The Composition of Capital

Reply to Andrew Kliman’s points (see the comments on my 13 March 2012 review of his book, The Failure of Capitalist Production)

Firstly, thanks for clarifying some issues. Secondly, I may have not fully presented what you were arguing when I made the comments in my review of your book, but I think that the logic of what I said stands, given your general thesis about the share of worker incomes (including benefits, etc) being roughly constant over time. I should also have been more specific about which ‘composition of capital’ I am talking about.

The ‘organic composition’ of capital as defined by Marx expresses the positive correlation that usually exists between the technical and value compositions of capital (see the opening paragraphs of  Chapter 25, Volume 1 of Capital). The technical composition looks at the use-value division between means of production and labour-power. The value composition is the value of means of production versus the value of labour-power employed. There can be cases where one goes up and the other one goes down, but overall they will tend to move (usually higher) together, and so produce a rising organic composition. The use-value side of the process is critical for showing the limits of how much labour-time capital can potentially exploit, but I agree that the value composition is most relevant for tracking the movements in the rate of profit. If some of the questions you have about the points I made are down to me using ‘organic composition’ rather than ‘value composition’, then hopefully this clarifies things.

Let us turn to the other points in question. You argue that the rate of profit (using US data) started out high, after 1945, and then fell owing to the impact of much lower incremental profit rates thereafter. Your analogy was with average ages at a party (p135 in your book). When the host is 22 and is the first to arrive, the average age is 22. Then the guests begin to arrive, and each one is 10 years old. So the average age begins to fall towards 10, even though ‘nothing changes during the party’. You only referred to average profits in this particular section, not to any composition of capital (as I incorrectly suggested). But only a few pages earlier, on p128, you argued that the data indicate your proxy measure for the rate of surplus value was flat and that “almost all the entire fall in the rate of profit was due to an increase in the ratio of advanced capital to employee compensation”.

The algebra surely indicates that if the rate of profit fell and if the rate of surplus value was constant, then the (value) composition of capital must have risen. In your argument, the average rate of profit fell because “the CPS-MA rate of profit on new investments (CPS-MA-NEW), the additional profit as a percentage of the additional advance of capital, was much lower” (p135-6). I did not discuss in my review what you meant by CPS-MA, etc, but the overall logic is clear. You must be arguing that the value composition of capital did not rise in the post-war period on new investments. Instead, the average composition of capital rose because the value composition of new investments was much higher, but presumably constant at the higher levels for these new investments. It was this constant value composition of capital on new investments in the post-1945 period that I found to be implausible.

Tony Norfield, 22 March 2012

Eurocentric Angst

Book review: Jűrgen Habermas, The Crisis of the European Union: A Response, (translated from the German by Ciaran Cronin) Cambridge, Polity Press 2012, 140 pages

This book correctly characterises the economic troubles in Europe as concerning the European Union as a whole, rather than simply members of the euro currency area. If the euro project fails, then that would not only be a major economic event; it would represent the destruction of decades of political planning by Europe’s major powers, Germany and France, and throw into turmoil the relationships between all European countries, including those outside the system. However, the book, by one of Europe’s prominent sociologists and philosophers, is an odd mixture of abstract conceptualising and rather commonplace opinions on recent events and does not live up to the implicit promise of being a high level assessment of the crisis. It is not a case of being short-changed by a mere 140 pages; valuable ideas can be concisely expressed. Nor has the force of the argument been weakened by poor translation (as far as I can judge, the translation from the German is good). The basic problem is that Habermas has nothing substantial to say, and what he does say just reflects his liberal imperialism.

