the rate of profit."
(Capital Vol. 3)
There’s something fishy
about Okishio’s theorem. What is a ‘willingly introduced technique’? Under what
conditions may techniques be introduced unwillingly? We are not told. Okishio
starts with a notion of what capitalists think and what they want, and what
they do as a result. (This is called ‘microfoundations’ and is popular with
academics who describe themselves as analytical Marxists. It is an application
of methodological individualism – the idea that the nature of a society can be
derived as the resultant of the wills of the individuals within it. Readers
will recognise it as philosophical idealism, the idea that ‘consciousness
determines being,’ in another guise)
Marxists start with the
nature of capital as self-expanding value and its relationship to the working
class. Marx was not much concerned with the psychology of individual
capitalists which, indeed, he believed was determined by their conditions of
existence. These criticisms can also be applied to Brenner’s hypothesis, as we
shall see later. "The way in which the immanent laws of capitalist
production are manifested in the movements of individual masses of capital: the
way in which they assert themselves as the coercive laws of competition and
thus enter the consciousness of the individual capitalists in the form of
motives – these matters lie outside the present scope of our enquiry."
(Capital Vol. 1)
The second point is to
query the whole purpose of Okishio’s theorem. The logic is that the rate of
profit must continually rise. Nobody suggests that is what is actually
happening. Nobody has ever run statistical tests. It is as if nobody thinks the
theorem is important in the real world. The gloomy conclusion we come to is
that Okishio’s theorem was propounded for one reason only – one of the oldest
reasons for intellectual endeavour. It was put forward to disprove Marx.
Third – what sort of
innovation are we talking about? Economists usually divide the purpose of
introducing new techniques in two. Process innovation is usually defined as
making old products in new ways. Since these new ways will usually be more
cost-efficient, that seems to fit Okishio’s theorem nicely.
But then there is
product innovation. This can be defined as producing new goods in old ways.
This is not intended to raise the rate of profit. It is meant to pioneer a new
market. Its effect on the rate of profit is indeterminate.
Even in the case of
process innovation, the results are by no means as clear cut as it may seem to
such a ‘theoretical’ economist as Okishio. In the real world innovation is a
process of trial and error. In Okishio’s world, there is no uncertainty.
Capitalists select the new technique from off the shelf, knowing exactly what
it can do for them. In the real world innovation is a matter of learning by
doing. It is an old story, going back as least as far as the power loom, that
pioneer machines are often slower and more inefficient than the old tried and
tested ways. It is only through effort and application that cost cutting is
achieved over time. The notion of a thunderclap of inspiration which invests
Okishio’s concept of innovation is a far cry from the continual drip of
perspiration leading to gradual improvement in firms in the real world.
Fourth, the mathematical
models that ‘explain’ Okishio’s theorem completely abstract from fixed capital.
Yet it is surely the increase in the mass of machinery behind the elbow of each
worker that is the intuitive basis for Marx’s perception (in ‘The law as such’)
that the organic composition of capital rises and therefore there is a tendency
for the rate of profit to fall. And Okishio abstracts from all that, that is to
say he ignores it! "Here we will ignore durable equipment" declares
the article in the ‘Palgrave dictionary of economics’ on Okishio’s theorem,
written by Okishio himself. It is not surprising under these conditions that he
can use maths to ‘prove’ that the rate of profit must continually rise.
Fifth, rising
productivity can cheapen the elements of constant capital. This one of the most
important counteracting factors to the tendency for the rate of profit to fall.
The mass of machinery at the disposal of the worker grows continually, but its
value grows much slower. It is obvious that in the real world capital stocks of
different vintages enter into the determination of the rate of profit. This is
very important when we come to look at Brenner’s own analysis. It is also
obvious that this capital is not ‘uniformly and instantaneously’ devalorised by
technical progress to use the phrase from Marx we quoted earlier. But this is
exactly what Okishio assumes! His mathematical ‘proof’ consists in a set of
simultaneous equations. Ex hypothesi, as soon as innovation starts, before it
is even generalised, the reduced value of outputs is reflected in the reduced
values on the ‘inputs’ side of the equation. In the real world, machinery which
may have been bought years before undergoes a ‘moral depreciation’ (its price
falls below its individual value, determined in the past) but this is a gradual
discovery process on the part of the capitalist, not an instantaneous result.
