yamamura on brenner
SYMPOSIUM ON ‘THE ECONOMICS OF GLOBAL TURBULENCE’
Thirty years ago, the field of late medieval and early modern economic history was the scene of a famous discussion in the pages of Past and Present, set off by a path-breaking essay by Robert Brenner, ‘Agrarian Class Structure and Economic Development in Pre-Industrial Europe’. The international controversy aroused by his arguments became a landmark, since referred to simply as ‘The Brenner Debate’, and published under that name. Ten years ago, NLR devoted a special number of the journal to Brenner’s equally remarkable entry into the field of modern economic history, ‘Uneven Development and the Long Downturn: the Advanced Capitalist Economies from Boom to Stagnation, 1950–1998’—no less of a historiographic landmark. In this issue we publish a symposium on the book which emerged out of this essay, The Economics of Global Turbulence (2006). Three distinguished scholars, from the Anglosphere, the Eurozone and the Far East, give their critical assessment of Brenner’s work below. Nicholas Crafts is widely regarded as the leading economic historian in Britain today. Michel Aglietta is the founder of the Regulation School in France, whose intellectual influence has been worldwide. Kozo Yamamura is perhaps the outstanding authority on the post-war economic development of Japan, a historian who has also ranged widely across the comparative institutional landscape of the advanced industrial states. The issues raised by their symposium include the reality or otherwise of a long downturn; the relative productivity records of the major industrial economies; the concrete ways in which rates of profit are formed; the historical impact of technological change; the differences between American, German and Japanese models of capitalism; the implications of China’s dynamism as a manufacturing power; and the prospects for the global economy as a whole, as it confronts its most severe crisis since the 1930s. In a setting where few economists are historically minded and few historians are economically trained, it is rare to find an exchange of this quality. In a subsequent issue Robert Brenner will respond to his critics.
KOZO YAMAMURA
MORE SYSTEM, PLEASE!
Whenever i read a stimulating book that challenges the predominant ideology of our day, ‘free market’ capitalism, I am reminded of a Renaissance astronomer from Poland. Nicolaus Copernicus proposed a radical new theory of the solar system, which was at first ignored by clerics and rulers, but eventually infuriated them, and with good reason. For the political and economic costs of maintaining their power over the tax-paying and tithe-paying masses were at a minimum, so long as people were led to believe that God had anointed the rulers and that the Church spoke for God. For Copernicus to repudiate a millennial Ptolemaic astronomy was tantamount to doubting divine authority, since it was God who had created the existing celestial and terrestrial orders, in which the sun revolved around the earth, and subjects obeyed those He had put over them. The Pope and his bishops, kings, princes and those who depended on them, could not have the geometry of the heavens questioned because its artificer was the indispensable warrant of their own power and privileges.
Robert Brenner’s Economics of Global Turbulence does not subscribe to the modern Ptolemaic cosmology of Markt über Alles and its kindred canons, espoused by the motley crew of politicians, industrialists, financiers and rentiers who command political and economic power today, and the multitude of experts and gurus, among them neoclassical economists, who reproduce this outlook. It is a work of prodigious research, whose intellectual ambition is always expressed in a measured and scholarly way, that makes it a pleasure to read. As a long-time student of the economic history of the major industrial economies, I find Brenner’s command of the post-war performances of the American, German and Japanese economies truly impressive. I am especially struck by his mastery of the recent economic history of Japan, the primary subject of my own research.
That said, as is to be expected of any ambitious and pugnacious book, Brenner’s work can be questioned in several aspects. In order to make what I hope will be constructive criticisms within a limited space, I will focus on three critical issues. Firstly, I will argue that Brenner’s analysis needs to become systemic—that is, more focused on the core characteristics of contemporary capitalism, the better to support his central thesis that it has suffered from declining rates of profit since the turn of the seventies. Secondly, I will contend that Brenner’s discussions of the post-war and near-future economic performance of the industrial economies would have gained from taking account of the history of cycles of technological change. Thirdly, I believe his rebukes of latter-day capitalism would be significantly more effective if he recognized, more fully than he has done so far, the substantive differences between the American and the Japanese–German variants of it. These three criticisms are closely intertwined, and even in a short compass I am confident readers will have little difficulty in seeing the analytic overlap between them.
Declining rates of profit
In support of his central thesis that rates of profit have declined, across the whole advanced capitalist world, since the seventies, Brenner musters a mass of empirical data and, at times, selected elements and vocabulary of neoclassical economic analysis. However, he does not offer a systemic analysis—that is, one based on an articulated, internally coherent view of the political and economic characteristics and core dynamics of modern capitalism. The analytic underpinning of his broad case comes in the tenth chapter of his book, ‘Why The Long Downturn? An Overview’, as well as in a few pages summarizing his alternative to the ‘supply-side argument’.footnote1 These are written from the ‘capitalist’ point of view—that is, of those who decide whether to invest or disinvest in productive capacity. Brenner notes that capitalists do not necessarily disinvest even when their rate of profit is declining, because their enterprises enjoy various advantages as established firms within a given market, which include good information about this market, long-standing relationships with suppliers and customers, and above all technical knowledge. He is also aware that firms have large sunk costs, which motivate them to do their best to increase sales abroad rather than reduce productive capacity, and that firms can and do incur debt to prolong their production.
