Capitalism, Development and Empowerment of Labour: A Heterodox Political Economy [1 ed.] 1032022396, 9781032022390

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Routledge Frontiers of Political Economy

CAPITALISM, DEVELOPMENT AND EMPOWERMENT OF LABOUR A HETERODOX POLITICAL ECONOMY Hartmut Elsenhans

Capitalism, Development and Empowerment of Labour

The dominant neoliberal approach presents politics and political economy as nuisances which disturb the smooth operation of self-regulating markets. But political economy is not merely an academic issue – it is a class issue, and this book forcefully argues that political economy should return to a central position in the study of the social sciences. Offering nothing less than a reconciliation of Marxian, Keynesian and neoclassical economics, the work opens with a discussion of the key, interconnected economic concepts which help us to understand capitalism: price, income, profit, value, growth and crisis. Prices reflect income distribution and therefore class relations, and the chapters show that the very emergence of capitalism resulted from mass empowerment of the so-called “lower orders”. Profit is always available if entrepreneurs spend on net investment and create incomes for additional labour; this, in turn, requires expanding demand, and so therefore profit depends on rising mass incomes. Conversely, underdevelopment is the result of the destitution and disempowerment of the masses. In the Global South today, it is clear that enormous riches go hand in hand with widespread misery and poverty because the market does not transform wealth into the kind of investment that might benefit all. This book argues that the new wealth triggered by productivity increases has enabled the rich to liberate themselves from the capitalist constraints of competition and waste their new wealth in the form of rents. The main threat today is, in fact, the globalisation of rent. The text makes a point for a progressive counter strategy: capitalist structures that empower labour need to be transferred to the Global South. This requires political and economic efforts towards empowering labour in the Global South. This book demonstrates the analytical power of political economy for all social scientists and will be invaluable reading for economists, political scientists and sociologists in particular. Hartmut Elsenhans is Professor Emeritus at the Global and European Studies Institute, Leipzig, Germany.

Routledge Frontiers of Political Economy

Democratic Economic Planning Robin Hahnel A History of Monetary Diplomacy, 1867 to the Present The Rise of the Guardian State and Economic Sovereignty in a Globalizing World Giulio M. Gallarotti Markets in their Place Context, Culture, Finance Edited by Russell Prince, Matthew Henry, Carolyn Morris, Aisling Gallagher and Stephen FitzHerbert China’s Belt and Road Initiative The Impact on Sub-regional Southeast Asia Edited by Christian Ploberger, Soavapa Ngampamuan and Tao Song Capital and Capitalism Old Myths, New Futures Rogene A. Buchholz Economic Change and Wellbeing The True Cost of Creative Destruction and Globalization Fabio D’Orlando, Francesco Ferrante and Albertina Oliverio Capitalism, Development and Empowerment of Labour A Heterodox Political Economy Hartmut Elsenhans For more information about this series, please visit: www.routledge.com/ Routledge-Frontiers-of-Political-Economy/book-series/SE0345

Capitalism, Development and Empowerment of Labour A Heterodox Political Economy

Hartmut Elsenhans

First published 2022 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2022 Hartmut Elsenhans The right of Hartmut Elsenhans to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Elsenhans, Hartmut, 1941- author. Title: Capitalism, development and empowerment of labour : a heterodox political economy / Hartmut Elsenhans. Description: 1 Edition. | New York : Routledge, 2022. | Series: Routledge frontiers of political economy | Includes bibliographical references and index. Identifiers: LCCN 2021011802 (print) | LCCN 2021011803 (ebook) Subjects: LCSH: Capitalism. | Globalization--Economic aspects. | Income distribution. Classification: LCC HB501 .E474 2022 (print) | LCC HB501 (ebook) | DDC 330.12/2--dc23 LC record available at https://lccn.loc.gov/2021011802 LC ebook record available at https://lccn.loc.gov/2021011803 ISBN: 978-1-032-02239-0 (hbk) ISBN: 978-1-032-02240-6 (pbk) ISBN: 978-1-003-18251-1 (ebk) DOI: 10.4324/9781003182511 Typeset in Bembo by Deanta Global Publishing Services, Chennai, India

Contents

List of figures List of tables Acknowledgements About the author

ix x xi xii 1

Introduction 1 The determination of prices: The relevance of value theory against the centrality of the egalitarian foundation of fexibility and effciency in capitalism

7

Summary 7 Marx’s argument 9 Value formation by spending on labour which is required for making a useful product 10 The category of abstract labour 12 Value formation on account of usefulness 13 Why are elasticities important for social scientists? 17 The supply side of the balance between demand and production 22 Who creates the value? Prices and profit 26 The issue of flexibility instead of the attribution of value to social actors 29 References 33 2 The macroeconomics of proft, crisis and growth in capitalism Summary 35 On profit and rent 36 Endogenous money 37 Profit depends on net investment spending 40 Profits are boosted by government deficit spending and export surpluses Profit and net investment depend on rising mass incomes 47

45

35

vi

Contents The creation of demand through capital deepening 50 Annexe 2.1 Extending the basic Keynesian model by government deficit spending and export surpluses 57 Annexe 2.2 The requirement of falling unit costs of production and the microeconomic dependence of capital deepening on rising labour costs (real wages) 57 Annexe 2.3 The viability of capitalist growth without rising wages on the basis of capital deepening 58 List of symbols 60 Notes 61 References 61

3 Rising mass incomes as a safeguard for capitalism

64

Summary 64 Multiplier, accelerator and oscillatory movements in capitalist growth 65 Marx’s tendency of the rate of profit to fall 71 Enlarged reproduction without rising mass incomes 78 Neoliberal pre-Keynesians: too much state intervention and illusory demand management 80 Capitalism = saving on capital 85 Annexe 3.1 The multiplier and the accelerator 92 Annexe 3.2 At constant wages an increase in the organic composition of capital is possible only if the rate of profit increases 94 List of symbols 95 Notes 95 References 96 4 Rent blocks capitalism: Today’s underdeveloped world Summary 99 Marginality and its consequences of blocking capitalist transformation 99 Marginality and patterns of growth 103 Unequal specialisation and the dominance of growth-impeding patterns of production in the Global South 106 Exploitation and unequal exchange: the terms of trade problematique 110 New rents from international specialisation 112 Note 115 References 115

99

Contents 5 On the intelligent use of rent for overcoming underdevelopment

vii 117

Summary 117 Development as a combination of economic, cultural and political change: import-substituting industrialisation and economic and political modernisation 117 Land reform and its economic dynamics 122 The political dimension of managing rent and the contradictions of rent-based state classes 125 The successful marrying of rent allocation and export-oriented manufacturing 131 Pragmatism instead of theoretical orthodoxy 136 References 140 6 The globalisation of an underconsumptionist threat and the emergence of a doomsday scenario of globalisation

142

Summary 142 Some figures on globalisation 143 A convoy versus a doomsday pattern of globalisation 149 Hierarchies in the international division of labour 152 Internal contradictions of capitalism and its external expansion, or: the pitfalls of the theory of imperialism 156 The challenges of globalisation: a global underconsumptionist crisis 163 The shifting balance against labour in the West 168 Notes 172 References 172 7 The globalisation of rent Summary 174 Fighting the decline of capitalism: financialisation and the rise of the state 175 The rise of financialisation 177 On economic bases and mechanisms: limited price competition and ample credit supply 180 States become hostages of financial markets 182 The rise of short-term capital movements and the detachment of financial markets from the real economy 185 The ultimate state guarantee for financial markets: overcoming instability by extending rent 188 Implications of a rise of rent in the global system of states 192 Note 196 References 196

174

viii

Contents

8 The alternative: Defending mass interests and capitalism through rising mass demand: some concluding considerations

198

Summary 198 The capitalist countries and rising mass incomes 199 The saving trap 203 Environmental protection as the new frontier of capital accumulation 205 The contribution of the marginality-ridden world to maintaining world demand in line with world productive capacities 207 Alienation is acceptable and liberating 211 On preserving capitalism by labour 213 Note 216 References 216 Index

219

Figures

1.1 1.2 1.3 1.4 1.5 4.1

Budget line and indifference curves Sales in case of price elasticity of demand of (1) Rising sales in case of high price elasticity of demand Decreasing sales in case of low price elasticity of demand Cumulated total earnings, total costs, and fixed costs The marginality-cum-rent model

16 18 19 20 24 101

Tables

2.1 3.1

3.2 4.1 5.1 5.2 6.1 6.2 7.1 7.2

The five configurations Changes in national income in relation to a base year by the interaction between a multiplier (marginal propensity to consume 0.6) and an accelerator (capital output ratio 2) Capital productivity in the last decades: Germany and the USA (1991 = 100) Production per 100 hours worked in England and India Share of different product categories in % of total exports of the developing countries (SITC and UNCTAD groupings) Production per 100 hours worked in East Asia and Germany Some indicators of the globalisation of the real economy Relation between capital exports and national gross fixed capital accumulation in high-income OECD economies Some indicators of financialisation Triennial OTC derivatives (daily turnover)

52

70 88 107 133 138 144 148 178 179

Acknowledgements

I thank Hannes Warnecke-Berger for comment and advice, Friederike Hartwich for efficient research assistance in these difficult times with difficult library access, Alex Burkhardt for putting the text into understandable language and Nora Richter for putting the text into a publishable form. Naturally all shortcomings are mine.

About the author

Born in 1941, Hartmut Elsenhans is Professor Emeritus at the Global and European Studies Institute, Leipzig, Germany. He is a representative of global Keynesianism, a Member Verein für Socialpolitik and honorary member of the students’ council of the Leipzig Political Science Institute. He has published in the areas of Political Science, Economics and Economic History in 25 countries and ten languages, and has taught in Berlin, Dakar, Frankfurt, Islamabad, Leipzig, Lisbon, Marburg, Montreal and Salzburg. He has completed extended field research in Algeria and France, also in Bangladesh, India, Mali, Senegal and Vietnam, and his studies focus on Algeria, world system theory, history of capitalism, development economics and politics, state and administration in developing societies, new cultural-identitarian movements and North-South relations.

Introduction

A fundamental condition of capitalism is empowerment of labour. By advancing this thesis, I am implicitly criticising Marxist and neoclassical economic approaches. Whatever separates these apparently divergent models, both concentrate on capital accumulation as the condition for capitalist growth. I reject this position. In its place, I argue that capitalism can exist only through empowerment of the “poor”. This is the central claim of the book that you hold in your hands. “The poor” have no particular interest in capitalism. However, they render the entire system possible by pursuing their interests. In doing so, they resist the strategies of entrepreneurs, and especially of rentiers. These privileged groups pretend that they are promoting capitalism, whereas, in fact, many among them are merely collecting rents. Capitalism is capital saving and needs rising mass incomes for growth. Today, this basic dependence of capitalism on the empowerment of labour is rarely recognised or acknowledged. The conspicuous silence around this question possibly owes to the fact that popular “ideological instances” are invariably colonised by powerful upper-class interests. In other cases, there has been a meek surrender to these interests, and a limp conformity to the curious “Social Democratic” neoliberalism that passes for mainstream thinking. Throughout this book, I argue that rising mass incomes and rising real wages indicate an improvement of the distributional position of labour against the desire of the privileged to increase their rents. The improvement of labour’s position may take diverse forms: higher purchasing power for products, but also decreasing work time or improving working conditions. These may occur even at the price of lowering increases in the growth of labour productivity. By showing that rising mass incomes are a condition for capitalist growth, I argue that new needs, new desires and new necessities can be articulated within capitalism without destabilising the progressive element of the system. This progressive element consists in subjecting the privileged to competition. Capitalists can be forced into cost-increasing reforms, such as rising mass incomes, more humane working standards or more respect for the environment. This can be accomplished without the necessity of overthrowing capitalism as a mode of production. Overcoming alienation through new forms of DOI: 10.4324/9781003182511-101

2

Introduction

organisation of work is a specific form of deploying productivity growth for raising the well-being of the great mass of the population. Capitalism is at the disposal of labour if labour is able to use its force of numbers to acquire its fair share in the total wealth of society. In order to avail itself of this possibility, labour must discontinue its adherence to mainstream economics. Capitalists will obviously oppose such reforms. However, in contrast to any mode of production which predates capitalism, the dominant class does not control the trajectory of the system. In the past, it was possible for the ruling class to acquire near-absolute power through political means. This was the case in the ancient dynasties and empires of antiquity. Under capitalism, however, empowerment of labour and the mechanism of competition serve to control the capitalist appropriation of surplus. Democracy is the macroeconomic environment in which capitalists and labour operate and negotiate this process. The revolution of the third estate does not imply an exclusion of labour. This, of course, assumes that such a bourgeois revolution is complemented by a democratic revolution, and that it does not succumb to the ideological dominance of the privileged. Incidentally, the pre-eminence of mainstream economic theory represents such a submission. Capitalism is a particular mode of production. The ruling classes in capitalist societies have no inherent desire to maintain the systemic structure of this mode of production. They simply pursue their selfish interests in assuming that increasing surplus is the best way to maintain stability and their own privileged position. Capitalism is not the result of an inevitable historical trajectory, as conceived in most developmental theories. It is a structure which has come into being as the unintended result of an emancipatory struggle of the lower orders. This struggle was possible only because of the very scarcity of these lower orders. Under such conditions, even the lowliest worker was able to produce a surplus, at least during the transition to capitalism. Capitalists as entrepreneurs must maximise surplus. They strive to be materially richer, by any means necessary. This is not a moral critique of capitalists. They may have inclinations other than wealth acquisition, according to the alternative social roles they inhabit. I am merely making the economic observation that competition on perfect markets does not award political power or result in the ideological dominance of entrepreneurs. Capitalism means appropriation of surplus limited to the form of profit, which is surplus appropriated under competitive conditions on anonymous markets. However, capitalists cannot fix the amount of profit they receive through their sales by imposing prices unilaterally. Consequently, profit ultimately depends on the purchasing power of customers who buy their products, and thus on rising consumption demand. Capitalists cannot provide this rising consumption demand without risking their own competitiveness. In the final analysis, rising consumption demand depends on rising mass incomes imposed on – and not granted by – capitalists.

Introduction

3

By increasing mass incomes, labour creates a market for profitable sales of goods and incentives for investment. It stabilises capitalism. It provides the basis for systematic innovation. Capitalists who take a competitive interest in new and greater needs sell at a profit. Through consumption increases, labour creates the basis for capitalist profit. These are the results of the class practices of labour. But they are not identical with the professed goals of labour. The political project of labour consists in enhancing participation, improving standards of living, the achievement of overall social security with reliable access to decent incomes and reduction of alienated work. This last goal is not necessarily achieved through the acquisition of more meaningful work, but it can certainly comprise a reduction of labour time. Rising mass incomes are decisive for “homogenising” productivity. This is despite large differences in production line-specific productivity growth. Without rising mass incomes, prices would not adjust to such a homogenising process. Moreover, homogeneity is a basic element of the flexibility of capitalism. It is certainly more important than the issue of prices reflecting utilities or labour values. Both constituent classes of the capitalist mode of production do not prioritise the defence of capitalism; they prioritise their own goals. These goals are deduced from their perspectives and immediate material interests. The selfish pursuit of these material interests stabilises capitalism, insofar as labour and capitalists happen to maintain an appropriate balance. Capitalism thus functions without its constituent classes necessarily understanding the basis of the system. Labour is buttressed by its own scarcity, which is always threatened by economic crisis. Capital earns net profits based on its net investment spending, which depends on final demand. The weak point is thus the maintenance of the empowerment of labour. A decisive arena for this struggle is the state. Capitalism is inherently unstable. There exists no ruling class which is capable of imposing an equilibrium between labour and capitalists. A sufficient expansion of mass demand is not necessarily reached, because capitalists do not understand its importance. If they do understand it, the individual capitalist is nevertheless unable to increase demand by raising the incomes of their own workers. If they did so, they would lose competitiveness. In the developed capitalist countries, absolute poverty has already been eliminated as a factor in the lives of the broad mass of the salaried population with regular employment. This removes the urgent necessity of solidarity among the “lower orders”. Labour organisations are weakened. The colonisation of the minds of these “lower orders” has served to eliminate alternative economic interpretations and projects as topics of discussion in the public arena. To be sure, protests still occur. But such protests are generally “unpractical”. The lower orders want concessions, which the capitalists magnanimously grant. They do not project an alternative organisation of economy and society, nor do they defend their claims in the name of defending capitalism – that is, competition among the privileged. The newly emerging “populist” political

4

Introduction

tendencies are perhaps the most flagrant evidence of labour’s lack of understanding of the nature and significance of its own struggle. Increased specialisation in production has resulted in a differentiation of the working population. Large segments of the workforce perceive their own advancement as the result of superiority in very specialised skills. Labour organisations no longer face the – still difficult, but more straightforward – task of addressing the “universal condition of labour”. If labour is disempowered, then the possibility of making a profit on the basis of entrepreneurial investment spending is reduced. There may be an underconsumptionist crisis. Increasingly, both classes of capitalist society prefer at least some rent appropriation in order to reduce the threat of underconsumption. Business is much better placed than labour in this regard, however. The contemporary configuration of the world system is characterised by globalisation. The stability of capitalism at the centre of this system is threatened. Increasing mass consumption at the centre is not paralleled by increasing mass consumption in the newly emerging industrialising countries of the periphery. Masses of labour in marginality-ridden countries become competitive on the world market for manufactured products. Their growing competitiveness is not limited to simple products, however. It increasingly extends to technically demanding products which enjoy high price and income elasticity of demand. This new competitiveness is not the result of differences in real wages, although these certainly exist. It results from the new capacity of some important, previously underdeveloped countries to devalue their currencies below purchasing parity. This reduces the international price of their labour substantially. Indeed, these prices are so low that this labour’s earnings in international currency are insufficient to buy major subsistence goods on the world market. The labour of developed capitalist economies simply cannot compete with developing countries whose international labour prices tend toward – in principle – almost zero. The attempt to limit wage costs in the developed capitalist countries is futile. Irrespective of how successful any particular country is at controlling wages, marginality-ridden countries will always be able to go even lower. They will devalue their currency as long as domestic marginality is not overcome and high levels of employment are not reached. Indeed, developed capitalist countries which increase domestic mass incomes in their national currency would not jeopardise their international competitiveness. Income distribution relates to the relative positions of capital and labour. International competitiveness depends on the exchange rate. The new integration of marginality-ridden economies into the world economy does not lead to the concomitant transfer to the Global South of the basic capitalist mechanism of empowering labour. On the contrary, the danger is that the Global South will transfer its marginality-dominated social and political structures to the hitherto developed capitalist West.

Introduction

5

Rising mass incomes in the capitalist West can be protected from the devaluation-driven underselling of newly industrialising countries. This requires the transformation of these newly competitive economies into capitalist, welfarestate oriented economies and societies. Marginality must be overcome in these countries. They may continue to have low wages, but this is beside the point. The decisive factor is that these wages rise in line with productivity increases. Such a structure is not the natural result of a historical process of technical learning, as assumed by the historical school of economics. Many societies never achieve the conditions for capitalism. In fact, it is development which has to be explained, because non-development is the rule. It is by no means a historical given that feudal societies will simply be broken up by an axial revolution in the local religion which gives rise to rationalism and an elaborate system of market regulation. Underdevelopment is the consequence of non-developed economies being subjected to intensive exchange with more developed economies. The issue here is not the fact that the underdeveloped world is exploited and mutilated. The question is whether or not this exploitation and mutilation are necessary conditions for the survival of capitalism. We might also ask if they are even functional for capitalist growth at the centre. Or could they result from a configuration which ultimately threatens the system? My analysis of capitalism demonstrates that reformist strategies of rising mass incomes in the Global South do not require the dismantling of world capitalism. In fact, they require intelligent development policies. These must combine market and government planning in order to adapt the productive apparatus to the satisfaction of mass needs. The development of the negotiating power of labour in the Global South is the condition for maintaining the negotiating power of labour in the West. More broadly, the maintenance of global capitalism rests on several further essential conditions for the Global South. These comprise development policies for economic and social transformation, continued access to the markets of the West and internal reforms in favour of empowerment of the masses in the South. If the capitalist mechanism is not maintained, underconsumptionist threats loom large. Capitalists are not committed to competition in principle. If they cannot appropriate surplus on competitive markets, they create market imperfections. One of the key mechanisms for achieving this, as this book shows, is financialisation. If successful, the outcome of these trends will be the globalisation of rent, not the globalisation of profit. Standard economic theories are not useful for a defence of global capitalism. Marxist and neoclassical economics are hypnotised by their mantra that capitalist growth depends on capital accumulation. There is, however, no capital accumulation in capitalism. There are more expensive investment goods per worker, because the workers who produce these goods receive higher wages in line with average productivity and real wage increases. But despite higher prices for these goods, the working time embodied in them has not increased.

6

Introduction

Capitalism does not increase the value of fixed capital in relation to output or the wage bill. Mainstream Keynesians focus on government policies to maintain effective demand. In doing so, they sometimes forget that monetary policy is not the decisive variable in creating sufficient demand to trigger decentralised capitalist investment spending. This variable lies in the empowerment of labour. This book thus follows what might broadly be considered a “left” real economy Keynesianism. Capitalism requires rising mass incomes, but these do not inevitably result from the class struggle. Due to cyclical and structural problems, labour may lose its scarcity and be unable to compensate for this loss through political organisations. Political organisation and ideological hegemonies are thus decisive. The “battle of the books”, the confrontation of ideas, is also decisive. This is where I hope to make a modest contribution with this book. Labour’s demand for empowerment and higher incomes is the fundamental condition of capitalism. Labour’s struggle is more effective when it concentrates on maintaining the basic conditions of capitalism. In short, labour must acquire the fruits of productivity growth. This improves the conditions of working people. Slowly but surely, this leads to a gradual realisation of the hopes of the labour movement, and thus of the liberation of mankind. We might call this socialism.

1

The determination of prices The relevance of value theory against the centrality of the egalitarian foundation of flexibility and efficiency in capitalism

Summary Microeconomic processes are closely related to macroeconomic equilibria. Egalitarian distributions of income have a positive effect on innovationoriented and competitive behaviour among those in control of economic surplus. The controversy between labour value or utility-based price formation is of little relevance here. Abstract labour is labour spent on useful products. It is spent only on those products which sell not only because they are useful, but because they are scarce and require labour for their production. Rising mass incomes promote price and income elasticity of products. This induces producers to compete. In an effort to increase sales, they lower prices to the levels of their costs plus average profit. The classical and Marxist formulations of price formation imply that surplus other than profit is as limited as possible. This implies the reduction of surplus in the hands of the wealthy to fit with profit appropriated under conditions of competition. However, high levels of employment (that is, rising mass incomes) are at the basis of a much more important mechanism at the level of microeconomics. This mechanism consists in the convergence of productivities. This occurs despite extremely different growth rates of physical productivities in different production lines. Productivities’ convergence is at the basis of the flexibility of capitalism, and ultimately of its economic cohesion. Indeed, the conventional behaviours and structures of capitalist systems are conceivable only if these high levels of employment and other factors of production are realised. The controversy among different schools of economics generally concerns the capacities of microeconomic mechanisms to produce full employment through their own independent dynamism. However, microeconomics does not determine macroeconomics. On the contrary, macroeconomic equilibria enable microeconomic mechanisms to operate. We start with the question of the formation of prices, because it seems so straightforward: scarce products are expensive and widely available products are cheap. By investigating some aspects of the intensity with which we demand products, and the obstacles in the way of increasing or decreasing production, we will discover that a meaningful discussion even of the problem of the DOI: 10.4324/9781003182511-1

8 The determination of prices

formation of prices is not possible without reference to a society’s overall macroeconomic conditions. We will also discover that precisely those questions which are the object of the most heated discussions, such as assignment of the value of the product to economic agents, labour or capital, are secondary to a much broader problem. This problem consists in the impact of price formation mechanisms on the other dynamics of an economy. We are not so much interested here in the question of justice. We are interested in the question of why products can be sold with a profit. In the debate between different schools of economic thought, especially Marxists against neoliberals, an important controversy concerns the determination of prices. Neoliberals insist that prices depend on demand, while demand depends on the usefulness of products – that is, on utility. Marxists insist on the labour value of products – i.e. on the costs incurred during the production process. They do so because labour value is created by the consumption of indirect and direct labour by capitalist entrepreneurs, inputs, including used up equipment and hours worked. Both have to be paid for by proceeds from sales, if it is intended that production should continue. This apparently academic discussion has important political implications. If there are labour values, then labour has a right to the value it has produced. It seems legitimate to denounce exploitation if labour does not get what it has produced. If value is created by the usefulness of products, the entrepreneur who designs and produces it by his ingenuity can be considered as the originator of the value. If there is a surplus of sales proceeds over all other types of costs, then the ownership of this surplus can be claimed by contending classes. In the end, both solutions are unsatisfactory: demand and therefore utility is necessary, but it does not explain profit. We need a theory of profit. As we come to understand the necessity of the overall macroeconomic conditions which create profit, we will discover that the debate on the relative importance of usefulness and costs tends to obscure a central fact. In short, the mechanisms for influencing prices by utility and cost imply that a particular capitalist economy enjoys a high level of flexibility. Small changes in cost may result in massive changes to supplies, provided that demand follows. Similarly, small changes in usefulness may trigger massive quantity reactions among producers – even when these changes are not linked to the relevant product, but perhaps only to some other product which is also in demand. This chapter ends with a reiteration of this central argument: that the core characteristic of a capitalist society is precisely this flexibility, and not, as some have argued, the assignment of values to specific factors of production. My model assumes the existence of competitive capitalist structures. The major characteristics of such structures are not controversial, at least not among Marxists and neoclassical economists. There are no monopolies or other market imperfections, provided that capitalism works according to its own rules. Monopolies indicate the decadence of capitalism. Both factors of production – capital and labour – compete on anonymous markets. So do products. Labour is doubly free, free to choose its employment and free(d) from the ownership

The determination of prices

9

of the means of production. Workers do not own the machinery they operate. Property rights can be reduced only by general rules (laws). Courts enforce private contracts within the stipulations of the rule of law. All goods exchange at their values. For exchange, they have prices. Prices tend to be equal to values and may diverge only temporarily when there are scarcities. The labour theory of value and the utility theory of value are relevant if microeconomic decisions on the prices of goods and the price of labour determine values and surplus. In reality, both the labour theory of value and the utility theory of value show that prices and values come together on the basis of costs (labour theory of value) and scarcity-dependent utility (utility dependent theory of value, with the implication that useful goods have no value if they are freely accessible). To be sure, Marx is not the only author to have presented arguments in favour of a labour theory of value. Nonetheless, given his historical importance and his place in heterodox economics, I choose Marx’s theory of value formation in order to show that a labour theory of value requires a theory of utility. Otherwise, production costs might not be justified as value creating. Moreover, I will show that a utility-based theory of value creation is fundamentally dependent on production costs. What all of this means is that, in effect, the heated debate between Marxists and neoclassical economists is irrelevant for a thoroughgoing economic analysis.

Marx’s argument According to Marx, all products are produced by labour, which works on raw materials by means of instruments (and since the Industrial Revolution, these instruments have taken the form of machinery). The value of these products is higher than the value of the materials used, the share of machinery used until the end of the production process and the cost of labour. Following Marx, we can conclude that: c + v + s =V

(1.1)

c = denotes constant capital, i.e. products used in the production process which do not add to value beyond their own costs of production = value, v = denotes variable capital, a specific “product”, labour power which has to be paid its own costs of “production” (because of its survival), but adds more to production than it actually costs, s = denotes surplus-value, according to Marx’s definition, the difference between the value of the production of labour and the cost of labour, V = stands for the total value of production. Constant capital is not the Marxist term for fixed capital. It is not constant because it does not move. Constant capital is called “constant” because it does not transfer more value to the good being produced than was used up during the production process. Raw materials are totally consumed in the

10 The determination of prices

production process. Their total cost enters in value formation. The machine cannot transfer more value to the final product than the entrepreneur had to spend in purchasing it. As the machine is not totally used up during one production period, part of its value is preserved. It transfers only that part of its value which is no longer available. Usually, this is defined as amortisation of the machinery. If the machine is used for a longer period than the production of the good described in the equation, then only the part which is amortised enters value formation. Variable capital is variable because its cost is lower than the value it transfers to the product. Variable capital is bought on the labour market. It is therefore identical with the cost of labour, the salary including side payments and social security payments. If constant capital cannot transfer more value than its cost at the moment of its purchase, and if the sales value of the product is higher than variable and constant capital, then there must be a surplus of sales proceeds over all costs incurred in production. As the entrepreneur can always buy constant capital at the going market rate, this additional value – the economic surplus – must be assigned to labour. Labour adds to the value of the product more than its cost. That capital which represents the cost of labour is variable because its value varies between the costs of its purchase and the value it adds to the final product.

Value formation by spending on labour which is required for making a useful product Value is produced by the process of labour working for a marketable product. This is called the labour process of value formation: By working, the latter becomes in reality what before it only was potentially; labour-power in action, a labourer. In order that his labour may re-appear in a commodity, he must, above all, expend it on something useful, on something capable of satisfying a want of some sort. Hence, what the capitalist sets the labourer to produce, is a particular use-value, a specified article. (Marx 1965 [1867]: 127) Even in his early formulations (1953 [1845–46]: 229 f.), Marx argued that the labour process is one of humanisation, the Hegelian transformation or the simultaneous production of products and skills (Hegel 1952 [1807]: 148): By thus acting on the external world and changing it, he at the same time changes his own nature. He develops his slumbering powers and compels them to act in obedience to his sway. We are not now dealing with those primitive instinctive forms of labour that remind us of the mere animal. An immeasurable interval of time separates the state of things in which a man brings his labour-power to market for sale as a commodity, from that

The determination of prices

11

state in which human labour was still in its first instinctive stage. We presuppose labour in a form that stamps it as exclusively human. (Marx 1965 [1867]: 127) In all class societies, labour is alienated. The labour process is purposeful, and the purpose is imposed in capitalism by the market: The result … already existed in the imagination of the labourer at its commencement. He not only effects a change of form in the material on which he works, but he also realises a purpose of his own that gives the law to his modus operandi, and to which he must subordinate his will. And this subordination is no mere momentary act. (Marx 1965 [1867]: 127). Labour is value-creating if the product is useful, as shown by market demand: Use-values are only produced by capitalists, because, and in so far as, they are the material substratum, the depositories of exchange-value. (Marx 1965 [1867]: 131) Under capitalist conditions, labour produces an economic surplus. Surplus production is the special service that the capitalist expects from labour-power and, in this transaction, he acts in accordance with the “eternal laws” of the exchange of commodities … The use-value of labour-power, or in other words, labour, belongs just as little to its seller, as the use-value of oil after it has been sold belongs to the dealer who has sold it. The owner of the money has paid the value of a day’s labour-power; his, therefore, is the use of it for a day; a day’s labour belongs to him. The circumstance, that on the one hand the daily sustenance of labour-power costs only half a day’s labour, while on the other hand the very same labour-power can work during a whole day, that consequently the value which its use during one day creates, is double what he pays for that use, this circumstance is, without doubt, a piece of good luck for the buyer, but by no means an injury to the seller. (Marx 1965 [1867]: 136) Value formation through the labour process depends on labour being expended on useful products in a purposeful manner, the purposes set by an external force: the market. Consequently, labour is alienated. Only such labour which is necessary socially – not gold spindle, but iron spindle, and therefore corresponds to general norms of technology – is value-creating. Only as much labour as necessary according to these general criteria is value-creating.

12 The determination of prices

A labour theory of value includes usefulness and therefore utility, because only a labour expended on useful products is value-creating. As the price for product is this same, if the product is the same, the particular conditions of its production are thus of no consequence to its eventual price. We can only consider labour to be value creating if it is embedded in a work process which is supplied at average productivity according to average technical norms of competitiveness. Any labour theory of value depends on demand and competition on markets and includes usefulness and therefore utility, the essential point of a utilitybased theory of price formation. We can consider labour to be “value-creating” only if it fulfils the following conditions: it is used for useful products, for which consumers pay prices and for which there is demand; it produces at average productivity in a branch of production/technology; it is required to satisfy demand at the price that consumers who buy in required quantities are able and willing to pay.

The category of abstract labour For Marx, labour is only value-creating if it works on the basis of average productivity. It is simply not possible to compare productivities between different production lines other than by examining the prices of the products. Marx is compelled to find a measure other than the appreciation of products on the market, because this would entail a relativisation of the importance of labour as the only source of value. Nor can hours of work be the only measure, because the difference in the burden of work between a miner and a cobbler is undeniable. The measure here would be the intensity of work in terms of required muscle power, stress, etc. During Marx’s time, a between-branches comparison was thus rather difficult. There are some anecdotal indications of this fact: for example, tailors did not need much muscle power, and so the reader is surprised by the fairytale tailor and his “seven on one stroke”. Typographers were known for the psychological stress they endured; they were frequently leaders of labour movements in the nineteenth century. Cobblers, meanwhile, were often philosophers due to their physical weakness. Marx believed that he could salvage his approach by stipulating that the intensity of labour increases value formation, but that productivity does not. This implies that workers with high physical burdens and stress move to branches of production with lower physical burdens and stress, provided that there is no difference in salaries. Branches where workers estimate burden and stress as higher than in other branches have to offer higher wages – provided, of course, that the labour market is free. More intensive labour creates more labour value. Workers will not shift to highly productive branches with similar burdens and stress as in their production lines just because productivity is higher. They will shift massively only if wages are higher – due to, for example, the better

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earnings of the capitalist entrepreneur. Of course, wages here may initially be much higher, but the migration of workers to these branches will allow employers to lower wages to the level of wages in branches with similar burdens and stress. Workers with similar stress and burdens will accept similar wages independently of the productivity of the production line. More productive labour does not create more labour value. All these movements require free labour markets, including migration. This is the case within nation states, of course. Under certain circumstances, however, mobility on the labour market is reduced – because migrating labour would have to cross international boundaries, for example. This mechanism of reducing scarcity-bound wages in initially high productivity branches will not work between nations. At the international level, more productive labour exchanges as more intensive labour. This is because less productive workers cannot freely migrate to more productive plants.

Value formation on account of usefulness What is utility? Utility is difficult to observe. You can judge the utility of a product by the behaviour of consumers who are ready to pay for it. The assumption is that consumers who have to work for their money do not spend money on products that they do not consider useful. Utility as defined by the spending behaviour of households diverges from utility as useful with respect to objective criteria: air has no price in most societies, because air is available without labour costs. Water has long been a noncost, hence a free product, but in leading industrialised countries, clean water increasingly costs money and therefore has a price. There are assumptions about the utility of products. The more a product is available, the less the last unit consumed is considered useful. Marginal utility thus decreases from one unit of a product to the next one consumed or available. That is why prices necessarily decrease with rising quantities. This is called the law of diminishing marginal utility. Consumers may buy many pairs of shoes and many shirts but few of them will buy many bicycles. The number of cars per household is limited because nobody can drive two or even three cars at a time. The number of cups of coffee is limited and the price you are ready to pay for the twentieth cup of the day is much lower than for the first cup in the morning. In principle, “more” of a product serves to augment satisfaction, even if marginal utility declines. Despite diminishing marginal utility of a product, marginal utility will be positive: more is better. This assumes the existence of a rational consumer whose rationality corresponds to the felt preferences of this consumer. However, these preferences do not have to be rational in relation to external standards. Poor people eat fattening food even though this is not rational according to health criteria. In such cases, their preferences clearly do not directly correspond to (rational) health criteria.