The first essay, ‘The Crisis of the European Union’, takes up half the book. His key point is that European politicians have been too timid to make the case for a unified European citizenship, because they have been narrowly focused on national concerns: ‘political elites and the media are reluctant to win over the populations to a common European future’ (p50, and a similar point on p20). This is hardly an original remark, but Habermas insists on building up to it by discussing the nature of democracy, how the sharing of power can take place between different states and peoples in a federal system and by comparing and contrasting the EU to the US and the United Nations. The problem here is that anyone with knowledge of either the origins of the US Constitution or of the UN would take exception to his whitewash of history. He has a tendency to draw upon such liberal icons to support his case that these were key markers in progress to a better world, and that a ‘common European future’ is the next logical step. Critics of the US Constitution, however, have noted that it was a document drawn up by the moneyed class in their interests (quite apart from the issue of slavery), while historian Mark Mazower in his No Enchanted Palace (Princeton University Press, 2009) has effectively debunked the idea that the UN was a universalist project and highlighted the big power compromises that led to the founding statements.

By comparison, Habermas is an ingénue, taking the documents he reads and their commitments to ‘human rights’ at face value. This may not seem to be a fair comment, since he has a tendency to introduce lofty concepts and then to note alongside these the dirty reality that they do not live up to. However, he does this so often that the reader is left wondering why he does not question the validity of his concepts.

This is also true of his view of Europe. Being of a certain age, he is impressed with the fact that moves towards European co-operation in the economic sphere developed into a political project, and that this appears to have cast aside the risk of intra-European warfare. Yet he downplays the economic power of Germany and the political influence of France in this project, preferring to see it instead as a fulfilled dream of the European peoples. For him, this is like the Hegelian notion of the realisation of the Idea. But this theoretical presentation is dishonest. In reality, and little to do with realising democracy, he is a strong advocate of a more powerful Europe that can assert itself and act in opposition to the power of the USA. He makes this very clear in the interview-based Appendix to the book: ‘only together could the euro zone countries acquire sufficient weight in world politics to be able to exert a reasonable influence on the agenda of the global economy. The alternative is to act as Uncle Sam’s poodle and to throw themselves at the mercy of a global situation which is as dangerous as it is chaotic’ (p117).

At least that was a clear political statement. In his theoretical expositions, a Mitteleuropa writing style full of soporific abstractions blankets any sense the reader may get of inconsistency, or even of what is being said. In explaining the ‘hesitation of political elites at the threshold to transnational democracy’, for example, he notes that ‘we must adopt a constructivist perspective when we want to conceptualise the democratic legal domestication of a supranational political community such as the EU as a further stage in civilising state power’ (pp44-45). The reader only wakes up when, within this framework, a more specific point is being made. For example: ‘the peoples of a continent [Europe] whose political and economic weight is diminishing are trying to recover a certain political room for manoeuvre in the face of political forces and systemic constraints of a globalised society. If they succeed, they can use this room for manoeuvre not only defensively to preserve their cultural biotope but also in an offensive way to undertake the still more toilsome task of extending global steering capacities’ (p28).

Make of that what you will, but my hackles are raised, not least by the need to be offensive in Europe on a global scale in order to recover ‘political room for manoeuvre’. A more realistic (and readable) assessment of the origins of the European project, its political design and imperialist mode of operation is given in Guglielmo Carchedi’s For Another Europe: A Class Analysis of European Economic Integration (Verso, 2001).

Habermas ends with a plea that: ‘With a little political backbone, the crisis of the single currency can bring about what some once hoped for from a common European foreign policy, namely a cross-border awareness of a shared European destiny’ (p127). Yet, in more mundane language, what he really advocates is that Europeans should pull together to reassert their privileged position in the world economy. His apparent philosophical universalism is in reality a Eurocentric nationalism.

Tony Norfield, 18 March 2012

The Number of the Beast

Andrew Kliman, The Failure of Capitalist Production: Underlying Causes of the Great Recession, London: Pluto Press, 2012, 240 pages

Andrew Kliman’s book is a valuable addition to the many things written on the crisis, and well worth reading. It is probably the most detailed, and effective, assessment of the economic statistics behind what happened that is available, with his analysis interpreting the data from the perspective of Marx’s theory of value and capital accumulation. He makes very clear what he is arguing and gives full references for anyone who may wish to check his sources. This can make the book a little hard going in places, but this is a text for those who want to explore the real origins of the crisis, not one for those who are satisfied with populist attacks on corrupt politicians or greedy bankers. My principal criticism of his book is that it does not address the question of US imperialism, but first I will note the book’s strengths.