Brenner’s discussion of the reasons why capacity reduction may not occur, so leading to excess capacity and a declining rate of profit, is persuasive until one realizes he has taken into account only the outlook of capitalists as they react to what they are expected to react to: costs of inputs (capital and labour), changing prices of their products, competition from rival firms, market shares, entry barriers to their respective markets, etc. He does bring in differing institutional features of the American, German and Japanese scene that affect such variables. But he does not delve into many economic factors that—indirectly, but very substantively—affect, indeed often determine, the decisions that capitalists make. That is to say, his account of the ‘long downturn’ is not embedded within the broader framework of a systemic analysis. Let me explain.
Brenner’s argument is that declines in the rate of profit typically result from the aggregate excess capacity that builds up as capitalists continue to invest in more efficient production, allowing them to raise output and to lower prices. But lower prices reduce profits, because of ‘downwardly inflexible costs’. Even when profits continue to fall, however, capitalists do not exit their industry but continue to ‘search for a better alternative’, while ‘lower-cost producers find it individually profitable to enter into these same lines despite their reduced profitability’. ‘This sequence’, he contends, ‘can be reversed and profitability restored only when sufficient high-cost, low-profit means of production can be forced from lines [of production] affected by over-capacity/over-production and reduced profitability, and successfully reallocated to sufficiently high-profit lines’. In many parts of Economics of Global Turbulence, ambiguous observations of this kind are flanked by others explaining that ‘a better alternative’ for capitalists in a given branch of industry will be sought in economies of scale, capital ‘deepening’ or ‘widening’, or reducing costs in other ways. If such alternatives can be found, firms will persist with traditional lines of production instead of exiting them, and so contribute to excess capacity and a decline in the rate of profit.
Many who study the behaviour of firms—especially neoclassical economists—will, however, question Brenner’s conclusion that if profits fall below ‘a certain level’, producers will be forced out of their existing lines of production, even as ‘other still lower-cost producers’ enter into these same lines and yet make a profit. The problem arises because Brenner not only fails to define exactly what he means by a ‘certain level’ and ‘lower-cost’, but also because he offers little discussion, beyond generally stated possibilities and vaguely formulated hypotheticals, of what would make some firms ‘still lower-cost’ producers and why whatever it was that made them lower-cost producers was not available to other firms. Thus when he writes that ‘sufficient high-cost, low profit’ producers must be forced out of an industry, because of excess capacity and output, for there to be a ‘successful’ relocation of them in new, ‘sufficiently high-profit lines’, students of firm behaviour cannot but ask: how does one judge which firms have such high costs and low profits for this to occur? Do we find such firms only post hoc? Why don’t ‘forced-out firms’ just go bankrupt and so reduce aggregate excess capacity? Why are they able to ‘relocate to sufficiently high-profit lines’? Wouldn’t such relocated firms making ‘sufficiently’ high profits boost the average rate of profit, rather than reduce it?
The cost of capital
Even more importantly, shouldn’t Brenner discuss the rate of profit as a financial coda of the performance of firms, which is predominantly affected by the real costs of capital—costs determined by the rates of inflation and of national savings, the international flow of capital, and several more macroeconomic factors that are systemic? Wouldn’t labour costs be similarly altered by globalization of supplies (see, as Michel Aglietta points out in this issue, the Chinese impact on world trade), by ongoing demographic trends, and by the seemingly increased ‘acceptance’ of American labour-market practices in Germany, Japan and other industrial economies? Moreover, aren’t rates of profit increasingly determined by how much profit is derived from firms’ earnings abroad, as opposed to those garnered at home?footnote2
Finally, there is another important question that economists, and many others in industry and finance, will ask: why has Brenner so little to say about the role of the capital market (read: the sharp-eyed, keenly profit-motivated shareholders, investment bankers, hedge-fund managers and the like), especially in the us economy? Don’t we observe daily how low-profit and loss-making producers, burdened by excess capacity, see the value of their shares fall and/or are forced by financial institutions into bankruptcy, as they are denied credit or become targets for acquisition and reorganization, often resulting in the reduction of productive capacity?
Simply put, what I am suggesting is that if Brenner wishes to argue that declining rates of profit have determined a long downturn since the seventies, and continue to weigh on the future of the advanced capitalist economies, he needs to be able to answer questions like those I have raised. But to do so he would have to offer a more explicitly articulated systemic analysis than he does at present, of which the narrative he develops would become an integral part. Let me suggest a skeleton of such an analysis, which I hope Brenner might find congenial and consider adopting.
During the past few decades and particularly since the late 1990s, we have seen in most industrial economies, and especially in the us and Japan, two incontestable facts. One is that what matters most to investors is their total income, which has been continuously increasing, little affected by declining rates of profit in the shrinking manufacturing sector of these economies. Investors’ incomes have risen—at least until October 2008—because of their increased ability and willingness to take risks, thanks to the past three decades of a historically low cost of capital. The second salient phenomenon is that the Gini coefficient has been steadily rising, most visibly in the us and Japan, because investors’ incomes have risen while real wages have increased more slowly, or even stagnated. Of course, these two facts are closely linked.
The cost of capital has been declining because of high rates of saving (in the case of the us, not by its own citizens, but those of other nations), policies of central banks, and declining real taxation of corporate and investment incomes (i.e. adjusted for inflation). More specifically, its historically low level is due to the very large amounts of capital flowing from Asia and the oil-producing economies to the United States, permitting the Fed to depress interest rates to maintain economic growth, to a point where the real rate of interest even became negative over many quarters; and to competition between nations in today’s highly globalized economy to reduce the real tax burden on capital as it moves restlessly around the world at electronic speed.