Sixth, and related to
the previous point, innovation takes place in real time. As we explained when
we dealt with the extraction of relative surplus value prices do not fall
simultaneously with innovation, as a simultaneous equation suggests it must.
Okishio inhabits a fantasy world far from the real process of the accumulation
of capital.
Finally we underline a
point made earlier. If one capitalist makes a super profit, where does it come
from? The only materialist explanation, surely, is that it comes from a
redistribution of surplus value from other capitalists. The alternative
explanation is that it is a gift from the gods.
So what does
Brenner think causes profits to fall?
Brenner agrees with Marx
that the rate of profit tends to fall over time. He argues that this tendency
is central to understanding the post-War world economy. But he disagrees
fundamentally with Marx as to why this is happening. He has also ruled out
‘profits squeeze’ from wages as a major factor. So what’s his explanation?
"I start from the
premise that, under capitalist social-property relations, the generalization of
the individual norm of profitability maximization combined with the pressure of
competition on a system-wide scale tends to bring about the growth of the
productive forces and overall productivity, with the result that, on the
assumption that the real wage remains constant, both the rate and mass of
profit rise, assuming there are no problems of realization." (i.e. getting
the surplus value back by selling the goods -MB) "But, given capitalism’s
nature, realization problems cannot be assumed away. The same cost-cutting by
firms which creates the potential for aggregate profitability to rise creates
the potential for aggregate profitability to fall, leading to macroeconomic
difficulties." (B1 p.24)
Let us agree with
Brenner that capitalist development inevitably produces overproduction and
overcapacity in its wake. What is central to his analysis is the response to
this – ‘cost-cutting by firms’. It is competition among capitals that triggers
the crisis, according to Brenner.
This flies in the face
of Marx’s analysis that ‘it is one thing to share out profits and another to
share out losses’. In discussing ‘over-accumulation’ Marx declares, "The
rate of profit would not fall under the effect of competition due to
overproduction of capital. It would rather be the reverse; it would be the
competitive struggle which would begin because the fallen rate of profit and
overproduction of capital originated from the same conditions." (Capital
Vol. 3 p.252) Marx’s analysis makes sense; "a fall in the rate of profit
calls forth a competitive struggle among capitalists, not vice versa."
(Capital Vol. 3 p.256) Capitalists co-operate with each other in a boom and
claw each other’s eyes out in a recession.
Adam Smith and
Robert Brenner
We’ve been here before.
In Theories of Surplus Value Vol. 2 (p.438) Marx notes, "Thus Adam Smith
says; as a result of the growing accumulation of capital, and the growing
competition between capitals which accompanies it. Ricardo retorts; competition
can level out profits in the different spheres of production but it cannot lower the general rate of profit."
Brenner is opposing an
important thread in Marxist theory. We do not start with what individual
capitalists want, and what therefore they do. We see competition as the
executor of the laws of the system. Struggle between individual capitalists is
not a gadarene rush of capitalists off a cliff. It is a consequence of a system
in crisis.
Constant capital,
fixed costs and sunk costs
We are not suggesting
that Brenner is simply repeating old errors by Adam Smith. But the roots of his
approach lie there. What is new about Brenner’s analysis is that he introduces
the notion of sunk costs into Marxist discourse. Let’s pause for breath.
Bourgeois economists before and after Marx distinguished between fixed
and circulating costs. This is not the most important distinction for
Marxists. Fixed costs are investments which depreciate over a period of time –
in particular over more than one production period. Fixed costs includes
buildings, machinery etc. In Marxist terms, fixed capital passes its value
gradually to the finished product through depreciation. We can surmise that a 1 million machine that makes one million widgets
before it is worn out passes 1 in value to
each widget. We don’t have to assume that depreciation goes in a straight line
(that is, the machine is worth exactly 999,999 after producing one widget and thereafter is losing 1 in value for each widget produced. Anyone who has
bought a new car knows it loses 1,000 off its
price when you drive it round the corner. In addition to physical depreciation
modern machinery is subject to moral depreciation. Its price drops below its
value and has to be scrapped before it is worn out because it can no longer
keep up with the competition. But the capitalist does need to get the money
back on their investment in fixed capital.