14 The determination of prices

There is no scientific explanation for why buyers/consumers on a market have particular needs. There is a large literature on the critique of the formation of needs through advertising or envy, though I do not discuss that here. I assume that consumer “sovereignty” is an objective possibility. The sociological critique of consumer sovereignty tends to devalorise existing preferences of households by arguments deduced from a more enlightened view of things. In my view, however, it makes more sense to observe needs based on patterns of consumer/household spending. How can we compare the utilities of products? According to the law of diminishing utility, more of the same good can be sold to a larger number of consumers/households only if prices decrease. The extent to which prices have to decline in order to increase quantities sold is, however, an empirical question. Moreover, selling to new consumers requires attracting them by lowering prices. In the case of most normal products, demand increases with declining prices or increasing incomes. According to the diminishing marginal utility, we increase our consumption of a given product only if its price declines. Similarly, should the price of the product rise, we reduce our consumption. The relation between changes in prices and changes in our consumption is called price elasticity of demand. There are different configurations of this relation which will be discussed below. Furthermore, if our income increases, then the decline in marginal utility with higher quantities consumed renders less useful additional units of what has already been consumed. With rising incomes, shares of these products in our consumption decrease. We are able to purchase products not yet consumed. The relation between changing levels of incomes and the demand for specific products is called income elasticity of demand of these products. As a result of diminishing marginal utility of any good, rising incomes lead to rising demand for goods already consumed (though in low additional quantities) or to rising demand for new goods. Luxury products increase with rising incomes at a higher rate than increases in incomes. Their consumption tends to decline if their prices decrease. Inferior products have diminishing income elasticity of demand (which may also result from declining prices for that product, as more income may be freed for other purchases: with declining prices for a product, total disposable income for all other products increases). We might define as “necessities” those products for which demand expands with higher incomes, but at a lower rate than incomes. Demand is constrained by disposable incomes of households. Households can spend more money than they earn only to a limited degree. Technically, the expansion of consumer debt is not limited. But creditors require consumers to pay back their debts. It can be assumed that people live as happily as possible in relation to their own preferences (though these preferences may be masochistic). Given this, we compare the effects of different purchases on our total well-being in our spending behaviour. We describe such relations as elasticities. The change of

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parameter x in relation to another parameter y is called elasticity of x in relation to y. Price elasticity of demand describes the change in quantity in demand in relation to a change in prices. Demand will increase for products relative to other products provided that the price relation between the two changes: this is called cross price elasticity of demand. The relation of utilities between two different goods which are not linked in their contribution to our satisfaction varies depending on the amount of each good which we already dispose of. Demand shifts to products with declining relative prices to other products. Demand decreases for products whose prices increase relative to other products. There are, however, two special relationships that must be outlined here. First, goods are complementary if the demand for product B increases even if its price does not decrease, provided that the price for product A decreases. Second, products appear as substitutes if the price of product B decreases whenever the price of product A also decreases. The diminishing marginal utility of particular goods expresses our desire for a diversified range of consumption goods. We do not want to eat only potatoes, or wear the same clothes every day, irrespective of how our bodies change. Four hundred years ago, most of the products we consume today were not yet invented. Even now, they are not widely consumed in poor countries, although the poor strive to obtain them. Twenty years ago, owning a TV was virtually unimaginable to the Indian poor. On special occasions, the poor rented a TV, possibly with video tapes, or maybe just to watch whatever was being broadcast at that point in time. The budget line describes the combinations between quantities of a product A and a product B which can be purchased for the same amount of money – in the standard illustration, the total budget of a household. These are lines where at x = 0, all the money is spent on product A, and on y = 0, all the money is spent on product B. In Figure 1.1, there is a budget line AB on which all possible combinations of spending on the 2 products are represented. Let us suppose that the disposable income of a household can buy 7.5 kg of meat or 15 kg of potatoes. In this instance, the following combinations are on the budget line: 7.5 kg of meat, zero kg of potatoes, 2.5 kg of meat and 10 kg of potatoes, zero kg of meat and 15 kg of potatoes. This is a line with the following slope: y = - ( 2 ) x + 15

(1.2)

Budget lines depend on relative prices and therefore do not change in the slope with rising household incomes. Total spending does not vary. Indifference curves describe combinations of two products which together provide equal levels of satisfaction. The curves in Figure 1.1 describe identical amounts of satisfaction for spending an identical amount of money on either product. As we already observed, a diminishing marginal utility of any product is concomitant with the quantity which is consumed of it. The decline of

16 The determination of prices

Figure 1.1 Budget line and indifference curves Budget line (straight lines): total of two products bought by one household. Two kg of potatoes are equivalent in cost to 1 kg of meat. Indifference curves (broken lines): all combinations of two products which yield the same level of satisfaction.

product A in consumption reduces the satisfaction of the relevant household but this decline in satisfaction is lower than the decline in quantity consumed. The rise of product B in consumption for the relevant household contributes to a rise of total satisfaction but this increase in satisfaction is lower than the increase in quantity consumed. As the rise and decline of satisfaction depend on the values of marginal utilities, we would normally expect that, given a relative balanced composition of total demand of these two products, satisfaction is highest. If only one product is consumed and marginal utility is decreasing, total satisfaction is lower than if a mix of the two products is consumed. If much of product A is consumed, a household will accept a small increase in B for a given quantity of A to be given up. A small quantity of B substitutes a relatively large quantity of A. In our Figure 1.1, A1 < A2 > A3. Where the budget line has equal slope with the indifference curves, there will be optimal use of the income of the household. Here, the same amount of spending produces the highest level of satisfaction. The level of satisfaction is optimised at a mix, which reflects the same utility of an amount of money spent on either product. Giving up the consumption of some amount of A provides the household with money for buying some amount of B. As long as the satisfaction drawn from this additional amount spent on B exceeds satisfaction achieved by this amount being spent on A, the household will strive to increase its satisfaction by changing the mix of the

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products consumed. Households will not change their mixes if they receive the same satisfaction for any identical sum spent on products A, B, C (…) X, Y, Z. Indifference curves depend on marginal utilities which change with increasing incomes at different rates. Consequently, the rate of substitution between the two products changes with rising income. Changes in income distribution change marginal utilities of households as in case of a more egalitarian distribution of incomes some utilities increase with increasing lower incomes, while others decrease with decreasing higher incomes. Income distribution and therefore the share of mass incomes in total consumption have an impact on the structure of demand and therefore on the structure of production. No Taj Mahal in England, then, but instead the invention of the steam engine in England for saving on heavy-duty work.

Why are elasticities important for social scientists? Elasticities shape the orientation of industrialisation to the extent that industrialisation is demand-led. The standard description of the relation between quantities and prices is the hyperbola which has the equation: 1 = xy

(1.3)

In this case, any change in prices changes quantities, but not total sales. This obviates the problem which interests the social scientist. If quantities increase with declining prices to an extent that total sales increase, then enterprises will have every interest in expanding production and cheapening products, so that mass sales become possible. This is exactly one of the major mechanisms that bring capitalism into existence. It is immaterial whether the extension of the market is due to rising mass incomes or to rising incomes of newly emerging middle strata. To be sure, there is an on-going discussion about which of these two eventualities formed the basis for the extension of the internal market during England’s Industrial Revolution. But in either case, lower prices for these products are accompanied by new consumers – that is, by increasing quantities of products sold. This is true in the case of textiles for the internal market. But it is also valid for many other consumer products, as described in the orientation of the small-scale industry serving the English market before their orientation to the world market (Figure 1.2) (Thirsk 1978: 115). If we assume that the hyperbola is the normal form of the price-demand curve, then we can dispense with the discussion of the causes of the Industrial Revolution. The failure to deal with the economic implications of income distribution and growth as a result of demand elasticities is characteristic for mainstream economics. After all, this field is largely indifferent to the question of the social embeddedness of capitalism. The more egalitarian the income distribution within a society, the greater the number of households for which marginal utility of the product is higher than its price, even in the case of an only slight decline of its price. The greater the

18 The determination of prices

Figure 1.2 Sales in case of price elasticity of demand of (1) The straight line is the price-demand curve. This is a hyperbola. Sales as quantity multiplied by price are constant.

number of households which are ready to buy a product at a lower price, the greater the incentive for industry to cheapen the product by simplification, technical innovation and mass production technologies. Some consumer revolutions are linked to this very fact. One example is the increase in household furniture in the last 40 years through regular refurnishing of households on the basis of cheap ready-made furniture. At the beginning of the Industrial Revolution, the process occurred with cheap cotton cloth and household equipment – plates and forks became generalised and we stopped eating with our fingers. The position of the price elasticity curve and the income elasticity curve are therefore fundamental for bringing capitalism into being. There occurs a perceptibly growing interest in standardised products which do not demonstrably enhance the social status of their consumers (as do, for example, works of art). This intensifies incentives to use machinery which can operate with the help of non-human energy. The result is a series of rather simple, identical production steps on a large quantity of inputs so that unit costs decrease. More machinery tends to be used. More machinery will be produced. And with the production of more machines, more improvements in these machines also become probable. Overall, more machinery will be bought and owned as physical capital by capitalist entrepreneurs. From this it can be deduced that a favourable position for capitalism is dependent on a relatively egalitarian distribution of income. This is true even

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on a microeconomic level. Ultimately, this entails the democratisation of consumption. Elasticities shape the possibilities for enrichment and influence the readiness to accept economic competition. Price elasticity is even more important than income elasticity of demand in terms of shaping the parameters which are decisive for stabilising capitalism. Enterprises which increase their sales while slightly lowering their prices will not try to maximise their earnings by reducing the supply in order to sell at high prices (as is the case for luxury producers, as described in the fairy tales of One Thousand and One Nights). In these fairy tales, the merchant goes to court presenting gifts to the Sultan in order to gain access to the Sultan’s protected market. On the contrary, businesses which increase their earnings by selling cheaply and in large quantities are normally interested only in security, with the state guaranteeing property rights and providing legal avenues for enforcing contracts. As high price elasticities go with rather egalitarian distributions of income, basic principles of capitalist organisation are promoted by rather egalitarian social structures. As we will discover, maximisation of earnings by selling expensively to small numbers of customers, and in small quantities, serves to contradict these principles of egalitarian distribution and state absence from governing supply and demand. In the following section, I compare total earnings in relation to price, first with a high price elasticity of the demand (Figure 1.3), and then with total earnings in relation to price in case of low price elasticities of demand (Figure 1.4).

Figure 1.3 Rising sales in case of high price elasticity of demand The straight line is the price-demand curve. Prices decrease less than quantities increase. Total sales as quantity multiplied by price increase. Price elasticity of demand is higher than (1). Rectangle ABC0 > A'B'C'0.

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Figure 1.4 Decreasing sales in case of low price elasticity of demand The straight line is the price-demand curve. Prices decrease more than quantities increase. Total sales as quantity multiplied by price decrease. Price elasticity of demand is lower than (1). Rectangle ABC0 < A'B'C'0.

Figure 1.3 illustrates the impact of decreasing prices on total demand in case of a high price elasticity of demand. As we can see, the quadrangle ABCO is smaller than the quadrangle A’B’C’O. The more that money can be made by cheapening a product and opening new income classes for its sale, the less companies will pursue strategies of monopoly pricing. Instead, they will prefer open markets and, at the international level, free trade. There are also products with a low price elasticity of demand. Let us take oil as an example. When quantities supplied to the market increase, prices will decrease more rapidly than quantities sold will increase. The more total sales decline with declining prices because of low price elasticity of demand, the more the sellers will be interested in monopoly pricing and restrictions to the free operation of the market. Oil and OPEC are good examples. The characteristics of price and income elasticities of products that enterprises use to earn money can therefore hold serious implications for major structures of the national and international economic systems of regulation. I illustrate this aspect by giving an interpretation of the early nineteenth century adoption of free trade by Britain. The vast literature on economic history offers Britain almost unanimous praise for this measure. Free trade, it is claimed, constituted a key social and cultural achievement, the credit for which belongs to an enlightened British bourgeoisie. But could it not simply have been the case that Britain specialised in particular products whose sales increased much more rapidly than their prices

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declined? This made it interesting for each firm to sell as much as possible on the market without trying to create coalitions with other firms. It also allowed for the maintenance of the principle that nobody on the targeted markets should be allowed to block sales, not even in foreign countries which had to be opened to British exports. Several nations learned this the hard way – such as the Latin American republics at the beginning of the nineteenth century, China in 1839 and Egypt in 1839. The idea of free trade as a basically violent enterprise is based on a specific configuration of the price-demand curve. In this case, Britain’s relatively poor upper class was not a key market for luxuries. Consequently, Britain had a competitive advantage in selling mass consumption goods. As I show in Chapter 4, p. 107f, this resulted from comparative advantage of Britain in such goods. It was not primarily Britain’s efficiency in producing such goods, but her lower efficiency in producing luxuries by comparison with, say, France or India. During the nineteenth century, this forced Britain to specialise in mass consumption goods. Economic historians have generally neglected this dimension of Britain’s thrusting campaign for free trade in the early nineteenth century – that is, the type of her export products, their price and income elasticities, i.e. cheap textiles. Instead, most historians generally explain the offensive nature of this campaign by citing certain authors who can be easily mined for supportive quotations. It is not certain that the promoters of free trade read these authors. Most products have a typical career of elasticities. In an initial period, the product is expensive, meaning that only richer households can afford it. In order to make more money in a society that does not suffer from excessive income inequalities, capitalist enterprises make any and every effort to cheapen the product, even if some enterprises prefer to stay in luxury niche markets (premium cars, for example). As marginal utility diminishes, utility becomes low, so that households will not increase their consumption at any further price decrease. This is called saturation. Being on a market with saturated demand entails limits to growth. Any new product has an initially high marginal utility which only slowly declines. Consequently, producers of new products will face less saturated markets. They will therefore easily increase quantities with only slowly falling prices. Producers on markets which are saturated will increase quantities only with sometimes massively falling prices, as shown in figure 1.4. This possibly points to a major reason for the ongoing global polarisation that we can presently witness. Let us imagine that leading economies are as inegalitarian as less advanced economies. Even in such a scenario, these highincome countries already possess internal markets which are interesting for entrepreneurs from the point of view of developing new products. They will therefore have a higher share of new products than less rich countries. In highincome countries, at least some segments of the capitalist class will become richer by selling new products with high price elasticities of demand also to the world market. Poorer countries will specialise in known and often older

22 The determination of prices

products with low price elasticity of demand, so that their total sales on the world market do not increase despite possible technical growth. This is the basis of the terms of trade problematic to which we will turn in Chapter 4 (p. 110). It has nothing to do with raw materials per se, but with diminishing income elasticities of demand for raw materials. This results from the dematerialisation of production in the wake of the scientific revolution, and the capitalist’s interminable crusade to reduce costs, including raw material costs. Price and income elasticities of demand have implications for firms’ behaviour with respect to monopoly, to free or controlled trade, even with state intervention in the internal economy and in external economic relations. The strength of this mechanism will depend on income distribution and the role of mass demand against luxury demand.

The supply side of the balance between demand and production Mainstream economics normally describes equilibria between demand and supply on markets for goods as determined by a downward sloping curve of demand. In such equations, high prices are linked to low demand, and low prices with high demand. Similarly, they usually show an inverse rising costs supply curve, with low supplies at low prices, and high supplies with high prices. To be sure, it is possible that entrepreneurs react to higher prices by increasing the supplies. But the model is nonetheless misleading. In fact, the model dates from early industrial markets. With increasing production, costs of production in precapitalist economies are expected to increase. If the quantity of products brought to the market encounters many more customers than products, then the price of individual products increases. This occurs because increasing prices are a rationing mechanism which favours suppliers. In the capitalist economy, such overheating may take place, but it is rare. From its very beginning, capitalism and industrialisation consisted in the exploitation of a special form of technical progress: the reduction of the cost of simplified products manufactured by the use of machinery. This allowed for the substitution of human labour, provided that the production process consisted of a series of relatively mindless and repetitive steps. And such products where especially in demand from the lower income strata. For some time, handmade textiles were considered superior to machine-made textiles. Many arguments contravene the expectation that higher quantities produced imply higher costs. Capitalist production facilities can be reproduced at the same or lower cost than previously established production facilities. Consequently, an attractively low price for a particular product is always possible if the overheating demand is considered to be lasting. At constant real wages, rising costs of goods are therefore improbable, because the amount of direct (wages) and indirect (inputs including amortisation) labour employed in the production of the same quantity decreases. Nobody will erect production facilities where the total requirements of labour

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per unit produced increase. When we turn to macroeconomics later in this volume, we will discuss how rising real wages do not lead to rising prices, but rather to the stabilisation of prices, and then to a balancing of the amounts of past costs and actual costs (Chapter 3, p. 76). From our above discussion about the impact of productivity increases on values, it seems clear that increasing productivity would lead to decreasing labour values. If values determine prices to deflation, then increasing productivity should lead to higher prices in the past than in the present and in the future. The associated increase of past values and the expectation of further cheapening of products in the future have two implications. First, money accumulated as savings from the past should increase in purchasing power if prices fall. This would weaken profits earned in actual production, as profits might fall with declining prices. Second, demand out of incomes decreases because of the expectation of a further cheapening of products. Avoiding deflation by keeping product prices stable and not transferring productivity gains to consumers in the form of declining prices is a contribution to capitalist growth. It is a further argument in favour of the connection between capitalist growth and rising mass incomes. Deflation of prices can be avoided under competitive conditions only because of the increase of the costs of factors of production, the most important of which is labour. Rising purchasing power through increasing mass incomes does not normally increase the demand for assets outside the productive sector to the same degree. Capitalists continue to invest for increasing productive capacity and limit the purchases of assets outside the productive sector if demand increases. In standard capitalist analysis, costs of capitalist production consist of variable and fixed cost (to be distinguished from the notions of variable and constant capital in Marxist analysis). Rapidly growing problems of management due to the size of the plant or the degree of capacity utilisation may lead to costly compensatory measures like supplementary hours, Sunday work, etc. Fixed costs might consist in the price of building the production plant including the basic investment goods, the development of the product to be sold, the administrative structure necessary for operating the plant, etc. Fixed costs per unit of produced product decrease with increasing quantity of production until full capacity utilisation is achieved and a new plant has to be built in order to extend production. It is very improbable that these short-term cost increases described by overutilisation of capacity counteract the tendency of decreasing fixed costs for longer periods. Variable costs are those costs which depend on the quantity to be produced, such as raw materials or working hours. They also tend to decrease per unit until full capacity utilisation is reached. In Figure 1.5, there is a stylised presentation of regularities in the development of costs with increasing quantities of production. This includes fixed costs, average costs, marginal costs, total costs and total sales proceeds. As we assume that the enterprise is a price taker, total sales proceeds (a sum, not an average) is a linear function of quantities produced, which we represent with a straight line, OD .

24 The determination of prices

Figure 1.5 Cumulated total earnings, total costs, and fixed costs Cumulated total earnings, total costs, and fixed costs cumulated at different levels of quantities produced. Average costs and marginal costs (broken lines), all per unit at different levels of quantities produced.

Average costs and marginal costs are unit costs. Per unit produced average and marginal costs change if capacity utilisation of the plant changes. Normally, these decrease for a certain period with rising output. In cases of overemployment of the capacity of the plant, they once more increase. Fixed costs are a lump sum necessary for starting production. They are considered in the figure as constant. Because fixed costs do not vary with output, increasing production levels will lead to a decrease in average fixed costs (this is not indicated in the figure). Total costs are the sum of production costs. Their increase decelerates provided that average costs decline, and accelerates when average costs increase. Economic surplus decreases when the slope of the curve of total costs becomes steeper than the slope of the straight-line (OD ), which represents total earnings (at point A’). Variable costs increase with output – but the same is not necessarily true of variable unit costs. Hanging a painting might require half an hour, but a newly married couple moving into a new apartment will hang all the paintings in one or two afternoons, because work is done more rapidly. Over a large area of possible production levels, variable costs do not increase more rapidly than the output. Consequently, total average costs will decrease for a large area of production levels. Capitalist entrepreneurs constantly search for improving production technologies in order to increase efficiency due to economies of

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scale. This means that savings in the use of labour and raw material may be made because of larger production runs. This will lead to decreasing average variable costs, which complements decreasing average fixed costs. Marginal costs constitute additional costs for an additional unit of output. The savings in unit costs from higher production levels, and therefore lower costs of fixed capital and savings due to efficiency in the wake of larger quantities produced, result in marginal costs decreasing more rapidly than average costs (average fixed costs plus average variable costs) over a wide array of production levels. Marginal costs may increase before average costs increase: at A, the turning point of the curve of marginal costs is reached before C, the point of marginal costs equalling average costs. When marginal costs are equal to average costs and increasing, then average costs are also increasing. Average costs will decline if marginal costs are lower than average costs. Until point C, average costs decreased, although marginal costs have risen since A. However, they have not yet reached the level of average costs. At this level, as illustrated by point B, total costs of production start to rise more rapidly than quantities produced. The slope of total costs becomes steeper than the line representing the earnings. There is usually a distinction between production levels with declining marginal costs and production levels with increasing marginal costs. From marginal costs of different technologies, optimal plant sizes can be deduced. The lower the percentage for the optimal plant in sales in total economy-wide sales of the product, the more reduced are the tendencies toward concentration, and the more enhanced the tendencies for competition. Marginal revenue is the difference between total cost and the value of sales which is highest in B where the slope of the total cost curve is equal to the slope of the total sales straight line. Increasing production leads to declining prices. When – and in contrast to our figure – prices fall, marginal revenue may also fall due to declining prices. The reason for this fall lies in the size of the market. The higher the average incomes and the number of people with average incomes, the larger the market on which the products produced with mass production techniques can be sold without declining prices. The larger such markets, the lower the share of the market of the efficient enterprise and the more intensive the competition. A relatively egalitarian market will be characterised by enterprises trying to reach the optimal size irrespective of quantities produced. And yet these enterprises will nevertheless have low prices due to competition. A relatively small market will present obstacles for firms to reach optimal size. All firms face the same restrictions and will have equally high costs, higher than in relativity egalitarian structures. From the end of the nineteenth century, the USA became superior to all other industrial nations exactly as a result of this mechanism. German industry in the 1920s was well aware of this American mechanism. The initiators of the European integration process explicitly referred to this mechanism and asked for European integration in order to reach market sizes comparable to those of the USA.

26 The determination of prices

Due to the scientific revolution of the last few decades, the cost of development of new products has massively increased in relation to the cost of the subsequent physical production of the same products. Economies of scale increase. Only a few firms can efficiently produce new products like social media. This remains true even if, in some areas, economies of scale have become less important (computer software, for example). The increase in sunk costs for product development and decreasing unit costs due to economies of scale promote a dangerous tendency toward concentration. The first firm to introduce a new product can charge high prices which already cover a very substantial part of the costs sunk into the product development. With high subsequent economies of scale, prices are reduced with the leading firm still being able to further contribute to its initial investment. Its marginal costs are expectedly lower than marginal costs of new competitors. With increasing economies of scale, the firm which is the first to supply a new product can initially charge high prices and relatively rapidly achieve cost reductions because of size and experience. From the point of view of “new strategic trade theory”, “being first” is thus highly important and extensively theorised (Krugman 1992: 436 f.). New endogenous growth theory shows the importance of being first on the basis of the importance of the acquisition of knowledge in the production process. The first to engage in the production of a new product is also the first who makes the necessary learning. Being first subsequently allows to reduce the price below the initial average cost of latecomers. The latter are required to finance the outlay for the fixed costs without enjoying initially high prices. Economies which are not first, but which still have the necessary innovative potential at initially higher costs, can achieve competitiveness if they are supported by nonmarket actors. In the last resort, such nonmarket actors include the state, which may engage in industrial policy.

Who creates the value? Prices and proft There currently exists a thoroughgoing debate over the assignment of value. Some economists argue that value is created by inputs, especially direct labour, but also indirect labour in the form of raw materials and used up capital goods. Others maintain that value is created on the basis of prices that products can fetch because of their utility on the market. The consideration of price formation has shown that this controversy is largely academic. In both cases demand and costs of supply are basic. An enterprise which invents a new product thereby demonstrates its superiority over other potential entrepreneurs. However, these other entrepreneurs remain interested in entering this market. They may succeed if the innovating firm cannot acquire permanent intellectual property rights. Once a discovery is made, several parallel discoveries are available which lead to the same result. Patenting one method of production does not exclude the discovery of similar methods of production. The discovery of one technology or one

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method of production inevitably indicates where potential competitors might usefully look in order to ease the acquisition of a new technology in principle unknown to new competitors. The catching up of Russia, China and India in military nuclear technology is a striking historical example. Firms will continue production as long as marginal costs are lower than marginal earnings. Marginal costs will depend on factors of production employed, labour, inputs and used up capital goods. The difference between standard mainstream theory and classical Marxism is that standard mainstream theory specifies regularities in the development of costs of production. Marx did not address this factor. Under conditions of perfect competition, prices will fall to levels where production is still sold at marginal costs which are higher than average costs. Products are sold at their marginal costs, which may be higher than their average unit costs. There are products which are produced at lower costs because, when marginal costs rise at rising level of output, average costs are lower than the marginal costs that have finally been reached. An economic surplus emerges. This is the usual explanation for the existence of profits and a profit margin. Its size remains unclear, however. Knowing this size would imply that, in investing, capitalists are able to predict the development of the marginal and average cost curves to precisely forecasted level of production. But they are not. Neither Marx nor mainstream economics can explain where the profit margin comes from. The imposed exploitation of the workers and rapidly rising marginal costs are used as interpretative schemes. But these schemes are extremely limited if we want to model the creation of profit, so that profits are deduced from limits to the wage rate. All theoretical approaches do not explain why, depending on the business cycle, profits vary despite at least stable wage rates and constant, not deteriorating technical conditions of production. In this equation, the most unstable variable is global demand. Marx deduces the value of his variable capital (mostly the wages), from production costs of labour. He admits that there is a historical and cultural element, so that these “reproduction costs” are not determined economically (Marx 1965 [1867]: 121). Mainstream economists argue about the marginal productivity of labour so that the wage represents the point where marginal costs of labour equal marginal product of labour. Up to this level of production, the cost of any additional worker brings at least as much additional production as the worker costs. That said, marginal product is dependent on demand (Irsch 1979: 37, 70) Wages are an important element for maintaining demand; they counteract the tendency of diminishing marginal utility and marginal revenue. Marginal revenue depends on demand and ultimately on levels of income of specific social strata. With high mass incomes, saving rates are lower and demand is higher. In cases where the distribution of income is inegalitarian, savings are higher, resulting in a reduced manifest demand for consumption goods. Contemporary mainstream economics has invented the idea that it is necessary to keep wages below productivity increases. Mainstream economists seek

28 The determination of prices

to justify this by arguing that productivity only increases due to a shedding of low productivity labour (Sinn 2006: 57). There is no reason why laid-off workers should have lower physical productivity than employed workers. However, their marginal product may indeed be lower if there is not sufficient demand. In countries which are capable of producing their essential wage goods, wages that are too high for international competitiveness basically indicate that, in some branches, productivity is so high that these branches trigger export surpluses which push up the exchange rate. Rising wages in these branches, with a declining exchange rate, would allow the “too expensive” labour outside leading export branches to be employed. There thus exists unproductive labour in the wake of export surpluses which render some local labour expensive in international currency. Imports produced by foreign workers with normally lower but possibly also higher real incomes (at a high exchange rate of the importing country) replace local production. This points to the overall problem of how wages in different production lines compare. It may appear that labour is not producing an economic surplus if other labour pushes the exchange rate. The same labour may produce products sold locally or even on the world market, provided that there are no cheaper imports when the exchange rate is low. If the exchange rate is high, even cheap labour may appear to be unproductive. The oil-producing countries provide one illustrative example. The destruction of local agriculture in most oil-exporting countries is a good example. Overall, then, the production function cannot explain why the same labour is surplus producing or uncompetitive, unless we also consider more global market conditions, as well as the resulting prices. Moreover, mainstream economics cannot argue with the production function, because rising output as the result of increasing inputs may lead to a decrease in revenue and marginal revenue. The effect of higher output does not necessarily translate into higher earnings on the basis of the production function. The labour theory of value describes the moral argument that no production is possible without labour producing the inputs, the machines and supplying direct labour. This is clear if we consider the case of Germany, which was rebuilt after 1945 with very little external capital (compared to the assistance received by Britain or France). Capital formation is possible if labour in consumption goods production produces a surplus over its direct consumption so that labour in investment goods production can be supplied with wage goods. The surplus will also depend on the quality of the investment goods. This quality is also the result of labour – though labour supplied in the past, rather than in the present. Obviously, capitalist accumulation depends on surplus appropriation. But surplus appropriation consists not just in enriching the powerful whatever their entitlements to economic surplus (Chapter 2, p. 36f.). It only contributes to growth by improving the conditions of production. It may be invested by non-market actors, such as the state or local government, in infrastructure or education. This very same factor – the necessity of, say, equipment – explains

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why workers do not receive the total of their value creation. In his critique of the Gotha programme, Marx himself showed that this was the case even in a socialist society (Marx 1962 [1875]: 19). The microeconomic enquiry into price formation, however, does not offer much insight into the question of where profit comes from. Instead of looking into this problem, both Marx and the neoclassical economist underlined the importance of profit as a source of investment. Neither party, however, was able to deduce the amount of investment from the availability of capital. They could only argue that, without surplus appropriation (i.e. profit), there is no surplus available for accumulation. They thus assume that the surplus is invested because, according to them, other long-term opportunities for preserving it are not available. This fundamental problem of why available surplus may – but does not need to be – invested lies at the basis of all socio-cultural explanations of capitalism. The father of such approaches is, of course, Max Weber (1934 [1904–1905]). There are those who reject capitalism on the grounds that this surplus appropriation is not necessarily linked to any interest in improving the lot of the common man and society as a whole. Those who take this view demand democratic procedures for the control of surplus appropriation beyond the market. In discussing the origin of profit (Chapter 2, p. 43f.), I will show that a solution to this problem can only be based on the macroeconomic functioning of capitalist economies.

The issue of fexibility instead of the attribution of value to social actors Throughout our discussion of price formation, we assumed that this process was characterised by the mediation between changes in cost, and demand by means of changes in prices. These changes send new signals to consumers and to producers. Such mediation does not occur without markets where consumers and producers can confront their expectations about their own needs and their own costs on the basis of choosing alternative options. Consumers shift from old products to new products provided that there are changes in relative utilities and prices. Producers opt for new production technologies in view of their perception of sales opportunities with changing prices and hence costs. These are also due to changing average costs in case of increasing quantities produced. The discussion about the assignment of value to the social classes who participate in production has neglected an important factor. This factor consists in the implications of the assumption of the flexible reaction of prices as mediating signals for producers and consumers. That said, both opposing sides in the debate about the assignment of value will agree that this flexibility is basically important: prices change because utilities and/or costs of a product change. These changes bring about further changes in production technologies. Both views are therefore basically two sides of the same coin.

30 The determination of prices

To reflect on the preconditions of such an adaptive process of the price system, we may concentrate on the consequences of an innovation under capitalism in order to deduce from this some microeconomic characteristics. These characteristics were implicit in our discussion of the price formation process. When slight technical innovations allow cost reductions and gradual reactions to as yet unsatisfied needs, new possibilities for sales and therefore new possibilities for production emerge. This requires that there is only minimal divergence in productivities in coexisting production lines. Consequently, small changes in costs and consumer preferences allow stepwise innovations without significant investment programmes. Such investment programmes are characteristic of precapitalist tributary modes of production, the famous hydraulic society argument or state-planned technical breakthroughs. Other examples include some major technologies under centrally planned real socialism, or even wartime state regulation of armament production in capitalist and non-capitalist economies (e.g. the Manhattan Project in the USA and the nuclear catch-up of the USSR). The gradualism with stepwise adaption to new consumer preferences and new technical possibilities on the basis of only small changes in costs is usually explained as the result of harmonious development in “central” capitalist economies (as opposed to the stop-start chaos which, according to theories on peripheral capitalism, characterises dependent, and sometimes catching up economies of the Global South). The central argument which I develop here, and which will be the bridge between my discussions in microeconomics and my presentation of some macroeconomic basics of capitalism, can be summarised as follows: There is no harmonious development under capitalism. However, under conditions of high levels of employment, highly diverging developments with respect to technology, productivity and even demand for new products are rendered “harmonious”. This occurs through the adaptation of relative prices so that this system appears as characterised by average productivity throughout its various production lines. Let us assume that there has been a technical innovation. It may consist in the discovery of a new product; for example the car, and/or the discovery of a new production technology, such as the assembly line. This development allows to reduce considerably the price of cars, provided that standard models with identical specifications are in demand (such as the Ford Model T, available in “any colour provided that it is black”). Suppose that there is a solvable demand for cars and that many new customers want to have cars if they can afford them. Demand is therefore expected to grow. Innovative enterprises will hire additional workers in order to satisfy the new demands. Provided that the economy operates at high levels of employment, new workers can be attracted to the growing plants only by offering better working conditions or higher wages, both implying higher labour costs. The innovative plants must be ready to incur higher labour costs. Some industries will be massively reduced, like coach making, if they do not adopt the

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new technical standards; motorised coach = car. Non-innovative plants which still satisfy social needs, for example haircutters, will lose labour, and face difficulties in supplying the desired services. There will be queues in the barber shops. Queuing people always send out the signal that there are many customers, some of whom are ready to pay higher prices. Raising prices will not lead to the number of potential customers falling below the level where total (now reduced) capacities are fully employed. By increasing production, the innovative plants will meet tendencies to saturation of demand. They can increase their sales only if they are able to increase consumption per household, thereby meeting diminishing marginal utility, or if they are able to tap new consumer groups. This normally requires lower prices in order that the new consumers can afford the new products. By growing, innovative plants face declining sales proceeds per unit produced, so that the tendency to attract additional factors of production, especially labour, will diminish. Non-innovative branches will increase their prices, as there are queues. They develop the capacity to pay higher wages to their workers. Wages in the innovative plants and in the non-innovative plants converge to those levels which correspond to the burden of work, hence to the price of abstract labour. A particularly striking example is the increase of wages in haircutting, despite hardly any changes in haircutting-related technology (with the obvious exception of the electrical haircutting machine some hundred years ago). This is especially striking if we consider the relatively small distance to wages in undoubtedly innovative branches like machine building or compared to the difference in haircutters’ wages between industrialised countries and those of the Global South. The limited variety of productivities (as measured in prices) in developed capitalist countries is not the result of harmonious technical development, but of productivity developments rendered “harmonious” by adaptation of the system of relative prices. Productivities and wages are made relatively homogeneous by competition on the market provided that labour is scarce. After converging productivities imposed by the adaptation of relative prices, small changes in demand and technologies trigger positive reactions at various stages of the productive system. The adaptation of relative prices makes capitalism more flexible and societies more integrated, because workers with similar qualifications find themselves in similar economic situations. Workers in different branches earn similar incomes (in Germany today, for example, they earn approximately +33% above average to −33% below average). Consequently, it is possible to develop the idea that labour shares a common destiny. Classes are large social groups which not only share similar material conditions, but also the perception that they share similar material conditions. Such social groups can only develop if the basis of their economic situation undergoes a process of homogenisation. This is especially so in the case of labour, the largest social class, which can act only if it is relatively united. In that sense, it could be argued that the adaptation of relative prices, including wages, is the

32 The determination of prices

condition for the very emergence of social classes. Since the Neolithic Age, exploited social groups have existed in most precapitalist systems – that is, more or less since the transition from hunter-gatherer to agricultural societies and the capacity to produce a surplus over immediate consumption. This process of convergence of factor productivities by adaptation of prices and wages depends on a variety of conditions. Obviously, factors of production, especially labour, must be mobile. In Chapter 4 (p. 101f.), we will encounter communitarian villages in which marginal farmers produce less then they need for themselves and their families for survival but are nonetheless supported by their community. Such systems will struggle to react flexibly to new demands from the outside world. More generally, the existence of large groups within the population who produce less than they need for survival tends to block the mechanism of price adaptation. Labour cannot become scarce because there is a supply of labour which, by its own production, does not earn as much as necessary for the upkeep of their families. These workers are always ready to work at a rate which just about secures their survival. Consequently, the process of increasing wages in non-innovative branches cannot be launched. An important, economically superfluous population will even block wage increases in innovative plants if these require skills which can be easily acquired by average labour. There will thus be no scarcity driven process of wage increases in the innovative plants, irrespective of productivity increases. If there are no wage increases following increases in average productivity, then the mechanism of wages following productivity increases will not be established. In such cases, labour costs exercise little pressure from the supply side to rationalise in order to save on labour cost. Productivity may thus increase at a lower rate than in cases of wages rising with productivity. Productivity increases will thus nevertheless occur – albeit in a perhaps more erratic manner. There will be additional amounts of products which can be distributed as income. Hopefully, given the readier access of the privileged to resources, these will be distributed to the better off. Income increases, and thus price increases which favour the better off will partly reflect precisely this better access of the privileged. On the other hand, they will reflect the possibilities of increasing prices given demand elasticities. Prices will appear to be determined essentially by demand elasticity, with costs playing a relatively minor role. Our consideration of price formation leads to an inescapable conclusion: the traditional capitalist mechanism of price formation on the basis of cost and demand is disestablished if the macrosocial conditions of empowerment of labour by high levels of employment are absent. Therefore, the microeconomic mechanism cannot be understood without taking into account the macroeconomic embeddedness of capitalism. This totally discredits the argument – which has been advanced for at least the last 30 years – that the micro determines the macro. As productivity has increased, there are goods available which can constitute a surplus. Provided that wages do not increase, the capitalists have “more” products which they can throw on the market. If there is a glut on the market,

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because of lack of expanding consumption, capitalists may intensify competition by transferring savings in cost to the consumers. This can lead to real wage increases for the consumers, because the nominal wages do not decrease, but product prices do. Alternatively, it could produce an intensification of the glut to which entrepreneurs ultimately react by reducing employment. Increasing the surplus which is appropriated by the capitalists will depend on their capacity to reduce price competition. If demand does not increase, then we can assume that there is no need for high additional investment. Under such circumstances, the only means of increasing the surplus in the hands of the capitalists is to remove the capitalist mechanism of profit appropriated under perfect competition on anonymous markets, and to appropriate surplus by non-market means, such as monopolies. If entrepreneurs and labour want to avoid a crisis, they have to use non-economic instruments for absorbing more of the production which is not necessary to remunerate the two camps at the going competitive rate. This is the situation on markets in precapitalist structures, such as tributary modes of production of the ancient empires. The process of adaptation of relative prices with the result of productivities converging will be severely hampered if there is no scarcity of labour. The theory of price formation does not insist on this condition. After all, it is part of an effort to generate a historical understanding of the economies of Europe during its rise to industrialisation, rather than to explain economics in general. Here labour was empowered from the very beginning of the Industrial Revolution, was scarce or rendered as such, and was thus politically capable of compensating its weakness on the labour markets (e.g. welfare state measures, like the English Poor Laws, Chapter 4, p. 102). European labour during this period was thus generally capable of participating in higher productivity via higher wages, as shown by the early rise of real wages in north-western Europe in comparison to the rest of the world (eighteenth century, Allen 2005: 116, Broadberry and Gupta 2006: 4). If the process of price formation depends on overall demand conditions, the argument can be pushed further only if we examine the macroeconomic conditions of profit and capital accumulation. We must therefore depart from the microeconomic perspective.