The lower cost of capital has reduced the risks of investing and increased the total income to be derived. Thus investors have become more willing to keep, or even increase, investments in industries in which the rate of profit is declining because of increasing excess capacity, so long as they can maximize their total income. They make investment decisions in manufacturing firms, swayed by the prevailing cost of capital and by weighing the expected returns they can realize from investing in any given manufacturing firms, or branches, as opposed to those in other industries or a multitude of financial instruments. While the expected returns from investments in the former are significantly affected by the likelihood or otherwise of increasing market share both at home and abroad, other investments, including in financial institutions, the housing market and countless types of ‘derivatives’, are more responsive to the cost of capital. Thus, when the latter types of investment make up an increasing share of investors’ income, the financial discipline exerted by the capital market on poorly performing manufacturing firms tends to be less swift and exacting if the cost of capital is low, because income from investments in manufacturing accounts for a smaller share of their total income. Of course, such behaviour on the part of investors who are motivated primarily by the low cost of capital will result in periodic financial crises as typified by the bursting of the bubble in Japan in 1990 and the historic and global financial crisis we are witnessing today.
Low-cost capital, justified in the name of maintaining stability and growth in industrial economies, and supposedly providing a trickle-down benefit to all, preserves the system as it is now constituted. At the same time it increases industrial excess capacity and reduces the rate of profit in manufacturing industries. This means that, in the absence of radical systemic change, the future of the industrial economies will be dependent on a steadily increasing supply of low-cost capital, which in turn will burden future generations with debt, bring about frequent financial and fiscal crises, and increase the Gini coefficient, which will continue to rise with inevitable consequences for political and social stability. Other systemic difficulties will occur as well. More explicit and broader systemic discussion of modern capitalism would strengthen, not weaken, Brenner’s warnings of further turbulence to come, not only in the advanced industrial economies, which account for the lion’s share of global gdp, but also in the emerging economies, making less necessary the qualifications with which he often hedges his findings at present.footnote3
Technological change
I also believe that Brenner could have strengthened his case for declining rates of profit as the key to the long downturn if he had offered reasons why the historically observable cycles of technological change that have reinvigorated industrial capitalism in the past are not likely to be repeated in the future. Here, overcoming what intellectual modesty I possess, I would like to suggest that Brenner take a look at some of my own work. For more than two decades, collaborating much of the time with the late Yasusuke Murakami of Tokyo University, I examined the relationships between economic performance and technological change since the onset of the Industrial Revolution in England. Together we studied a wide range of historical data for the uk, the us, Germany, Japan and several developing Asian economies. Such data ranged from local wage rates for factory workers in late eighteenth-century England to growth rates in the productivity of capital and labour, by industry, up to the 1990s. The history of the technologies of a dozen industries were investigated as thoroughly as time and sources permitted.footnote4
Since the onset of the Industrial Revolution, there have been two identifiable technological cycles, each about one century long, and by the early 1970s, a third was under way. The first cycle, which began in the 1760s, featured the appearance of the steam engine, machines made of iron, railroads, ocean-going ships and many other innovations and industrial products. The second cycle, which started in the early 1880s, saw the widespread use of electricity and petroleum, the invention of various man-made materials such as rubber, the discovery and dissemination of dyes and plastics, and the arrival of automobiles, many types of new machinery and other industrial products. All of these new technologies profoundly changed our daily lives. The third cycle is the ongoing it revolution that began in the early 1970s, when the output of semiconductor chips began to skyrocket, and computers and many other novel means of electronic communication began to transform our existence in myriad ways.
Both of the first cycles had two phases, lasting about 50 years each: a ‘breakthrough’ phase and a ‘maturation’ phase. In the former—the period of ‘Great Inventions’, in Nicholas Crafts’s terms—the rate of productivity increase is slow because a great deal of trial and error is involved in adopting new technology, which is often costly and requires considerable practical and institutional change. Since labour productivity rises only slowly, or not at all, real wages are sluggish or may even fall. In the ‘maturation’ phase, on the other hand—corresponding to the period when ‘General-Purpose Technologies’ become available, in Crafts’s terms—the productivity of labour and capital rises rapidly. The most important reasons for this change are ‘learning by doing’ and a rapid increase in ancillary innovations. For example, it took more than two thousand patented improvements upon the earliest monochrome television sets to reach today’s state-of-the-art models. Equally important are a host of institutional and behavioural changes, to laws, employment practices, forms of financial transaction and so on, as economic agents adjust to the new possibilities.
Each of the two phases in each cycle has distinctive market characteristics. In the breakthrough phase, markets tend to be monopolistic, or highly oligopolistic, because those firms that have access to new technologies can more easily acquire capital and expand their productive capacity ahead of would-be new entrants into markets—that is, potential competitors. In the maturation phase, competition in an increasing number of industries that adopt the new technologies becomes keener, especially internationally. However, despite intensifying competition and an increasing tendency towards excess capacity, profit and wage levels increase as productivity jumps.