Circulating costs are those
that can be recouped in a single production period. Labour power and raw
materials are both examples of circulating costs. The capitalist producing Kit
Kats has chocolate poured over the bar by a worker for, let us say, ten
seconds. The capitalist has to pay the worker for the ten seconds’ work and buy
the chocolate up front. But once the consignment is shipped out and sold, the
capitalist has ‘realized’ the surplus value locked up in the chocolate bars and
the cycle of the production of surplus value can begin again.
Now the reader can see
that the distinction between fixed and circulating costs is an important one
from the perception of the capitalist, who has money locked up for ages in the
form of fixed capital. But while economists were emphasizing this distinction,
they were in effect covering up the one that really matters. Both machinery
(fixed) and raw materials (circulating costs) are forms of constant capital in
Marxist terms, because they pass their value unchanged to the final product.
Labour power (also a circulating cost) is variable capital because it can yield
a surplus. Marx had a major intellectual struggle against the primacy of these
rules of accountancy that concealed the reality of exploitation.
Now to sunk costs. Sunk
costs are fixed costs that are unrecoverable upon exit from an industry. For
example I may choose to enter the takeaway pizza industry as Mick’s pizzas.
Apart from premises and motorbike riders, I need a pizza oven and advertising
fliers to put through doors to make people aware of my business. Apparently
there is a vigorous second hand market in pizza ovens. I can sell out at any
time without losing anything on the oven apart from depreciation as a result of
cooking pizzas. I get my money back. But if I quit, I’ve lost my investment in
‘Buy Mick’s pizzas’ fliers forever.
Sunk costs is a concept
developed in recent years by bourgeois economists interested in the realities
of competition. In the homely example above, I may be inclined to stand my
ground and compete rather than close down immediately when the big pizza chains
open up near me. I know that my advertising expenditure is a sunk cost,
unrecoverable if I run away from the competition.
Let Brenner explain.
"Already existing, already paid for – or sunk – fixed capital
discouraged further capital accumulation, because it enabled firms to use their
existing plant and equipment free of charge, so long as they could make at
least the average rate of profit on the expenditures on variable capital
(wages, raw materials and intermediate goods) required to put that fixed
capital into motion. This enabled them to discourage entry by more
technologically advanced potential rivals who could reduce unit costs below
incumbents’ total costs but not below their circulating costs per unit."
(B2 p.11)
As the reader may have
gathered, sunk costs is not a rubbish concept. It can be quite useful in
analyzing when price wars may break out or when capitalists can resolve their
differences peacefully. (Of course, this is not why Marxists study economics).
But this precious concept is stretched to breaking point when Robert Brenner
uses it as the centre piece of his analysis of competition between capitals in
the world economy since the Second World War.
The heart of the
argument
In ‘outline of an
alternative explanation’ (B1 p.24- ), Brenner puts forward his theory. The
competitive struggle between capitalists is perceived as a struggle to cut
costs (Okishio’s position). Cost-cutting competition leads to overproduction
within the industry. How do firms respond? Brenner assumes there are
established firms which have not adopted all the latest technology (we will
call them laggards) and new entrants who have naturally tooled up with state of
the art technology (these we call leaders). Leaders, "rather than merely
replacing at the established price the output hitherto but no longer produced
by a higher cost firm which has used up some of its means of production – as in
the aforementioned case of perfect foresight and perfect adjustment – real world
cost-cutting firms, by virtue of their reduced costs, will reduce the price of
their output and expand their output and market share at the expense of
the higher cost competitors, while still maintaining for themselves the
established rate of profit." (B1 p.25) Fair enough. The leaders have lower
costs. The real question is why don’t the leaders blow the laggards out of the
water with low prices?