References Allen, Robert C. (2005): Real Wages in Europe and Asia: A First Look at the LongTerm Patterns. In: Robert C. Allen, Tommy Bengtsson and Martin Dribe (eds.): Living Standards in the Past: New Perspectives on Well-Being in Asia and Europe. Oxford: Oxford University Press, pp. 111–130. Broadberry, Stephen N. and Gupta, Bishnupriya (2006): The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, 1500– 1800. In: Past and Present 59 (1), pp. 2–31. Hegel, Georg Wilhelm Friedrich (1952): Phänomenologie des Geistes [1807]. Hamburg: Felix Meiner.

34 The determination of prices Irsch, Norbert (1979): Lohnbestimmungsmechanismen bei restringierten Substitutionsbeziehungen. Kritische Analyse grenzproduktivitätstheoretischer Verteilungsaussagen. Aachen: RheinischWestfälische Hochschule Aachen. Krugman, Paul R. (1992): Does the New Trade Theory Require a New Trade Policy? In: World Economy 14 (15), pp. 423–441. Marx, Karl (1953): Die deutsche Ideologie [1845–1846]. In: Karl Marx (ed.): Die Frühschriften. Stuttgart: Alfred Kröner, pp. 339–560. Marx, Karl (1962): Randglossen zum Programm der deutschen Arbeiterpartei [1875]. In: Karl Marx and Friedrich Engels (eds.): Marx Engels Werke. Band 19. Berlin: Dietz, pp. 15–32. Marx, Karl (1965): Capital (1) [1867]. The Process of Production of Capital. Moscow: Progress Publishers. Sinn, Hans-Werner (2006): Internationaler Vergleich der Arbeitskosten. Warum Deutschland keine starken Lohnerhöhungen. In: ifo Schnelldienst 60 (4), pp. 54–59. Thirsk, Joan (1978): Economic Policy and Projects. The Development of a Consumer Society in Early Modern England. Oxford: Clarendon Press. Weber, Max (1934): Die protestantische Ethik und der Geist des Kapitalismus [1904–1905]. Tübingen: J.C.B. Mohr.

2

The macroeconomics of proft, crisis and growth in capitalism

Summary The stability and growth of capitalism depends on rising mass incomes. Profit depends on net investment spending. Resources for investment are provided by the banking system and its capacity for creating money. Effective demand can be temporarily stabilised through neo-mercantile government deficit spending. However, this is not sustainable in the long term. There are four distinct types of investment. Rising mass incomes are required in order to realise three of them (expansion of the production of existing products, introduction of new products and defensive investment). Any attempt to deepen capital accumulation by raising capital per unit of output without rising mass incomes leads to unrealistically exponential growth. Under certain circumstances, even this growth is simply blocked because of lack of effective demand from rising mass incomes. The central argument of my presentation on the macroeconomics of profit, crisis and growth in capitalism can be summarised as follows: collapse does not occur due to unmanageable internal contradictions. As in any other complex social system composed of contradictory or seemingly contradictory interests, there are inevitably fluctuations and crises. Mass consumption and thus mass incomes rise against the immediate interests of those who are powerful, own essential assets and are able to exert a profound influence over mainstream interpretations of the capitalist system. From its very inception, capitalism requires rising mass incomes as a condition for its own growth. It does not allow solely for rising mass incomes when the social forces it generates inevitably become powerful enough to impose them. Indeed, capitalism comes into being precisely because of the pressure of demand and ultimately rising mass incomes. Capitalism is generally framed as an economic system in which capitalists, the owners of the means of production, believe that their economic goals are best served if wages are low. Conversely, in such a system, workers protest their exploitation and constantly demand higher wages and better conditions. They justify their claims on moral grounds. Capitalists, meanwhile, believe that if mass incomes rise, then their profit and investment spending will inevitably DOI: 10.4324/9781003182511-2

36 Profit, demand and growth in capitalism

be threatened. However, beyond and behind the dramatic struggles between capital and labour that we can observe in the functioning of capitalist structures, profit fundamentally depends on net investment spending (independently of its impact on productivity growth). Any new technology reduces incomes paid out in relation to the volume of production. Consequently, net investment spending requires rising mass incomes, not low wages. This is wholly contrary to the convictions of capitalists.1

On proft and rent Capitalist profit is a special form of surplus appropriation. It depends on net investment spending. It is certainly part of the surplus, produced by labour. In contrast to precapitalist forms of surplus appropriation, any private entrepreneur’s profit depends on competitiveness. It thus relies on the entrepreneur’s ability to produce products in demand on the market at affordable costs which are no higher than competitors. The dependency of profit on its socially beneficial utilisation goes beyond this, however. I will show that profit can only be appropriated if the class of capitalist entrepreneurs has proceeded to spend money on investment, thereby creating the income which allows it to sell capitalistically produced products at a profit. The microeconomic mechanism of competition forces private entrepreneurs to cautiously use economic surplus produced by labour. The macroeconomic mechanism removes net profit if the class of entrepreneurs is not engaging in a process of economic growth based on net investment spending. To begin, some definitions. Economic surplus refers to the portion of production which is not required for the reproduction of the various economic elements of the system at the level already achieved. In short, surplus = whatever remains once enough of the production has been spent on keeping the specific economic system functioning at constant levels of production. Surplus is comprised of three principal components: rents, taxes and profit. Rent is one type of economic surplus. Rent is surplus appropriated on the basis of natural or politically created market imperfections. These imperfections do not allow equal access for all competitors; they create a monopoly of one or a limited number of economic agents and normally require political instruments. As rents accrue to the better off, it leads to rising consumption (normally of luxury items) among the better off. Rent implies the orientation of the productive apparatus in favour of luxuries, and protection from competition for the privileged. Taxes are appropriated on the basis of political power by a state which may or may not be democratically legitimised. When the sphere of private rent collecting agents and (apparently) public tax collecting agents becomes unclear, as is the case in most precapitalist empires, then it becomes difficult to distinguish between rent and tax.

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Proft is a special category of surplus. It is appropriated on competitive anonymous markets that are not subjected to direct political intervention by nonmarket oriented agents (such as the state). Profit competes with other forms of income, especially rent. Profit could be conceptualised as the economic surplus which is accrued only by relying on market mechanisms: the “dull compulsion of economic relations” (Marx 1965 [1867]: 523). In reality, however, capitalist profits can be appropriated by the rich only through the utilisation of resources for investment. Any given capitalist is embedded in the game of market competition, and is compelled to compete, usually quite vigorously, with other capitalists who are striving after the same profits. Obviously, capitalists try to overcome these obstacles to enrichment, which is why they rarely defend pure capitalism. In fact, they prefer mechanisms that reduce competition and thus generate opportunities to increase rents. It follows from this that, in a hypothetical economic system unmarred by either political interference or market imperfections, all surplus would be profit; however, as I will show, this is provided that there is enough final demand. There are, however, strong tendencies among capitalists to try to evade or reduce competition, and to make access to surplus dependent on market imperfections or political power. Capitalists search for surplus in whatever form it takes; they are thus entirely comfortable with increasing market imperfections in their favour, because it entails easier access to surplus in the form of rent. My argument proceeds in the following steps. I first show that a seemingly limited availability of money has no restrictive effect on profit. This is because the banking system can create money whenever there is demand for credit from entrepreneurs who want to invest. I then show that profit is dependent on net investment spending. This has an income-creating effect – it is not an inherently productivity-increasing measure (although it normally does increase productivity). Net investment is promoted by a concentration of demand on simple products which are manufactured in large batches (as opposed to luxury products) by means of machinery, i.e. by investment goods. Mass incomes are used predominantly for such mass consumption products, while rent incomes are used mainly for luxuries. Profit is therefore promoted through the egalitarian distribution of incomes. Without rising mass incomes, innovations tend to reduce total final demand. Capitalism needs rising mass incomes in order to maintain continual investment. Consequently, rising mass incomes are also necessary at the macro level in order to launch positive net investment.

Endogenous money The modern theory of money stipulates that money is endogenously created; it is created if there is a demand for it. There is thus no need to accumulate savings for the purpose of financing investment, because the supply of money is elastic. This contradicts J. B. Say’s so-called “law of markets” (1767–1833). Say viewed the supply of money as a result of production:

38

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[W]hen the last producer finishes his product, his greatest desire is to sell it; in order that the value of these products does not stay idle in his hands. He is equally eager to get rid of the money he got from his sale, in order that the value of the money also does not remain idle. He can get rid of his money only by purchasing some product. It becomes clear that the very effect of creating a product opens at the same moment a market for other products. (Say 1824: 87) Provided that available money is solely the result of earnings, the introduction of credit does not fundamentally change this relationship. This remains the case even if circulating money may be influenced by the velocity (speed) of its turnover. Managing specie, gold and silver moneys, is burdensome and causes high transaction costs. Its limited availability may hamper economic activity. Not only in Europe, but also in other continents, this results in the creation of symbolic money on the initiative of the private sector. This occurs already in the more advanced precapitalist societies; I call them tributary modes of production as their ruling classes appropriate surplus by taxes without representation of the taxpayer, hence by power as characteristic for tribute. The bill of exchange is the classical instrument for achieving money creation via credit. A supplier has to be paid without the customer being in possession of the necessary money, because the supplier can sell his own product only after having been able to work with supplies delivered by a second supplier more upstream in the chain of production. However, even this second supplier might not be able to work without possessing some monetary instrument with which to purchase raw materials and other items. Only at the end of this production process, monetary incomes drawn from sales to consumers are available. But these lie at different levels in the chain of production, with different entrepreneurs needing financial resources in order to work. The bill of exchange is the pledge of an honourable businessman to pay an agreed sum at a fixed date (typically, when his intended sales have provided him with money). In order that the other businessmen in the chain of production accept this pledge, the issuer has to be a trusted member of the commercial community. A bill of exchange carries a future settlement date and can be discounted by the going interest rate as if it were a simple credit. The banknote is a special form of a promise of payment. It typically carried the same promise, through which (until the end of the gold standard) the issuer, normally the central bank, underwrote the obligation of paying the agreed amount in gold at any time. If there is a demand for credit, money is created, which is once more deposited in bank accounts, normally called a sight account of the receiving entrepreneur at a bank. The bank is eager to relend it. The original amount of money created is multiplied by relending via the banks. Capitalist economies are money economies, which create money called “fiat” money. If there is demand for money, then such “paper”

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or “credit” money can increase by means of the money multiplier. The money multiplier is kept going by the permanent relending of fiat money to customers who are ready to take on loans. Endogenous money is based on the aforementioned element of trust. Financial resources can be held in symbolic money, banknotes, or sight accounts in banks. Provided that these institutions are trusted, their symbolic money can be used for settling any financial obligation. Symbolic money was introduced under colonialism into sub-Saharan Africa. This was done on the basis of the colonial powers accepting the settling of (very repressive) taxes (capitation tax, hut tax) with the otherwise worthless currencies they had issued. These currencies were used to pay for products and services supplied by the local economy. A developed banking system flexibly adjusts to the demand for money by deployment of the money multiplier. Suppose, for example, that a person wins $1 million in a lottery. A portion of the money will be spent on products of his or her choice, while the rest will be given to a bank on a sight account. The money spent on products will come back to the banking system – though not necessarily the same bank, because suppliers will deposit their earnings in the banking system.2 The main incentive of a banker is to rent out money so that he can pay his or her company and interest to the people and organisations who have deposited money. The capacity of the bank to do this depends on the readiness of enterprises, and perhaps also households, to incur debt. Enterprises are generally prepared to incur debt by taking loans, provided that the enterprise can hope to profitably sell the additional products which it receives from its new credit-financed investment. It accomplishes this by increasing its capacity of production through investment. The loan is used for purchasing products for investment (machines, buildings); ultimately, it returns to the banking system. The banks receive it from the suppliers of our borrower and try to rent it out again. In this way, new quantities of money repeatedly emerge, on the basis of the readiness of both enterprises and households to incur debt. Indeed, this process is actually dependent on the readiness of enterprises and households to become indebted. There is thus, in principle, no limit to it. Inflation is not an issue here, provided that there are idle capacities of production in the “real economy”. The real economy is defined here as those enterprises which produce goods and services whose prices are included in the basket of goods from which price indexes are calculated. This basket does not include “products” such as financial assets which are merely objects of speculation. Any increase in the prices of these financial “products” is interpreted by business not as inflation but as an increase in wealth. Since the nineteenth century, central banks have attempted to monitor the process of monetary expansion in order to avoid inflation. Central banks limit the autonomy of private banks in money creation. In today’s world, one of the chief instruments central banks use for this purpose is credit lines, which they maintain with respected banks operating within the relevant currency

40 Profit, demand and growth in capitalism

area. Historically, central banks limited the expansion of money creation by fixing the interest rate according to which private banks could obtain money. Private banks could present bills of exchange from respected traders before the day of their due payment with a discount – a rate of interest mandated by the central bank to all possible presenters of bills of exchange. This discount rate determined the cost of credit handed out by the banks. Provided that entrepreneurs perceived the possibility of making money at that rate of discount through investing money, then the only limit to the creation of credit lay not in money, but in the full utilisation of production capacities. Should the expected rate of profit be higher than the rate of discount, private business would increase its spending and an inevitable rush among investors eager to increase their capacities of production would occur. If capacities of production are too limited, scarcities of goods and services on the market will inevitably follow. This results in inflation. This limit in productive capacity is not eliminated if entrepreneurs can draw on previous savings (as deposited in banks, for example). Such savings would increase productive capacities only if they had been spent on additional capacities of production before the emergence of the new demand. There is therefore no need for previous savings for the sake of investment, and it is not necessary to account for the origins of financial resources in order to finance accumulation.

Proft depends on net investment spending Profit is a specific form of surplus which does not merely imply the capacity of the powerful to exploit labour. Markets existed long before capitalism. However, under capitalist conditions, the bulk of economic surplus is predominantly distributed via markets. This is an important distinction between capitalism and all other modes of production: it implies that access to profit is based on efficiency in using scarce resources (including labour), in service of customer demand. It also entails the reinvestment of profits in innovation. These microeconomic conditions for profitability determine the relative share of each competing enterprise in the total amount of profit, but not the total amount of profit available for the profit-making capitalist class. Following standard Keynesian macroeconomics, I will show that total profit depends on overall spending on investment goods by capitalist business as a whole. Profit therefore does not primarily depend on exploitation but on the whip of extending markets which trigger investment spending higher than the cost of replacement of worn-out equipment. Let us initially make the usual simplifications. In the simplified classical capitalist society, there are only two social classes: workers and capitalists. There are two categories of products: investment goods (I) and consumption goods (C), called department 1 and department 2 in Marxist terminology. The economy can therefore be considered to be composed of two main sectors, consumption goods production and investment goods production.3 The steel used for

Profit, demand and growth in capitalism

41

the production of machinery belongs to the former category, while the steel used for the production of forks for households belongs to the latter category. There are only two categories of incomes: profit (P) and wages (W). All workers, including managers and independent entrepreneurs, receive wages (W). We therefore assume that capitalist entrepreneurs receive profit and a labour income for their managerial services, which we add to total wages in the economy. They perform managerial functions, just as do hired managers who receive salaries. All wages are spent on consumption goods. Here I disagree with Kalecki (1942) and follow Rosa Luxemburg (1951 [1912]: 104) in assuming that competition prevents independents and entrepreneurs from arbitrarily raising their consumptive income and spending (in this case, by increasing the money they take out of their firms for their own consumption). Capitalist owners of companies can withdraw incomes from their businesses for the purpose of consumption. But because of competition, they can only do so to an amount which corresponds to the cost of hired management labour in their respective branches. Otherwise, they risk becoming uncompetitive. They also oppose high charges for paying the better off employees or middle strata financed by government taxes, which they are obliged to pay. For simplicity’s sake, I initially assume that there are no savings out of wages, that the government sector is in balance neither with budget deficits or surpluses, and that foreign trade is in balance with exports equalling imports. A balanced government sector cannot contribute to demand out of wages, because these wages are also private business costs via government taxes. Capitalist enterprises (and their owners, whether or not these owners are also managers) receive profits which they do not spend on consumption goods. The proceeds from the sales of consumption goods equal the wages (C = W) because, according to the simplified model of the classical capitalist economy described here, all wages – but only wages – are used for the purchase of consumption goods. If producers in the consumption goods industry make a profit above their own wage bill (Wc) incurred during the production of consumption goods (including the wages paid in the production of their inputs and worn-out equipment, and by government), and if we exclude debt and hence increases in government and private household debt, then there must be wages being paid outside of the consumption goods industry, i.e. in the investment goods industry. If consumption goods producers can sell the total of their production at a profit, there must be wages which have not been paid in the production chain of the consumption goods producers. If the government sector and foreign trade are in balance, these wages must have been paid to workers who were employed in investment goods production at a production level higher than the replacement of worn-out equipment, hence net investment goods production. The direct and indirect costs of labour in consumption goods production and in investment goods production for the replacement of worn-out equipment are costs of the consumption goods producers. These costs fall directly

42 Profit, demand and growth in capitalism

on the factories of the consumption goods producer. The owners of these factories are compelled to pass on these costs to their customers by imposing costrecovering prices. The total sum of wages attributed to the consumption goods sector (Wc ) comprises wages paid in consumption goods production, and in investment goods production for replacement of worn-out equipment along the supply chain; as well as the salaries of government workers, the producers of consumption goods have paid as taxes. These are comprised in the cost of the consumption goods producers (Wc). Together, these directly paid wages plus the cost of input and investment goods that replace worn-out investment goods and taxes, correspond to the running cost of production in consumption goods industries. Let us assume that there are no new investment spendings but only replacements of worn-out equipment. Under such circumstances, the cost of the production of investment goods replacing worn-out equipment in consumption goods production is also part of the running cost of production of the consumption goods producers. Each single consumption good leads to costs of labour and costs of inputs, which in turn represent costs of labour and used inputs. Under the restrictions of the model, total sales of the consumption goods producers correspond to the total amount of wages in consumption goods production and in the production of inputs and worn-out equipment, which are cost to the consumption goods producers. As there is no net investment goods production (W = Wc), and (C=W=Wc). By definition, wages are the only income spent on consumption goods, and thus on the sales of enterprises in the consumption goods sector. All wages are costs of consumption goods production – either directly, in consumption goods production, or indirectly, as costs of investment goods for replacing worn-out equipment. Demand out of wages and direct and indirect labour costs are equal. Under such circumstances, there can be no profit. Let us now consider how profit emerges. We introduce net investment (gross investment minus amortisation) and therefore the production of investment goods in excess of the value of investment goods needed for the replacement of worn-out equipment. In the following demonstration, all production values are net (gross investment minus amortisation which represents the consumption of investment goods). Spending on the replacement of worn-out equipment is not taken into consideration. All products which enter the production process as intermediate products belong either to consumption goods or to investment goods, depending on their ultimate use. At this level, we do not know the amount of net investment, the amount of profit, or its economic basis. We simply give a formal definition. The cost of production of consumption goods is defined as consumption equals wages paid in consumption goods production (including wages paid in the production of inputs and worn-out investment goods) and profit paid in consumption goods production: C = Wc + Pc

(2.1)

Profit, demand and growth in capitalism

43

According to our dual assumption – that consumption goods are bought only by wage earners, and that only wages, but all wages, are used for consumption goods (i.e. no private household saving) – the proceeds of consumption goods are equal to the total sum of wages: C = Wc + Wi and from ( 2.1)C = Wc + Pc

(2.2)

follows that all wages paid in the net production of investment goods equal profit in consumption goods production: Wi = Pc

(2.3)

Moreover, the formal definition of the costs of production of the investment goods industry consists of its profits and the wages it pays to its workers: I = Wi + Pi , and hence from ( 2.3 ) also

(2.4)

The sum of sale proceeds in investment goods production equals total profit: I = Pc + Pi = P

(2.5)

Equation (2.5) states that total profit in the economy is equal to spending on net investment. Net investment goods production determines the total amount of profit. Profits in consumption goods production emerge because of wages paid in net investment goods production. Consumption goods producers may make a profit on their capital (Kc) which corresponds to a certain positive profit rate. The profit rate in consumption goods production is total profit in consumption goods production divided by total profit-earning capital in consumption goods production: p=

Pc Kc

(2.6)

Prices for net investment goods production are compelled to respect a similar profit rate compared to consumption goods production. If investment goods producers do not make a rate of profit comparable to consumption goods producers, then they will not engage their own capital (Ki). This is because entrepreneurs commit money only in order to maximise profit. Investment goods producers cannot be prevented from engaging in consumption goods production because, through their capacity to produce machinery for consumption goods production, they possess the necessary technical knowledge. Any innovation in consumption goods production has repercussions on the design of the new machinery which is ordered from investment goods producers. If there is no comparable profit rate in investment goods

44

Profit, demand and growth in capitalism

production, investment goods producers are faced with two options. Either they abscond entirely from the realm of investment goods production for consumption goods producers, thus creating scarcity of investment goods, or they charge prices at which profit rates in investment goods production are comparable to the profit rates already achieved in consumption goods production. Let us suppose that there is the fear that wages are too high to leave a profit to the entrepreneurs of both sectors of production. Because of their higher nominal incomes, workers are expected to address an additional demand to the consumption goods sector. If there are idle capacities of production, then capacity utilisation in the consumption goods sector is increased in response. Employment and production both rise. Should purchasing power exceed short-term capacity of the consumption goods sector, then prices for consumption goods increase. In order to maintain their share of total sales, a substantial portion of consumption goods producers will react to rising demand and rising prices by expanding their capacities of production. They can realise new capacities of production only by ordering additional investment goods. Consequently, investment goods producers will hire new workers in order to satisfy this additional demand. This creates new labour incomes for workers who have not added to consumption goods production. Prices for consumption goods further increase. If demand exceeds productive capacity, there is inflation. This process could be considered as forced savings in the form of price rises for consumption goods. These price rises follow from an excessively high demand resulting from increased wages. These increases in wages are the consequence of a new investment-led upswing, triggered by rising wages. Labour is physically capable of consuming only consumption goods. If total consumption demand exceeds the capacity of production of the consumption goods industry, then any further increase in monetary resources for consumption cannot increase real consumption. Instead, it triggers additional investment. This leads to more employment and therefore higher payments to labour, perhaps with rising wage rates in investment goods production, in order to increase capacities of production (with further forced saving as in any economic boom). Consumption on the part of labour cannot threaten profit in the real economy through excessively high incomes. Because of the role of net investment spending, Keynes argued that the task of managing the global level of investment could not be left to private enterprise, with its parochial view of specific markets. Instead, this had to be a state responsibility. The state may even undertake spending on non-productive activities in order to trigger off investment spending by private enterprises. This would occur on the basis of additional demand created by the state with its deliberately unproductive spending such as pyramid building (Keynes 1936: 131). This explains why Keynesianism gave little consideration to the efficiency of state spending. State spending is justified not on its inherent contribution to the rise in productivity, but on its generation of income and hence its impact on market-guided private investment spending.

Profit, demand and growth in capitalism

45

Let us now surrender some of these simplifying assumptions. In reality, there are of course many additional mechanisms that operate. These include, for example, export surpluses as a result of mercantilist strategies, or government deficit spending. Producers of consumption goods can make a profit because there are consumers whose wages have not been paid, neither directly nor indirectly, in the production of consumption goods. Based on the simplifying assumptions we have imposed, these additional wages cannot come from government spending – because all government spending is also a tax burden on the private sector – nor from the export sector, given our assumption that exports do not exceed imports.

Profts are boosted by government defcit spending and export surpluses We now drop these assumptions (Annexe 2.1). In cases of permanent government surpluses, profit can be supported by the state’s deficit spending (spending in excess of incomes, ultimately taxes, hence a deficit in government budget, G, over government income T). This is often the recommended solution for crises in capitalism; government spending should be raised without raising taxes (deficit spending). There are, however, political limits to operating a permanent government deficit. In principle, the government can service any debt. It can create fiat money up to the point of full capacity utilisation. Indeed, it can even exceed this level if creditors do not buy products with the money they receive as debt service. But the political limits remain. The public fears “over indebtedness”, and the servicing of a huge debt normally represents an income redistribution in favour of the rich, because they hold government debt. Capitalism can also be stabilised through export surpluses, as the “mercantilist” strategy of the Federal Republic of Germany illustrates. But one country’s export surplus is another’s trade deficit. These have to be financed by international indebtedness. Unlimited international indebtedness is not sustainable, as shown by the current crisis in the Eurozone or the regular defaulting of underdeveloped countries since the early nineteenth century. In the case of export surpluses, profit will be higher than net investment spending, as shown in Annexe 2.1. Some commentators have floated the idea of providing the additional demand from other economic formations. One notable example was Rosa Luxemburg’s (1951 [1912]: 427 f.) natural economies (which would initially be inside, and then, in the imperialist phase, outside capitalist countries). However, such an idea can be realised only to the extent that these noncapitalist economies are able to increase their purchasing power by selling their goods to the capitalist economies or by obtaining loans from them. The latter is only a temporary possibility because of the limits to international indebtedness (Chapter 6, p. 161f.). But there is another major dimension here that is rarely discussed, and which we have not alluded to in the formulation used here. In short, we are assuming

46 Profit, demand and growth in capitalism

that households spend their entire incomes. This is indeed probable in the case of low household incomes. But when households get richer, the usefulness of actual consumption decreases according to what we already saw in the case of diminishing marginal utility (Chapter 1, p. 14). In such cases, other needs may become more pressing. This might include making provisions for future, mostly unspecified needs (nobody can foresee the future, after all). Households opt for saving substantial parts of their incomes. Any reduction of consumption (C) below wages (W) will reduce profit below investment spending,4 just as imports without corresponding exports do. In such a case of an enhanced shift to future needs (with the threat of increased private savings), the model I present here will work only if it is embedded in a politically based system of solidarity. Many neoclassical authors would probably describe such a model as “socialist”. Increasing savings are a threat to profit. Only part of the wages become demand for consumption goods. C = W - S,henceC < W , and because I + C = P + W , and P < I

(2.7)

An economy cannot save; it can only invest. Goods which satisfy future needs can only be produced in the future. Savings without corresponding investment in the real economy (and not on financial markets for speculation) are nothing more than lost production. Savings do not create value. They create entitlement on somebody who has incurred debt. At the macroeconomic level, savings are just as useless as a runway behind a landing aircraft. The basic proof of the futility of net savings in an economy is the character of money. Money is not a value; it is a title on other, indebted economic agents. If this is so, then the future transformation of savings into the consumption of material goods depends on the surplus which will be available from the production of future generations. This, of course, is actually dependent on the readiness of these future generations to honour debts which they themselves have not personally amassed (Elsenhans 2021[1999]). A famous conservative dictum holds that public indebtedness means that any baby born is saddled with a huge amount of debt. This basically translates to the macroeconomic observation that on average any baby born is saddled by enormous private claims to the public sector, but that only some of them benefit. The problem lies in the income concentration on those among future generations who have inherited financial assets and are able to impose the payment of interest on these assets. State debt is not a problem; the problem lies in increasing inequality of current incomes in the future. Let us now summarise this demonstration that profits depend on net investment spending, rather than vice versa. As I have indicated, government deficits and export surpluses are excluded as permanent means for maintaining a sufficient level of demand to allow private enterprise to realise profit. The conclusion, then, is that capitalists themselves determine the amount of profit.

Profit, demand and growth in capitalism

47

Does it mean that profits in a certain period determine capitalists’ consumption and investment, or the other way around? … It is therefore their investment and consumption decisions which determine profits, and not the other way round. (Kalecki 1942) For the first time in history, access to surplus does not depend on power but on two economic mechanisms. The first of these is the amount of overall profit available for the entrepreneurial class as a result of spending on investment. The second relates to the access of individual entrepreneurs to their share of profit on the basis of their competitiveness, and hence to their economic efficiency. Access to economic surplus thus becomes independent from political power. We thus witness a growing autonomy of economics in relation to political power. And because of the dependence of profit on rising mass incomes, this may well be accompanied by the growing autonomy of civil society, as there are resources available for the “many” (Elsenhans 2001).

Proft and net investment depend on rising mass incomes Investment spending requires additional demand. I will show that this additional demand can come in the longer term only from additional mass consumption and hence the empowerment of labour. Entrepreneurs aim to remain competitive by selling cheap products on the basis of minimisation of unit costs, and by creating new products for new demands. I distinguish here between four different types of investment: • • • •

Investment for cutting unit costs in known products Investment for increasing capacities of production in known products Investment for new products Defensive investments in order to save on ever more expensive labour

I will show that any investment which does not reduce total final demand requires rising mass incomes. This even includes “defensive investments” which lead to a higher capital output ratio. Investments in new technologies for reducing the unit costs of known products are described here as “rationalisation investments”. These rationalisation investments may reduce the amount of labour with or without increasing the amount of capital per unit produced. Their essential characteristic is not an increasing or decreasing capital output ratio, but rather a minimum increase in productivity which results in decreasing unit costs. In his critique of Marx’s Law of the Tendency of the Fall of the Rate of Profit (Chapter 3, p. 71ff.), Bortkiewicz (1907: 455–457), followed later by Okishio (1961), and confirmed by Samuelson (1972), rightly argued that new technology under capitalist conditions can only be introduced if it reduces unit costs for already known products (or comparable products which replace them).5 This means

48

Profit, demand and growth in capitalism

that any reduction of unit costs implies a corresponding reduction of the sum of incomes paid for an identical quantity of production in the different stages of the production chain. Any rationalisation innovation diminishes the total volume of direct and indirect labour (indirect = labour employed input production and in investment goods production for replacement of worn-out investment goods) in relation to the volume of production. Only rising mass incomes can counteract this tendency to a reduction of total demand in the wake of the capitalists’ search for rationalisation innovations. The increase in already known products obviously requires rising demand and under our assumptions on income differences higher real wages (Chapter 2, p. 41, Chapter 1, p. 14). The production of totally new products which address new needs and do not replace older products also implies rising incomes. New labour incomes for new productions may emerge, as well as higher labour incomes in the production of technologies which are used for the production of these new goods. The Bortkiewicz criterion of decreasing unit costs cannot be applied when comparing totally different products. The relation between the cost of the net capital stock engaged in production and the sales proceeds of the new products may even increase. The share of profit in national income may increase, because net investment may grow more rapidly than total production. In cases of competition for the better off, such new products can be consumed in larger quantities only if mass incomes ultimately rise. New products are “democratised”. With rising demand, idle workers and workers in lowwage sectors become increasingly attracted to those enterprises which produce in order to meet the new demand. Less well-paid workers shift to better paying enterprises which can offer better wages because they earn relatively well. In an atmosphere of rising demand and tendential full employment, even the least productive worker is fought over by producers. Defensive investments are those investments which are realised in order to substitute technology for labour when labour has become too expensive. Their defining characteristic is that costs of capital per unit of output increase. If labour costs increase because of increasing real wages also with respect to the old technology, then increases in capital costs for the new technology may be partially matched by savings in labour costs in comparison to the old technology. The latter has become more expensive because of the higher wage rates involved. A crucial factor is the difference between, on the one hand, the cost of highly skilled labour which is capable of producing innovative technology and, on the other, the less-skilled labour which uses this technology. Also important are interest rates on loans. The lower these two factors are, the more competitive capital-intensive technology will be. Defensive investments become cost-efficient only if real wages increase. These technologies save on labour, but only at the price of engaging important funds in new technology. The additional costs of this new technology are so high that, despite reduced requirements of labour (quantities, but also

Profit, demand and growth in capitalism

49

expensive labour skills), unit costs of production increase independently of the “progressiveness” of the new technologies. They become competitive only because average-skilled labour as used for operating technologies has become more expensive. Its employment with old technology has become prohibitive. This increase in cost of labour without corresponding productivity increases makes the purchase of costly new technology cost-efficient. Older technologies may therefore still be employed in low-income countries as today in the Global South. Higher real wages trigger the development of labour-saving, more capital-intensive technologies. This contributes to total demand. By definition, in the case of defensive technologies capital used per unit of production increases; otherwise we would have nothing more than a rationalisation technology. Capital productivity declines. Unit costs in the new costly technology decrease in relation to unit costs in the old technology, if the old one is exploited with now expensive labour. This condition (Annexe 2.2, equation 2.14) can therefore be fulfilled only if the more expensive outlays for capital per unit produced are matched by higher labour productivity. Technology costs increase, wage costs normally decrease despite rising wages (lower quantities of labour used), so that wage costs per unit produced decrease; however, this is less than technology costs per unit produced increase. This explains the limits to increasing cost of investment goods used in the new technology. Rising mass incomes lead to productivity increases of labour either in the construction of (better, more performant) inputs (including investment goods), or through a more highly skilled labour force. More expensive labour constructs better machines, even if the performance of these better machines does not improve to the same extent as their cost. This is the case when the capital output ratio increases in a production line. In the case of the improvement of the skills of labour without more expensive machinery, the configuration of equation (2.14) in Annexe 2.2 would be inverted; the argument about rationalisation investments would then apply. Defensive investment increases final demand and allows for compensating the reduction of labour in the wake of rationalisation innovations in other production lines. The more rapid the increase in average labour costs, the more intensive the search for defensive investment. Rising mass incomes are thus a necessary condition for increasing capital outlays per unit produced for compensating rationalisation investments. Overall, then, of the four types of driving force for new investment, three depend on rising mass incomes/rising labour costs. Two of these types do not exclude rising investment per new capacity of production as measured in monetary terms. Investment – and thus spending on net investment and capital – may grow more rapidly than national income and wages. Even in those two cases rising mass incomes are necessary in order to keep the growth process going, as long as the better-off have to face competition. Profit does not depend on high mass incomes, but on rising mass incomes. The argument that high incomes also constitute costs for the entrepreneurs is

50 Profit, demand and growth in capitalism

indeed viable – but it is ultimately irrelevant, because entrepreneurs trigger forced savings whenever production capacities are fully used and final demand is dynamic. Profit depends on investment spending, not on the availability of financial resources for investment spending.