The Failure of Capitalist Production has two main theses. Firstly, it argues that the major post-war crisis of the 1970s did not result in enough destruction of capital values to provide the basis for sustained accumulation thereafter. This meant that profitability showed little, if any, sign of recovery and economic growth remained weak. This, in turn, set the stage for credit-driven, speculative bubbles, not least the biggest and most recent one that has burst with such intractable consequences. Secondly, and following from this analysis, it argues that the common radical arguments about the nature of the crisis are myths. ‘Neoliberal’ economic policies did not cut real wages and did not divert resources into finance and away from production. A close look at the data for the US finds no evidence for these assertions. Instead, the slow growth of incomes and investment is shown to be a consequence of problems with capital accumulation, problems that resulted from inadequate profitability.

In order to substantiate his points, Kliman conducts a thorough review of how to measure the rate of profit on capital investment. He focuses on the US, not only because America is the biggest capitalist power, but also because US data are the most comprehensive. However, he does not claim to come up with the ‘Marxist rate of profit’ for the US, thinking that there is no unambiguous way in which to derive such a thing from official statistics. Instead, he builds a clear case for using a number of profitability measures that reflect the pressures capitalist business is under. He makes a strong point about how commonly used measures of profit rates (using ‘current cost accounting’) give the impression that the US profit rate rose, but that these are not meaningful reflections of the rate of return earned by capitalist businesses.

Kliman notes that almost all measures of profit rates ‘rose sharply in the years immediately preceding the latest crisis’. Yet while a fall in the rate of profit may not have been a proximate cause of the crisis, it was a key indirect cause:

‘The rate of profit was low at the start of the 1980s and it never recovered in a sustained fashion. This led to a marked decline in the rates of capital accumulation and economic growth. Government policies kept this problem from getting out of hand, but also prolonged and exacerbated it.’ (p14)

His case is well made, and is convincing. These are critical points for an attack on the notion that mistaken government policies – or a ‘neoliberal coup’, as some writers suggest - are the root cause of the crisis. Kliman shows that the deterioration in profitability, investment, growth, etc, began in the late 1960s or in the 1970s, prior to the beginnings of the ‘neoliberal’ era that is usually dated from 1979-81 with the Reagan (US) and Thatcher (UK) political regimes.

He also argues that there has been no rise in the share of US national income going to corporations (pp124-128), a measure that he uses as a proxy for the rate of exploitation. The counterpart to this is that the share of workers’ incomes has not fallen, contrary to many reports. Kliman shows that although the wage share did decline, this was offset by a rise in medical, retirement and unemployment benefits, so that the total compensation of workers as a share of national income has not fallen (pp152-160). Real wage growth (including benefits) for US workers has also been positive. While this growth was slow, this was based on the slowdown of accumulation deriving from the low rate of profit (a chart illustrates this relationship on p91).

Weak profits and sluggish accumulation of capital were also the reasons behind the low interest rate regime that the US Fed implemented from the early 2000s. The Fed feared a ‘lost decade’ of growth (pages 38-47) as had already happened in Japan. These developments set the scene for the rise in consumer credit, subprime mortgages, the boom in derivatives trading and so forth. ‘Neoliberalism’ played no part in these events. Alongside this analysis, Kliman gives a critique of ‘under-consumption’ theories of crisis (Chapter 8) that divert attention away from profitability as the cause of the crisis and promote government spending plans as a solution.