Brenner continues his
narrative. "If they possess fixed capital, firms which sustain
reduced profitability as a result of the introduction of lower-cost and
lower-priced goods by cost-cutters in their line cannot be assumed to
respond by more or less immediately leaving the line; this is because it is
rational for them to remain in the line so long as the new lower price allows
them at least to make the average rate of return on their circulating capital –
that is the additional investment in labour power, raw materials and
semi-finished goods that is required to put their fixed capital into
motion." (B1 p.26)
Brenner concludes his
analysis by asking how low-cost firms make more profit than the average and
concludes, "We know that, to the extent that the reduced price in the line
leads, as above, to a reduction in profitability in that line, that same
reduced price will provide an equivalent increase in income to others in the
economy who purchase these goods as their inputs." (B1 p.29) The question
is, who actually secures these gains? And his conclusion is ‘the new prey on
the old’. In other words there is a continual transfer of values from the
laggard capitalists to their leading competitors.
The concept of sunk
costs is critical to Brenner’s analysis. The laggards are actually losing money
in the sense that they are selling at prices that will not replace their fixed
constant capital. They are only showing a ‘profit’ for this reason. Though our
earlier example of a capitalist putting a in a piggy bank every time they sell a widget and having exactly enough
money to replace the machine when it is knackered is obviously a
simplification, the fact is that these capitalists are not putting money aside
for reinvestment, even at the old level of productivity. Why are they doing
this? Why don’t they just get out? Brenner’s argument is that they know they
won’t get the money invested in capital back if they do – they are faced with
sunk costs.
But Brenner’s analysis
is contradictory. The laggards are selling at prices that do not cover the
replacement of fixed constant capital, just wages and materials. (They have to
pay these otherwise production will cease.) In effect they have written their
capital off. But if it has been written off, it can’t be a sunk cost!
How does Brenner get
himself into this pickle? It is because he treats capital as a thing, when in
fact it is a social relation. Marx dealt with the three circuits of capital.
From one point of view capital starts as a sum of money. This is then spent on
means of production ( c ) and labour power (v). These are brought together in
the production process. The produced goods are realised and capital once more
appears as a sum of money – a bigger sum of money. This is the circuit of money
capital. Then there is the circuit of productive capital with capital starting
and finishing in the production process. From yet another, equally valid, point
of view we have a circuit of commodity capital. The point is, these are all
different forms of appearance of capital. In effect Brenner is just looking on
capital as machinery.
Isn’t it possible for
the process described by Brenner to happen in the real world? Certainly
individual capitalists find their capital devalorised. Its original value, in
terms of the socially necessary time to produce it at the time it was
constructed, is destroyed by the entry of shiny new capitals with higher
productivity. To get any money back at all the laggards have to sell at a loss.
As a result they do not recoup the cost of their investment in fixed capital.
We agree with Brenner that all this can happen and does happen. But classical
Marxists would argue that this contradiction is resolved by the destruction of
the laggard capitals through bankruptcy. Just as Brenner finds incredible the
argument of the ‘profits squeeze’ theorists that wage militancy should plunge
the entire capitalist world into a prolonged crisis for three decades, so we
find it difficult to believe him when he argues that laggard capitals can
linger on in a half life for thirty years of stagnation.
Even bourgeois
economists understand that capital goes through various phases. They use a
‘putty-clay’ analogy which points to the different time scales involved in the
life of capital. In the long run capital is money. It is putty. It can be
turned into a fleet of passenger aircraft, part of a car plant, or a shop in
Oxford Street. Once it is transformed into a productive use (productive of
surplus value) it is clay – fixed in that form for the time being. Over time
the capital asset will depreciate but the continual sale of commodities at a
profit should provide money for its replacement. In the long term the owner of
an unsuccessful budget airline can opt to become the owner of a chain of shops.
Capital in money form allows the capitalist to invade any sector with a higher
rate of profit. That is how the rate of profit is equalised between different
industries.
In Brenner’s analysis,
fixed capital can only be a sunk cost in the short term. In the longer term,
laggard firms will either disappear or migrate to more profitable sectors of
production.
Do Marxists accept the
‘putty-clay’ analogy? Not entirely. It is useful in pointing to the difference
between capital in the long and short term. The problem is, the concept of a
long term and a short term itself is simplistic. Bourgeois economics basically
treats productive capital as ‘stuff’. This understates the richness and
complexity of actual capital equipment. Most capitalists may own such items as
buildings, fork lift trucks, PCs, a fleet of delivery vans, lathes, tills and a
whole host of other pieces of capital equipment, all of different vintages and
all depreciating over different time scales.