The creation of demand through capital deepening The dependence of profit on rising consumptive demand, and ultimately on rising mass incomes, is challenged by the argument that accumulation of capital creates its own market. Neoclassical, classical and Marxist economists assume that rising surpluses facilitate accumulation and contribute to growth. My argument is in contravention of Lenin (1960 [1899]: 54), who argued that the extension of the internal market could be realised purely by increasing spending on investment. He therefore established the theory of the priority of the growth of investment goods production: the so-called “department 1”. On the basis of the Bortkiewicz argument, this can be disproven. In analysing defensive investment, I have shown that capital deepening depends on rising mass incomes. Capital deepening does not free business from cutting unit costs. So capital deepening requires minimum productivity increases in the form of increasing labour productivity. When analysing later Marx’s Law of the Tendency of the Profit Rate to Fall, I show that capital deepening at constant wages leads to increasing surpluses (Chapter 3, p. 76). In this chapter, however, I argue that these increasing surpluses, if accumulated, imply explosive rates of growth of labour productivity and production (Baran and Sweezy 1966: 81). In order to model capital deepening in a dynamic process I assume here constant capital productivity. I assume that on average in the economy, capital productivity should not decline in the long term when choosing new investment either in a defensive intention or for the production of new products. This assumption does not exclude that capital productivity may decline in several production lines (defensive investment, new products). Maintaining appropriate profit rates for these production lines will depend on changes in relative prices between their products and the products of production lines where rationalisation technologies are predominant. As defensive investments depend on rising wages, the capitalist growth process can be described as capital deepening only under the assumption of rising wages, although in the counterfactual demonstration in this chapter I do not introduce rising wages. In order to show the contradiction of modelling capitalist growth with constant wages I run my model with constant capital productivity which corresponds to the stability of the capital output ratio under capitalism, empirically observed (Chapter 3, pp. 85–89). I will show that, in the absence of rising wages and with a constant capital productivity, accumulation implies an explosive growth of production and a later decline of the rate of increase of net investment (i) to the level of the rate of growth of net production (y). This reduces the rate of growth of the capital

Profit, demand and growth in capitalism

51

stock and the profit rate. Small letters indicate the growth rates of the aggregates which are described with capital letters. The rate of growth of net investment (i) is by definition the rate of growth of profit. If the rate of growth of net investment declines, the rate of growth of profit declines. As long as the capital stock grows through additions by net investment, a temporary increase of the profit rate may ultimately imply an alignment of the rate of profit ( p = P / K = I / K ) to changes in the rate of growth of production. When all additional production is invested the rate of growth of investment (i) falls to the rate of growth of income (y). This seems to come close to the basic hypothesis of those who assume capitalist growth being possible if only capital deepening occurs. In the model, profits (P) grow more rapidly than national income, as wages (W) with w = 0, and hence consumption (C) with c = 0 stagnate. The capital stock (K) therefore grows and with it national income/net output (Y) in the following period because of constant capital productivity. The rate of growth of profit and hence the rate of growth of the capital stock accelerates and so does the rate of growth of national income with a lag, as the rate of growth of net output follows the rate of growth of the capital stock of the previous period. A positive rate of growth in capital stock implies a positive rate of growth in net output. We assume stagnant real wages and a stable volume of labour employed. Net output equals consumption (C) and investment (I) as formulated earlier in this chapter. The increase in production can be described as yY = wW + pP , and, because P = I, yY = wW + iI . The new level of production is (1 + y ) Y = W + (1 + i ) I . Imagine a sum which grows, but one element of the sum does not grow. In this case, at least one element has to grow more rapidly than the sum. In Annexe 2.3, I show that an accelerating growth of the capital stock leads to rates of growth of national income and the capital stock which are positively explosive. As we assume that the model is run with a constant supply of labour and a constant wage rate, then (Y/W) grows in line with the labour productivity (Y/L). Accumulation without rising wages thus implies increases in labour productivity which follow these explosive increases in national income. With an increasing share of investment in net production, the lead of the rate of growth of investment (i) over the rate of growth of net production (y) decreases. Increasing rates of growth of net production with constant labour input imply increasing labour productivity (here Y/L = Y/W at constant wages). The question remains of how realistic the values for increasing labour productivity are in order for the model to be viable. In the absence of rising consumption, the constant rise in labour productivity necessitates the investment of ever-increasing resources in projects which satisfy the Bortkiewicz criterion. From each period of production to the next, the resources for investment grow more rapidly than national income. As there are no wage increases, these resources simply drift around, searching for new investment opportunities in

52 Profit, demand and growth in capitalism

investment goods production where the rate of profit is at least as high as previously, if capital productivity does not decline. Everything depends on parameters.6 We have chosen five configurations. Configuration 1 is characterised by a very high capital output ratio, i.e. low capital productivity and therefore low efficiency by standard interpretations of capitalism. Configurations 3 and 2 have similar initial shares of wages in national income, but different capital output ratios. Configurations 4 and 5 are characterised by very low capital output ratios, hence are superbly efficient in standard interpretation of capitalism. We examine the viability of these growth processes by using four yardsticks: • •

• •

Maximum shares for investment in national income by looking into how many periods pass until this share goes beyond 66% Maximum rates of growth, looking into the number of periods after which the growth rate of the capital stock passes 20%, which implies that the labour productivity and the growth rate of national income follow in the subsequent period Period after which the rate of growth of investment (i) decreases Period after which the profit rate and the rate of accumulation decreases (max k) (Table 2.1)

Configuration 1 is unrealistic but relevant for the demonstration. It is characterised by very low capital productivity, shown by the extraordinarily high capital output ratio of 10. Capital output ratios in the private sector of capitalist economies are around 2. They are high in the Global South where public investment could be realised without short time profitability. They were equally high in the countries of real socialism, the former Soviet bloc. This was

Table 2.1 The five configurations 1st

2nd

3rd

4th

5th

K0/Y0 W0/Y0 After how many periods It > 66% Yt -1

10 0.9 36

3 0.6 9

2 0.6 5

1 0.4 1

1 0.9 3

After how many periods (K - K t -1 ) k= t > 20% Kt

never

8

3

1

4

After how many periods it < it -1

9

6

7

7

14

Max k After how many years max k

9.2 238

26.4 87

26.6 53

61.8 35

61.3 45

Profit, demand and growth in capitalism

53

a manifestation of economic inefficiency which led to its defeat in the productivity race with Western capitalism (Elsenhans 2000). The configuration (1) is remarkable because it shows that the more a capitalist system is inefficient, the more easily it avoids unrealistically high rates of growth of production, capital stock and labour productivity. The share of spending on investment becomes near 100% of national income as the rate of growth of investment approaches the rate of growth of national income. There is therefore a decline after the rate of growth of investment after some time. Configurations (2) and (3) are characterised by still relatively high but empirically observable capital output ratios with a moderate share of wages in the initial phase. This leads to unrealistically high rates of growth of capital, therefore also of production and labour productivity, and high shares of investment after about eight years, hence slightly more than ordinary business cycles. A lower capital output ratio accelerates the process (configuration 3) as also a lower share of wages in the initial phase (configuration 4). An initially high share of wages allows growth by capital deepening for larger periods (configuration 5). The proponents of capitalist growth by capital deepening assume normally that the best placed candidates for such a growth model are those economies where capital productivity is high and where the share of wages in national income is low. The five cases show just the opposite. The higher capital productivity, i.e. finally technical efficiency, and the higher the share of profit (indicated in the configurations by the share of investment as any profit is assumed to be invested) face relatively early the problem of maintaining realistic growth rates of investment, capital stock and national income and realistic shares of investment in national income. Accumulation without rising mass incomes can thus be achieved under three conditions: • • •

Unrealistic increases in productivity after some time, depending on initial parameters Abandoning the condition of constant capital productivity, which leads to Marx’s scenario of a declining profit rate, as we will discuss later in Chapter 3 (pp. 71–78) Reducing the financial surplus available for financing accumulation

Under capitalism, financial surplus has to be limited to the possibilities of technical progress. Such a limitation can be brought about by increasing consumption. If capitalists are to be spared the necessity of obtaining monopoly incomes, then the only sources of increasing consumption are increasing state spending and increasing mass incomes. Assuming that increased state spending is subject to typical bureaucratic inefficiencies, the only source for increasing consumption in the long term is – once again! – rising mass incomes. Assuming that rising mass incomes are not entirely spent on products of the real economy, but put into household savings, capitalism needs democratically

54 Profit, demand and growth in capitalism

controlled collective consumption in order to overcome bureaucracy in compensating public investment. What this means is that green growth, which intentionally slows down productivity growth via additional costs in the production process in order to preserve the environment, actually constitutes a new growth frontier of capitalism (Elsenhans 2020, Chapter 8, pp. 205–207). This may take the form of imposing costly technologies or additional activities in production for removing pollution. Some authors – even some Marxists – admit that capitalism always – or at least in some periods (so-called Fordism) – entails high mass incomes in relation to productive capacities.7 But as I argue here, capitalism actually requires rising high mass incomes. Otherwise, the increase in surplus does not face a similarly increasing demand for investment goods. These are essential for capitalists in order that they might maintain their competitiveness. Consequently, surpluses increasing beyond the capacities of absorption of investment trigger off behaviour of the asset holders which undermine the capitalist mechanism of investment being triggered by final demand and made efficient by competition. All agents attempt to appropriate the available surplus by political means in order to overcome crises. In this contest, business is better placed than labour. Labour accepts political appropriation of surplus by business, because this appears as a means for preserving jobs. In the political appropriation of resources by labour, capital perceives additional labour costs which merely deepen the crisis. This imbalance between labour and private business, with the latter’s turn to restricting competition, can be legitimately interpreted as a weakening of capitalism. Increasing real wages are not the result of historical necessity – that is, because of labour’s unruliness, or because of the humanitarian whims of wealthy philanthropists who agree to higher real wages. In fact, rising mass incomes are a necessary condition for capitalist growth. This growth ensues only as a byproduct of rising real wages (Elsenhans 1983b). Limits to higher surpluses are imposed by higher mass incomes. This favours a particular type of technical progress. Such progress may be oriented towards the excellence of the product as represented in the work of an artist. However, it may also be oriented to a reduction in the cost of producing large quantities of standardised items. The quest to reduce the cost of an item by mechanisms which can be replicated precedes capitalism (e.g. the pottery wheel or the handloom). An increase in mass demand for a narrow range of rather identical items increases the possibility of developing machines which allow the rationalisation of production. The relatively massive reduction of unit costs is called economies of scale. These are maximised under conditions where income is distributed on a relatively egalitarian basis. Nearly any new product is a luxury, at least initially. Its consumption is democratised when entrepreneurs perceive a large enough potential demand so that costs can be brought down through standardisation and production in large batches. Thirty years ago, computers were produced for calculation

Profit, demand and growth in capitalism

55

centres in banks. Today, in middle-class families nearly all over the world, most family members have a laptop. This points to the fact that capitalist technical progress is favoured if consumption is focused on an increase of a limited variety of standardised products. Mass consumption propels this process. Vernon (1966) has made this mechanism into a central element of his theory of the product cycle. Capitalist growth thus depends on rising mass consumption in order that the growth of surplus be limited. By limiting financial surpluses at the disposal of the rich (rentiers, but also capitalists) the amount of financial resources available for investment is adapted to the requirements of investment. These are subject to limitations because of limits to effective demand and available innovations. Increasing mass consumption is satisfied by the production of ever-improved investment goods. In this way, rising mass incomes increase the possibilities for investment. They also bring down the volume of financial resources and increase the possibility of their use for productive investment. The basic condition of capitalist growth can thus be summarised as follows: • • • •

Capitalist investment takes place on the basis of improving technologies This leads to increases in the productivity of labour The absorption of the additional output depends on rising mass incomes Rising mass incomes limit the increase of surplus available for investment and increase the outlets for capitalist investment spending through new possibilities for the employment (and production) of physical capital

This does not imply that capitalists themselves impose such limitations on the available surplus. Today, it simply means that they cannot avoid doing so – that is, if they do not wish to upset the political structure and remove de jure – or at least de facto – the principle of equal suffrage of all citizens (as was the case under fascism). This inability to block the empowerment of labour was a major by-product of the “bourgeois” revolutions of the seventeenth and eighteenth centuries, and a precondition for the transition to capitalism. Such empowerment may be favoured by political conditions, but I rather doubt that merely political empowerment can endure. Political pressure always implies organisation and the operation of the “iron law of oligarchy” (Michels 1925: 182 f.), but organisation is a necessary condition for having a voice in a “bourgeois” democracy (Hirschman 1970: esp. 35). Formal bourgeois democracy was an important instrument for maintaining the negotiating power of labour. This, of course, is seldom acknowledged by those sections of the political left who critique bourgeois democracy’s perceivable limits. Marx’s critique of the freedom of labour in a capitalist society is a key point here. The doubly free proletarian (Marx 1965 [1887]: 507) will reject the bonds of dependence (but also protection) as an unfree labourer only if he has a reasonable chance of finding a job. This condition is fulfilled if average skilled labour succeeds in regularly producing more than its cost of subsistence/reproduction. When an exploiter can use the fruit of a worker’s labour

56

Profit, demand and growth in capitalism

for purchasing other labour, the worker will be employed without pleasing the employer. The surplus drawn from this labour leads to the production of a tradable product. If the employer can use the fruit of a worker's labour only for his own consumption, the worker will be in the same situation as Adam Smith’s (1976 [1776]: 368) dancing girls, performing for a noninnovative landlord. Workers in this position lack any kind of negotiating power because they cannot be used for purchasing another product. They can supply only a service or a product they are specialised in. At best, they can negotiate over whether or not they supply this service to the landlord’s satisfaction. Exploiting a worker provides the capitalist with a universally tradable good. Apart from political power, labour can be considered as empowered when marginal labour yields a surplus for those in control of the means of production. Those in control of the surplus may maintain marginal labour – that is, labour which produces less than required for its survival. Such labour may provide its employers with non-economic services, as characteristic of the structures where hierarchical positions do not depend only on economic resources, i.e. most precapitalist societies. Let us assume that such non-economic interests in the use of labour (not for production of marketable goods but personal services) are no longer pursued (e.g. because of intensified economic competition in the wake of the penetration of capitalist mechanisms from the outside). Under such conditions, those in control of the surplus may also shed marginal labour for economic reasons, as argued in Marx’s theory of primitive accumulation (1965 [1887]: 510 ff.). In such cases, marginal labour which cannot produce more than its costs of reproduction either starves or is politically powerful enough to impose new forms of access to the means of subsistence. To be sure, in cases where labour enjoys personal freedom, political power may be a complementary factor. But this power has a less decisive impact on the empowerment of labour than a marginal product above the costs of reproduction. Conversely, in precapitalistic societies with high marginal product of labour (e.g. precolonial sub-Saharan Africa), enslavement becomes the only means for blocking the transition to capitalism. The argument has important implications for the future of capitalism in underdeveloped economies of the Global South, as I discuss in Chapter 4 (p. 103). Capitalists are not inherently interested in rising mass incomes. A weakening of labour will make surplus available which may not be invested due to the Bortkiewicz criterion and the contradictions shown in this section. Obviously, capitalists can overcome these problems by raising their own consumption. In order to achieve such a higher consumption, competition between capitalists must be weakened. The dominance of the interests of the capitalists thus destabilises capitalism and moves it in the direction of a rentbased politico-economic structure. We have thus far considered the possibility of temporarily matching consumptive capacity and productive capacity by accelerating investment. Based on this discussion, I deduce that capitalist accumulation depends on deepening

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markets, and ultimately on mass markets. In the short term, however, aggregates of national income do not necessarily develop in a parallel way. Investment spending in particular can grow more rapidly. There may be cyclical movements. Such movements are modelised by the mechanisms of the multiplier and the accelerator.

Annexe 2.1 Extending the basic Keynesian model by government defcit spending and export surpluses In cases of permanent government surpluses, profit can be supported by the state’s deficit spending (spending in excess of incomes, ultimately taxes, hence a deficit in government budget, G, over government income T). We obtain from G + I + C = T + P + W , with W = C and G > T

(2.8)

G + I = T + P, and G > T , I < P (2.9) There are, however, political limits. Capitalism can also be stabilised through export surpluses. But one country’s export surplus is another’s trade deficit. There are, however, limits to the foreign debt of any country, as shown by the current crisis in the Eurozone. So the strategy can be applied only for some time after which the countries with import surpluses are no longer able to serve their debt, i.e. pay back even limited amounts and pay the interests due to the creditors. In the case of export surpluses, profit will be higher than net investment spending, as shown in equation (2.10) (Ex = Exports, Im = Imports) Ex + I + C = Im + P + W with C = W

(2.10)

Ex + I = Im + P with Ex > Im (2.11) Ex - Im = P - I and Ex - I > 0, P > I

(2.12)

Annexe 2.2 The requirement of falling unit costs of production and the microeconomic dependence of capital deepening on rising labour costs (real wages) I define the cost of labour (W) as the cost of a quantity of labour (L) multiplied by the wage rate (λ) with (W =L∙λ), (C) as the cost of capital employed, (Q) as the quantity produced. Marx’s constant capital is represented by ConstC.

58 Profit, demand and growth in capitalism

I formalise these conditions and compare two technologies – in equation (2.13) without increasing real wages, in equation (2.14) with rising real wages. In the case of constant hourly wages l1 = l 2 defensive technologies are not cost-efficient: ConstC1 +W1 Q1


Q1 Q2

(2.14)

If condition (2.13) obtains, we deal with a rationalisation investment which simply reduces total demand. It seems reasonable to argue that the lowest unit costs are achieved if technology 2 is produced by labour paid at λ1 with capital goods also produced by labour paid at λ1. At this wage rate, labour capable of constructing the more capital-intensive technology may not be available. This results from the scarcity of highly skilled labour. Furthermore, the exploitation of the more capitalintensive technology may depend on production runs which require rising mass incomes due to economies of scale.

Annexe 2.3 The viability of capitalist growth without rising wages on the basis of capital deepening We estimate the viability of a capitalist growth process with constant wages, increasing productivity leading to higher production, with all additional production used for additional investment. The capital stock grows. A positive rate of growth (k) in capital stock (K) implies a positive rate of growth (y) in net output (Y). We assume stagnant real wages (W) and a stable volume of labour employed. Net output equals wages (W) and profits (P) as well as consumption goods (C) and investment goods net of amortisation (I). The increase in production can be described as yY = cC + pP , where the small letters indicate the growth rates of the aggregates which are described with the capital letters. Because of all wages, but only wages are used for consumption goods W = C, and yY = wW + iI .

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We assume w = 0, as real wages are supposed to stagnate. Imagine a sum which grows, but one element of the sum does not grow. In this case, at least one element has to grow more rapidly than the sum. With w = 1, it > yt The capital stock grows annually with annual net investment so that K t = K t -1 + I t -1 , with K t = K t -1 + (1 + it -2 ) I t -2

(2.15)

There is a relation between national income and capital stock, called the capital output ratio β, which measures the value (price) of capital accumulated required for a determined value of production (in prices) æK ö æY ö ç ÷ = b,and its inverse capital productivity g = ç ÷ , èY ø èK ø

(2.16)

and K = bY We assume constant capital productivity, although we admit that capital productivity can vary. However, in really existing capitalist systems this variance occurs only within rather narrow limits, which we will not investigate here (see Chapter 3). National income depends on the size of the capital stock of the previous period. We can thus state that: K t -1 = bYt , and K t = (1 + kt -1 ) K t -1 = (1 + yt ) bYt = b ëéW + (1 + it ) I t ùû ,

(2.17)

with β = constant. The amount which accrues to capital grows more rapidly from period to period than does Y between the corresponding periods, as long as the share of wages is not close to zero. With the rate of growth of investment higher than the rate of growth of net production at constant capital productivity, it > yt = kt -1. The rate of increase of (K) in period t is therefore higher than the rate of increase of Y in period t, so that, at a constant level, capital grows with the rate kt > yt . At constant capital productivity for long periods, y1 < y2 < y3 , with i1 < i2 < i3 and k1 < k2 < k3. According to (2.16) and (2.17)

(1 + kt -1 ) K t -1 K t -1

é (1 + it ) I t + W ùû = (1 + k1-1 ) = b (1 + yt -1 ) ë ( I t +W )

b ( I t +W ) = K t -1, and (1 + kt -1 ) K t -1 = b éë(1 + it ) I t +W ùû W is constant with W0/Yt tending to zero and i tending to y.

(2.18) (2.19)

60 Profit, demand and growth in capitalism

(1 + it ) will tend to (1 + yt ) and because ( y = kt -1 ) , (1 + it ) will tend also to (1 + kt ). At a high (W0/Yt), (i) will be higher than (k) so that the capital stock

grows more rapidly. With an increasing share of W in Y the relation (I/K) can increase but not indefinitely because of a decrease in (i/y). (I/K) is also the profit rate (because I = P). Therefore ultimately the profit rate falls despite constant real wages if the growth of I declines, whereas the capital stock still grows, albeit at lower rates than before with ( I t -1 / K t -1 ) > ( I t / K t ). We start with K 0 (1 + k0 )¼(1 + kn ) = btY0 (1 + y1 )¼(1 + yn ) = b éëI 0 (1 + i1 )¼(1 + iin ) + bW0 ùû

(2.20)

After how many periods in in-1


Q1 Q2

(3.11)

with c = constant capital, v = variable capital, p = profit all three in value terms and Q = quantity produced (and at constant prices the value of production).

( c1 + v1 )(1 + p ) > ( c 2 + v2 )(1 + p ) Q1

Q2

(3.12)

There is the argument that capitalists are interested in extra profit with an extraordinary, above average profit rate πE, and not in reducing unit costs. This leads to the same condition. For the profit rate we use Marx’s definition p = p / ( c + v ), with pE > p, so that

( c1 + v1 )(1 + p ) = ( c 2 + v2 )(1 + pE ) Q1

Q2

(3.13)

The condition (3.13) can easily be transformed into condition (3.12), because pE > p. From (3.12) and (3.13) we get c 1 + v1 c 2 + v 2 > Q2 Q1

(3.14)

The minimum increase in quantities and hence value of production produced following Marx’s example is in period 2: Q 200 Q1 > 2 ;Q1 > Q2 = 133 150 200 150

(3.15)

In order to proceed to this type of rising organic composition of capital as assumed in Marx’s example, the minimum total production in period 2 is 133. This implies that 133 = 66.666 200 so that the profit rate has not fallen.

(3.16)

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List of symbols a C c Iaut Iind K L p Q s v W y Y Z α β π

Basic consumption Consumption Constant capital in Marxist writing (inputs and investment goods) Autonomous investment, which does not react to an increase in final demand Induced investment which is undertaken as a reaction to increased final demand Capital stock accumulated Quantity of labour employed Annual profit in Marxist writing Volume of production/quantity of products Surplus produced by labour In the Marxist argument, variable Capital, the outlays for purchasing labour power, i.e. wages Sum of wages Annual rate of growth of national income Annual national income Increase in government spending without increase in government taxes propensity to consume Capital output ratio Profit rate (P/K), or in Marxist writing ((p/(c+v))

Notes 1 For Germany the share in investment oscillates around 9% until 1870, around 13% 1870 to 1913, and around 18% in the 1950s, cf. Hoffmann, Grumbach and Hesse 1965: 104. Net investment in net national product in the USA was higher before 1913, fell even before the crisis of the 1930s, and oscillated between 13 and 18% between 1945 to 1979 (US Department of Commerce 1975, F 47-70). 2 1950: 3.4%, 1962 3.3%, 1980 13.1%, 1990 13.7%, 2000 9.0%, 2017 9.9%, Statistisches Bundesamt 1965: 529, Statistisches Bundesamt 2018: 1.7. In the United States, it remained at around 7% over that period (OECD 2019). 3 Net national product decreased during the crisis of the 1890s, the deepest one reported by US historical statistics, from 1890 to 1892 by 7.5%, with unemployment reaching 18.4%. In the crisis of the 1930s, production decreased by 31% and unemployment reached 24.9% (United States Department of Commerce 1975, F1.5 and D85-86).The corresponding data for Germany show a maximum decrease of production before 1913 in 1900–1901 of 2.5%; maximum unemployment before 1913 was 6.3%; in 1901, 3.1%; in 1894, decline of production in the 1930s 1929–32 23.5% and unemployment 1932 30.1%. Hoffmann, Grumbach and Hesse 1965: 104, 454, and Metz 2005. 4 c = constant capital, we indexed above as ConstC, v = variable capital, s = surplus-value. 5 I do not deny that in really existing capitalism they may do so, but I argue that this is a sign of their permanent attempts to destroy capitalism in order to become rentiers who, by non-economic means, have access to the surplus. In that case these capitalists could increase their privileged consumption and keep accumulation and consumption in balance, or follow the rule of always accumulating any surplus available, independently of sales on competitive markets. So the Marxist example could work, if capitalists were allowed to reduce competition and increase their consumption, i.e. to become rentiers.

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6 7

8

9

In the appendix 2.3, I show on the bases of the argument developed in Chapter 3 (pp. 71–78), that ultimately the profit rate may fall, but here “overaccumulation” is the result of stagnating real wages, not of an inevitable trajectory of capitalism.This supports my argument that capitalism depends on rising mass incomes. “Long hours of labour seem to be the secret of the rational and healthful processes, which are to raise the condition of the labourer by an improvement of his mental and moral powers and to make a rational consumer of him.” (Marx 1956 [1885]: 314) A crisis may become so deep that the mechanisms assumed by the neoliberals to overcome it, such as reestablishing high profits by wage restraint and reduced government spending, will not relaunch the economy. Röpke calls this a secondary crisis, which justifies increased state intervention in the economy. Alternatively, the capital stock can be deflated by the real wage index. Deflating the capital stock by the index of real wages, the economy-wide rate of inflation and the increase in labour productivity leads to the result of a zero increase of labour value of the production, if the quantity of labour is held constant. In our Keynesian perspective, capital is considered as emerging because of spending on investment goods, a process which creates demand.This is a macroeconomic perspective. In a business consideration, capital is an asset from which incomes for the owner can be drawn, a microeconomic perspective.

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4

Rent blocks capitalism Today’s underdeveloped world

Summary The inevitable emergence of marginality and rent are both characteristics of underdevelopment and of the absence of a dominant role for capitalist structures. A substantial segment of the active population produces less than it needs for its and its families’ basic subsistence. This does not exclude the existence of huge economic surpluses. However, these are appropriated as rent through non-economic, political means. There is a surplus of resources and a surplus of labour. Under such circumstances, scarcity of labour cannot occur. The capitalist mechanism of triggering investment and profit through mass demand is weak, even if financial resources are not only available but also increasing. Nor is the lack of effective capitalist structures compensated by international specialisation. Comparative advantage lies in low-selling products, not in dynamic mass consumption goods. The initial importance of raw materials in exports strengthens rent, and not labour. This remains the case even if capitalist mechanisms of competition and regulation are adopted by the local elites or imported by international investors. Because of the weakness of labour, mass-market and local investment goods production do not develop. Unequal specialisation means that export products remain cheap because of the low mass incomes of the labour producing them. This has typically been perceived as exploitation, especially in the form of declining terms of trade. The appropriation of raw material rents has become a central demand of the decolonising South. This demand neglects the crucial significance of a key principle for overcoming underdevelopment: the creation of a popular pole of industry. This can only occur through empowerment of labour and increasing mass consumption.

Marginality and its consequences of blocking capitalist transformation Underdevelopment is characterised by the simultaneous existence of a surplus of labour and a surplus of resources (Lewis 1954). There is no scarcity of labour if a substantial part of the able-bodied, potentially available labour force produces less than its cost of reproduction (i.e. the necessities required for the DOI: 10.4324/9781003182511-4

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survival of a nuclear family). It is sufficient if, with rising economic activity, some labourers produce less than this subsistence level. Indeed, this is a normal condition in early phases of economic “growth”, when human beings make their first tentative steps into the technical mastery of nature. In precapitalist societies, the share of food and agricultural activities in total working time is high. This was true even in the socially stratified societies of the ancient empires, where rich ruling classes absorbed all surplus labour to support their luxurious lifestyles. Ordinary people tend to have many children. Most couples have an interest in having children who will look after them in their non-productive old age. Demographic growth must thus be considered inevitable, provided that there are no famines or wars. This indicates that an increasing amount of labour is combined with limited land resources. Technical progress, such as the transition from hunting and gathering to agriculture and cattle raising, may improve productivity and allow increasing product per area of agriculturally useful land. However, such technical progress is limited. Before the introduction of chemical fertilisers, increasing labour in relation to available fertile land led to diminishing returns per unit of work time applied in agriculture. The decline of agricultural production per agriculturally active labourer only began to reverse, in the Global South, with the generalisation of the Green Revolution in the 1960s. In Figure 4.1, I illustrate the mechanism and the consequences of diminishing returns in food production (Elsenhans 2021 [1995]). This diagram illustrates the simultaneous existence of a surplus of labour – that is, of all the labour which produces less than required for its subsistence to the right of (A3) hence the line (A3C 2 ) – and a surplus of resources, which is maximum at ( A1 A2 ). Labour left of A3 produces less than it costs. No surplusmaximising landlord will employ it, even if he is able to feed it. If there are no landlords, labour up to the amount of C2 can be employed. Such labour is shed, if the land owner does not tolerate redistribution of some surplus among the poor. Hence the importance of the extended family and other communitarian structures as caste. Labour services are assumed to be the only factor of production engaged in agriculture. These are measured as the number of subsistence units produced by active labourers, the necessary income for the labourer and his nuclear family. All active labourers receive only subsistence incomes. Perhaps production per labour input initially increases as cooperation is facilitated by denser population. At a non-determined level of activity, additional product per labour input decreases. There is still an increase of additional labour time supplied, as labour continues to yield an additional product. Because of diminishing returns, this additional product can become less than the additional subsistence requirements of additional labourers (and their families). In the diagram, this is beyond the level of employment (A3). These requirements consist in food, as well as some non-agricultural products supplied by non-agricultural workers

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Figure 4.1 The marginality-cum-rent model. L = Straight line: accumulated costs of reproduction of labour in agriculture. Y = Straight line lying parable: agricultural production. Y = f (L), with f ≥ 0, and f ′ ≤ 0 (Y−t) = Dotted parable: gross agricultural production: available for landlords for costs and rent after payment of a land tax. (L−b) = Broken line: costs of reproduction to be borne by landlords after government support out of tax. A1 = Production at maximum surplus. A2 = Cost of reproduction of labour at maximum surplus. A3 = Employment at maximum surplus. t = Amount of land tax. b = Maximum of government support. B1 = Level of production which can be achieved with government support to marginal labour. B2 = Costs of reproduction to be borne by landlords at maximum employment in the case of government support. B3 = Maximum of employment in the case of government support for the marginal. C1 = Production in case of egalitarian distribution of land. C2 = Maximum of agricultural activity in case of egalitarian distribution of land

who may live in the villages or in small towns. This labour time, however, is supplied, because it adds to the total income of the group, to which this additional labourer belongs. If the labourers receive the totality of production, they will continue to work until (C2), because there are no other remunerative activities. Consider a landowner who organises production with dependent labour that he has to pay for, or to whom he has to leave parts of the product for subsistence purposes. This landowner will naturally limit the agriculturally active population to level (A3). At this point, said population still produces a maximum economic surplus (beyond its own consumption in food and non-food products, paid by food). Beyond that level, surplus decreases. Additional labour costs more than it can produce. We thus have two levels of activity in agriculture, represented by points (A1) and (C1), a maximum of surplus at (A1), and a maximum of production (C1). At level (C1), total agricultural production is just about sufficient for feeding the total, active population (in agriculture and in industrial activities

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for the agriculturally active population). There is no surplus. Social stratification is limited. In the case of an egalitarian distribution of land, peasants will expand their families until level (C1). Beyond that level, a society is compelled to engage in birth control, or its younger population is required to migrate. I refer to that section of the population which produces less than its cost of subsistence as marginal. In the event of the penetration of capitalist mechanisms of regulation, this marginal section of the population is shed. I refer to that section of the population which is shed because of its low marginal product as marginalised. At the level of activity (A3), the total surplus to be appropriated from the agriculturally active population reaches its maximum level (A1 A2 ). The landlord may use this surplus for a variety of purposes; for luxury consumption, for financing violence against the population in order to increase surplus extraction or for violence against foreign landlords and rival empires in order to enlarge the tax base. The diagram shows the possibility of taxing the surplus by a land tax of the amount of (t) which is independent of production. We chose a tax of 50% of the surplus at the level of production with maximum surplus (A1). This tax provides government with means of subsistence of the amount of (b) from which marginal labour can be subsidised. This allows to increase the level of activity to (B3). The point of parallelism of slopes between the curve of production and cost of subsistence is moved to the right. Landowners do not reduce production. This mechanism was at the basis of the English Poor Laws (Elsenhans 1992 [1980]). Wages paid by the landowners did not cover the cost of reproduction. Support from the parishes covered the rest. Parishes taxed the landowners. The landlords paid for all labour the cost of reproduction, whether they gainfully employed it or not (then via the tax). Ancient empires evinced a considerable orientation toward luxury, as well as a compulsion to manifest architectural greatness as an expression of the apparently superior unity of the community. This surely points to their splendour and cultural refinement. But it is also indicative of their need for surplus. This explains their repressiveness, their tendency toward violent expansion, and the incessant attempts by their rulers to centralise surplus extraction in order to reduce competing claims from “feudal” lords. The existence of a population producing less than it needs to consume means that those with standard skills can be kept near a level of basic subsistence. This enables for a maximum appropriation of surplus on the part of the rulers. The mass of the population thus lives at historically determined levels of destitution. Its demands are limited to food, simple shelter and a few nonagricultural industrial products. In many cases, this arrangement even serves to limit the development of market-oriented craftsmen. Most craftsmen are concentrated in those areas of production which cater to the luxury demand of the powerful. Income inequality is high, with concentration of demand – especially industrial demand – lying solidly on products consumed by the rich and powerful.

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Consider a closed economy, one characterised by class separation between owners of land and landless workers. In such a society, maximum employment is the sum of mass consumption goods producing labour and luxury-/powerrelated goods (= prestige goods) producing labour. This comprises those whose marginal product in agriculture is still higher than the cost of labour, those who satisfy the demand of agricultural labour for non-agricultural goods and services and the sum of those who are paid by the owners of land for prestige goods and services. The demand for prestige goods depends on the consumption habits of the landowners.