Now, as far as the first phase goes, the data presented by Brenner are essentially consistent with my own findings. Note also that Aglietta’s table of labour productivity in the eu 15 and the us supports this line of thinking. In the ‘breakthrough’ period of the third cycle, which began in the 1970s, labour productivity in the us, the leader in the it revolution, rose faster than in the eu 15, but its rate of growth remained substantially lower than that which characterized the ‘maturation’ period of the second technological cycle. Thus the critical question becomes: will Brenner’s basically cheerless view of the near future of industrial economies prove to be on the mark, or will history repeat itself for the third time, bringing us a period of ‘maturation’ like that of the two preceding cycles (i.e. about 40–50 years after the inception of the third cycle), in which the industrial economies enjoy several decades of rapidly increasing productivity and high performance, and therewith an upward slope of profits?
The third cycle
My own view is that Brenner’s tacit hypothesis is plausible, and we are not likely to see history repeat itself in this third historical cycle. For two principal reasons, I think it unlikely that the large, leading industrial economies will return to the kind of prosperity they enjoyed during the ‘maturation’ periods of previous cycles. The first is that in sharp contrast to these earlier ones, which saw intensified competition among advanced industrial economies only in the ‘maturation’ phase, what we witness today—already in the ‘breakthrough’ phase of the third cycle—is that the emerging economies, led by China and other Asian nations, are increasingly capable of competing against the advanced industrial economies in more and more markets for industrial products, including the most technologically sophisticated lines. This is the result of both a steady inflow of advanced technology and fdi into the emergent economies in conditions of accelerating globalization, and of the ways in which capital and technology from the richest economies are seeking to increase their returns by boosting trade, usually at the expense of wage-earners at home. The strength of the emerging economies even in the ‘breakthrough’ phase of the current cycle is evident not only in trade data, but in the fact that 62 of the Fortune 500 top global companies were by 2008 firms from these countries.
The second reason is that the leaders in the ‘breakthrough’ phase of the last two cycles were not as burdened by debts and unfunded government obligations relative to their respective gdp as are their equivalents today. No major state of the past had a national currency whose value was dependent on borrowing an average of $3 billion a day, as the us now does. No such state had a national debt exceeding 150 per cent of its gdp, as Japan now does. None had crushing unfunded national obligations as do Germany and most other economies in the eu. The force of these observations can be extended to various other systemic limitations of the advanced capitalist economies, notably their seeming inability to reduce their Gini coefficients or to confront looming environmental crises. I hope that Brenner will see that reflection on the history of technological cycles, a bare outline of which I have sketched here, could enrich his own analyses.
Different capitalisms
Brenner devotes the larger part of his book to detailed narratives of the trajectories of the biggest industrial economies, the United States, Japan and Germany, since the war. But I was disappointed not to find any pithy comparative discussion of the systemic—institutional and behavioural—differences between the American and the Japanese–German types of capitalism, or consideration of the way in which such differences could affect their futures. What Brenner tells us about the contrasts between them is inadequate, consisting for the most part of passing observations on practices and anecdotal summaries of institutions. Yet we should all be familiar with the quite decisive differences that set these economies apart, even after the past few decades of the ‘Americanization’ of Japanese and German societies. Here I note only two profound divergences.
The United States has been a debt-ridden economy since the 1960s. This well-known fact can be expressed in many ways. Perhaps the simplest is to note that in 2008 the total debt of government, firms and households has reached 350 per cent of gdp. The highest ratio ever recorded in the past was 300 per cent, during the depths of the Great Depression. In the early 1980s, total debt was around 150 per cent of gdp. In the past twenty-five years it has shot up as the federal deficit has continued to mount and cheap credit has continued to be made available, to ‘stimulate growth’. The present American-originated financial crisis is an inevitable outcome of this huge increase in indebtedness. On the other hand, in sharp contrast to the us, both Japan, despite its large national debt, and Germany, albeit with its huge unfunded government obligations, consistently post large trade surpluses, are the world’s largest net international creditors, and have high savings rates (as opposed to the zero-to-negative rate in the us). The ratio of German and Japanese total debt to gdp is less than 200 per cent because these countries’ corporate and household debts are substantially smaller than their counterparts in the United States. It is important to remind ourselves that today the total American debt now stands at a staggering $48 trillion—and this figure does not include a few more trillion dollars currently being added because of the ongoing financial crisis. This gargantuan debt is only a few trillion dollars less than the entire gdp of the world, estimated at $54.3 trillion.
A second profound difference is that, despite all the changes that have occurred in Japan and Germany during the past three decades, the relationships between government and business, among firms themselves, and between employers and employees, are still much more ‘corporatist’ than in the us. American capitalism is often described as a casino or jungle variant of the species. The contrasts between it and the Japanese or German variants imply very significant ‘costs’ and ‘benefits’ in terms of economic efficiency, social welfare, income distribution, and more.footnote5 To strengthen his case, I truly hope that Brenner will take more seriously such substantial differences, which persist between the ‘winner-takes-all’ character of American capitalism and the German–Japanese form of capitalism. By comparison with American capitalism, the latter has longer and closer bank–firm relationships; protects employment better through significantly more effective laws and a still enduring socially embedded consensus to protect job security; maintains inter-firm trading relationships that are more lasting and multifaceted (including capital participation and technology transfers); has a business–government relationship that is much less adversarial; and pays few executives in the largest firms a salary that is an unconscionably high multiple of a worker’s wage plus an obscene bonus. Such systemic differences will enable Germany and Japan to cope better with the global competition that is certain to intensify as the ‘breakthrough’ phase of the current cycle of technological change passes over into a ‘maturation’ phase in the near future. A systemic analysis is indispensable if one wishes to foretell the futures of the three economies Brenner has examined and, by inference, the future of industrial capitalism.