So what? We believe that
capitalists have to recover the cost of their fixed capital. And we agree that
they often don’t, because of the devalorisation of capital. But we would argue
that this non-stop destruction of capital, which is an inevitable feature of
capitalist ‘progress’, takes the form of the destruction of the failing firms.
And because productive capital consists of different items of equipment which
all have to be replaced at different times, the laggard capitalists cannot just
discount their entire capital stock.
That is the principal
difference between Marx’s position and the analysis by Brenner. Capitalists
cannot survive forever on antiquated technology, as Brenner believes. In fact
there was a massive destruction of capital in the 1970s and 1980s – as anyone
who was politically active at the time will recall. Great swathes of British
capitalism disappeared, never to return.
So for Marx overcapacity
is a moment of capitalist crisis, not a permanent condition of its existence.
Excess capacity is destroyed in a slump, preparing for a recovery – till the
system falls again at the next fence. In fact Brenner’s analysis indicates the
problem is one of chronic stagnation, not of boom and bust. Now it is quite
true that since the definitive end of the ‘golden age’ of the post-war boom
capitalism has been characterised by slower growth,. But there have also been
crises in 1979-82, 1990-91 and at the present. These have to be explained. They
can only be explained with the help of Marxist economics.
The nature of
capitalism
Robert Brenner
‘privileges’ manufacturing in his analysis of post-war capitalism. We agree it
has an importance beyond the proportion of the working class that works in this
sector. All the dramatic improvements in productivity have taken place in
manufacturing. In the ‘service’ sector (not a Marxist expression, but one we
have to deal with because of its importance in national income accounting) in
many cases productivity has not increased at all. Consider the case of
cleaners, bar staff, shop workers, lorry drivers, actors and waiters. In many
other cases (such as nursing) the whole notion of productivity measurable
against an outcome is frankly ludicrous. We deal with Brenner’s account of the
interaction between rising productivity and lower costs in manufacturing and
the non-manufacturing sector at a later stage.
For the present, we want
to criticise what we regard as a simplistic depiction of competition among
capitalists in the manufacturing sector. It is perceived as a relentless drive
to cut costs and sell cheaper. This might be a realistic depiction of the world
steel market. Brenner does not mention individual industries in any detail. The
case of steel actually is a very bad example for his thesis. Inefficient
producers in the advanced capitalist countries have not been able to survive by
wallowing in obsolescent technology and selling at a low price at the cost of
consuming their capital. They have been threatened by new entrants to the world
market such as Korea armed with state of the art technology. Many have gone
under. Those who have survived have done so by retooling in order to compete
with the market leaders.
But steel is an
exception. It is an exception because it is a homogenous good. Nobody can tell
where steel of a given grade was produced. Most goods, certainly most consumer
goods, are differentiated from one another. Cars differ by nature. And car
manufacturers deliberately accentuate these differences. They spend enormous
amounts of money trying to persuade people how different their product is from
everyone else’s even when, and especially when, it’s not really much different.
Brenner spends a lot of
time discussing under what conditions capitalists may collude and under what
conditions destructive price wars may break out. But the normal course of
modern oligopoly capitalism is neither collusion nor competition on price,
though these have their place, but never-ending non-price competition, the
never-ending search for a new market or market niche for new products. This
entire dimension of capitalist ‘competition’ is missed out in his analysis.
Equalisation of
profit rates
Since capitalism is
production for profit, each capitalist seeks a higher rate of profit. The
resultant of this search however is a tendency for a uniform rate of profit to
be established throughout the system. This equalisation of the profit rate is a
tendency, not an accomplished fact. It comes about precisely through the
constant striving of capitalists for higher profits than their fellows.
Nor is this process
instantaneous. It is accomplished within industries and across industries
throughout the system. Within a branch of industry we believe it is achieved
through the innovation process outlined by Marx. "No capitalist ever
voluntarily introduces a new method of production, no matter how much more
productive it may be, and how much it increases the rate of surplus value, so
long as it reduces the rate of profit. Yet every such new method of production
cheapens the commodities, hence the capitalist sells them originally above
their prices of production, or perhaps above their value. He pockets the
difference between their costs of production and the market prices of the same
commodities produced at higher costs of production. He can do this because the
average labour time required socially for the production of these latter
commodities is higher than the labour time required for the new methods of
production. His method of production stands above the social average. But
competition makes it general and subject to the general law. There follows a
fall in the rate of profit – perhaps first in this sphere of production, and
eventually it achieves a balance with the rest – which is therefore wholly
independent of the will of the capitalist." (Capital Vol. 3 p.264-5)
So within an industry
establishing a uniform rate of profit is achieved by wiping out the laggards
through technical progress. A standard level of expected productivity is set
down in each industry through competition.