Marginality and patterns of growth Demand for mass consumption goods is limited; demand for prestige goods is high. This implies a pattern of technological development which discourages capitalist development. Technical progress may have two alternative objectives: it may be oriented to make better and more prestigious products, or it may cheapen standard products. The consumption of superior, more prestigious products is basically a competition among the rich and powerful. Nobody understood this mechanism better than Aurangzeb (1618–1707), one of the cruellest of the Mughal emperors. Aurangzeb realised that if he could succeed in creating a Taj Mahal more beautiful than his father’s, then a successor might create a Taj Mahal more beautiful than Aurangzeb’s. He thus cynically insisted that his tomb cost no more than he had personally earned in his pious copying of the Koran. Nobody could outdo Aurangzeb for modesty, and nobody could pretend to be his equal in adopting the same modesty. Conversely, poor people are in no position to choose products with a view to the contribution these products make to their social status and distinctiveness. Keeping up with the Joneses is a relatively recent phenomenon for the lower classes. Its origins lie in the tremendous push for industrialisation that followed World War I. The symbol of mass consumption of consumer durables, the Ford “Tin Lizzie”, did not actually compete with the model of car then used by the higher income strata. In fact, it enlarged its market by simplifying the automobile to its essential characteristics. This reduced its cost to levels which were affordable to lower income classes (such as farmers). The rich and powerful are interested in the uniqueness of the product. When it comes to repetitive production processes, however, machines are superior to craftsmen. Machines can thus be used only to a limited degree in the production of unique “prestige” products. Their functions here might include reducing handling costs, transport costs or cheapening inputs. This is the case for spinning and weaving in (perhaps luxury) craft production of cloth. As a result of marginality, non-agricultural production in precapitalist societies is dominated by prestige products. These excel in artistic quality. However, they do not develop technology using nonhuman energy for cheapening simple products for mass consumption. One driver of the Industrial Revolution

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was the development of technology for cheapening standard products. There may be conflict over whether the consumers of these products were middle- or lower-class. But even the middle classes were interested in cheapening high-quality products. Eighteenth-century England developed methods of industrial production for manufacturing otherwise expensive Asian luxury products. There exists an extensive debate over the question of Asia’s initial superiority in relation to Europe. However, the participants in this debate tend to overlook the fact that the supposed level of technical performance is irrelevant. The true driver of industrialisation is the observed capacity for cheap production. This holds in any part of the world at any point in history. Modern China is an illustration of this, as its products are considered cheap and not particularly reliable. Should new luxuries become available through foreign trade, the purchasing power of the rich and powerful will be increased by maximising the surplus drawn from agriculture. Land may be used for producing cash crops like sugar or tropical beverages. A dynamic external market may exist for these products, and they may be produced with limited amounts of labour. The shedding of marginal labour allows for an increase of the import capacity of the rich and powerful. Here, the penetration of the economy by the kind of management relationships that are characteristic of capitalism will therefore reduce the livelihoods of rural labour. This labour will inevitably migrate to the urban centres, where the rich and powerful demand services and some goods. Rural to urban migration can thus be observed in all three continents of the Global South. This phenomenon is linked not to increasing opportunities for productive employment, but to the expanding opulence of the rich and powerful. The limited penetration of capitalist mechanisms does not lead to empowerment of labour through high levels of productive employment. In fact, it creates a deepened dependency based on the wealth of the upper income groups. The process of appropriation of surplus is political. Even if they appear as private, landowners depend on political and military means for appropriating the surplus of the peasantries in the form of, say, taxes or tithes. In order to improve their position in the political struggles for influence/power, resources and military instruments, landowners must form alliances. They will not invest in the production of mass consumption goods. They spent money on instruments for technical improvement in the production of prestige goods, and on military capabilities. They did not invest in improving technologies for reducing the cost of goods for the poor. They did not aim at increasing mass incomes. A cursory review of the histories of the ancient empires is sufficient to prove this. This lack of investment in machinery for the production of simple goods, and the availability of high and, in cases of some modernisation, increasing surpluses, has some clear socio-economic consequences. It results in the continued existence of marginality, with its implied polarisation of income and

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power. This amounts to a strengthening of the role of the upper classes in the struggle over the surplus. Key mechanisms of capitalism include profit appropriated on anonymous markets, and an entrepreneurial independence from politics born of competitive efficiency. The evolution of these mechanisms depends on the creation of demand for capitalist products through collective net investment spending (Chapter 2, p. 43). If mass incomes rise, net investment spending may increase. In this way, capitalist profit for the most efficient entrepreneurs is promoted. In the absence of such support for capitalist profit, even efficient capitalists are compelled to address themselves to powerful non-capitalist forces which consume prestige goods. And so capitalists become little more than politically dependent suppliers to the royal court. They have no perspective to disempower those who, by political means, appropriate surplus. On the contrary, in such circumstances, capitalists support and become dependent on non-capitalist elites. Consequently, expanding market relations do not create the social structure of mass incomes creating profit. Similarly, commercial capital of longdistance trade depends on those who wield power. This precapitalist character of regularly monopolistic long-distance trade is amply illustrated by the Middle Eastern folk tales collected together in One Thousand and One Nights, or by the investment of long-distance trade “profits” in land, public office or prestige. The beauty of Bruges and the splendour of Venice both testify to it. Continued marginality depends on very few mechanisms. These include a lordly acceptance of population growth beyond the marginality level, and preservation of the political structures which allow the politically powerful to appropriate surplus by political means. Lords are interested in minimising the cost of maintaining power and security. Resource-deficient poor people are an ideal reserve for instruments of repression. They depend on distribution of resources from benign figures within their community, religion, caste or any other (real or imagined) unifying bond. Some of those at the bottom of society are, in fact, more privileged than others. Their relative, if still meagre, privilege is dependent on the toleration of their situation by the politically powerful. The ruling class may improve political stability by permitting some crumbs to trickle down to bridgeheads in the exploited population – to, in effect, co-opt certain elements within their workforce. They provide these bridgeheads with some resources for maintaining the solidarity networks which help to keep the marginalised more or less alive. This system constitutes a doubly persuasive “argument” for these bridgeheads. On the one hand, the function they perform enables them to guarantee the privileges bestowed from on high. On the other, they are able to shore up popular dependence on the local support networks which they control. We can therefore safely conclude that precapitalist societies do not independently develop economic, social or political forces which explode the old structures and impose capitalism. This fantasy was central to most theories of social development which emerged from the eighteenth century, including

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(and, in fact, especially) Marxism. In fact, however, the transition to capitalism depends on non-economic factors. Chief among these factors is the potential for resistance among the lower classes. Through this resistance, a popular pole of industry emerges in response to lower-class demand. This pole expands and provides possibilities for profitable investment. From the demand side, it thus enhances the economic basis for profit. The capacity of the lower classes to resist political appropriation of surplus has diverse historical origins, from demographic decline in the case of England, to government-sponsored military spending on railways in the case of nineteenth-century Germany and France, to the possibility of migrating to virgin agricultural lands in the nineteenth-century USA. Even in the case of a limited number of migrants, their demand for industrial products increases the bargaining power of the left-behind on the labour market.

Unequal specialisation and the dominance of growth-impeding patterns of production in the Global South As mentioned above, the splendour of the precapitalist economies of the Global South reflects their superiority in prestige products, especially luxuries (e.g. silk and cotton textiles, chinoiserie). Differences in climate, and therefore in the natural conditions of production, explain their respective specialisations in some agricultural products. The military superiority of the European naval powers explains the plunder of precious metals, especially in Latin America since the sixteenth century. The Europeans were able to pay high international prices for low-weight tropical products such as spices (pepper) or tropical beverages (coffee, tea, cocoa and sugar), or for Asian luxuries. They were in a position to do so because of their plundering of non-European societies, whereby these societies were divested of their products and inhabitants by force (Latin American gold and silver, Atlantic slave trade). All powers participating in precapitalist long-distance trade tried to maximise the price of any exported product and to minimise the cost of any imported product. This model has existed for centuries. The long-distance trade of the Age of “Discovery” is just one example of precapitalist monopoly trade. When the result of plundering was limited in relation to the expanding demand for products of the Global South in Europe, the Europeans had to find products which they could sell in the continents of the Global South. Europe had no particularly valued goods (such as spices) which it could sell on a global market. To be sure, Europe had been historically well-endowed with mineral deposits. Yet, in precapitalist times, there were only very few raw materials which Europe could sell to the rest of the world (notable exceptions include copper from Cyprus or tin from Cornwall). Europe therefore had to pay for

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its imports by selling products on the global market – products which, at least initially, this global market was actually able to self-produce. These products generally comprised relatively cheap mass consumption goods, especially standard textiles. The law of comparative advantage indicates that exports are possible even if the exporting country has lower productivity than the importing country in the respective product. I present a stylised example in order to prove that, in the case of a two-product model with mass consumption textiles and luxury high-quality textiles, the industrially backward country (England, in this example) will specialise in mass production textiles. It will do so even if it is inferior to India in terms of productivity. The only condition is that the advance in productivity of India is higher in high-quality textiles than in mass consumption textiles (Table 4.1). Let us assume that Asia wants to exploit its advantage and specialises in highquality textiles. It may sell 160 high-quality textiles to England. England saves 160 working hours as it can produce only one high-quality textile per hour worked. With the saved working time, England can produce an additional (160 × 130)/100 mass consumption textiles for export. For 160 high-quality textiles, India will receive 208 mass consumption textiles. It is therefore in the interest of India to specialise in high-quality textiles. This is even the case if India is more productive in both high-quality and mass consumption textiles. India specialises in the product where its superiority is relatively greater. It also imports mass consumption textiles where it is also superior, but relatively less than in high-quality textiles. Why, then, does specialisation occur? Certainly not on the basis of where a particular economy has an advance in productivity and can produce better/ cheaper than another economy. In fact, specialisation follows relative advantages, where the country has comparative advantage. It will occur in the product where the country has the highest relative advantage in relation to its other products compared to the productivity of another country. Specialisation has implications for growth. Specialisation and exports provide financial resources which are expected to finance capital accumulation and therefore economic growth. Specialisation also creates incentives for generating investment in the production processes used for exports, including the machinery employed and the infrastructures required for increasing exports. This improves their quality and decreases their cost. Economies of scale decrease unit costs of production, and capital costs do not increase with the size of production (Chapter 1, p. 24). Growth ultimately does not depend on capital accumulation but on other factors – and ultimately, on technical Table 4.1 Production per 100 hours worked in England and India

Mass consumption textiles High-quality textiles

England

India

100 100

130 160

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progress (Chapter 3, p. 90). A country specialising in mass consumption products, selling them at cheap prices on the world market, nevertheless experiences higher growth. It faces a more dynamic external demand when the products of traditional crafts are outcompeted (as in nineteenth-century Latin America and Asia, India and China). Of the two mechanisms, financial resources and incentives to transform, the latter are important. Conversely, financial contributions may be secondary. This radically distinguishes precapitalist monopolistic long-distance trade from capitalist international trade. Mass consumption goods become competitive through cheap prices provided that the quality is satisfactory in relation to their use in daily life. Mass consumption goods exports are therefore promoted by technical progress, which allows for their cheaper production. The kind of artistic perfection associated with high-quality products is secondary. It suffices that prices are competitive. The dynamics of industrial development on the basis of increasing mass markets combine with technical progress oriented to the cheapening of these products. This provokes a search for new technologies for production processes which reduce unit costs. Specialisation on mass consumption goods provokes the development of new technologies. These not only cheapen existing products; they also make available inputs and similar technologies for totally new products which could hitherto only be dreamed of. The sewing machine and the bicycle are complex mechanical products which, through their cheapening, allowed for the emergence of cars. Cars made aeroplanes conceivable; missiles and spaceships followed. The development of new luxury products drove the old luxury products of the Global South out of the markets of industrialising countries. They even had a similar effect in the Global South, though more so in Latin America, where the attachment to a local culture was weaker than in Asia. The countries of the Global South which did not enjoy precapitalist stratification and civilisational achievements were, much like the ancient civilisations of Asia, largely specialised in raw material exports. With industrialisation, rich mineral deposits were first depleted in regions close to industrial centres of production. The deterioration of the deposits (decreasing metal content, for example) was combated through improvements to extraction technologies. These technologies could also be applied to rich deposits in the Global South. This was especially the case in regions close to maritime transport, such as copper in Chile and tin in Malaysia during the late nineteenth century. Raw material deposits are dotted all over the countries of the industrialised West. However, they have been wondrously concentrated in coastal regions of the Global South. It seems that transport costs still matter. Rising mass incomes create new needs. The consumption of tea, coffee and cocoa served as early indicators for rising incomes. They first did so among the middle strata, then later among the masses. Today, fruit and transcontinental tourism play similar roles.

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The comparative advantage of the industrialising world is especially stable in machine production. Let us say that a new machine is invented which allows for a reduction in costs of production, for an improvement of products or even for the launch of new products. In this case, the innovative enterprise may fix the price of the machinery high enough to draw all the advantages from this innovation to the inventor of the machine. With the generalisation of the innovation in the wake of competition and the discovery of similar, non-patented innovations, the price of the machinery will be reduced to the level of its production cost. Technological monopoly profits disappear. These costs of production will include the cost of the development of new machinery. No machine-building enterprise can survive if it does not permanently spend money on innovation. The result is a reduction of costs for the machine producing company in relation to its total sales. The reduction of the machine price is in fact higher than the reduction of costs in relation to sales achieved by the users of the machinery through their adoption of the new technology. Productivity as measured in the price/cost relation increases more rapidly for machine production than for those activities in which the new machines are used. Processes which are highly mechanised can be operated in technically lagging economies with similar productivity as in industrialised countries. This is especially the case if they are in mature technologies. However, lagging economies have generally not participated in the discovery and learning process realised during the development of the new machinery. Productivity lags in the technically less advanced economy are lowest in machine use and highest in machine development. An initial lag in productivity in mass consumption industrial products is deepened by continued specialisation. In the Global South, this takes several forms. These include deindustrialisation, the capture of local markets for mass consumption products by the more advanced economies, the relative or even absolute decline of the production of traditional luxury goods and the absence of local machine production capacities. That said, deindustrialisation has not occurred to the extent often claimed by critics of imperialism. As early as the late nineteenth century, countries such as India, Japan or Brazil had developed modern textile production. Textiles make up as much as one fourth of the market for industrial products in early phases of economic development. However, these industries operated on the basis of imported technology, as would Japan in the first decades of its industrialisation. With respect to early industrialisation in the Global South, great significance must be attached to two key factors. These are: • •

Existing marginality at low yields of agricultural production Demographic growth in the wake of improved public security as a result of colonial and non-colonial state building

Unhappily, the impact of the first steps in establishing modern industries was insufficient for creating bargaining power of labour in the Global South. Those

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productivity increases which did occur were hijacked by local elites. Inequality increased. Internal markets for selling mass consumption goods were limited. The possibilities of local machine production depend on the demand of industries for investment goods. If this demand is limited, local technology production does not occur. The penetration of capitalist mechanisms of management did not create the social structures necessary for a successful transition to capitalism.

Exploitation and unequal exchange: the terms of trade problematique The origins of the critique of the exploitation of the South as a cause of its lagging behind the industrial centre lie in a late nineteenth-century discussion about the drain of India by and to the benefit of Britain. The Indian national movement explained the lagging behind of India in industrial production through this “drain” of resources. Nothing remained to spend on investment. This reflected the precapitalist mindset of Indian nationalists: growth depends on maximisation of resources. During the Great Depression of the 1930s, this idea of a blockage of industrialisation through exploitation arose once again. As a result of the crisis, raw material prices of the Global South fell much more than prices of industrial products in the West. This provided the empirical basis for the theory of declining terms of trade. These terms measure the development of export prices in relation to the development of import prices of a particular country. If terms of trade deteriorate, a country must export more products in order to import the same quantity of products. It has been argued that countries of the Global South are disadvantaged, because the prices of raw materials necessarily decrease in relation to the prices of industrial products. The classic image used to illustrate this principle comprises an increase of the number of bags of bananas needed for purchasing a tractor. The argument must be more carefully differentiated. Singer (1950) compared freight-on-board prices for British exports with import prices, both in British ports. Import prices comprised different costs, especially insurance and freight costs. Exports were priced as freight on board, hence did not comprise freight and insurance costs. Further studies which compared export prices in the countries of the Global South with British export prices showed limited and erratic terms of trade movements. The reduction of transport costs since the second half of the nineteenth century appears as a deterioration of the terms of trade of the Global South. Recent developments do not support the theory of a secular deterioration of the terms of trade in raw material exports. This is despite volatility in the terms of trade. Raw materials producers have considerable difficulty in the short term adjusting output volume to changes in demand for their products. A central element of capitalist development consists in the launching of new products. These are usually developed on the basis of innovations realised in

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the process of cheapening older products. New products have a fairly typical career: they enjoy high price elasticities of demand and high-income elasticities. Initially, high prices can be charged and large quantities be sold. Theories of the product cycle (Vernon 1966) thus argue that technically lagging economies are compelled to specialise in old products. Countries with low levels of income and narrower markets for initially expensive products will be characterised by specialising in mature products. The price and income elasticities of these products are generally low. Raw materials, for example, are characterised by low price and income elasticities of demand. This owes to the fact that, when it comes to increases in Gross Domestic Product (GDP), capitalism is raw material-saving. This also applies to labour-intensive manufactured products, such as those exported today by some countries of the Global South. Capitalists constantly strive to reduce the costs of production. Consequently, they always try to save on raw materials per product. Today, cars have become less heavy. Steel is produced with less than one-twentieth of the energy consumed in iron production during the early industrial revolution. Similarly, energy efficiency has increased to the degree that energy consumption in capitalist countries rises less rapidly than GDP. These demand side factors are buttressed by the supply side. A country will accept declining prices for its exports if it is unable to locally produce the goods bought with its export sales. Let us assume that the exports which pay for textiles imports require 10% of available labour. In this case, a halving of export prices in relation to the prices of imported textiles (i.e. a terms of trade deterioration by 50%) will reduce export earnings. Imports will stop if the relevant country can produce the required textiles with less than 20% of its working time. This would be equivalent to the working time required for a doubling of its previous exports. An economy that can shift to substituting imports at reasonable prices will be required to accept only very limited terms of trade deteriorations. The deterioration of the terms of trade is due to low productivity in a large variety of production lines. These become competitive only in the case of massively rising prices of imports in relation to the prices of the country’s own exports. The deterioration of the terms of trade is not so much a result of a northern domination of the South. In fact, it owes to a lack of development in the South. Deteriorating terms of trade are not the cause but rather the result of underdevelopment. The rising political weight and successes of industrialisation strategies in the South have exposed the minimal importance of the terms of trade argument. On the one hand, raw material cartels, like OPEC, were able to extract immense amounts of money from the industrialised countries. In the 1970s, export earnings among the oil-exporting countries rose by a factor of 10, with oil rents increasing from 18% to 45% of the GDP of Middle Eastern and North African countries. Industrial development was limited. Workers in oil-producing countries often received the mere crumbs, cast down to them by elites. A

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system-stabilising and state-dependent middle class was often the most visible result. New industrialisation efforts were accompanied by the deliberate reduction of export prices. This was most evident in China. The Chinese consistently stuck to a low exchange rate in order to hold down the offer price of their industrial products. Western industrial countries have often pejoratively described this employment-destroying practice (for them) as “social dumping”. Deteriorating terms of trade do not imply slower growth if comparative advantage lies with products that have high price and income elasticities on the world market. England experienced declining terms of trade in the first quarter of the nineteenth century. So too did China during the phase of its initial export drive (by about one quarter between 1980–1986). Improving terms of trade may even block development. At the very beginning of the terms of trade debate, Singer (1950: 482), the first systematic critic of the terms of trade deterioration, observed: Good prices for their primary commodities, especially if coupled with a rise in quantities sold, as they are in a boom, give to the underdeveloped countries the necessary means for importing capital goods and financing their own industrial development; yet at the same time they take away the incentive to do so. This amounts to a discouragement of economic diversification. It frequently blocks broad local industrialisation with increasing shares of local technologies. A term exists for such a scenario: “Dutch disease”, because Dutch industries suffered from high exchange earnings due to the discovery of gas fields in the 1960s. Deteriorating terms of trade do lead to development because growth does not depend on the availability of financial resources. (Chapter 3, pp. 85–87).1

New rents from international specialisation The Global South’s uncontrolled integration into the world economy thus confronts it with significant disadvantages. An acceptance of this idea serves as the theoretical basis for modifying exploitation and unequal specialisation. Declining terms of trade with specialisation in price and income inelastic products allows for an increase in prices without corresponding losses in volumes of exports (export taxes, marketing boards). Earnings can be increased in the case of political intervention into the market. Rising incomes from some exports can contribute to financing the development of new patterns of specialisation. The unfavourable pattern of integration of the Global South into the capitalist world system provides the basis for appropriating new rents. These incomes can be channelled into not-yet-competitive production lines. This will result in a change to the unfavourable pattern.

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Rent is that part of surplus which cannot be appropriated by capitalists by competition on the market whenever there is a lack of profitable investment spending. It results from structural obstacles to investment spending (lack of demand, for example). We have already seen that rent is inevitably generated by precapitalist societies which are heavily burdened by marginality. The integration of a given economy into the capitalist world system opens the possibility of appropriating new rents by political means. Such rents are based on the transfer of the system of relative prices which prevails on the world market. This system of relative prices is largely dominated by the system of relative prices in the leading capitalist economies. Productivity levels in the Global South do indeed lag behind those achieved in the industrialised West. There is, however, significant variability here. Indeed, some Southern production lines – like raw materials – are competitive even at high prices, others at slightly lower costs. Many require unrealistic reductions of costs in the Global South. Lower labour and environmental costs can be used for cost reduction, but the costs of imported equipment or inputs cannot. Provided that world market prices shape relative prices in underdeveloped economies, productivities vary between different lines of production in the countries of the Global South. In some they are highly productive in comparison to world standards, in other ones lagging behind considerably. This is called structural heterogeneity (Amin 1976: 216 f.). Labour has not become scarce. Consequently, the convergence of productivities does not occur (Chapter 1, pp. 30–32). The characteristic flexibility of capitalist economies is conspicuous by its absence. Redistribution of monetary incomes is not enough to trigger the extension of existing – or the creation of new – capacities of production. If additional measures for promoting production for this new consumption are not realised, then rising mass incomes may peter off into inflation. We are confronted by the reality of economies which are locked into specialisation in products with low price elasticities of demand, but where the products required for rising local mass consumption are also blocked. Such economies may try to increase their external revenues by intervening in their exports with political instruments. They may use these resources for financing investment in non-competitive production lines. They will appropriate rents and finance non-capitalist investment from rents. Differences in development strategies are characterised by differences in using rents for increasing external revenues and promoting local diversification. These differences impact on the relation between the market and planning aspects of overcoming underdevelopment. All these strategies are essentially attempts to efficiently overcome underdevelopment and rent through the wise use of rent (Elsenhans 2004, 1997). Two types of rent are available for such policies: consumer rents and differential rates. Consumer rents describe the increase in real incomes of the consumers of goods produced in the Global South. This increase originates in

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the cheap prices of these products. There are no clear substitutes for most of the agricultural products of the Global South, such as tropical beverages (coffee, tea, cocoa) or sunshine tourism. To be sure, these products are not essential for the survival of the Western societies. Nonetheless, Western consumers are ready to pay higher prices whenever there is a shortage (in the case of, for example, coffee crops being destroyed by frost). To return to the argument on declining terms of trade, export proceeds will increase when prices increase, despite slight decreases in volumes sold on the world market. Even with very low prices, consumers will not drink more than one kilogram of coffee per household per month. Limiting supply may well increase export earnings, leading to the appropriation of consumer rent. In the latter stages of Western imperialism, the colonial powers promoted the appropriation of consumer rents. They did so by establishing monopolistic organisations for commercialisation: marketing boards. With decolonisation in the second half of the twentieth century, such practices were internationalised in the form of raw material agreements. In 1974, the Global South succeeded in imposing a significant resolution at the United Nations General Assembly. This resolution recognised the right of the Global South to remunerative and equitable prices for its natural resources. The basis for international cartels in “unimportant products” such as tea or coffee was thereby created. The intention was to develop this into an Integrated Programme for Commodities, and indeed, this was actually launched in 1976. After the debt crisis of the Global South in 1983, however, the initiative was quietly buried. The South became dependent on the West for rescheduling its debt. The Global South becomes competitive in raw materials if rich deposits in the West are depleted, and if Western technology for cost reduction in raw materials can also be applied in the South. This leads to differential rents. Raw material productivity increases more in the South than in the West. Conversely, manufacturing productivity in the South does not increase more than in the West. In some mineral products, industrialised countries maintain reserve capacities. The USA did precisely this with oil, despite the very high price of American oil in comparison to Middle Eastern oil. Oil exporting countries with cheap oil reserves can, of course, raise the price of oil to the level of already-operating wells. However, they can also raise this price to the level of not-yet-exploited oil, such as those reserves in the North Sea or Alaska, or today in fracking. For this purpose, it is only necessary to eliminate competition between oil countries with cheap oil. This principle served as the very basis of OPEC, which controlled a huge proportion of the world’s cheap oil. This was despite the fact that, with the exception of 1973, OPEC’s share in world oil production was never more than 50%. Indeed, after 1981, it was less than 40% (International Energy Agency 2019). The appropriation of rents requires political intervention in the market. Indeed, it might even necessitate international government cooperation in

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order to limit supply and price competition. This is best exemplified by international agreements on commodities. That said, the efficient use of rents for overcoming underdevelopment also requires political intervention. Incomes from rent should not be invested in the production line which generated rent. This would lead to increased production in this commodity. The inevitable result would be declining prices and declining sales. Rent can be a source of development. But it can only function as such if there exists an agency which can channel this additional income against the logic of the market. It must be directed into diversification for launching production processes for which there is not yet sufficient demand for profit creation. Correcting unequal specialisation and removing the economic basis for deteriorating terms of trade thus requires the mobilisation of rent for restructuring the economy. All development policy is, in effect, the politically mediated use of available rent (including development assistance, which ultimately comprises a political rent).

Note 1 Emmanual 1972 [1969] demonstrated the inability to develop the growth process on the basis of expanding consumption and growth-promoting specialisation. In his analysis, the South was hurt by lack of capital. However, this was shown to be irrelevant when the oil prices increased. Emmanual did not take into account the warning of Singer (1950). Cf. chapter 6, p. 154.

References Amin, Samir (1976): Unequal Development: An Essay on the Social Formation of Peripheral Capitalism. New York: Monthly Review Press. Elsenhans, Hartmut (1992): English Poor Law and Egalitarian Agrarian Reform in the Third World. In: Hartmut Elsenhans (ed.): Equality and Development. Dhaka: Center for Social Studies, pp. 130–162. Elsenhans, Hartmut (1997): The Relevance of the Principles of Keynesian Economics for the Transition to Capitalism in Today’s Underdeveloped World. In: Paul Davidson and Jan A. Kregel (eds.): Improving the Global Economy: Keynesianism and the Growth in Output and Employment. Cheltenham: Edward Elgar, pp. 283–303. Elsenhans, Hartmut (2004): Overcoming Rent by Using Rent: The Challenge of Development. In: Intervention 1 (1), pp. 87–115. Elsenhans, Hartmut (2021): Overcoming Marginality as Objective of the Struggle against Poverty. In: Hannes Warnecke (ed.): Development, Capitalism, and Rent: The Political Economy of Hartmut Elsenhans. New York: Palgrave-Macmillan, pp. 101–133. Emmanuel, Arghiri (1972): Unequal Exchange [1969]. London: New Left Books. International Energy Agency (2019): World Oil Production by Region 1971–2018. Vienna: International Energy Agency. https://www.iea.org/data-and-statistics/charts/world-oil -production-by-region-1971-2019. Lewis, William Arthur (1954): Economic Development with Unlimited Supply of Labour. In: Manchester School of Economic and Social Studies 33 (2), pp. 139–191.

116 Rent blocks capitalism Singer, Hans Wolfgang (1950): U.S. Foreign Investment in Underdeveloped Areas: The Distribution of Gains between Investing and Borrowing Countries. In: American Economic Review 40 (2), pp. 473–485. Vernon, Raymond (1966): International Investment and International Trade in the Product Cycle. In: Quarterly Journal of Economics 80 (2), pp. 190–207.

5

On the intelligent use of rent for overcoming underdevelopment

Summary The creation of capitalist mechanisms of development ultimately requires political intervention into the economy. Such intervention is based on the appropriation of rents and their allocation into appropriate lines of production. These are capable of satisfying increasing mass demand without inflationary pressures. The appropriation of rent creates classes which control these rents. These classes exist independently of market controls. They are thus free to indulge themselves and preserve their own privileges. State classes are more coherent in their direction than traditional oligarchies. Nonetheless, they ultimately fail to overcome underdevelopment. They also face increasing scarcity of financial resources due to their incessant self-privileging, and to developments on international raw materials markets. State classes are thus invariably replaced, or forced to shift to strategies of growth via export-oriented manufacturing. In stark contrast to the usual provisions of neoliberal thinking, exportoriented manufacturing constitutes a mobilisation of rent which allows for a devaluation of the national currency below purchasing power parity. Export-oriented manufacturing allows for efficiency to be combined with an extension of internal mass markets. However, it must be complemented by government-sponsored efforts to equalise local demand through income redistribution, or through land reforms and import substitution for local consumption, and for inputs in the emerging export industries.

Development as a combination of economic, cultural and political change: import-substituting industrialisation and economic and political modernisation In economic terms, rent is a free income. Those who appropriate it are only remotely bound by the rules of economic rationality. Capitalism exhibits no comparable mechanism. Capitalists earn profits because they invest efficiently. This determines the use of their surplus and leads to further growth.

DOI: 10.4324/9781003182511-5

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The use of rent for overcoming rent and underdevelopment requires political decisions on the part of the rent-appropriating class. Unfortunately, this class is under no obligation to make such decisions. In principle, there is a basic chasm between, on the one hand, the economic mechanisms which influence the efficient use of rent and, on the other, the political mechanisms which determine the behaviour of the rent-appropriating classes. Development strategies reflect choices among politically powerful forces. I distinguish here between two basic developmental strategies. The first comprises an internal market-oriented approach to industrialisation with strong state intervention and redistribution of income. In principle, such a strategy aims at increasing mass demand. It thus allows market mechanisms to promote and orient the productive apparatus to mass consumption goods and deployment of locally produced technologies. The second basic approach consists in export-oriented strategies. These can lead to rapid development of the internal market and local technical possibilities. This requires that outside market demand is complemented by state-governed promotion of local mass demand. It also necessitates the development of strategically important lines of production. These must be capable of deepening and proliferating the linkages between different production lines and enterprises. In this way, dependence on foreign markets and foreign technology is effectively reduced. The more that markets can play a role as, for example, redistributors of income along more egalitarian lines, or as export orienters, the more the role of the state is reduced. Conversely, the less prominent the role of dynamically expanding demand, the more important the role of the state. Development policies reflect dominant positions in economics as a discipline. An earlier generation shared the Keynesian scepticism about the capacity of markets to launch growth. This scepticism was to some extent accompanied by political approaches which underlined the idea of social justice with income redistribution, especially land reform (that is, redistribution of property rights in land). The successors to this generation were focused on economic liberalisation. A key development in their historical experience was the demise of really existing socialism, low efficiency of investment and increasing balance of trade deficits of state-oriented developing countries. Development policies face a dual challenge. There is a surplus of resources which can be invested, but there are only few incentives for private entrepreneurs to use them for this purpose. There is therefore the necessity of programming investment without control by the market. The goal of development policies should thus be to channel available resources into investment by means of government intervention. This must ultimately take the form of planning. In the past, overcoming underdevelopment has been seen as a matter of increasing financial resources available for investment and improving delivery of government administrations in planning. The necessity of dynamising the middle and upper class, in order to transform it into a reservoir of modern entrepreneurs, has also been emphasised.

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The first requirement was the increase of financial resources available for investment. External financial development assistance should contribute. Improving raw material prices are also a source. Both mechanisms were enshrined in the demand for a New International Economic Order, which was formulated in 1974. The principal authors of this demand were drawn from UNCTAD, an organisation under the strong influence of the most progressive developing countries grouped around the Non-Aligned Movement (founded in 1961). Second, there was a clear lack of skills in modern technologies and modern management. External assistance in the form of development workers was intended to help, because few privately owned Western businesses were prepared to take up the challenge. Local administrators had to be trained. Anglo-Saxon universities participated massively in research on and teaching of administrators. This was meant to serve to transmit Western attitudes to the newly forming elites of the Global South on an extensive scale. In fact, the ambition to create Westernised elites in the colonies was a major aim of the Western powers during the latter stages of imperialism. Development theory was confronted with the question of why the societies of the Global South had not been able to develop their own administratively competent elites. They did have the historical experience of the ancient empires. These were characterised by extensive bureaucratic apparatuses, such as line responsibility and the so-called scriptural process of management – that is, the keeping of files. Max Weber (1934 [1904–1905] argued that the basis of the West’s rational culture lay in the efficiency of the Protestant work ethic. Only this, Weber argued, could provide the social and cultural norms needed to keep bureaucrats on the path of rational decision-making in the face of patrimonial political systems. The rational behaviour of the newly created, Western-style modern bureaucracies was therefore considered an advance toward true modernity. They had the mission to modernise, to transform their still reluctant traditionbound home societies. Some commentators believed that their preponderant political influence favoured development. Others even deduced the necessity of developmental dictatorships orchestrated by Westernised elites. The military appeared here as the most rational institution, and a major element of a new, rising middle class in the Western style. For reasons of efficiency, and because the colonial powers had created “modern” armies, the military also appeared “Western”. Development theory was complemented by a political theory of modernisation with strong cultural undertones. The inculcation of Western values seemed to present a guarantee of economic growth. The focus on the military and administrative elites was justified with the argument about the absence of an entrepreneurial class. From a Western perspective, the existing multitude of small-scale entrepreneurs simply went unnoticed, for the most part. If it was perceived, then it was characterised as a mere “moral economy” – that is, an economy rooted in social-cultural (irrational) values. This seemingly debarred it from any meaningful innovation. The later

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discussion on the informal sector, which began in the early 1970s, constituted a total rejection of the purported absence of an entrepreneurial spirit. Any kind of discussion about changing macroeconomic structures and creating rising mass incomes as a condition for capitalist growth was conspicuous by its absence. Economic modernisation theory combined important elements of neoclassical growth theory (for example, that growth is dependent on capital accumulation) with a bastardised Keynesianism which restricted the role of government to support for investment. This model generally explained the lack of success of accumulation with reference to socio-cultural factors. The apparent problem was the disjunct between a gratifyingly Westernised elite on the one hand, and a disagreeably non-Western, precapitalist heritage on the other. This heritage lay in supposedly prevailing social practices of corruption and luxury. An early Keynesian variant of an economic theory of modernisation also insisted on raising the rate of growth of investment. This model explained the blockage of private investment not with reference to socio-cultural values, but through the distributional structures of underdeveloped economies. It took its origin from the very practical question of how to eliminate the dependency of Central East European countries on industrial imports. This had provided the basis of Nazi domination of Eastern Europe. The classical formulation was provided by Rosenstein-Rodan (1943). The points of departure of his analysis comprised a low level of industrialisation and a dependence of industrial goods consumption on imports. Given these factors, the income created by new isolated investment could not be expected to provoke investment in other production lines. Higher mass incomes could only result in additional imports. The aim was to ensure that the demand effects of a particular investment should contribute to dynamising production in other production lines. For this to occur, there had to be a temporal and spatial concentration of the various investments. The state had to launch simultaneous investments in a large variety of production lines. Only this would guarantee that building workers and shoe producers would buy the products of textile workers; that all of these workers would buy the products of an expanding food industry; and that food industry workers would buy shoes, textiles and housing. Such coordination had to be operationalised. At the theoretical level, coordination could take the form of balanced growth, achieved by a relatively centralised and efficient administration (Nurkse 1953: 23ff.). From a Western perspective, such conditions had obtained in the industrial successes of the Soviet Union, with its constant cycle of developmental plans. The hope connected to this approach was not shared by all, however (Hirschmann 1958: 65). The information required was too complex and too voluminous. Officials acted under conditions of considerable uncertainty, without the market guaranteeing adjustment through economic losses for those who had invested unwisely. It was not considered that investment had to be profitable in the immediate future, but it did have to be socially useful. Investment evaluation

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thus depended on expectations around hypothetical future prices. These prices depended on the fit of a particular investment project into an anticipated structure of production which, at best, were based on input–output tables. As a means of simulating profitability, shadow prices and shadow costs were attributed to products to be obtained and inputs to be applied. Such shadow prices increasingly depended on political targets – such as the contribution of products or processes to gender equality. They were thus very much subject to prevailing intellectual trends and ideological rules of thumb. A more detailed approach required that the future structure of the economy be designed and operationalised as production targets in different production lines. Household surveys differentiated by household income levels could allow for an evaluation of future demand in the case of rising mass incomes by different production lines. The demand in one particular production line for products of any other production line could be entered into an input–output table. This connected the different production lines within the input–output table of the projected future production and demand structure. The only historical attempt to achieve a consistent programme of investment had been in the late colonial phase of the Algerian War of Liberation. France tried to undercut popular support for the liberation movement through an economic and social promotion of the Algerian masses. This entailed massive financial transfers (Elsenhans 2000: 648–654). What remains from these attempts at central economic planning? We can of course point to the de facto obligation imposed on all underdeveloped countries by the multilateral development agencies to establish enlarged input–output tables. These are known as social accounting matrices. They show their expected developmental paths. In practical terms, all variants of economic and political modernisation theory converged in focusing on investment. These approaches have uniformly assumed that the creation of jobs and incomes through investment spending would provide the necessary expansion of internal markets. Cumulative industrialisation would be based on this expansion. This strategy was called import-substituting industrialisation. By referring to the experienced imports, substitution occurred in those production lines which were producing for the upper income strata. Beyond some basic products like textiles, narrow internal markets for prestige products led to inefficient production runs and high capital output ratios. Under such circumstances, there was no scope for availing of economies of scale. Small series production did not allow for an adoption of production in upstream component and investment goods manufacturing. There was a clear lack of local capacities for mass goods production. Timid social measures in order to hold down popular resistance continued to cause balance of trade deficits or inflationary pressures. High costs blocked exports of the newly created industrial sector. On balance import-substituting industries did not earn foreign exchange on the world market. Instead, they consumed foreign exchange because of necessary imports for equipment and even for inputs. Local inputs

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were often not adapted to the rather sophisticated imported technologies used in the prestige goods industries. The strategy of import substitution directly led to indebtedness. This was greatly deepened after the oil price crisis of the 1970s, and it led to the 1982 debt crisis of the Global South. Latin American countries were particularly hard hit. Western banks lent readily, because of their heightened petrodollarinduced liquidity. Petrodollars were funnelled from those Arab sheikhs who had been empowered during decolonisation. These sheikhs had been tasked with barring the Arab masses from access to oil, thereby ensuring the continuity of Western oil interests in the Global South. They had no available labour for their newly created industrial plants, and no internal mass markets to produce for. They wanted to save or invest their money abroad, preferably in the West. Furthermore, all raw material exporting countries dreamt of following OPEC, and started to spend lavishly on industrial investment without internal reforms and the launching of internal mass markets. The hope of raising raw material prices removed any reservations about indebtedness.