Thirty years ago, the field of late medieval and early modern economic history was the scene of a famous discussion in the pages of Past and Present, set off by a path-breaking essay by Robert Brenner, ‘Agrarian Class Structure and Economic Development in Pre-Industrial Europe’. The international controversy aroused by his arguments became a landmark, since referred to simply as ‘The Brenner Debate’, and published under that name. Ten years ago, NLR devoted a special number of the journal to Brenner’s equally remarkable entry into the field of modern economic history, ‘Uneven Development and the Long Downturn: the Advanced Capitalist Economies from Boom to Stagnation, 1950–1998’—no less of a historiographic landmark. In this issue we publish a symposium on the book which emerged out of this essay, The Economics of Global Turbulence (2006). Three distinguished scholars, from the Anglosphere, the Eurozone and the Far East, give their critical assessment of Brenner’s work below. Nicholas Crafts is widely regarded as the leading economic historian in Britain today. Michel Aglietta is the founder of the Regulation School in France, whose intellectual influence has been worldwide. Kozo Yamamura is perhaps the outstanding authority on the post-war economic development of Japan, a historian who has also ranged widely across the comparative institutional landscape of the advanced industrial states. The issues raised by their symposium include the reality or otherwise of a long downturn; the relative productivity records of the major industrial economies; the concrete ways in which rates of profit are formed; the historical impact of technological change; the differences between American, German and Japanese models of capitalism; the implications of China’s dynamism as a manufacturing power; and the prospects for the global economy as a whole, as it confronts its most severe crisis since the 1930s. In a setting where few economists are historically minded and few historians are economically trained, it is rare to find an exchange of this quality. In a subsequent issue Robert Brenner will respond to his critics.
KOZO YAMAMURA
MORE SYSTEM, PLEASE!
Whenever i read a stimulating book that challenges the predominant ideology of our day, ‘free market’ capitalism, I am reminded of a Renaissance astronomer from Poland. Nicolaus Copernicus proposed a radical new theory of the solar system, which was at first ignored by clerics and rulers, but eventually infuriated them, and with good reason. For the political and economic costs of maintaining their power over the tax-paying and tithe-paying masses were at a minimum, so long as people were led to believe that God had anointed the rulers and that the Church spoke for God. For Copernicus to repudiate a millennial Ptolemaic astronomy was tantamount to doubting divine authority, since it was God who had created the existing celestial and terrestrial orders, in which the sun revolved around the earth, and subjects obeyed those He had put over them. The Pope and his bishops, kings, princes and those who depended on them, could not have the geometry of the heavens questioned because its artificer was the indispensable warrant of their own power and privileges.
Robert Brenner’s Economics of Global Turbulence does not subscribe to the modern Ptolemaic cosmology of Markt über Alles and its kindred canons, espoused by the motley crew of politicians, industrialists, financiers and rentiers who command political and economic power today, and the multitude of experts and gurus, among them neoclassical economists, who reproduce this outlook. It is a work of prodigious research, whose intellectual ambition is always expressed in a measured and scholarly way, that makes it a pleasure to read. As a long-time student of the economic history of the major industrial economies, I find Brenner’s command of the post-war performances of the American, German and Japanese economies truly impressive. I am especially struck by his mastery of the recent economic history of Japan, the primary subject of my own research.
That said, as is to be expected of any ambitious and pugnacious book, Brenner’s work can be questioned in several aspects. In order to make what I hope will be constructive criticisms within a limited space, I will focus on three critical issues. Firstly, I will argue that Brenner’s analysis needs to become systemic—that is, more focused on the core characteristics of contemporary capitalism, the better to support his central thesis that it has suffered from declining rates of profit since the turn of the seventies. Secondly, I will contend that Brenner’s discussions of the post-war and near-future economic performance of the industrial economies would have gained from taking account of the history of cycles of technological change. Thirdly, I believe his rebukes of latter-day capitalism would be significantly more effective if he recognized, more fully than he has done so far, the substantive differences between the American and the Japanese–German variants of it. These three criticisms are closely intertwined, and even in a short compass I am confident readers will have little difficulty in seeing the analytic overlap between them.
Declining rates of profit
In support of his central thesis that rates of profit have declined, across the whole advanced capitalist world, since the seventies, Brenner musters a mass of empirical data and, at times, selected elements and vocabulary of neoclassical economic analysis. However, he does not offer a systemic analysis—that is, one based on an articulated, internally coherent view of the political and economic characteristics and core dynamics of modern capitalism. The analytic underpinning of his broad case comes in the tenth chapter of his book, ‘Why The Long Downturn? An Overview’, as well as in a few pages summarizing his alternative to the ‘supply-side argument’.footnote1 These are written from the ‘capitalist’ point of view—that is, of those who decide whether to invest or disinvest in productive capacity. Brenner notes that capitalists do not necessarily disinvest even when their rate of profit is declining, because their enterprises enjoy various advantages as established firms within a given market, which include good information about this market, long-standing relationships with suppliers and customers, and above all technical knowledge. He is also aware that firms have large sunk costs, which motivate them to do their best to increase sales abroad rather than reduce productive capacity, and that firms can and do incur debt to prolong their production.