But capitalists
producing steel or suites of furniture are not directly competing with those
making chocolate bars. How is the rate of profit equalised between industries?
It is done through the movement of capital between industries, as we outlined
earlier. Capital in its money form will migrate in search of higher profits. It
is true that capital locked up in a productive form, such as a car plant, is
not usually able to switch uses at short notice. But the very destruction of
old industries, from the manufacture of ships with wooden hulls and canvass
sails down to modern times, shows that capital is not stuck forever in the
productive form it adopts for a time.
Manufacturing and
non-manufacturing capital
Robert Brenner spends
most of his detailed country by country analysis in looking at the problems of
manufacturing capital. We agree that manufacturing has been the heartland of
surplus value production since the Second World War. We have also indicated
that Marxists find the division of national income into primary (farming,
fishing and extraction), secondary (industry) and tertiary (everything else –
all non-material production) unhelpful. Surplus value is generated in all three
sectors. However, having drawn his conclusions on the basis of manufacturing
capital, Brenner then has to consider the implications of what happens there on
the rest of the economy.
He uncritically applies
the conclusions of Okishio’s theorem to the workings of the world economy. Or
rather he does so till he comes to discuss the relations between manufacturing
and non-manufacturing capital. The logic of Okishio’s theorem is that cost
savings in one sector pop up as lower input prices and higher profits elsewhere
in the economy. Cost-cutting in manufacturing should reduce the price of inputs
for the rest of the economy, improving profits all over. We should expect the
whole economy to have a higher and higher rate of profit as productivity
continues to go up by leaps and bounds.
But Brenner knows that
the rate of profit has gone down in the economy as a whole. Yet what he knows
is inconsistent with his espousal of Okishio’s theorem. He has also offered an
explanation for falling profit rates, though we believe it is flawed.
How does a decline in
manufacturing profits impact on the rest of the economy? As we have indicated
in our discussion of the equalisation of profit rates between industries, the
fall of profits in manufacturing produced a drift towards non-manufacturing.
Eventually this movement of capital would be expected to produce a tendency
towards equal (lower) rates of profit in manufacturing and non-manufacturing.
Brenner chronicles this
movement of capital in his work. We would expect a drift in employment towards
non-manufacturing in any case. If productivity in manufacturing doubles while
it remains unchanged in the rest of the economy, and if the structure of demand
stays the same, it would only take half as many workers to produce the
manufactured goods we want.
What Brenner does not
discuss is the possibility of conflicts of interest between different fractions
of the capitalist class. He tends to lump the whole non-manufacturing sector
together and treat it as a passive add-on to developments in manufacturing.
Occasionally he gives
hints as to differences between capitalists that may lurk below the surface. He
notes the rise of FIRE (Finance, Insurance and Real Estate) within the service
sector. This of course is the cloven hoof of finance capital. He makes a
passing reference to the preference of bankers to non-inflationary solutions.
But this is important. If he is suggesting that bankers impose their own
interests on the rest of the ruling class and at their expense, he should spell
it out. And he quite wrongly, in our view, refers to the 1979-82 downturn as
‘Volcker’s recession’ – as if America’s central banker single-handedly
precipitated a world crisis.
Most of the time Brenner
has little to offer about finance capital in his analysis. It is treated as
part of the service sector (which it is in national income accounting terms).
But Brenner’s tendency to use this concept uncritically means that he rolls
millions of working class people in the service sector (such as nurses, shop
workers, home care assistants, lorry and bus drivers) in with the speculators.
World Economy?
Brenner’s detailed
analysis of events since 1945 is undertaken by looking at three crucial
national economies – the USA, Germany and Japan. There is no doubt these are
the most important national economies over the period.