Land reform and its economic dynamics The alternative to this type of import-substituting industrialisation should have been policies for income redistribution. Land reform was an important issue from an early stage in this process. Many developing countries were home to radical national liberation movements, such as the Communist Parties in China and Vietnam. These movements mobilised the peasantry against moderate proWestern nationalist elites. The Western goal was to cut off peasant support for extremists at the roots. From the 1950s, the US strategy of fighting communism through nationalism has comprised the lynchpin of containing Soviet influence in the Global South. The Kennedy Alliance for Progress in Latin America was only the most glaring example of this approach. Land reform could have two goals. Egalitarian land reform could mobilise marginal labour. This is precisely what occurred in South Korea, Taiwan, mainland China or Vietnam. Following independent India, much milder redistributions of land occurred in most other countries of the Global South (assuming, of course, that land reform occurred at all). This led to the creation of a “middle peasantry” which presided over supposedly economically viable farms. This group was expected to engage in investment and to supply surpluses for industrialisation. These mild agrarian reforms were the result of large class coalitions which formed during the decolonisation process. These coalitions included the – often considerable – “national bourgeoisie”. These were frequently entrepreneurs in the technically modern sectors, as well as large-scale farmers. This was the predominant type of coalition in the anticolonial resistance movements of the Global South. They gave priority to national independence over social reform. The most typical example was the Indian Congress Party. The mild

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land reforms enacted by these coalitions established upper ceilings for land holding. Farmers were guaranteed sufficient revenues for additional investment in agricultural modernisation. Perilously low yields were attributed to the behaviour of feudal landlords. Social, cultural and political reasons purportedly explained the failure of these landlords to adequately use the already available factors of production, especially land. It is certainly true that yields were extremely low. Until the 1950s, they were around the same as the British yields of 1800. Per capita yields were also declining due to demographic growth. This was immensely troubling for the colonial powers and their ally, the USA. It threatened to compromise their drive for a peaceful decolonisation process toward a nationalist – but still proWestern – autonomy. Many decades ago, Georgescu-Roegen (1960) drew on the example of inter-war Romania to show that middle-sized firms tended to shed labour previously employed by the feudal lords. Over half a century later, his demonstration of the coexistence of marginality with rent remains convincing. If the landowner in a typical precapitalist patriarchal society has to compete on a market, he can no longer appropriate the rent element in the surplus, but has to accept price competition. He will no longer tolerate part of the surplus being affected to supporting marginal labour. In order to maximise surplus, landowners had to shed marginal labour. Egalitarian agrarian reforms aimed at maximising rural employment through an equitable distribution of land. Marginal labour was internalised on the farm and subsidised by the already productive, but rather limited number of hours of work on the owner-operated farm. Let us assume that the diagram (Chapter 4, p. 101) represents not only the national average of a rural economy, but also the typical farmer household. It seems reasonable to assume this, in the case of a fairly egalitarian distribution of land among farmer families. Consequently, even with its first hours of work, a farming household is highly productive, as shown in the diagram by point A1. However, this production does not suffice for the survival of the family. In order to survive, the farmer household has to mobilise any available additional worktime (assuming, of course, that there exist no alternative opportunities for earning a living). The farming household will therefore supply work time (beyond A3) which yields less additional product than the first hours of work. The additional product per work time is lower than its average product. The household works for additional hours which contribute less to its subsistence than to its cost in effort. This additional work time will be supplied as long as the economy is not yet developed enough to supply more productive jobs. This low yielding work time can be supplied by the farming household. After all, this household gets relatively high yields with its first hours of work. A rent produced in the first hours of work is channelled into the subsidy of the low yielding hours of work. Total agricultural production increases, but agricultural surplus may decrease. In order to improve production, rural households will make any effort to increase the yields of their fields and to engage

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worktime in small investment projects. These could include terracing, canal building, tree planting or stone clearing. Short-term increases of production may be low, with the result that this type of investment may appear to landowners as unprofitable. After redistribution of land, rural households may have no other possibility to fruitfully employ additional work time. The realisation of this type of investment is thus more probable. Rural work programmes in countries like India show that there is a large array of labour-intensive investment with no short-term profitability. Rural households will also order inputs and investment goods which they cannot produce themselves. The Green Revolution was not limited to large farms. In fact, it was rapidly enacted by small farmers. The example of large farms demonstrated that these new inputs and investment goods worked. That said, poorer households will not order equipment which replaces their work time, provided that they cannot use this displaced work time in other activities. This has an important implication for the price of labour in emerging industry. Rural households will offer labour whenever the marginal product in agriculture is lower than the wage which industry is ready to pay. Industry will offer labour something lower than the lifetime-adjusted subsistence wage (the cost of reproduction). This is the case in modern industry, but also in the informal sector (where they build their own enterprises). As female household members normally have lower productivity in heavy farm work, rural households will be particularly likely to provide female labour time. Younger females earn their current upkeep, but they do not earn the income normally designated to taking care of the elderly and children. They are marginal, earning less than they need for their cost of reproduction, but more than they need for their current upkeep. They reduce the burden on the farm. They can be therefore a very cheap labour power. This explains the feminisation of emerging industries. When income opportunities for the “surplus” agricultural population increase in the economy, this feminisation of industries decreases. Precisely this is what happened in China, Taiwan and Korea. Such migration may also occur in cases where the trickling down of rents allows for the generation of incomes in urban, mostly unproductive “services”. This stabilises the power of local “Big Men” in the cities and explains the weakness of democratic structures, even if there are elections. Demand among poor households is oriented to simple industrial products. These can be produced by small-scale enterprises of the type to be found in the so-called informal sector of industry. The new distribution of income with a decreased surplus of agriculture massively reduces the market for sophisticated products. The critique of import-substituting industrialisation has shown such products to be highly import-dependent. Based on available skills and available technologies, there is an expansion of the market for products of a market-driven sector, such as the informal sector. Such an increase of simple products presents the chance of improving production and technology. This

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sector follows a typical capitalist trajectory, provided that the demand for its products increases. Massive land redistribution is politically difficult. Urban propertied strata fear the possible hollowing out of property rights entailed by such a programme. These privileged groups thus normally ally with the better-off, more entrepreneurial farmers – Lenin’s “Kulaks”. Even in the event of the accession to power of leftist forces, the resistance of the middle peasantry has historically proven resolute, as the Bolsheviks and Chinese Communists discovered to their consternation. Success is normally related to political dominance of forces which are committed to the removal of market regulation. They typically preserve reformed agriculture from market regulation under the pretext of fighting capitalist exploitation. Peasants were forbidden to sell their surpluses on the market, and were instead compelled to supply them at low prices to state marketing organisations. This does not constitute an incentive for supplying low productivity labour. It is not a coincidence that, when the Chinese reform movement started to liberalise the Communist regime, it started with agriculture. Freely commercialised surpluses were permitted, provided that certain requirements had been met in terms of quotas sold to the state. Consequently, agricultural production in China massively increased. Land reform is no longer a prominent issue in most of the Global South, however. Leftist forces have declined; neoliberalism has triumphed. This owes mainly to the balance of payments crises triggered by inefficient import-substituting industrialisation. Whether or not land reform has actually occurred, however, is an important element in the success of export-oriented industrialisation. This also constitutes the mobilisation of a rent in favour of subsidising low productivity labour. Politically, redistribution takes less challenging forms. This also owes to the growth of productive forces. Some models here include direct support to families, such as the “Bolsa Família” in Brazil. We might also mention here programmes for guaranteeing minimum employment to the marginalised, such as the Mahatma Gandhi National Rural Employment Guarantee scheme, launched in India in 2005. With respect to the expansion of the internal market in the Global South, however, the impact of such programmes is generally negligible. They represent less than 1–2% of Gross Domestic Product (GDP) in the two most successful countries for this type of transfer, Brazil and India.

The political dimension of managing rent and the contradictions of rent-based state classes Neoliberal thinking holds that rent seeking is inimical to growth. It does so because it limits accumulation, which is considered essential to growth. Investing rent, however, may contribute more to growth than simply not appropriating it and allowing it to accrue to foreign customers. Underdeveloped countries claimed the rent from their raw material exports. This was the case with oil

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exports before 1945/1950. “Profit” sharing was introduced by US companies in their dealings with Venezuela in 1943–48, and by Anglo-Saxon companies in their dealings with Iran in 1953. Appropriating and channelling rent is inherently political. It requires an ultimately centralised political structure. I refer to those in charge of this system as a “state class”, and contrast this with what we understand as a capitalist class (Elsenhans 1992 [1977], 1996 [1981]). Members of state classes draw their income, influence and prestige from their position within the political system. This comprises formal state institutions and their transmission belts to society, such as state-controlled unions and state-dominated parties (one-party states, dominant party states with satellite parties, etc.). Within such a framework, economic efficiency is secondary. The position or prominence of specific individuals within the state class does not depend on the profitability of their undertakings. The capacity of their investment to generate funds through sales on competitive anonymous markets is not relevant to their status. This represents a historical opportunity for, as well as a danger to, development. Mass markets triggering capitalist growth have not yet been established. Consequently, investment for the demand out of capitalist markets with rising mass incomes is not yet profitable. In order to achieve such markets, investments in restructuring the productive apparatus must be undertaken. These are not immediately profitable. That said, there is no economic mechanism which guarantees that members of state classes will allocate scarce resources to strategies which efficiently transform their economies into capitalist ones. Such a mechanism would allow mass markets to take over the triggering of investment and innovation. The state classes control the bulk of economic surplus. On the basis of this surplus, they create relations of patronage with all other relevant social classes. This prevents these rival classes from articulating their own developmental projects. Purely electoral democracy can be tolerated, even if nominally “independent” political parties are permitted. The very notion of a state class stands in direct contravention to concepts such as state capitalism and state bourgeoisie. It is not only capitalists who appropriate economic surplus by lowering mass incomes. In fact, ruling classes in all class societies do so, whether or not they are capitalists. “State bourgeoisie” is a deliberately offensive term for rent-based but industrialising classes. In fact, the very term is contradictory: a bourgeois appropriates surplus on an anonymous market and, when investing, follows the goal of maximising the profit rate. State classes do neither. They use political instruments for appropriating surplus and politically determined decision-making procedures for allocating it. The beneficiaries are often unprofitable undertakings. These undertakings serve to restructure the economy by creating not-yet-profitable production lines. These production lines may well become profitable in a restructured economy. The terms “state capitalism” and “state bourgeoisie” fail to encapsulate the decisive weakness of rent-based classes: inefficiency. Being freed from the profit

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rate as an efficiency criterion, the state class may also use its resources for its own privilege (conspicuous consumption) and prestige projects (conspicuous production). We are dealing here with a fundamental incongruity between two sets of goals. On the one hand, the macropolitical goals to be followed in order to maintain stability of the rent-appropriating system. On the other hand, the micropolitical goals to be pursued by the members of rent-allocating agencies inside the system. At the apex of the political system, we might assume the goal of system stability. Under conditions of the impoverishment of the masses of the Global South, this may imply a priority for economic growth, including increased standards of living for politically important social groups. The impoverished poor may benefit from this. The likeliest beneficiaries, however, are the middle classes which emerge because of the skill requirements of the development process. These requirements exist in production and in management. The core of a state class will try to impose coherent investment targets drawn from a plan. This combines expected increases in production with attempts to convince relatively important social groups of the efficiency or legitimacy of the chosen growth path. The state class will surely mobilise all available political resources in order to accomplish this, including the colonisation of public space. It will also move to restrict political competition. This will be justified with reference to the theory that a strong state is needed in order to overcome underdevelopment. This very principle is a lynchpin of political modernisation theory, with its positive evaluation of the administrative elites and the military (this chapter, p. 119). At the micropolitical level, we can assume that the members of rent-allocating agencies want to maintain their position within the state class. For this, however, they must appear compliant with the declared objectives of the core of the state class. They must present themselves as efficient with respect to these targets, even if they are, in reality, struggling to meet them. Indeed, difficulties are inevitable. After all, the targets stated in plans and the means of achieving them are based on experiences drawn from more advanced economies. The overarching goal of the developmental process is to densify the web of inter-industry relations in order to achieve more autonomy from the world economy. In order to achieve growth, it is necessary to increase multiplier and accelerator effects. If units do not achieve projected targets, upstream and downstream activities will suffer. Localised non-achievement implies nonachievement of nominally efficient agents upstream or downstream. Obvious disjuncts between planned and realised targets lead to political discussions. Officials try to shift the blame to upstream and downstream partners, and to “unforeseen difficulties”. The limited knowledge of the central planning agency makes it highly likely that it has neglected the difficulties faced by local officials and therefore will have to accept their complaints. In fact, decentralised officials consciously contribute to the emergence of “unforeseen difficulties”. These officials draw their relative standing within

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the state class from a pervasive image of their efficiency. The efficiency of a class which attributes surplus on the basis of political processes is, of course, the result of political power/influence, financial resources, and prestige. Officials will therefore invariably try to increase the financial resources and size of the agencies they control. This can be accomplished if they are able to draw additional resources from the planning authority. They will try to increase the projects authorised under their control. In order to ensure that new projects are passed, they will minimise their costs and maximise the potential of their productive results. Heroic assumptions and projections will be cleverly integrated into the design of these projects. When results are not achieved, three mechanisms come into play. First, the centre of the state class further transfers resources; second, an external rent of an enterprise permits the overcoming of shortages through imports; third, the generalised emergence of non-achieved targets invites collusion among subordinate officials within the state class. If a project begins to visibly fail, the centre of the state class rarely has the option of shifting the task to another, competing unit. The sanction of merely allowing the ailing operation to fail completely is also rarely available; there is a considerable and justified fear of losing those resources already sunk in the enterprise. These cannot be simply written off by investors who rely on resources transferred from a state agency. Capitalists, however, will not consider sunk costs. After all, should the undertaking fail, these are lost in any case. But there are already other capitalists who want to enter the production line if it seems to be profitable. Capitalists will consider future incomes. In a capitalist system, the flexibility of the economy and its capacity to generate new investment goods means that bankruptcy of a single inefficient enterprise carries only a limited social cost. Indeed, it provides new opportunities for competitors and new sales for the local investment goods industry. In a developing country which industrialises on the basis of an external rent, however, the replacement of failed investments reduces the funds available for growth. In a capitalist economy, scrapping an unwise investment triggers new investment spending which creates profit. The rent-based character of the state-planned model of industrialisation, however, imparts undue bargaining power to inefficient elements within the state class. Unexpected inefficiencies create political practices within the state class which diminish the coherence of its action. The state class does not depend on profitability. Consequently, the coordinating mechanism of markets is weakened. Efficiency is not measured by the profit rate, but rather by the acceptance of explanations for inefficiencies within the state class. Any executive official at the middle and local levels of the state class is obviously uncomfortably aware of the fact that pre-programmed targets are not being achieved. These officials will thus explain their own failings with reference to a general climate of inefficiency. Buck-passing becomes common practice. Under such circumstances, the availability of information becomes a politically negotiated process. Indeed, the more restrained the free competition of

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political and social forces, the more negotiated becomes the process of information sharing. As noted above, the state class has an intense interest in colonising public space. In much the same way, officials are concerned to manipulate the public space. This is especially true of that quasi-public space which is typically restricted to communication within the state class itself. Alliances are important for these machinations. Decentralised officials will continuously try to enlarge the strength and the scope of their networks. Interagency alliances are necessary. On rare occasions, a homogeneous sector within the state class and the productive and political system becomes powerful enough to impose its view of inefficiencies on the rest of the apparatus. Allies in other sectors of the system are most helpful to such a settlement. Maintaining these alliances requires a spirited defence of the failures of allies, even if these failures are glaringly obvious. Political communication – indeed, any communication about economics – becomes politicised. Negotiations follow networks. A centre interested in increasing efficiency does not face individual officials; it faces networks. I refer to these networks within state classes as segments, because they are not limited to the formal agencies of the state; they reach out to all organisations which have some institutionalised power within the system. In 1980, the head of the Algerian ministry of heavy industries had his tentacles in all agencies of the state and in all legal mass organisations. He strongly opposed an extension of the small Algerian private sector. Similar conflicts characterised the Indian state class of the 1980s before the switch to an open economy. State classes may constitute themselves on the basis of a national development project. Such projects may, in their formative stages, be quite controversial. The state classes may return to a restructuring of the economy when the crisis becomes overwhelming. Precisely this was the case in the conflict between Deng Xiaoping and the Maoist Gang of Four. Such situations are beset by myriad conflicts. Leftist groups oppose moderates, agriculturalists oppose the promoters of industrialisation, promoters of the priority of investment struggle with those who underline the importance of the internal market. In the search for allies, segments will promote friends and marginalise segments which pursue alternative development paths. Such alternative segments tend to disappear when state classes become “old”, established and consolidated. In such older, more consolidated state classes, conflicts typically do not occur over priorities in the production system. Instead, they occur over power games between trans-agency networks. In the 2010s, for example, the Algerian president found himself in a confrontation with the director of the secret services without visible divergences on policies to be pursued. In fact, conflicts often do not reflect the rational coordination of different specialised parts of the productive system. It seems that similar conflicts are erupting today in the People’s Republic of China. The differences in economic strategy between President Xi Jinping and those he is suing for corruption are not immediately apparent.

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Increasingly, there are no longer opposing views on the development process within the state class. Rivalries concentrate more and more on particular, often personalistic interests. The state class loses its capacity to generate alternative options. Inefficiency-creating biases are encapsulated in a hollow ideological discourse. These inefficiencies weaken the state classes’ capacity to interact with society and the economy. This would normally be expected to increase and correct official information. On the contrary, the segments of state classes tend to deform data in order to draw financial resources. They do so in order to explain failures. They protect themselves from possible reproach from competing segments by deliberately subduing the flow of information. An atmosphere of conspiratorial secrecy develops. The core of the state class is regularly deprived of accurate information on the political and economic situation. This is not necessarily because the lower levels of the state class withhold information; but rather because they actively manipulate it. Everybody tries to conceal information pertaining to their own problems by producing wrong information, while simultaneously trying to acquire information on everybody else’s problems. The core of the state class usually occupies the planning ministries and other politically powerful institutions. In these centres of power, officials often develop rules of thumb for interpreting what they well known to be falsified data from subordinate agencies. Over time, inefficiencies reduce the availability of rent in relation to tasks and demands. The state class normally reacts to the greater visibility of its inefficiencies by spoon-feeding the politically most dangerous groups in society. It increases the privileges of some elements of middle strata which emerge in the developmental process. At the beginning of this process, there may well have been a basic orientation toward the needs of the masses. This may have been evident in programmes of land reform or redistribution of income. Over time, however, these impulses are thoroughly thwarted by the necessity to pacify the middle strata through spending. Such processes need the fuel of an external rent in order to compensate for unachieved targets. Accelerating inefficiencies lead to the exhaustion of available resources. Capitalism is threatened by the exhaustion of demand. In principle, this can always be met by redistribution. After all, the system is never short of money (Chapter 2, p. 37), and provided there is unemployed labour, no risk of inflation exists. By contrast, rent-based systems are threatened by shortages of financial resources, especially the exhaustion or rent. The attitudes which generate inefficiencies in rent-based systems may have their origins in the traditional culture. After all, most precapitalist systems were rent-based. The ancient empires provide only the most glaring historical examples. But the same information inefficiencies have been observed in the centrally planned economies of the Soviet bloc, including East Germany. These attitudes emerge through dominant constellations of economic and political interests and not through culture.

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State development policy fails to efficiently use economic resources because of dominant political structures. These emerge by necessity on the basis of the configuration of officials’ micropolitical and macroeconomic predicaments. They do so because political tendencies within the state class rarely lead to the adoption of the principle of increasing mass incomes in order to exploit growth opportunities. The explanation of growth as resulting from accumulation of investment makes any increase in mass consumption appear as pure waste. This should be repressed, where politically feasible. Such a system may culminate in the decomposition of the existing state class into much more independent groups: oligarchs. These groups and individuals protect property rights in order to safeguard their access to their own rentgenerating assets. In the case of severe balance of payments problems, the issue may be a shift to export-oriented industrialisation. In international conflict, the kind of rent-based system described above will always be dominated by, and become dependent on, capitalist systems. This is due to capitalism’s superior innovativeness. However, capitalists tolerate rent appropriation, because it leads to rising demand in the world economy. This mirrors grudging capitalist toleration of rising wages in capitalist countries. How is it possible to limit inefficiency of rent allocation by optimising market regulation? How can this be achieved while, at the same time, providing the political structures necessary for increasing mass incomes before capitalist full employment equilibrium has been achieved? The solution here lies in external demand substituting for lack of internal demand. The condition is comparative advantage in products with expanding markets.

The successful marrying of rent allocation and export-oriented manufacturing From 1973, the majority of developing countries interpreted the success of OPEC’s price rise strategies as a victory for the demand for economic decolonisation voiced already at the Bandung conference of the non-aligned countries in 1955. States, it seemed, had acquired “permanent sovereignty” over natural resources. For other raw material-exporting countries, the oil price crisis indicated that, in the future, they might also be in a position to impose rising prices for their exports to the level of substitutes to be produced in the rich, industrialised world. They even hoped that this might be possible with the economic support of the oil-producing countries. Few recognised that the closest allies of the USA stood at the forefront of OPEC price rises. Such ambitions had originally been launched by Arab and Iranian secular nationalists in the 1950s. Increasing competition by the emergence of new, non-cartelised Western oil companies created the danger that Western Europe and Japan would enjoy access to increasingly cheap oil outside the control of the “Seven Sisters”, the great, US-dominated oil companies. The USA was confronted with a choice between, on the one hand, politically secure but expensive American oil or, on the other, increasing dependence on

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politically precarious Middle Eastern oil. By inciting the oil-exporting countries – and particularly the most conservative among them – to raise oil prices, the USA achieved two goals. First, the USA and her capitalist competitors were placed on an equal energy price; second, the USA’s allies in the Global South were supplied with funds on which economic growth could be based. The additional rent could be used to promote political Islam in order to fight the secular nationalists and godless Marxists of the Muslim world. Attempts were made to intensify earning increases on other raw materials. However, the USA successfully thwarted these efforts. US markets for manufactured goods remained largely inaccessible to countries which unwisely increased the prices of their raw materials, either independently or in collusion with others. The fall of the Berlin Wall and the disappearance of the Soviet Union eliminated the USA’s most credible rival for dominance of the Global South. Consequently, any constraints on the delocalisation of raw material production to the South were removed. The exception here was of course oil, which continued to be a strategic commodity. In other raw materials, high-cost producers in the West stopped production. Beyond the energy sector, raw material rents were limited to cost differentials between different raw material exporters in the Global South. Rents based on alternative costs of production in the West or on consumer rents in the case of highly price inelastic products disappeared. An indebted South suffering from the disappearance of raw material rents had only one option left. This lay in the pursuit of strategies already adopted by other raw material-poor countries with special ties to the USA. The way was shown by the so-called East Asian “Tiger Economies” of South Korea, Taiwan and the city states Hong Kong and Singapore. Whatever their level of development, most of these countries had to have comparative advantage in manufactured products. Quite simply, they did not possess raw materials which sold well. The shift to export-oriented manufacturing was accompanied by the rise of neoliberal economics. This was most marked in the Washington consensus (1990). The crisis of the (indebted) East European centrally planned economies and the fall of the Berlin Wall (1989) cast this consensus in a most favourable light. The shift to export-oriented manufacturing was ideologically legitimised by the rejection of state intervention into the economy. This only proved successful, however, when neoliberal recipes were first selectively applied, but then actively ignored. Over the last four decades, export production of manufactured goods has become the major domain of economic growth, far beyond raw materials (Table 5.1). The share of raw materials in total exports was massively reduced despite stillincreasing values from 1960 (55%) to 2019 (12%). The share of manufactured exports increased especially during the 1980s, when state-led industrialisation policies were slowly abandoned and China opted for export-oriented industrialisation. The rather low-skill category of “other manufactures” doubled its

29.9 25.6 28.8 1.1 12.6 0.7

1960 25.2 18.5 33.0 1.6 19.4 2.5

1970 10.6 6.4 60.3 1.0 15.0 4.8

1980 10.5 6.5 24.6 4.4 32.4 19.6

1990 6.8 4.3 19.6 5.3 26.7 35.1 29.8

25.6

2000

9.9 6.5 15.2 5.6 30.4 29.5

1995

28.8

6.1 4.9 22.1 6.3 2.38 33.4

2005

29.2

6.8 5.8 21.1 6.9 22.0 33.9

2010

31.2

7.4 4.6 13.9 7.3 25.4 37.4

2015

32.2

7.2 5.0 15.7 7.9 22.7 37.9

2018

31.9

7.5 4.9 14.3 7.7 24.0 37.8

2019

1

1960–1990 UN Monthly Bulletin of Statics, various issues, 1995–2019 UNCTAD. http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_Chose nLang=en 2 From 1995 without SITC 67 and 68

Food (0+1) Primary products (2+4+67+68) Fuel ( 3) Chemical products (5) Other manufactures (6+8)2 Machinery and transport equipment High skill and technologyintensive products

Total = 100%

Table 5.1 Share of different product categories in % of total exports of the developing countries (SITC and UNCTAD groupings)1

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share from 1960 to 2019. However, the products to be attributed to low-skill labour-intensive production already reached its highest share in 1990. This share fell because the manufactured goods exporting developing countries succeeded in placing themselves on the market for technically more demanding products of the category “machinery and transport equipment”, which obviously comprises the rise of the automotive industry in the Global South. This industry rose from a nearly insignificant share in exports in 1960 to one-third of total exports of the Global South in the 2010s. Since 1990 overall exports increased by factor 11, raw materials only by factor eight, but manufactured exports increased by factor 14, especially through the export of machinery and transport equipment, which rose by factor 21 (1990–2019). Export-oriented industrialisation was characterised not only by growth, but massive increase in technical competence. This is also shown by the high share of high-technology products in the export mix since 1995, when the category was documented. The transformation of new comparative advantage in manufacturing into cost competitiveness was apparently triggered by low real wages in the Global South. Left-wing critics of the new market orientation of these economies spoke of intensified exploitation of the South. Wages in export manufacturing were found to be less than one-twentieth and sometimes one-fiftieth of corresponding wages in the West. But the transformation of new comparative advantage into cost competitiveness was not due to immiseration. It was achieved by the intelligent mobilisation of rent and the success of the Green Revolution. This was especially the case in the rice-producing economies of East, South and Southeast Asia. Real wages in the export industries of the Global South are difficult to measure. However, available measurements show that real wages were about one-six to one-seventh of corresponding wages in the West. This relationship was, in fact, not far removed from comparable differences in the late nineteenth century between the British textile workers and those of the Mumbai region. The new competitiveness of the South was not due to decreasing real wages of labour; it was due to the new capacities for devaluation in many economies of the Global South. Except for the oil countries, per capita incomes in practically all countries of the Global South are multiples of per capita incomes as measured by monetary incomes expressed at the official rate of the currency exchange. Incomes at purchasing power parity are therefore much higher than their purchasing power on the world market (in 2018, from 2 to 3 in the case of sub-Saharan Africa; in the case of low-income countries, from 3 to 7). Income-specific calculations of purchasing power among poor households would provide still-higher multiples of real incomes in relation to incomes measured by the exchange rate. In dollars, labour can be very cheap, provided that it does not depend for its subsistence on the world market and the prices which obtain there. At a rate of devaluation below purchasing power parity, dollars earned in exports may well

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be extremely low. They might not suffice for purchasing the subsistence goods for additional labour employed in export manufacturing. The most important single item purchased by workers paid near subsistence levels is food. This swallows up about 40–50% of income. According to official records, China shows poor households (39% of all households) spending 47% on food and beverages against 36% in the case of average households. The corresponding values for India show the lowest income households (84% of all households) spend 51% of their incomes on food and beverages as compared to average households spending 45% on food and beverages (World Bank 2020). Food spending is followed by simple industrial products. These include textiles, housing (with a low import share) and household equipment. They also include more complex products, such as refrigerators, TV sets and cellphones. These modern products are all manufactured in the Global South. In some cases, they are even produced competitively, as is the case with many electronic devices. A food surplus is the most problematic phenomenon. From 1970 to 2010, the Green Revolution allowed for agricultural yields to be multiplied in lowincome countries such as India and China by more than a factor of 2. Even prior to this revolution, most successful export-oriented industrialising economies had been food surplus countries like Taiwan, South Korea, China and Vietnam. The city states of Hong Kong and Singapore were located close to agricultural surplus regions. Sub-Saharan Africa and the Arab world are food-dependent. Export-oriented manufacturing has been adopted by economies where the Green Revolution was successful. But it has not been adopted by the much poorer regions of sub-Saharan Africa. Real incomes are irrelevant to the price of labour on the world market. More critical is the capacity to accept devaluation on the basis of the efficiency of local mass consumption goods production. The locally produced food surplus feeds additional workers in the informal sector who produce simple industrial products. It also feeds workers in modern industrial sectors which produce some consumption goods and even some equipment required in large production processes. An essential condition for devaluation-driven exports is that local food producers are prevented from exporting their surpluses because of transport costs or administrative regulations. Under such conditions, their only possibility to earn money consists in selling it locally. If world market prices are higher, they forego an earning they otherwise would have been able to acquire. The low cost of subsistence for the local consumer is preserved. In turn, the international (dollar) price of local labour is lowered. This constitutes a subsidy for export workers in comparison to perfect specialisation with exports of the food surplus at high prices on the world market. This is basically commensurate to taxing successful food exports and channelling the money into subsidies for manufacturing exports production. The macroeconomic effects are comparable to an oil country’s taxing oil exports for subsidising industrial development

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programmes. In case of devaluation-driven exports, however, the administrative efficiency is much higher (low corruption). In principle, the local costs of additional export workers, food and simple industrial products can all be absorbed by an expanding agriculture and a vigorous informal sector. Some modern industries benefiting from economies of scale also contribute here. In principle, prices of exported products can then decrease to the amount of international currency needed for the import of inputs in export manufacturing. This strategy can be deepened. The condition is that the import content of exports be reduced. Alternatively, productivity in new production lines must be increased so that comparative advantage is expanded to a wider range of products, and transformed more easily into cost efficiency at acceptable rates of devaluation. Export-oriented industrialisation is thus accompanied by a state drive for industrialisation in import-substituting and export-oriented production lines.

Pragmatism instead of theoretical orthodoxy There are three pathways for deepening industrialisation in underdeveloped economies. These are: • • •

The rise of internal market-oriented industries for mass consumption goods The substitution of hitherto imported inputs Government promotion of new export production lines

The latter two require government industrial promotion policies; the first needs government support for “inclusive” development. Foremost among such developments are rising mass incomes, enhanced equality and the wise use of rents. The concentration of additional demand on the lower bracket of incomes implies flushing demand for those industries where entry is easiest because technologies are not sophisticated. If they are sophisticated due to Western imports, they can be replaced or locally adapted by less sophisticated technologies, especially at realistic exchange rates. Economies of scale favour such adjustments. The improvement of locally available technologies is enacted by a dynamic sector of small- and middle-scale industries. For broad sections of the industrial sector, the capitalist mechanism of rising mass demand can be used without much state intervention. State intervention can be reduced and the scarce resource of administrative staff can be saved. The weight of the state class is thereby diminished. Devaluation is costly. It may imply the loss of foreign exchange, because it may be difficult to tax already competitive production lines efficiently. Price elasticities of those manufactured export products which are rapidly competitive may be low with saturation tendencies on the world market. In the

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export industry, expanding exports based on continued devaluation may lead to decreasing export earnings per worker. Without massive further devaluation, new production lines with comparative advantage will still be too costly to become competitive. Export-oriented manufacturing countries thus try to reduce the import content of their exports and to promote new promising export production lines by government-induced industrial policies. When exports grow and benefit from economies of scale, inputs can be produced locally. These include technologies required for the export branches. Locally produced, initially more expensive inputs can be imposed on the already competitive export branches with low losses. Additional losses in quantities exported through rising prices may be low. This is provided that price elasticities of the respective export lines are already low due to saturation in the world market. In the early 1980s, for example, South Korea faced declining prices for its textiles. Consequently, the government blocked the import of textile machinery. Korean textile exporters were forced to turn to their suppliers of spare parts and ask them to produce entire machines. Naturally, they copied the machines that were already present. The costs were of course higher than previously imported machinery. However, the reduction of sales due to higher prices in international currencies was limited. Similarly, Singapore has taxed low-skill export lines and subsidised training programmes in order to make higher-skill labour available. This has also facilitated a shift into technically more demanding production lines. Local content rules have the same effect. The exporter has to use part of his export earnings for buying more expensive local inputs. Exporters will do so provided that the average profit rate they would achieve elsewhere is respected. Rents due to especially low production costs are thus channelled into economic diversification. Local content rules are no longer permitted by the World Trade Organization (WTO). However, increasing devaluation and taxing exports have the same result as local content rules. These are not forbidden, because neoliberal economists simply cannot conceive of the idea that a country could reduce its export capabilities by taxing exports. The People’s Republic of China is an example of precisely such an arrangement. Foreign investors are treated very liberally with respect to the transfer of profits to their headquarters. However, they are expected to contribute to the training of local labour and the transfer of technology. Multinational enterprises have a relatively short-term perspective in maximising returns. They are therefore interested in liberal transfer rules. China is not particularly interested in short-term earnings. It has enough Western currency due to its continuous balance of trade surpluses. China is, however, interested in the long-term transfer of technologies. The multinational enterprise always expects that, in the short term, its technology will become outdated. China considers this soon-to-be-outdated technology as the springboard on which labour can be trained. Trained labour can better learn new technologies. In this way, China can make considerable strides in technological advancement.