Brenner’s discussion of the reasons why capacity reduction may not occur, so leading to excess capacity and a declining rate of profit, is persuasive until one realizes he has taken into account only the outlook of capitalists as they react to what they are expected to react to: costs of inputs (capital and labour), changing prices of their products, competition from rival firms, market shares, entry barriers to their respective markets, etc. He does bring in differing institutional features of the American, German and Japanese scene that affect such variables. But he does not delve into many economic factors that—indirectly, but very substantively—affect, indeed often determine, the decisions that capitalists make. That is to say, his account of the ‘long downturn’ is not embedded within the broader framework of a systemic analysis. Let me explain.
Brenner’s argument is that declines in the rate of profit typically result from the aggregate excess capacity that builds up as capitalists continue to invest in more efficient production, allowing them to raise output and to lower prices. But lower prices reduce profits, because of ‘downwardly inflexible costs’. Even when profits continue to fall, however, capitalists do not exit their industry but continue to ‘search for a better alternative’, while ‘lower-cost producers find it individually profitable to enter into these same lines despite their reduced profitability’. ‘This sequence’, he contends, ‘can be reversed and profitability restored only when sufficient high-cost, low-profit means of production can be forced from lines [of production] affected by over-capacity/over-production and reduced profitability, and successfully reallocated to sufficiently high-profit lines’. In many parts of Economics of Global Turbulence, ambiguous observations of this kind are flanked by others explaining that ‘a better alternative’ for capitalists in a given branch of industry will be sought in economies of scale, capital ‘deepening’ or ‘widening’, or reducing costs in other ways. If such alternatives can be found, firms will persist with traditional lines of production instead of exiting them, and so contribute to excess capacity and a decline in the rate of profit.
Many who study the behaviour of firms—especially neoclassical economists—will, however, question Brenner’s conclusion that if profits fall below ‘a certain level’, producers will be forced out of their existing lines of production, even as ‘other still lower-cost producers’ enter into these same lines and yet make a profit. The problem arises because Brenner not only fails to define exactly what he means by a ‘certain level’ and ‘lower-cost’, but also because he offers little discussion, beyond generally stated possibilities and vaguely formulated hypotheticals, of what would make some firms ‘still lower-cost’ producers and why whatever it was that made them lower-cost producers was not available to other firms. Thus when he writes that ‘sufficient high-cost, low profit’ producers must be forced out of an industry, because of excess capacity and output, for there to be a ‘successful’ relocation of them in new, ‘sufficiently high-profit lines’, students of firm behaviour cannot but ask: how does one judge which firms have such high costs and low profits for this to occur? Do we find such firms only post hoc? Why don’t ‘forced-out firms’ just go bankrupt and so reduce aggregate excess capacity? Why are they able to ‘relocate to sufficiently high-profit lines’? Wouldn’t such relocated firms making ‘sufficiently’ high profits boost the average rate of profit, rather than reduce it?
The cost of capital
Even more importantly, shouldn’t Brenner discuss the rate of profit as a financial coda of the performance of firms, which is predominantly affected by the real costs of capital—costs determined by the rates of inflation and of national savings, the international flow of capital, and several more macroeconomic factors that are systemic? Wouldn’t labour costs be similarly altered by globalization of supplies (see, as Michel Aglietta points out in this issue, the Chinese impact on world trade), by ongoing demographic trends, and by the seemingly increased ‘acceptance’ of American labour-market practices in Germany, Japan and other industrial economies? Moreover, aren’t rates of profit increasingly determined by how much profit is derived from firms’ earnings abroad, as opposed to those garnered at home?footnote2
Finally, there is another important question that economists, and many others in industry and finance, will ask: why has Brenner so little to say about the role of the capital market (read: the sharp-eyed, keenly profit-motivated shareholders, investment bankers, hedge-fund managers and the like), especially in the us economy? Don’t we observe daily how low-profit and loss-making producers, burdened by excess capacity, see the value of their shares fall and/or are forced by financial institutions into bankruptcy, as they are denied credit or become targets for acquisition and reorganization, often resulting in the reduction of productive capacity?
Simply put, what I am suggesting is that if Brenner wishes to argue that declining rates of profit have determined a long downturn since the seventies, and continue to weigh on the future of the advanced capitalist economies, he needs to be able to answer questions like those I have raised. But to do so he would have to offer a more explicitly articulated systemic analysis than he does at present, of which the narrative he develops would become an integral part. Let me suggest a skeleton of such an analysis, which I hope Brenner might find congenial and consider adopting.
During the past few decades and particularly since the late 1990s, we have seen in most industrial economies, and especially in the us and Japan, two incontestable facts. One is that what matters most to investors is their total income, which has been continuously increasing, little affected by declining rates of profit in the shrinking manufacturing sector of these economies. Investors’ incomes have risen—at least until October 2008—because of their increased ability and willingness to take risks, thanks to the past three decades of a historically low cost of capital. The second salient phenomenon is that the Gini coefficient has been steadily rising, most visibly in the us and Japan, because investors’ incomes have risen while real wages have increased more slowly, or even stagnated. Of course, these two facts are closely linked.
The cost of capital has been declining because of high rates of saving (in the case of the us, not by its own citizens, but those of other nations), policies of central banks, and declining real taxation of corporate and investment incomes (i.e. adjusted for inflation). More specifically, its historically low level is due to the very large amounts of capital flowing from Asia and the oil-producing economies to the United States, permitting the Fed to depress interest rates to maintain economic growth, to a point where the real rate of interest even became negative over many quarters; and to competition between nations in today’s highly globalized economy to reduce the real tax burden on capital as it moves restlessly around the world at electronic speed.