In Chapter 7, Kliman demonstrates that a rising ‘organic composition of capital’ was the main driver of the downtrend in profitability. I would agree with this point, except that Kliman’s explanation looks odd. His argument is that the organic composition was very low in 1945, resulting in a high rate of profit. After 1945, the organic composition for new capital investments was much higher, and the rate of profit on new investments was much lower. But he claims that the organic composition did not rise on these new investments after 1945. Instead, in his view, the overall rate of profit fell because, over time, the total stock of capital was made up by a higher proportion of the newer, higher organic composition, lower profit rate investments (pages 134-137). This argument is made in a chapter that is full of technical detail, and is one of the few in his book that I find implausible. Although it is difficult to find a good proxy for the organic composition of capital with official statistics, my reading of reports on business investments would suggest that there has indeed been a rise in the organic composition on new investments in the post-war period.[1]

Kliman’s book is a detailed discussion of the causes behind the current crisis, with the specific aim of focusing on US data and countering some common beliefs about trends in the US economy. To that extent, it is perhaps unfair to ask for a wider perspective. However, I think that his analysis is weakened by the absence of any discussion of imperialism, or even the key features of US imperialism.

His book has nothing on the role of the dollar, nor on the global domination of US finance that acts as a support for US capital.[2] Neither does he take account of the benefits the US has gained from its exploitation of other countries in trade and investment. His argument, made to me in response to my questions on these points, and in this book, is that such benefits would have appeared in the figures for US corporate profitability. His conclusion remains that the US corporate rate of profit fell despite whatever the size of these benefits may have been.

However, while that is a fair point, to ignore America’s status as an imperialist power means that some important countervailing tendencies to declining profitability are set aside. It would have been a stronger point for him to argue that, despite US imperialism’s attempts to appropriate profits from other countries, and despite its success in doing so, this did not avert the crisis.

Kliman dismisses the impact of the earnings on US foreign direct investment by noting that the rate of return on these investments has also fallen over time (pages 78-80). This is true, but it ignores the fact that the rates of return on investment in oppressed countries are several times the rate earned in other imperialist powers! It is also worth recognising that in recent decades a large share of productive investments has been in oppressed, low wage countries, despite the fact that recorded FDI figures show the bulk of total assets and new investments as being in rich countries. Furthermore, in addition to FDI, many low wage countries, not least China, have been brought into imperialist companies’ value chains via trade relationships. This allows the benefits of cheap supplies of goods to be enjoyed by consumers, governments and businesses in the imperialist countries.[3]

It would be tricky to put a value on these imperial benefits, and Kliman understandably focuses on data that he can more readily incorporate into his analysis. However, these points still deserve recognition. I would suspect that an important reason why US working class living standards have risen in recent decades, despite the onslaught of a capitalist class that has had a free hand to attack workers, is due to such benefits.[4]

The absence of imperialism from Kliman’s analysis also leads him to conceive of the crisis as setting the ground for a struggle between capitalists and workers (Chapter 9). In the abstract this is true, but the more important reality is that workers in the imperialist powers usually support their states in any international conflict over economic privileges, and especially in war. Even opposition to the Iraq war in 2003, a war that was widely seen as criminal aggression, basically stopped once the troops had been sent in. Kliman’s book is a valuable attack on mistaken views of the crisis, and on calls for state regulation or spending as the solution. However, it elucidates neither the economics nor the politics of imperialism.

Tony Norfield, 13 March 2012

---

[1] For a recent example, see the article ‘Foxconn and the Organic Composition of Capital’ on this blog, 2 August 2011.

[2] See ‘Dimensions of Dollar Imperialism’ on this blog, 5 October 2011.

[3] For these points, see John Smith’s analysis in a PhD thesis entitled ‘Imperialism & the Globalisation of Production’. The pdf (1.5MB) can be downloaded here.

[4] See ‘What the “China Price” Really Means’ on this blog (4 June 2011) for data on wage and compensation levels of workers showing a dramatic gap between wages earned by workers in imperialist and in oppressed countries. This article spells out the benefits of cheap imports for the general population in imperialist countries.