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Making some advances in mastering technologies is interesting. The pattern of specialisation is, initially, in low-technology industrial products. But this may create skills which play a role in modifying patterns of specialisation. Turning a farmer into a textile plant worker is much more difficult than turning a textile worker into an electronics plant worker. Specialising on initially low technology products, such as textiles, has allowed for the later acquisition of comparative advantage in high-technology products. In relation to the industrialised West, relative productivities in the Global South are not lowest in labour-intensive products. In fact, capital-intensive technologies are frequently managed at the same level in underdeveloped countries as in industrial countries. Technologies which can be learned from manuals may be easily transferable. Conversely, technologies based on the acquisition of skills and experience among the operating worker require much more training. The latter may be relatively costly in an underdeveloped economy. But the knowledge revolution has an impact here. It leads to an increase in the share of technical knowledge represented in textbook form. An expert reader can rather easily understand and apply this knowledge. Let us reformulate our example on specialisation according to comparative advantage. Assume that there are two technologies. One of these requires extensive training in metalworking, such as machine building. The second can be learned by any student who has passed a degree in computer programming. The relevant geographical areas are East Asia and Germany (Table 5.2). Germany is superior in both technologies. But German superiority is greater in the old technologies based on training skilled workers. Germany is compelled to specialise in the older technology, machine building, and to give up computer programming. This is despite the fact that computer programming promises higher prospective growth rates (Chapter 5). In fact, precisely this is happening today. Asia is increasing its share in the new high-technology branches linked to digitalisation. German shares are decreasing. The European Union and the USA are losing ground in the most modern technologies (Elsenhans 2021). Latecomers overtaking established economies is a recurring theme in the history of capitalism. We come to it when we discuss patterns of globalisation (Chapter 6, p. 149). The new competitiveness of the Global South is based on its capacity for devaluation. The South is able to replace well-paid jobs in the West with less well-paid jobs on the basis of devalued exchange rates.

Table 5.2 Production per 100 hours worked in East Asia and Germany

Based on book learning, computer programming Based on training, machine building

East Asia

Germany

100 100

130 160

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If marginality in the export-oriented countries of the South is overcome, then this process will sustain itself. It will ultimately entail a successful transition to capitalism. If marginality is overcome, the rules of standard theory of specialisation and foreign trade apply. In order to transform the global international system into a capitalist system with empowerment of labour, unemployment in the marginality-ridden economies has to be reduced. The higher the multiplier effects of manufactured exports, the higher will be the positive effect of increasing such exports. These multiplier effects depend on the position of labour on the labour market. Additional exports imply increasing demand for labour. Additional income for export workers increases demand for the aforementioned locally produced goods. If labour can negotiate even only slightly rising incomes, the demand for locally producible goods increases beyond the number of workers. If a land reform has been realised, peasants constitute an additional market for these locally producible popular goods. Changing terms of trade between local agriculture and local industry favour local agriculture, expand the internal market for locally producible goods and contribute to higher multipliers. It is therefore understandable that those economies that perform best in the absorption of shed labour are precisely those which reformed their agricultural sectors. In this way, they created minimum incomes for the non-marginal labour force on the farms. Scarcity of labour has important political consequences. When workers know that their time is required for reaching surplus production targets, they no longer fear the prospect of being shed. This is how they discover that they have bargaining power. In the 1980s, the South Korean trade union movement was able to assert itself politically (through a worker and student rebellion in Gwangju). A similar (if less spectacular) process took place in Taiwan. It has been occurring over the last two decades in the People’s Republic of China, irrespective of what the Communist Party tries to implement locally. Official state unions are advised to avoid direct confrontation with local grassroots organisations as long as these do not openly challenge the political role of the Communist Party. A dynamic develops which is not dissimilar to the class struggles which facilitated European growth from the second half of the nineteenth century. Labour increasingly comes to share in the fruits of technical progress. Moreover, labour’s struggles lead to a democratisation of the political system, because the conditions for the class struggle must be created. It is immaterial whether or not nationalism and political traditions constitute obstacles to these processes. This relation between a reformed agriculture and export-oriented manufacturing explains the similar trajectories of countries which apparently have little in common with each other. Not much else, after all, characterises both South Korea and Taiwan on the one side, and mainland China and Vietnam on the other. The issue here is not the (admittedly disastrous) deformation and exploitation of the periphery by capitalism. More important is the weakness of capitalist

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expansion to the Global South. This is thwarted by marginality. It is also hampered by the implied obstacles to scarcity of labour in the process of capitalist penetration and additional export possibilities for local enterprises. This is an illustration of the central argument of this book: that capitalism needs empowerment of labour. Marginal labour must be absorbed. For this to happen, labour has to be empowered in order to create local mass markets. The implied increase in real mass incomes does not obstruct international competitiveness. After all, this depends on the exchange rate and not on the local real wage. This basically entails the transfer of capitalism to the Global South. Capitalism here refers to a structure in which labour is empowered and able to impose wage increases in line with average productivity increases (more on this in Chapter 2). When this goal is achieved, export-oriented manufacturing no longer depends on rents and devaluation. Devaluation has the obvious limit of the availability of a surplus of mass consumption goods, especially food. However, it also has a second limit. A devalued currency allows export-oriented producers to achieve higher earnings on the world market than internal market-oriented producers can earn on the local market. If high levels of employment are reached, they can hire scarce labour only by offering higher wages than internal market-oriented entrepreneurs can pay. Prices of labour increase. Germany in the 1960s and Japan in the 1970s provide examples of imported inflation caused by undervalued exchange rates. They had to accept appreciation of their currencies. In the German case, this occurred in the face of strong opposition from German industries. The success of development policy depends on several factors which must be intelligently combined. The first comprises redistribution of incomes (perhaps through land reform). The second consists in import-substituting industrialisation, as in the case of reducing the import contents of exports and providing additional wage goods for expanding an export-oriented working class. The third necessity lies in devaluation-driven exports. Export-oriented industrialisation allows for the transformation of rent into a subsidy for industry by exchange rates below purchasing parity. This is achieved without the overexpansion of a corruption-prone and mostly inefficient state sector. This trajectory does not lead to the elimination of capitalism by some sort of association-based socialism. In fact, it will result in the transfer of (welfarist) capitalism to the Global South. When labour is empowered, the goal has been reached.

References Elsenhans, Hartmut (1992): The Position of the State-Class/State Bourgeoisie in Underdeveloped Countries Between Privileging and the Compulsion to Legitimize. In: Hartmut Elsenhans (ed.): Equality and Development. Dhaka: Center for Social Studies, pp. 163–185.

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Elsenhans, Hartmut (1996): State, Class and Development [1981]. New Delhi: Radiant. Elsenhans, Hartmut (2000): La guerre d’Algérie 1954–1962. La transition d’une France à une autre. Le passage de la IV à la Ve République. Paris: Publisud. Elsenhans, Hartmut (2020): European Integration at the Crossroads. In: Cultural WorldKul'tura Mira 8 (22), pp. 37–66, 8 (23) pp. 157–180, 8 (24), pp. 270–306. Georgescu-Roegen, Nicholas (1960): Economic Theory and Agrarian Economics. In: Oxford Economic Papers 12 (1), pp. 1–40. Hirschman, Albert O. (1958): The Strategy of Economic Development. New Haven, CT: Yale University Press. Nurkse, Ragnar (1953): Problems of Capital Formation in Underdeveloped Countries. New York: Oxford University Press. Rosenstein-Rodan, P. N. (1943): Problems of Industrialization of Eastern and Southeastern Europe. In: Economic Journal 53 (210/211), pp. 202–211. Weber, Max (1934): Die protestantische Ethik und der Geist des Kapitalismus [1904–1905]. Tübingen: J.C.B. Mohr. World Bank (2020): Global Consumption Data Base. Washington: World Bank. http://dat atopics.worldbank.org/consumption/country/India.

6

The globalisation of an underconsumptionist threat and the emergence of a doomsday scenario of globalisation1

Summary Globalisation does not automatically lead to the transfer of capitalist structures to the rent-dominated, non-capitalist Global South. In this region, empowerment of labour occurs only to a limited degree. Marginality is too marked, and the impact of transborder flows on the elimination of marginality is too negligible. The second wave of globalisation is based on the new competitiveness in price and income elastic products of internationally cheap labour in the Global South. Labour here is cheap because of the capacity to devalue local currencies below purchasing power parity in the wake of self-sufficiency in strategically important wage goods, such as food. In comparing nineteenth century with contemporary globalisation, I contrast a benign with a doomsday model of globalisation. I show that, in both cases, the decisive variable is not the intensity or degree of transborder flows. Classical theories of imperialism, such as those developed by Lenin or Luxemburg, have no explanatory power here. There is no conflict over surplus; the conflict is over demand. A global underconsumptionist crisis is looming today. Productivity increases more rapidly than production: by necessity, unemployment also increases. Labour in the South remains disempowered. At the same time, the empowerment of labour in the industrial West is eroded. The Global South exports its social structure to the West. Global capitalism is threatened. Globalisation and its contradictions affirm the argument that capitalism does not depend on the availability of surplus or low wages. It depends on rising mass incomes. The critique of contemporary capitalism has come to focus on the phenomenon of globalisation. This term describes the increasing transnational crossborder flow of goods, services, long and short-term capital. It also encapsulates other, predominantly social and cultural interactions, such as communication, I do not deal with here. DOI: 10.4324/9781003182511-6

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In the nineteenth century benign model, advances in productivity do not undermine the innovative capacity of weaker economies. Such advances allow these economies to maintain high levels of effective demand. A possible overturning of the leading by the lagging behind economy has little effect on the maintenance of world effective demand. In a doomsday model, however, catching up economies may overtake leading economies, even if the leading economy is more productive than the catching up economy in frontier technologies. However, catching up economies may not achieve high levels of employment. Consequently, they may not contribute to effective demand in line with their increases in production and productivity. The participation of marginality-ridden economies in price and income elastic world market products leads to an increase in production. This increase is not matched by a parallel participation of these economies in global consumption. The new competitiveness is based on the capacity to devalue the currency, and not primarily on low real wages. The additional income earnings of the catching up economies are lower than the previous incomes paid out in more developed countries, which these exports replace. This replacement of internationally expensive labour by internationally inexpensive labour has the same consequences as any increase in productivity. In order to maintain a balance at the macroeconomic level, world consumption must increase (Elsenhans 1981). Marginality-ridden economies have successfully pursued strategies of export-oriented manufacturing. These strategies are based on the low international prices of labour in these economies, and hence on their low contribution to world consumption. Increases in local mass consumption due to production increases in the local wage goods production do not contribute to international consumption. The previously leading economies react by attempting to preserve jobs, which they do through wage restraint. This only facilitates further underconsumption (Elsenhans 2002). In this way, underconsumptionist tendencies become predominant and undermine the creation of investment possibilities. These are a key capitalist mechanism because of their capacity to increase mass demand. Productivity increases more rapidly than production: by necessity, unemployment also increases. Globalisation and its contradictions affirm the argument that capitalism does not depend on the availability of surplus or low wages. It depends on rising mass incomes.

Some fgures on globalisation The figures presented in Table 6.1 show a tremendous increase in global exports, far exceeding the increase in global Gross Domestic Product (GDP). The relation between global exports and global GDP rose from 14.8% in 1990 to 21.6% in 2019 (line 12). This trend was perceptible on the global level, as well as among developing economies (line 13). Also evident is a deceleration of the growth of world GDP after 2005. This deceleration did not occur among the developing economies. On the

11

10

9

8

1 2 3 4 5 6 7

Economy World GDP DevEco GDP World Exports DevEco exports World inward FDI DevEco inward FDI World stock of inward FDI in relation to world GDP, % DevEco inward FDI in relation to DevEco GDP, % Share of DevEco in world GDP, % Share of DevEco in world trade, % Share of DevEco in world inward FDI, %

Year

42.01

29.33

22.61

12.61

12.37 2.80 2.00 0.59 0.70 0.29 5.67

1980

37.54

20.56

20.56

13.72

13.57 2.79 1.93 0.49 0.99 0.37 7.27

1985

23.17

22.84

17.57

21.12

22.97 4.04 3.39 0.77 2.20 0.51 9.56

1990

23.64

27.96

19.74

23.50

31.13 6.14 5.12 1.43 3.56 0.84 11.45

1995

Table 6.1 Some indicators of the globalisation of the real economy1

20.95

32.02

21.77

27.74

33.62 7.32 6.38 2.04 7.38 1.55 21.94

2000

23.20

36.24

23.70

29.16

47.61 11.28 10.46 3.79 11.43 2.65 24.01

2005

30.55

42.02

33.14

31.29

66.23 21.95 15.25 6.41 19.92 6.09 30.08

2010

32.14

44.81

39.13

31.93

74.88 29.30 16.52 7.40 26.58 8.54 35.49

2015

32.28

44.50

39.66

31.29

85.69 33.99 19.46 8.66 32.94 10.63 38.44

2018

31.02

44.44

40.40

31.93

87.69 35.43 18.92 8.41 36.47 11.31 41.59

2019

144 The globalisation of underconsumption

14.25 17.72

16.17

20.98

19.19

14.76 23.31

16.45 27.91

18.98 33.58

21.96 29.20

23.03 25.27

22.07 25.47

22.70 23.74

21.58

1

1960–1990 UN Monthly Bulletin of Statics, various issues, 1995–2019 UNCTAD. http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ ChosenLang=en https://databank.worldbank.org/reports.aspx?source=world-development-indicators DevEco = Developing economies FDI = Foreign direct investment US dollars at current prices in trillions if not otherwise specified

12 World share exports in GDP, % 13 DevEco share exports in GDP, %

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146 The globalisation of underconsumption

contrary, their share of world GDP increased from 17.6% in 1990 to 40% in 2019 (line 9). This increase was more than the increase of their share of world trade (line 9). Exports from developing economies expanded more rapidly than global exports. Developing economies’ share in world exports increased from 23% in 1990 to 44% in 2019 (line 10). That said, the relation between developing economies’ exports and developing economies’ GDP remained relatively constant (line 13). Increases were lower than the increase of the corresponding relation between exports and GDP on the global level (line 12). The expansion of exports was thus particularly relevant for the non-developing world, especially the industrialised economies of the capitalist West. In 1980, the higher values among developing economies’ share in world exports were almost exclusively the result of high oil prices. The lowering of this share since 1980 has resulted from a decline in rent appropriation of raw material, especially oil exporting countries. Foreign direct investment has increased massively, from 5.7% of world GDP in 1980 to 41.6% in 2019 (line 7). However, there has been a less marked growth in foreign direct investment received by the developing economies. For these economies, the relation of received direct foreign investment to gross national product is much lower than the world average (line 8). It is thus fair to assume that the tremendous catchup of the developing world is not based exclusively on rising exports and rising foreign direct investment. In fact, additional exports have attracted foreign direct investment in export-oriented industries. Both of these phenomena have triggered growth impulses via multiplier effects. The empirical evidence does not support the idea that globalisation per se constitutes a threat to further growth. There has certainly been a higher growth of trade and GDP in the developing world in comparison to global averages. But this merely demonstrates the higher capacity of the developing world to benefit from global growth impulses (lines 1, 2, 3, 4). There are two possible explanations for this. Perhaps, despite existing backlogs in technology, the Global South benefits from existing demand at the world level to the detriment of the capitalist centre. Alternatively, it could be that the developed economies were unable to create the dynamics which allow for parallel growth in their own markets. Developing economies, of course, have low international labour costs. The transfer of production to such economies cheapens the resulting products. According to standard neoclassical theory, this should increase the scope of distribution in the leading capitalist economies. In turn, this should favour accumulation. According to neo-classical economic theory, excessively high labour costs can block accumulation. However, this could be expected to translate into balance of trade deficits. The high-income OECD economies have balance of trade deficits. These result from their trade in goods and services. These are not significant deficits – in 2019, they amounted to 4% of exports. But they are entirely attributable

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to the United States. If we extract the United States from the group of highincome OECD economies, then we see a surplus of around $450 billion. This is higher than the Chinese trade surplus. The dollar represents an international purchasing power which the American central bank can produce more or less without restriction. The position of the United States in the international system ensures that most of its partners continue to accept dollars. The United States effectively engages in a practice of Keynesian demand creation. This allows other economies to implement wage restraints in order to maintain their international competitiveness. The problem of social reform in the “indispensable nation” can be handily circumvented by buying cheaply from China with easily available dollars. Contemporary globalisation is unique in its management of the challenge of maintaining effective demand. However, there is nothing unique about the degree of globalisation that has occurred over the last half-century. Only after 1990 did the shares of exports in GDP reach the percentages achieved before 1913.2 Moreover, in the leading capitalist economies, the share of capital exports in relation to gross fixed capital formation was much higher before 1913 than it has been in recent decades (Deane and Cole 1967: 332–33). Nineteenthcentury Britain spent up to 136% the amount of its annual gross fixed capital accumulation on annual net investment abroad. This amounted to 7.2% of its gross national income. None of the high-income OECD economies achieved such a percentage during the contemporary wave of globalisation (Maximum 4% in 2000) (Table 6.2). Since the second half of the nineteenth century, a globalisation of investment began. The outbreak of World War I merely signalled an interruption to this process. The decades after 1918 were characterised by economic crises and increased state intervention in the economy. The period of reconstruction after World War II was initially characterised by national efforts at capital accumulation. American foreign direct investment was perceived as a challenge only in the early 1960s. If we compare the two periods of globalisation, then the only area where recent decades appear more globalised relative to the nineteenth century is short-term capital movements (Chapter 7, pp. 177–179). The argument that we are living through an unprecedented age of globalisation is thus simply inaccurate. The difference between the late nineteenth century and the late twentieth/early twenty-first century is not to be found in the degree of globalisation, but rather in the form in which it is realised. The two principal differences consist in: • •

Floating exchange rates with the possibility of devaluation The participation of economies with high levels of marginality

This marginality enables these economies to devalue their currencies without importing inflationary pressures. Devaluation means a lowering of the level

88

99

112.1

36

38.0

18902

96

18802

22.6

39

171

19002

135.8

168

123

19102

2.2

49.4

2,219

1980

2.5

59.0

2,374

1985

5.0

231.9

4,601

1990

5.3

308.6

5,823

1995

17.3

1,080.4

6,245

2000

2

1

1980–2019 UNCTAD. http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en 1880–1910 only Great Britain, Mio. £ (Deane and Cole 1967: 332–33) 3 Before 1913 Net foreign investment including portfolio investment US dollars at current prices in billions, before 1913 Mio. £, if not otherwise specified

Economy Gross fixed capital accumulation Net foreign (direct) investment3 Capital outflow in % of domestic gross fixed capital accumulation

Year

8.5

699.7

8,199

2005

10.5

991.4

9,473

2010

11.7

1,280.2

10,956

2015

Table 6.2 Relation between capital exports and national gross fixed capital accumulation in high-income OECD economies1

581.2

2018

952.9

2019

148 The globalisation of underconsumption

The globalisation of underconsumption

149

of prices, so that export products can become cheaper on the world market. Depending on the extent to which particular products differ in terms of local content, all prices decrease in international currency. Locally produced products from locally produced inputs become cheaper in international prices in line with the fall of wages in international currency. Real wages in national currency do not change for those income strata which do not buy from abroad. Economies with high levels of marginality may devalue up to the level where hitherto unprofitable labour becomes competitive on the world market. Because of these differences, the reaction to the globalisation of production via trade was totally different in the decades before World War I compared with the kind of reactions observable today. The latter point to strong underconsumption tendencies. These are partially outweighed by the readiness of the United States to run balance of trade deficits.

A convoy versus a doomsday pattern of globalisation Let us first sketch out a benign configuration. All participating economies are characterised by tendential full employment in the case of an adequate increase in mass incomes. Let us assume that there is an innovation in the leading industrial economy A, perhaps a new product or a cost reducing technology which we will refer to as P1. A increases its sales of P1. The balance of trade improves. In the case of floating exchange rates, foreign-exchange markets react by appreciating the currency. In A, the production line which produces P1 attracts additional labour by offering higher wages. It increases production of P1, which ultimately endures market saturation. This production line can grow further only by decreasing prices. With increasing production and decreasing prices, the readiness to pay higher wages decreases. Wages in the innovative production line increase, but they do not increase at the rate of innovation in P1. In the case of high levels of employment, wages in all production lines of A increase. They do so at least in international prices (currency appreciation in the wake of export surpluses). After all, without such increases, the new competitiveness of A in P1 leads to an appreciation of its currency. The innovation in P1 triggers price increases for everything else produced in A due to either an exchange-rate appreciation or to real wage increases. All production processes in A where comparable innovation did not occur become more expensive on the world market. Before the innovation in P1, economy B had been competitive on its internal market in all products. Otherwise, A would have increased some of its exports. B acquires comparative advantage in all those production lines where A did not accomplish a P1-level of innovation. Productivity in P1 has increased in A, whereas productivity in A’s other production lines has remained the same. A is relatively more productive in P1. No productivity increases have been realised in P1 in B. B is as productive in all other production lines as A. B has comparative advantage in all non-innovative production lines.

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B should be able to transform comparative advantage into competitive advantage, at least in some products. B becomes competitive on A’s market in some of these products. Under such circumstances, those production lines of B where extension of production is associated with the lowest increase in unit costs – or even with declining unit costs – will be the first to transform comparative advantage into competitive advantage. Following an innovation in P1 of the leading economy, the lagging behind economy B enjoys export increases in some non-innovative products. Additional demand for such production lines may compensate the loss of internal demand due to additional imports from A and its P1. The new demand created for some of B’s non-innovative products may lead to rising real wages in B. This, however, depends on the additional export effect. This effect may be too small to compensate the displacement of local demand for old products in the wake of increasing imports from the leading economy A. Even in this case, limited rates of currency devaluation will render other older products from B competitive. Jobs are created; unemployment is avoided. The higher the rate of A’s currency appreciation and wage increases, the better for B. The less that B needs lower international prices for its noninnovative products, the earlier will be the rise of employment in B in the wake of rising international prices of labour in A. B’s new competitiveness in the non-innovative production lines should lead to labour scarcity in this economy. If B also enjoys high levels of employment, wages in international prices increase. This upward movement of real wages is naturally limited by its impact on export prices. Some non-innovative products remain competitive at the now-rising real wages; others do not. The production lines which can bear higher wage costs will increase their production. Conversely, when labour becomes scarce in B, production lines which cannot bear internationally higher wage costs will tend to limit production. There will of course be differing adaptational capacities among different noninnovative production lines in B. Nonetheless, the overall effect (in terms of international prices) of lower wages in B will lead to scarcity of labour in B, at some level of increase of the international price of labour in A. B participates in the productivity increase in P1 in A by the improved supply of P1 (which becomes cheaper than B’s previous production of the product). Depending on the parameters, rising mass incomes in B are entirely possible. This is due to better learning possibilities on the world market for some of its non-innovative products. In A, wage increases in the wake of innovation in P1 lead to converging wages across the entire economy. Export possibilities of the non-innovative production lines of B have a similar effect in B. Differences in wage levels correspond to differences in average productivity, not to sector-wise differences in productivities. The possibilities of adjustment for B depend on A and B being capitalist economies with high levels of employment – indeed, with tendential full employment. The relatively homogeneous interests of the working classes are

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an expression of such high employment levels. These are stabilised by the maintenance of the mechanism of equalisation of factor incomes. This is despite sectoral and national differences in productivity. The capitalist mechanism of empowering labour through high levels of employment is maintained at the national level (Chapter 1, pp. 30–32). Labour therefore struggles to maintain its rights on a transnational basis. It endeavours to achieve the freedom to unionise – and insists on this right even for the labour of foreign countries and trading partners. This was evident in the late nineteenth century when trade agreements were concluded (though not in the case of trade agreements between European economies and the USA, Huberman and Meissner 2010: 679). Let us now introduce a third economy – C – into our model. C is characterised by marginality. We assume that A has such an effective and innovative system that it quickly and continuously achieves technical leadership in most modern products. We have characterised economy B as much less capable of making such technical advances, but of nonetheless being competitive with A in older products at moderately lower international labour prices. In these same older products, C has become competitive at a lower exchange rate. This has been brought about by devaluation. We assume that B is still competitive in most of these older products at the exchange rate and international labour costs accessible to C. At the level of devaluation, where C’s balance of trade is in equilibrium, C does not enjoy high levels of employment. This is because there is a large population which produces less than it costs for reproduction in internal market-oriented industries and agriculture. C is a marginality-ridden economy, and no realistic rate of devaluation can engender it with high levels of employment. Because of A’s innovation in P1, B increases its imports of P1 from A. As in the previous example, B enjoys a new comparative advantage. But now B is also in competition with C. Despite the appreciating currency or the increase in real wages of A, B cannot increase its prices in the field where it enjoys a new comparative advantage. If it does so, then C becomes competitive in a large segment of non-innovative products where B specialises. Higher levels of production in products where B is not innovative do not lead to higher real wages if C increases its competitiveness in response to higher real wages in B. B no longer participates in increases in A’s productivity advances in hightechnology production lines. Suppose that productivity increases in C result from other factors. Such factors might include learning by doing, the transfer of technologies due to foreign investors, or imitation of technologies. The productivity increases may not relate to the products which B is specialised in. They may not occur in tradable production. It is sufficient that productivity increases in C allow further devaluation of its currency. Productivity increases may be limited to internal market-oriented production lines which reduce the share of imports in the consumption of local labour. B can no longer sell its non-innovative products at its previous wage rates. B is normally an economy where the share

152 The globalisation of underconsumption

of imported products in popular consumption is important. Therefore, B is prevented from devaluing its currency to levels where it is competitive with C. B’s real wages become tied to C’s marginality-ridden economy. This does not necessarily occur because of low wages in C. It occurs because of C’s ready capacity for devaluation due to its increasing productivity in internal marketoriented wage goods production. Developed economies inevitably attempt to avoid being outcompeted by devaluation-driven manufacturing exports from developing countries. In order to do so, they try to specialise in products with good market conditions, and in which a technical monopoly can be defended, at least temporarily. Today, the middling capitalist countries find themselves caught between, on the one hand, the hammer of the technically leading economies and, on the other, the anvil of marginality-ridden, catching up economies. These are in this position because of comparative advantage and the possibility of transforming it into competitive advantage.

Hierarchies in the international division of labour According to the convoy model, backward economies maintain competitive advantage at low levels of devaluation. They also participate in backward areas of production with increasing real wages, despite innovation being concentrated in a limited number of leading economies. After 1945, Germany intensified its specialisation in machinery production and in most areas of car manufacturing. Increasing imports to Italy of German machinery led to an adjustment of the exchange rate – that is, to the continuous deterioration of the Italian lira’s value in relation to the German mark. Consequently, the German shoe industry became uncompetitive on the European market. Italy, however, developed a first-class shoe industry which set global standards. The point is that backward economies, on the basis of their lack of competitiveness in high earning products, may overtake their nominal superiors. Nineteenth-century Britain was the world leader in the textile industry, certainly compared with Germany. In the second half of the nineteenth century, a Second Industrial Revolution was ushered in by new developments in chemical, electrotechnical and machine-building industries. Innovations in these three industries occurred in Germany, Britain, and also the USA at approximately the same time, resulting in virtual parity between these three economies in these new branches. The United States developed these branches for their internal markets. However, they struggled to sell on the world market because of their high international costs (high real wages, due to the level of farm incomes). As a result, American companies with innovative products migrated to lower-wage European production sites. The sewing machine industry provides perhaps the most prominent historical example. Britain fell behind due to its booming textile industry and overall higher productivity in old products. Its economy could offer higher average real

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wages than Germany. In the new industries, however, both economies were at the same level of productivity. Britain’s superior performance in older, more established industries meant that the two countries experienced very different trajectories in the new industries. Germany, with its comparative advantage (but not initial higher productivity) benefited most from the Second Industrial Revolution in all three branches. Even before 1913, the Germans had overtaken Britain on the basis of 1938’s relative prices. Together with the United States and later Japan, Germany became the leader in these new branches (Aukrust 1964). The overtaking of an old leader should be considered as the norm in economic history. Marxist and neoclassical models in particular highlight the supposed persistence of hierarchies in the international division of labour. In fact, however, such persistence is exceptional. These models are underpinned by the assumption that leadership allows for higher profits and more rapid capital accumulation. However, if capital accumulation is excluded as a major driving force for technical progress, then other factors come into play. A catching up economy may certainly have comparative advantage in technically undemanding industries. In such branches, the established leading economy’s learning by doing does not play a role. Such unsophisticated technologies are readily accessible for any economy capable of engendering some basic skills and imposing labour discipline. This is the pattern of specialisation expected by neoclassical foreign trade theory. The catching up economy specialises according to its factor endowments and hence in labour-intensive products. But what if productivity increases do not depend on capital per worker, but on other factors, such as disembodied technical progress or skills of labour which result from learning-by-doing? In such cases, the originally leading economy cannot completely transfer its productivity advance in established technologies to newly emerging technologies (Chapter 5, p. 138). All economies have access to these new industries, though at different costs. Because of learning by doing, the productivity advance of the leading country is higher in the old established technologies. In such branches, emerging economies have no practical experience. To be sure, even in the emerging technologies, catching up economies may well be less productive. But they invariably suffer from less severe backlogs than they do in old leading technologies. In such branches, only the old leading economy has learning by doing. Technology-related learning-by-doing in an older high technology increases productivity, though less in the new high technology than in the old high technology. The productivity advance in relation to the catching up economy is higher in the old high technology. The old leading economy has comparative advantage in old leading technologies, even if it is superior in the newly emerging leading technologies. The leading economy risks specialisation in high technology – but last generation – products. In the next generation of leading technologies, no economy has learning by doing effects. The catching up economy may be inferior in the

154 The globalisation of underconsumption

next generation leading technologies. Despite this inferiority, however, it is less inferior than in the leading technologies of the past generation where the old leading economy had learning by doing productivity increases. It thus makes sense for the catching up economies to specialise in the most modern technology. Their comparative advantage in these most modern technologies is relatively healthier, however backward they might be (see Chapter 5, p. 138). The more that book knowledge becomes important for innovation and substitutes skill formation for learning by doing, the more this process intensifies. This is the case in the knowledge revolution. But why do lagging economies overtake? Factor endowments do not matter. What matters are comparative productivities. Neoclassical trade theory attempts to conceal its lack of explanatory power in this area by inventing an unmeasurable factor: human capital. This is the economic equivalent of alchemy attempting to save itself in the face of a rising chemistry by inventing a weightless element, phlogiston. In the convoy pattern of globalisation, falling behind is disadvantageous. However, the implied falling behind in real wages and value of the currency provide the conditions for leadership in the next wave of innovation. In the doomsday model, an initially rather high-income economy may be unable to preserve its industrial base for future innovation. This occurs because marginality-ridden economies hollow out innovative industrial production in the leading economies. An industrial economy can participate in a new wave of innovation only if it manages to avoid being hollowed out in this manner. In order to ensure this, the leading economy will defend its industrial base through government protection. Against the weakening of its industrial base, governments will support innovation even in realms of production where no internal market exists. Otherwise, it risks falling back to the levels of marginality-ridden economies. Unequal specialisation in a convoy model thus presents fairly surmountable dangers. Britain, as the first industrial nation, enjoyed a high level of technical development during the First Industrial Revolution. However, it was superior not in sophisticated products for the rich, but in mass produced goods for the middle-income strata and the poor. In this light, the entire debate on Asia’s supposed superiority in the late eighteenth century with respect to Europe prior to the so-called “Great Divergence” (Frank 1998; Pomeranz 2000) appears somewhat misguided. The British export offensive – especially in textiles – was not reliant on British superiority in these products. The key condition was Britain’s inability to competitively sell the kind of luxuries that the ancient civilisations of Asia were specialised in. Britain was helped by possibilities for cost reduction in mass consumption goods, however slight these might initially have been. The British were able to tap existing demands for textiles from lower income strata. After all, textiles are necessities in all civilisations and irrespective of income. If price elasticity of demand for these products was high among poorer households, then small technical innovations in Britain should have translated into massive increases in exports. Sure enough, this is precisely what happened.

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The basis for differences in comparative advantage is linked to the internal structure of demand. Egalitarian structures create high price and income elasticities of unsophisticated products. These can be cheapened by technical innovation in production technologies. In a convoy model, internal markets for high-technology and sophisticated products will be created by the sophistication of consumers. By contrast, lagging behind economies will enjoy comparative advantage in simpler products. They will specialise in products with high price elasticity of demand because of high priority in mass consumption, both globally and domestically. China does precisely this today. Depending on the mechanisms of technical progress, this may constitute an important condition for catching up. Mainstream thinking assumes that technical progress originates from improving technologies and inventing new products. In fact, however, technical progress depends on developing ever more sophisticated machinery geared to cost reduction of production. This orientation of the specialisation of machinery becomes possible by large production series for consumption goods and the production of such machinery in relatively large series. An economy specialising in mass consumption goods may thus develop superior technical performance. The use of special purpose machinery opens the avenue for conceiving new products. Technical progress depends on the improvement of machinery by increasing specialisation. Consequently, the lagging economy can catch up or even overtake the leading economy. A key condition for this is that the catching up economy is capable of keeping essential parts for learning technology production within its own national production system. This possibility exists also for the underdeveloped economy C, provided that it follows a deliberate strategy of endogenising the production of its own equipment. The pressure of C-type economies for catching up on the basis of comparative advantage is brought to bear on all economies trying to specialise in hightechnology products. The leading economies are better placed to accomplish this specialisation, provided that technical progress is generated from previous achievements in a path-dependent way. This has two implications for government policy. In leading, type A economies, and in less advanced type B economies, governments opt for statesponsored investment in productivity increases. This takes the form of creating innovation capacities in publicly financed institutions. These supply their innovations to the private sector. This explains the proliferation of government-sponsored innovation institutions called national systems of innovation, as well as the increasing subordination of academic institutions to business requirements. Governments correct the market-based process of innovation. They intervene in costs and sales by reserving their own markets for their innovative products. They endeavour to be first in order to reap the fruits of high prices on the world market when competition is still low. The doomsday pattern of

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globalisation entails an enhanced economic role for the state, and for deepened cooperation between the state and private sector. This also applies to C-type economies when they have exhausted growth possibilities on the basis of simple labour-intensive products. Export-oriented industrialising economies of the South all develop their research and development systems on the basis of state funding. Their success depends on their ability to impose a relatively egalitarian distribution of income. This allows them to use economies of scale in technology development, not only in larger batches of locally produced machinery.

Internal contradictions of capitalism and its external expansion, or: the pitfalls of the theory of imperialism Theories of imperialism try to deduce the expansionary character of capitalism from its internal contradictions. They explain this expansionary character via increased exports of manufactured goods or increased capital exports. To be sure, many commentators have remarked on these developments. However, critical theories of imperialism distinguish themselves from these more prosaic accounts by arguing that the additional exports are necessary for the survival of capitalism. The system, they argue, cannot exist without expansion. However, increasing merchandise and increasing capital exports may be due to comparative advantage. If they are transformed into competitive advantage by adjustment of local factor prices in international currency, they allow for a reduction of the total costs to the world capitalist system. This follows the view of capitalism as progressive due to the need for capitalist entrepreneurs to reduce costs and increase sales. Intensified international economic relations between the West and the South – and within the developed West – prove nothing more than the capitalist compulsion to save on financial resources. These relations do not demonstrate that capitalism will break down without success in reducing costs and increasing sales. Let us return to our distinction between a benign and a catastrophic scenario of globalisation. It goes without saying that theories of imperialism should describe intensified economic relations. Moreover, however, such theories must show that the doomsday pattern of globalisation is necessary for maintaining capitalism at the centre. According to theories of imperialism, capitalism at the centre depends on the availability of a periphery which can be exploited or instrumentalised as markets. More recent theories of imperialism – such as those originating in the Marxist sociology of Anglo-Saxon countries (example Harvey 2003) – rarely make any additional contribution to this observation. They are apparently satisfied that purportedly increasing surpluses and markets are due to the “expansion of international capital”. They have added little to the demonstration of the necessary character of imperialism for the survival of capitalism at the centre. To moralising commentators, this point may not seem particularly important.