The lower cost of capital has reduced the risks of investing and increased the total income to be derived. Thus investors have become more willing to keep, or even increase, investments in industries in which the rate of profit is declining because of increasing excess capacity, so long as they can maximize their total income. They make investment decisions in manufacturing firms, swayed by the prevailing cost of capital and by weighing the expected returns they can realize from investing in any given manufacturing firms, or branches, as opposed to those in other industries or a multitude of financial instruments. While the expected returns from investments in the former are significantly affected by the likelihood or otherwise of increasing market share both at home and abroad, other investments, including in financial institutions, the housing market and countless types of ‘derivatives’, are more responsive to the cost of capital. Thus, when the latter types of investment make up an increasing share of investors’ income, the financial discipline exerted by the capital market on poorly performing manufacturing firms tends to be less swift and exacting if the cost of capital is low, because income from investments in manufacturing accounts for a smaller share of their total income. Of course, such behaviour on the part of investors who are motivated primarily by the low cost of capital will result in periodic financial crises as typified by the bursting of the bubble in Japan in 1990 and the historic and global financial crisis we are witnessing today.
Low-cost capital, justified in the name of maintaining stability and growth in industrial economies, and supposedly providing a trickle-down benefit to all, preserves the system as it is now constituted. At the same time it increases industrial excess capacity and reduces the rate of profit in manufacturing industries. This means that, in the absence of radical systemic change, the future of the industrial economies will be dependent on a steadily increasing supply of low-cost capital, which in turn will burden future generations with debt, bring about frequent financial and fiscal crises, and increase the Gini coefficient, which will continue to rise with inevitable consequences for political and social stability. Other systemic difficulties will occur as well. More explicit and broader systemic discussion of modern capitalism would strengthen, not weaken, Brenner’s warnings of further turbulence to come, not only in the advanced industrial economies, which account for the lion’s share of global gdp, but also in the emerging economies, making less necessary the qualifications with which he often hedges his findings at present.footnote3
Technological change
I also believe that Brenner could have strengthened his case for declining rates of profit as the key to the long downturn if he had offered reasons why the historically observable cycles of technological change that have reinvigorated industrial capitalism in the past are not likely to be repeated in the future. Here, overcoming what intellectual modesty I possess, I would like to suggest that Brenner take a look at some of my own work. For more than two decades, collaborating much of the time with the late Yasusuke Murakami of Tokyo University, I examined the relationships between economic performance and technological change since the onset of the Industrial Revolution in England. Together we studied a wide range of historical data for the uk, the us, Germany, Japan and several developing Asian economies. Such data ranged from local wage rates for factory workers in late eighteenth-century England to growth rates in the productivity of capital and labour, by industry, up to the 1990s. The history of the technologies of a dozen industries were investigated as thoroughly as time and sources permitted.footnote4
Since the onset of the Industrial Revolution, there have been two identifiable technological cycles, each about one century long, and by the early 1970s, a third was under way. The first cycle, which began in the 1760s, featured the appearance of the steam engine, machines made of iron, railroads, ocean-going ships and many other innovations and industrial products. The second cycle, which started in the early 1880s, saw the widespread use of electricity and petroleum, the invention of various man-made materials such as rubber, the discovery and dissemination of dyes and plastics, and the arrival of automobiles, many types of new machinery and other industrial products. All of these new technologies profoundly changed our daily lives. The third cycle is the ongoing it revolution that began in the early 1970s, when the output of semiconductor chips began to skyrocket, and computers and many other novel means of electronic communication began to transform our existence in myriad ways.
Both of the first cycles had two phases, lasting about 50 years each: a ‘breakthrough’ phase and a ‘maturation’ phase. In the former—the period of ‘Great Inventions’, in Nicholas Crafts’s terms—the rate of productivity increase is slow because a great deal of trial and error is involved in adopting new technology, which is often costly and requires considerable practical and institutional change. Since labour productivity rises only slowly, or not at all, real wages are sluggish or may even fall. In the ‘maturation’ phase, on the other hand—corresponding to the period when ‘General-Purpose Technologies’ become available, in Crafts’s terms—the productivity of labour and capital rises rapidly. The most important reasons for this change are ‘learning by doing’ and a rapid increase in ancillary innovations. For example, it took more than two thousand patented improvements upon the earliest monochrome television sets to reach today’s state-of-the-art models. Equally important are a host of institutional and behavioural changes, to laws, employment practices, forms of financial transaction and so on, as economic agents adjust to the new possibilities.
Each of the two phases in each cycle has distinctive market characteristics. In the breakthrough phase, markets tend to be monopolistic, or highly oligopolistic, because those firms that have access to new technologies can more easily acquire capital and expand their productive capacity ahead of would-be new entrants into markets—that is, potential competitors. In the maturation phase, competition in an increasing number of industries that adopt the new technologies becomes keener, especially internationally. However, despite intensifying competition and an increasing tendency towards excess capacity, profit and wage levels increase as productivity jumps.
Now, as far as the first phase goes, the data presented by Brenner are essentially consistent with my own findings. Note also that Aglietta’s table of labour productivity in the eu 15 and the us supports this line of thinking. In the ‘breakthrough’ period of the third cycle, which began in the 1970s, labour productivity in the us, the leader in the it revolution, rose faster than in the eu 15, but its rate of growth remained substantially lower than that which characterized the ‘maturation’ period of the second technological cycle. Thus the critical question becomes: will Brenner’s basically cheerless view of the near future of industrial economies prove to be on the mark, or will history repeat itself for the third time, bringing us a period of ‘maturation’ like that of the two preceding cycles (i.e. about 40–50 years after the inception of the third cycle), in which the industrial economies enjoy several decades of rapidly increasing productivity and high performance, and therewith an upward slope of profits?
The third cycle
My own view is that Brenner’s tacit hypothesis is plausible, and we are not likely to see history repeat itself in this third historical cycle. For two principal reasons, I think it unlikely that the large, leading industrial economies will return to the kind of prosperity they enjoyed during the ‘maturation’ periods of previous cycles. The first is that in sharp contrast to these earlier ones, which saw intensified competition among advanced industrial economies only in the ‘maturation’ phase, what we witness today—already in the ‘breakthrough’ phase of the third cycle—is that the emerging economies, led by China and other Asian nations, are increasingly capable of competing against the advanced industrial economies in more and more markets for industrial products, including the most technologically sophisticated lines. This is the result of both a steady inflow of advanced technology and fdi into the emergent economies in conditions of accelerating globalization, and of the ways in which capital and technology from the richest economies are seeking to increase their returns by boosting trade, usually at the expense of wage-earners at home. The strength of the emerging economies even in the ‘breakthrough’ phase of the current cycle is evident not only in trade data, but in the fact that 62 of the Fortune 500 top global companies were by 2008 firms from these countries.
The second reason is that the leaders in the ‘breakthrough’ phase of the last two cycles were not as burdened by debts and unfunded government obligations relative to their respective gdp as are their equivalents today. No major state of the past had a national currency whose value was dependent on borrowing an average of $3 billion a day, as the us now does. No such state had a national debt exceeding 150 per cent of its gdp, as Japan now does. None had crushing unfunded national obligations as do Germany and most other economies in the eu. The force of these observations can be extended to various other systemic limitations of the advanced capitalist economies, notably their seeming inability to reduce their Gini coefficients or to confront looming environmental crises. I hope that Brenner will see that reflection on the history of technological cycles, a bare outline of which I have sketched here, could enrich his own analyses.
Different capitalisms
Brenner devotes the larger part of his book to detailed narratives of the trajectories of the biggest industrial economies, the United States, Japan and Germany, since the war. But I was disappointed not to find any pithy comparative discussion of the systemic—institutional and behavioural—differences between the American and the Japanese–German types of capitalism, or consideration of the way in which such differences could affect their futures. What Brenner tells us about the contrasts between them is inadequate, consisting for the most part of passing observations on practices and anecdotal summaries of institutions. Yet we should all be familiar with the quite decisive differences that set these economies apart, even after the past few decades of the ‘Americanization’ of Japanese and German societies. Here I note only two profound divergences.
The United States has been a debt-ridden economy since the 1960s. This well-known fact can be expressed in many ways. Perhaps the simplest is to note that in 2008 the total debt of government, firms and households has reached 350 per cent of gdp. The highest ratio ever recorded in the past was 300 per cent, during the depths of the Great Depression. In the early 1980s, total debt was around 150 per cent of gdp. In the past twenty-five years it has shot up as the federal deficit has continued to mount and cheap credit has continued to be made available, to ‘stimulate growth’. The present American-originated financial crisis is an inevitable outcome of this huge increase in indebtedness. On the other hand, in sharp contrast to the us, both Japan, despite its large national debt, and Germany, albeit with its huge unfunded government obligations, consistently post large trade surpluses, are the world’s largest net international creditors, and have high savings rates (as opposed to the zero-to-negative rate in the us). The ratio of German and Japanese total debt to gdp is less than 200 per cent because these countries’ corporate and household debts are substantially smaller than their counterparts in the United States. It is important to remind ourselves that today the total American debt now stands at a staggering $48 trillion—and this figure does not include a few more trillion dollars currently being added because of the ongoing financial crisis. This gargantuan debt is only a few trillion dollars less than the entire gdp of the world, estimated at $54.3 trillion.
A second profound difference is that, despite all the changes that have occurred in Japan and Germany during the past three decades, the relationships between government and business, among firms themselves, and between employers and employees, are still much more ‘corporatist’ than in the us. American capitalism is often described as a casino or jungle variant of the species. The contrasts between it and the Japanese or German variants imply very significant ‘costs’ and ‘benefits’ in terms of economic efficiency, social welfare, income distribution, and more.footnote5 To strengthen his case, I truly hope that Brenner will take more seriously such substantial differences, which persist between the ‘winner-takes-all’ character of American capitalism and the German–Japanese form of capitalism. By comparison with American capitalism, the latter has longer and closer bank–firm relationships; protects employment better through significantly more effective laws and a still enduring socially embedded consensus to protect job security; maintains inter-firm trading relationships that are more lasting and multifaceted (including capital participation and technology transfers); has a business–government relationship that is much less adversarial; and pays few executives in the largest firms a salary that is an unconscionably high multiple of a worker’s wage plus an obscene bonus. Such systemic differences will enable Germany and Japan to cope better with the global competition that is certain to intensify as the ‘breakthrough’ phase of the current cycle of technological change passes over into a ‘maturation’ phase in the near future. A systemic analysis is indispensable if one wishes to foretell the futures of the three economies Brenner has examined and, by inference, the future of industrial capitalism.
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