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Certainly, if capitalism does not require additional surplus because of its internal contradictions, then the rise in prices for products of the Global South may be opposed by those capitalists who are impacted. It would not, however, constitute a problem for the survival of capitalism at the centre. The “acceptability” of oil price rises in the 1970s was a neat illustration of this. Orthodox Marxist critics of imperialism had considerable difficulties in digesting this development. After all, if capitalism does not need external markets, then social policies and rising mass incomes do not endanger it. As shown above, they do not even endanger the international competitiveness of the economies in which they occur. I therefore concentrate on the two classical formulations of the theory of imperialism. These are the necessity for higher surpluses (Vladimir Ilyich Lenin 1964 [1916]), and the necessity of expanding markets (Rosa Luxemburg 1951 [1912]). Lenin’s conceptualisation of imperialism as the last stage of capitalism aims to describe empirically observed tendencies of capital exports to the continents of Latin America, Asia and Africa. Most attempts to explain this phenomenon dating from Lenin’s time related it to the ceaseless search for cheaper raw materials. Lenin, however, also aimed to demonstrate the inevitability of these capital exports. They were, he argued, the last resort in the struggle against declining profit rates. Other instruments for fighting the decline of profit rates were the emergence of monopolies, the fusion between large companies and banks as financial capital. This had brought about the constitution of transnational businesses, and a struggle between these transnational business coalitions over the division of the world. Declining profit rates create a surplus of capital which cannot be invested. Indeed, in his argument about food production, Lenin explicitly denies the possibility of capital being invested in wage goods production. Because of its internal structure, there is an overriding interest of capitalists in keeping real wages down. Imperialism is thus a reaction to the contradictions of capitalism. It allows for a temporary postponement of the ultimate crisis of capitalism. At some indeterminate point in the future, the imperialist exploitation of the Global South will no longer be sufficient or possible. Capitalism will simply be unable to expand any further. At this point, it will collapse. If Lenin was right, then the tendency to cheapen products – such as raw materials, in the case he draws on – must contribute to the maintenance of the profit rate in the global capitalist system. Lenin’s theory of imperialism is thus linked to the Marxist theory of an ultimate exhaustion of available surplus in relation to accumulated capital. This is formulated in the theory of the tendency of the profit rate to fall. In Chapter 3 (pp. 71–78), I supplied a critique of this theory by illustrating the contradictions of the Marxist formulation of an increasing organic composition of capital. It is possible to conceive of two mechanisms through which the rise in the organic composition of capital can be counteracted by imperialistic capital exports. First, the combination of important amounts of constant capital with

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cheap labour increases the surplus drawn from that labour. It is cheap because it is exploited by imperialism; it is productive because of a high organic composition of capital. This allows for the share of profit in total value creation and hence the profit rate to rise. It does so even if the organic composition of capital increases. This was the case for capital-intensive mineral extraction. In the Global South, this began in the 1890s. Capital might also migrate to areas where labour-intensive technologies are used for the exploitation of available labour. Under such circumstances, large numbers of workers are combined with limited amounts of constant capital. Technologies with lower levels of constant capital are less productive than technologies with higher amounts of constant capital. Consequently, such technologies are not competitive on the world market. Even if wages in imperial centres and in the exploited South are similar, they yield high profit rates because of the low organic composition of capital, ultimately the highly labour-intensive character of these productions. This, of course, assumes that these products do not have to compete on the world market with products from more productive economies (despite the latter’s higher organic composition of capital). The lower organic composition of capital would imply the possibility of raising the profit rate by producing in such countries for their internal markets. This would indicate a concentration of capital exports to internal market-oriented production lines in economies with low labour costs – that is, in the Global South. The profit rate is high because of a low organic composition of capital. Competitiveness can only be achieved if real wages in the advanced capitalist countries have already risen. According to Lenin, this is an improbable prospect. Only a small fringe segment of the working class – the so-called “labour aristocracy” – is effectively bought off by capital with increasing wages. A cursory glance at the geographical distribution of European capital exports before 1914 shows that imperialist export of capital to the cheap labour economies does not play a dominant role in capital exports. Even in Lenin’s time, the bulk of capital exports did not go into cheap labour economies. This was even the case for Britain, the European country with the highest share of the Global South among its capital exports. British capital investment was up to 50% in high-income countries. This was especially so in the regions of recent settlement with their white immigrant, high labour cost populations. The single most important area of British investment before 1913 was the USA. Among the underdeveloped countries, investment in India was outstanding. It was attracted by loans which were guaranteed by the British government, and which had interest rates statutorily higher than British government bonds. For all colonial powers with colonies that had important white minorities (e.g. Algeria, South Africa), per capita investment from the colonial metropoles was highest in colonies with immigrant populations (Feis 1930: 23 f.). Outside the raw materials sector, foreign capital in the regions of recent settlement, and to some extent also in the white minority settler colonies, was invested in production processes oriented largely to the internal market. In

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such regions, foreign capital drew on high-cost white labour. The technologies employed were thus highly advanced, as shown by industrialisation in the USA. No reduction of the organic composition of capital occurred in cheap labour countries. It certainly did not occur in mineral raw material production or in infrastructure (such as railways or ports). These were the main areas of foreign investment. The technologies employed outside agricultural production, and thus also in mineral raw material production, were as intensive in constant capital as these branches were in the industrial West. Their international competitiveness resulted from the combination of two factors. First, these were the best performing capital-intensive technologies which were developed for the industrial countries in the late nineteenth century. They were developed precisely for the purpose of combating the deteriorating natural conditions of production. Second, they were used in the Global South for tapping the rich deposits available there due to the lack of industrial development in these countries. The richness of these deposits allowed high capital-intensive means of transport costs (steamships and railways), and they provided mineral (differential) rents. The cheapening of raw materials by their delocalisation into the cheap labour economies of the Global South has certainly increased the range of available products to be distributed to capital and labour. Most of the new exports of the Global South were consumption goods such as tropical beverages, fibres for cloth like cotton, and fats. These new exports from the South contributed to increasing real wages in the West. Naturally, this occurred among the better educated, better positioned labour aristocracy. But it even occurred among the lower strata of labour. This is because there is a close relation between rising mass incomes and the consumption of amenities. Palm oil production was triggered also by the need for soap among the British working class. Real wage increases triggered an expansion of colonial raw material production. As real wages rose in the imperialist centres, capital exports cannot be interpreted as a contribution to the cheapening of variable capital as a counter tendency to the tendential fall of the profit rate. The geographical concentration of foreign investment has only mildly been modified by the new wave of globalisation starting at the end of the twentieth century. It has not, however, been substantially altered. The Global South’s share in stocks and flows of foreign direct investment from the capitalist West has increased. However, it has not done so on the basis of poor countries, but rather on the basis of the growth of internal markets in the BRICS. Especially in the case of China and Brazil, investment for the production for local markets is important. The production lines built by foreign capital tend to be as technology intensive in these countries as in the countries of origin. The application of most modern technologies is a condition for competitiveness which cannot be ignored. The possibility of making profits on the basis of cheap labour certainly contributes to the profitability of foreign companies investing in these countries. Increasingly, however, it only does so on the basis of the most modern technologies.

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Let us suppose that we want to prove that these investments are absolutely necessary for maintaining the relation between total profit and total capital employed in the industrialised West. If this were so, we would have to show that the capital output ratio in the West is increasing, or that the share of capital in national income is decreasing. In Chapter 3 (pp. 85–88), I showed with data that there has been no increase in the capital output ratio in Western industrialised countries in recent decades. Studies on the long-term development of the capital output ratio in this region show a secular decline. This began prior to the expansion of capital exports to the Global South in the late nineteenth century. Moreover, the share of labour in total product has not secularly increased. The structure of technical progress or of capital accumulation does not require imperialism. Imperialism happens if there are possibilities for reducing the costs of production or of opening new markets for profitable production in the South. If such opportunities emerge, capital will exploit them. Competition dictates that individual instances of capital – that is, particular companies – cannot neglect these opportunities. They thus appear dependent on them. However, capitalist systems are not forced to draw on them in order to mitigate their internal contradictions. If the cheap labour economies of the Global South had not existed, capitalist accumulation in the centre would have proceeded in much the same way, though perhaps at a somewhat slower pace because of costlier raw materials. Similarly, the contribution of the export expansion of the Global South in recent years has not, as far as I know, been conceptualised as a contribution to maintaining adequate profit rates in the capitalist West. Instead, the threat of delocalisation of production lines to the Global South is characterised as a threat to accumulation. The shift to more technology-intensive processes of production in the industrial West has often been hailed as the basis for the relocation of footloose industries to the old industrial centres. An increase of the organic composition of capital in the old industrial countries works in the direction of limiting capital exports. The second classical theory of imperialism is Luxemburg’s (1951 [1912]) argument about the impossibility of the “realisation of surplus” in the capitalist industrialised countries. As in Lenin’s theory, imperialism appears here as a response to the inherent contradictions of capitalism. Luxemburg’s theory continues to be invoked even in contemporary narrations of capitalist expansion. Here, the continued accumulation of surplus in Marx’s enlarged production will not occur (Chapter 3, pp. 78–80). Despite the availability of surplus, capitalist entrepreneurs do not invest it, because there is no market for the additional product. Orthodox Marxists defend their mentor by arguing that the banking system can always provide credit which allows for the increasing surplus for enlarged reproduction to be realised, i.e. bought by customers, here capitalists who invest. But this does not address Luxemburg’s argument. She expressed some doubt about the interests of capitalists in new investment if the market does not enlarge (Luxemburg 1951 [1912]: 104).

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Many contemporary authors assume that, under capitalist conditions, capitalists can increase their consumption. By contrast, Luxemburg took seriously the requirement imposed on capitalist entrepreneurs: they lose their competitiveness if they do not refrain from excessively high increases in consumption. Capitalists must invest their surplus into innovation and growth. Capitalist entrepreneurs cannot expand their consumption. Consequently, they will not tolerate an increase in consumption among the middle classes which depend on them. A striking confirmation of this is the evident downsizing of the state under the auspices of the neo-liberal offensive which, since the late 1970s, has gripped much of the West. Additional markets can thus exist only outside the capitalist economy. They must be characterised by their readiness to increase imports over exports. Exports to the capitalist world absorb purchasing power in the capitalist world. This would not be available for the local capitalist sector. Only by balance of trade deficits the non-capitalist economy can contribute to the extension of sales of the capitalist one. The extension of the external market thus requires lending from the capitalist countries – i.e. capital exports. This, however, is limited. Indebted countries have to repay the banks or western governments that lent them the money (Chapter 2, p. 45). Third World states such as Turkey, the Latin American republics, or Morocco in the late nineteenth century had a clearly non-capitalist character. This is evidenced by the fact that the ruling classes of these countries were ready to take on high debts in order to participate in the consumption of the Western ruling classes. Facing political decline, they made efforts to modernise their countries. In most cases, they were not particularly successful (with nineteenth-century Japan being one exception because of high rural incomes). Spending on the internal economy in the capitalist West would have had the same economic effect on demand creation as loans to foreign countries. However, this would probably have been linked to a different perception of long-term political effects. And so, political influence in foreign countries was guaranteed, based on the expectation of the exploitable potential of these countries. This was attractive for the mixture of capitalists and aristocrats which governed Europe until World War I. However, it has proven less appealing for today’s capitalists. Rivalries between capitalist countries (though not companies) are less intense than they were a century ago. American hegemony and the transnationalisation of Western business are the dominant features of the age. Increases of loan capital have always been limited by debt crises. The reluctance of the West to massively transfer resources to the South is glaringly apparent from the real stagnation of development assistance. According to Lenin’s formulation, the non-capitalist world is gradually, and inevitably, transformed into a capitalist one. Imperialism appears here as a pioneering force in capitalist development – the advanced guard of capitalism (Warren 1980). Luxemburg’s formulation presents imperialism as destructive to the natural economy: its market. Imperialism in the periphery, by contrast to

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the centre, does not construct a capitalist economy in the process of destruction of the natural economy. Most modern forms of dependency theory are thus highly redolent of Luxemburg’s approach. When compared with classical Marxism, however, these theories are much more sceptical with respect to the transformative capacities of imperialist penetration. They maintain that dependency on the capitalist centre prevents the periphery from developing. According to these theories, it does so for two reasons. First, the centre is held responsible for blocking the emergence or the diversification of local manufacturing. Second, by organising “decapitalisation” by transfers of surplus generated in the periphery, the centre ensures that these surpluses are no longer available for local industrialisation. Marx and Engels (1979 [1853]) expected the development of Indian industry; Indian nationalists denounced the “drain of India” (Limaye 1989: 36). Emmanuel’s (1972) formulation of unequal exchange has added to this early anticolonialist critique. It has shown that decapitalisation is possible in the case of perfect markets. Industries in the high wage countries of the West need more “variable capital” for wages than technically equal industries in the lowwage countries of the South. High-wage industries receive a higher share of the surplus if, in equilibrium, all industries achieve average profit rates. This raises the following question: why don’t all industries move to the Global South, where they are guaranteed to produce higher surpluses? True, lower wages may well be accompanied by higher surpluses. However, they do not constitute the vector for diversification in industrialisation. After all, capitalists always earn the surpluses necessary for investment as profit, provided that there is sufficient demand and they do not have to contend with more efficient competitors. Theories of imperialism are rooted in Marx’s idea of capitalism being dependent on capital accumulation. Indeed, they are so deeply rooted in this idea that they are unable to admit a central fact: if a country accepts its own exploitation, as those countries which follow devaluation-driven exports do, then it can promote industrial growth. Conversely, the appropriation of surplus, which is something practised by raw material-rich countries, tends to block industrialisation, as shown by the OPEC countries. Development is achieved on the basis of the growth of lines of production which are capable of transforming class relations and of creating technical knowledge in their economies. Imperialism emerges because of the economic and social structures of peripheries. When real wages in the advanced capitalist countries are high, the cheap labour of the Global South offers a tantalising prospect to Western capitalists. So too does its cheap and frequently rich raw materials, assuming that these have not been exhausted by local industrial customers. Certainly, capitalists do not work against the emergence of a source of additional surplus or a source of additional demand. Ultimately, however, such additional surplus and additional demand may not contribute to the drive of the capitalist world

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system. These structures are unfair to the South, but they do not result from the internal contradictions of capitalism. The important point here is that the shape of globalisation can be influenced. There is no essential mechanism in the internal structure of dominant capitalist systems which precludes a shift of today’s pattern of globalisation from catastrophic to benign – that is, to rising mass incomes in the South and in the North. In my view, two early critics of the classical theories of imperialism did not gain the respect due to them. J. A. Hobson (1938 [1902]) proposed social reforms aiming at a more egalitarian distribution of income in the West in order to create possibilities for profitable investment. Karl Kautsky (1914) argued that western capitalists do not need to go to war against each other over their influence in the Global South. War could be avoided, he argued, if capitalists were put on an equal footing for exploiting labour and resources in cheap wage countries at the going market rate. Both were vilified by Lenin. Nonetheless, Hobson’s model of demand creation was extensively adopted during the golden thirties after World War II. Kautsky’s vision of “ultra-imperialism”, the exploitation of the Global South by transnational businesses which cooperate in the maintenance of capitalfriendly regulations in the Global South, has in fact become the reality of today.

The challenges of globalisation: a global underconsumptionist crisis Globalisation comprises, amongst other things, the replacement of well-paid jobs by what would – by Western standards – be considered poorly paid jobs. Enterprises relocate because production costs in the Global South are lower than in the West. This is, of course, due to the much higher price of labour in the West. But this cost reduction is not primarily the result of low real wages in the Global South. In fact, it derives from the capacity of marginality-ridden economies to engage in devaluation. These economies are able to produce sufficient amounts of wage goods internally. Because of progress in these industries, rising manufactures exports from low-wage countries do not mean that underconsumptionist tendencies might be unleashed in these countries. There is just more mobilisation of hitherto marginalised labour. At the global level, however, the amount of demand out of additional manufactured exports is lower than the amount of demand articulated before delocalisation by those factors of production (labour, land) which are replaced in the West. The cheapening of whole segments of production by employing cheaper labour does not necessarily give rise to global underconsumptionist tendencies if increases in mass incomes are triggered. This, of course, assumes that the cost reduction is met by countervailing tendencies. In the case of integrated national economies, labour can become scarce even if productivity increases. The provision is that these economies already operate at high levels of employment.

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Real wages increase in leading lines of production with productivity so that sectoral scarcity of labour continues to be imposed and other sectors follow. In the case of the benign model of globalisation, the lagging behind economy acquires new comparative advantage. It is thus able to maintain its overall employment by means of low levels of devaluation and moderate decreases of its price level in international currency. This was shown to be (perhaps) accompanied by rising real wages, provided that the lagging economy is already initially characterised by high levels of employment In the Global South, real wages may also rise in the case of export offensives from marginality-ridden economies. They will be limited to the export sectors if marginality is not reduced. The contribution of the South to global demand can rise only if the growth of its exports is accompanied by the growth of imports. Import growth is determined by local capital accumulation and the expansion of consumption, private and public. Local capital accumulation and internal consumption, however, can only become additional demand for imports if shares of imports in both categories of spending are high or at least rising. If marginal labour is available, marginality-ridden economies will make every effort to bring it into production. Such moves are not linked exclusively to the export-oriented manufacturing drive. Indeed, among both the forerunners of the Industrial Revolution and the relative latecomers of the nineteenth century, capitalist growth was characterised by the massive transfer of low productivity labour from agriculture to industry, and later to services. A similar pattern can be observed in export-oriented manufacturing in the Global South. This has been closely linked to an attempted indigenisation of technology production in order to maximise learning. This results in limited growth of the demand for foreign investment goods in relation to the growth of exports and local manufacturing production for the internal market. To be sure, many countries of the Global South have been able to decisively reduce poverty. In the low-income countries, poverty (US$1.90 purchasing parity/day) was lowered from 68% in 1995 to 45% in 2015. In the low- and middle-income countries, it was reduced from 55% in 1980 to 12% in 2015. In India, it went down from 44% in 1988/89 to 33% in 2009, and 25% by 2011.3 This not only points to a reduction of poverty, but to an acceleration of this reduction. Brazil and China, two BRICS countries long known for their mass poverty, were especially successful. Brazil reduced poverty from 23% in 1985 to 3.2% in 2015, while China made even more dramatic progress, from 66% in 1990 to 0.7% in 2015. Improving mass incomes is compatible with maintaining international competitiveness. This, of course, depends on the international price of labour being kept at levels where competitiveness is guaranteed. In marginality-ridden economies, real wage increases ultimately depend on the growth of local wage good industries. This is a goal pursued by most privileged classes in order to increase the total value of exports over necessary imports and therefore the possible sources of their self-enrichment.

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Higher wages in the production of manufactured exports may well be desirable. However, they do not solve the problem of maintaining global demand. Higher local wages in the wake of devaluation and increased exports do not contribute to world consumptive capacity. This, of course, assumes that the additional wage goods are supplied by local production. Higher international labour costs in particular countries will inevitably accelerate the shift to other devaluation-driven production sites in the Global South. As long as there is a nearly unlimited offer of marginalised labour, higher wages as well as fair labour standards are difficult to implement. Marginalised labour is ready to work under almost any conditions, for any wage which allows survival. Higher wages and fair labour standards are beneficial only to those in employment. The danger here is the emergence of a labour aristocracy. This further diminishes the political standing of low-skilled and precariously employed or self-employed labour. The behaviour of developed capitalist economies with high levels of employment differs totally from the behaviour of marginality-ridden economies. West Germany after World War II neatly illustrates the limits to the devaluation-driven growth of a high employment economy. In the late 1950s, West Germany reached high levels of employment. This led to unprecedented labour turnover. For whatever reason, almost nobody feared that they would be the first to lose their job in the case of their company running into difficulties. West Germany achieved huge foreign trade surpluses – so huge, in fact, that they are eminently comparable to those reached under China’s contemporary export-driven development strategy. Unsurprisingly, West Germany’s strategy triggered strong American criticism. However, it also led to inflationary pressures within West Germany itself. Given the undervalued mark, German exporters earned higher profit rates than local market-oriented German companies. The former competed for scarce labour, offering higher wages than would have been justified by physical productivity increases. Consequently, German prices for wage goods increased. Germany imported inflation. German industry offered to transfer capital to the rest of the world in order to solve the problems connected to this balance of trade and balance of payments surplus. This, however, would not have limited the inflationary pressures. And so the German government opted for the only viable solution: currency appreciation. Export offensives based on internationally cheap labour will end if marginality is overcome. However, until this transition to a properly capitalist economy is achieved, the export-oriented manufacturing countries will not contribute to the expansion of world demand in line with their increase in exports. It is thus necessary to develop other mechanisms for compensating the decline of demand to see us through, and to shorten, this period of transition. An initial step is to keep Western markets open. Access to these markets is the driver of the periphery’s economic transformation. True, the labour of

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the periphery has become competitive with Western labour. However, global labour solidarity in the twenty-first century consists in empowering the labour of the Global South. This entails increasing its employment through the only factor that Western labour can directly influence: access to Western markets. In discussing the strategy of export-oriented manufacturing as a development strategy, I have shown that it is legitimate to expect in return internal economic strategies which maximise multipliers (Chapter 5, p. 139). This does not mean imposing higher international prices of labour. Maximising multiplier effects is perfectly compatible with the expansion of the local wage goods industries at unchanged exchange rates. There have been attempts to thwart expanding manufactured exports from the Global South by keeping real wage increases in industrially developed countries below productivity increases, including terms of trade increases. This will only deepen underconsumptionist tendencies. It has been estimated that job losses due to productivity outstripping production in the West are four times as high as job losses due to delocalisation to the Global South. The adoption of wage restraint in high-wage countries in order to defend national jobs risks destroying jobs in other high-employment capitalist countries. This, of course, assumes that these other countries do not respond by devaluing their currencies – a possibility which is denied members of the Eurozone. One contemporary illustration of this is Germany’s strategy of disrupting the EU by wage restraint. The world is, of course, split into different currency zones. But between these zones, wage restraint for improving international competitiveness leads to still limited state intervention into trade relations and adjustments of currency parities. In the 1930s, it led to a race for devaluation. In fact, the strategy of wage restraint is self-defeating. It destroys jobs in the centre without any impact on the continued competitiveness of marginalityridden economies. Because of their very marginality, the international prices of labour of these economies depend on their capacity to locally produce wage goods. Let us suppose that the Global South realised its transition to capitalism via export manufacturing by engaging in massive imports from the West for its own equipment. Indeed, this is precisely what the Global South did during the period when it relied on raw material rents (as shown by the OPEC countries). Such a scenario might mitigate the tendency of costly jobs in the West being replaced by internationally cheap jobs. This would require transfers to the South, as shown by the OPEC price increases for oil in the 1970s. In sum, the Global South’s balance of trade is positive, although not for all its constituent countries. Surpluses are due to the rent incomes of the OPEC countries and the export surpluses of China. China’s export surplus is about the balance of trade deficits of the non-OPEC low- and middle-income countries. The four leading economies of the Global South – Brazil, China, India and South Africa (BICS) – have positive balances of trade. This has been achieved despite massive terms of trade deteriorations for some of the leading exporters

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of manufactures since 2000. China (−8%) and Korea (−41%) have been particularly afflicted. The quantities of goods offered on the world market increase more rapidly than the export earnings of these countries. Nevertheless, the Global South is busily engaged in increasing its own indebtedness. According to World Bank data, between 1980 and 2019, the debt stock of low- and middle-income countries multiplied by the factor 17. By contrast, in the same period, the debt stock of the four leading countries multiplied by the factor 37. This increased the share of the BICS in the total debt of low- and middle-income countries from 19% to 42%. Low-income countries could increase their indebtedness only by the factor 4. The BICS were able to maintain the relation between their debt and their gross national income at around 18% in 2019 (with a short increase to 21% in 2000). The low- and middle-income countries were less successful in this respect: here, the relationship rose from 21% in 1980 to 35% in 2000 and fell to 25% in 2015. Debt exposure of the low-income countries had a similar trajectory, but the shares were much higher: in 1990, these were 94% of Gross National Income (GNI); 133% by 1995; and 33% by 2019. Since the debt crisis of the 1980s, the mechanism of creating demand through loans to marginality-ridden countries of the Global South has been limited. The banking system of the West lost too much money in the world debt crisis. Moreover, it can no longer hope to be so readily bailed out by deducing all its foul credits from their tax liabilities, as was the case in the 1980s.4 For the BICS, the debt service in relation to gross national income in the Global South has risen from 7% to 17%. For low- and middle-income countries, it temporarily hit 6% of gross national income in 2000. Even the low-income countries have low amounts of debt service in relation to their export earnings of 7% in 2015. The equivalent figure for middle-income countries was 5% in 2018. Resources flow to the Global South through direct investments. Between 1980 and 2019, the stock of foreign direct investment in the BICS (Brazil, India, China, South Africa) multiplied by the factor 97. In the low- and middle-income countries, the equivalent figure was 35. This raised the share of the BICS in foreign direct investment stock from 12% to 30%. Export-oriented industrialisation triggered massive foreign direct investment when the original pattern of specialisation in textiles and similar products was abandoned. The new products, such as electronic products, were no longer labour-intensive with well-known standard technologies. This process, however, was linked to increasing exports and balance of trade surpluses. Those countries which succeed in attracting lasting transfers in the form of foreign direct investment are running balance of trade surpluses. In 2019, Brazil, China, India and South Africa had a balance of trade surplus of $282 billion, despite foreign direct investment inflows of $268 billion. The balance of inflows is positive by approximately the amount of foreign direct investment. For the low- and middle-income countries, however, there is on average an outflow of net financial resources.

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So the Global South does not run balance of trade deficits but nevertheless contributes to the increase of financial assets in the form of debt. There are no mercantilist policies of the Global South which aim to increase balance of trade surpluses on the basis of capital exports to the export markets of the West. Here the Global South does not contribute to the underconsumptionist tendencies evident in the world economic system. The Global South does contribute to such tendencies by replacing well-paid Western labour with cheap Southern labour. This does not compress local real wages; rather, it effects deteriorating terms of trade in the wake of keeping currency parities below purchasing power parities. There may also be a contribution from undocumented illegal capital exports from the South to the West – that is, so-called flight capital into offshore financial places. Anecdotal evidence seems to suggest that these offshore tax havens attract financial resources from many economies of the Global South. Such sums do not find their way into international financial statistics, and they certainly contribute to lower exchange rates.

The shifting balance against labour in the West The state played no role in our imagined benign pattern of globalisation. The capacity of the lagging behind economy to maintain high levels of employment by maintaining mass demand did not depend on state intervention. It depended on high levels of employment. This created scarcity of labour, through which additional demand for labour led to wage increases. Naturally, the state can contribute to intensifying job creation by financial transfers from the highly productive to the less productive branches. The mechanism of equalisation of wages due to scarcity of labour does nothing more than this. The productivity increase of a highly efficient production line (Volkswagen, for example) is transferred to hairdressers through decreasing prices for cars and increasing prices for haircuts. The state makes additional resources available by raising some factor costs above the going rate. It may, for example, increase wage costs by fixing the minimum wage or support labour by other means (Rodrik 2011). The state modifies the relation between rents accruing to the privileged and mass incomes. The state cannot reduce profit required for investment spending, nor can it influence the international value of local factors of production, but it can redistribute rent. Too “high” nominal wages increase may lead to a decrease in the international value of the national currency. This has little impact on the interests of wage earners – as much as their consumption is characterised by high shares of locally produced goods. But it will impact the wealth and perhaps the consumption of financial asset holders. By contrast, the doomsday scenario of globalisation – where labour is not protected against unemployment – is characterised by two traits: •

The entry onto the world labour market of labour from economies with high levels of marginality. This occurs in production lines with highly

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price and income elastic products, on the basis of local independence in mass consumption products, especially food. The transformation of comparative advantage into cost competitiveness via low exchange rates ensues. Mechanisms which disestablish the close relationship between exchange rates and factor prices. The most important mechanism is the aforementioned increase in international capital movements. This is because exchange rates do not only react to the balance of trade. Depending on the amount of capital movements in relation to the balance of trade, they also react to the balance of payments.

In the West, the tendency toward wage decreases in relation to productivity increases and in relation to terms of trade increases is reinforced by labour’s (diminishing) negotiating powers and sector specific strategies. In leading export economies of the West, labour in export industries aims to maintain its competitiveness and therefore its jobs by wage restraint. Normally, this does not meet much opposition. After all, wages in this sector are higher than in internal market-oriented production lines. In the case of wage restraint, the contribution of the export sector to total demand is lower than in the case of productivity-cum-terms of trade changes. Relative to technical progress, production in internal market-oriented industries slows. Productivity increases outrun production increases. On top of this, contemporary globalisation proceeds under the dominion of neoliberal thinking. According to this perspective, supply always creates its own demand. The leaders of industrial countries therefore advise (or force) their workers to exercise wage restraint. It is assumed that this will improve international competitiveness. But it results in production slowdown also at the local level. According to our theory of investment, all those investments triggered by rising wages, extension of production, new products or defensive investments, are reduced in relation to cost-decreasing rationalisation investments. These investments are also realised in the case of stagnating real wages. There is a slowing down of capital accumulation and thus of demand for investment goods. The observation of a falling capital output ratio is due to a slowdown of accumulation, at least in the case of Germany (see Chapter 3, p. 88). Certainly, however, this trend occurred in all Western industrial countries. An overall loss of jobs diminishes the negotiating power of labour. This is especially so in the technically less advanced industrial countries (the type B of our convoy model). In the case of unemployment, skilled workers are scarcer than unskilled workers. The deterioration of wages will be of special concern to the latter. Skilled workers in the tradable sector (export-oriented or import competing) may well suffer from reduced demand for labour. To the extent that this occurs, they will try to find employment in technically less demanding production lines at lower wages, further reducing the demand for unskilled labour. This is evidenced by the common account of globalisation hitting unskilled

170 The globalisation of underconsumption

workers particularly hard. Indeed, the bulk of unskilled workers in a typical capitalist industrial country produce non-tradables (especially in services). However, they suffer from competition on local labour markets where better skilled workers from the tradable sector offer their services. At otherwise equal qualities, employers will prefer skilled workers. This is even so in jobs with low skill requirements, provided that there is no cost difference. Unemployment decommissions the mechanism of homogenising labour described in Chapter 1 (pp. 30–32). Workers are no longer in similar situations independent of their production line and its growth conditions. Labour in the safe production lines, especially in tradables, and particularly in leading exporting countries such as Germany, will exercise wage restraint. It will show limited solidarity with workers in less secure production lines who cannot maintain their jobs despite wage restraint. Labour opts for preserving jobs by moderate wage increases in relation to productivity increases and differentiating demands according to the “economic situation” of particular enterprises. Labour becomes heterogeneous with respect to specific production lines, and even to specific companies and their position on the world market. The most illustrative example is the domination of German unions by the German export sector. The policies of these unions are largely determined by the interests of the export sector workers in high (but not too high!) wages. They are also determined by the benign neglect of internal market-oriented and precarious employment. A clear sign of this shift is the abandonment of economy-wide – or even industry-wide – agreements on salaries and working conditions. Company contracts are prioritised. The heterogeneity of labour as a class increases in economic and political terms. Large-scale enterprises can preserve acceptable levels of employment for longer periods. This remains so if they have to reduce jobs. Workers in this sector typically opt for maintaining the competitive position of the enterprise, disregarding solidarity with workers beyond it. Labour ceases to be a political force due to spontaneous strategies of adjusting to the tendencies of unemployment. Capital does not suffer from this gathering underconsumptionist crisis to the same degree as labour. This crisis is especially disadvantageous to newcomers. Established enterprises can normally finance important portions of investment spending from amortisations. Net investment in German manufacturing industries is currently 20% of gross investment; in the 1960s, it was 68% (Baumgart and Krengel 1970). Established enterprises have better financing conditions for innovation on the basis of large amortisations. Indeed, the more that capital accumulation in current prices slows down, the higher this figure is. This in turn reduces price competition and allows mark-up pricing. The post-Keynesian critique of free price formation on competitive markets is relevant here. Profit rates can be defended if market competition is reduced. Under these conditions, profits will be higher than investment spending. They will not go back into the real economy as employment-creating orders. There are incomes as profits which are higher than the effective demand originating from

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spending of profits. Demand in relation to paid out incomes is reduced. The deficit of demand in relation to paid out incomes translates into additional underconsumptionist pressures. This nullifies the nineteenth-century mechanism of prices falling more rapidly than real wages in the downturn of the capitalist cycle. Until the Great Depression, product prices in the United States and Germany fell more rapidly in the downturn of the cycle than nominal wages. Despite declining employment, this resistance gave rise to some support for consumption. Decreasing price competition in the wake of diversification and branding of products makes capitalism more vulnerable to underconsumptionist tendencies. The breakdown of the basic mechanism of rising mass incomes guaranteeing profit becomes visible in various aspects. Wage restraint limits capital accumulation and increases surplus. This is not invested; it is appropriated by noneconomic means. Balance of trade surpluses which succeed in alleviating the job problem is unsustainable. Keynes already showed this in his view that the surplus countries are responsible for channelling surpluses into investment for the deficit countries. Additional indebtedness among the successful countries intensifies the struggle for improving trade balances by cost-cutting. The contradiction between limited expansion of consumption spending because of limited increases in mass incomes and productive potential is increasingly managed through the extension of private consumer credit, as was the case in the 1920s immediately prior to the Great Depression in the United States. It would thus be inaccurate to suggest that the financial system and monetary policies allow for underconsumptionist tendencies to be obviated. This can happen, provided that the degree of unemployment and disempowerment of labour are low enough for launching net investment. This occurs through a reduction of the cost of financing investment to degrees where high levels of employment are achieved and labour is empowered. The experience, however, is that monetary policies will not work in situations of high-level unemployment and important deficits in effective demand. The hope for dealing with underconsumptionist tendencies by launching financial markets will not strengthen the basic mechanism of capitalism – that is, profits by means of rising mass consumption. Instead, it will reinforce tendencies to increasing rent appropriation. This is accompanied by changes in the relation between government and the private economy which are stabilised by corresponding tendencies in the structure of the international system. This outcome is called financialisation. The capitalist is governed by microeconomic rationality. Globalisation detaches this model of governance from the macroeconomic mechanisms or governance structures which serve to discipline capitalists and make capitalism viable. This demonstrates one of the basic arguments of this book – that a fundamental distinction must be drawn between, on the one hand, relentlessly self-interested capitalists and, on the other, capitalism as an economic system or mode of production.

172 The globalisation of underconsumption

Notes 1 If not otherwise specified, data are either UNCTADstat, https://unctadstat.unctad .org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en, World Bank, World Development Indicators, https://databank.worldbank.org/reports.aspx?source=world -development-indicators or, for German data, Statistisches Bundesamt. 2 Western Europe 1890: 14.9%, 1913: 18.3 %. Bairoch 1996: 176. For the later years tab. 6.1, line 12. 3 World Bank, World Development Indicators, India human development report 2000. World poverty and equity portal. https://povertydata.worldbank.org/poverty/country/ IND. 4 When the debt crisis broke out, major Western creditors introduced regulations which already existed in Germany. Banks could deduce provisions for losses from their taxable incomes. Rescheduling, the only possible instrument instead of just writing of bad credits, could be used to increase the principal by the amount of interest not paid, amounts of higher interest to be charged because of loss in creditworthiness, and fees for rescheduling. At a tax rate on profits of banks of 50%, a doubling of the principal on which amortisation and provision for losses could be declared to the tax authorities, allowed for the whole principal to be recovered from tax authorities of the home countries of the banks.The debt was paid by home-country taxpayers who were the only solvent actors in the debt crisis. Major German banks showed increasing amounts of outstanding debts of the developing countries despite no new money being transferred, cf. Elsenhans 2003.

References Aukrust, Odd (1964): Factors of Economic Development: A Review of Recent Research. In: Weltwirtschaftliches Archiv 93 (1), pp. 23–43. Bairoch, Paul (1996): Globalization, Myths and Realities: One Century of External Trade and Foreign Investment. In: Robert Boyer and Daniel Drache (eds.): States Against Markets. The Limits of Globalization. London: Routledge, pp. 173–192. Baumgart, Egon R. and Krengel, Rolf (1970): Die industrielle Vermögensrechnung des DIW. Ergebnisse einer Neuberechnung. Beiträge zur Konfunkturforschung 10. Berlin: Duncker und Humblot. Deane, Phyllis and Cole, W. A. (1967): British Economic Growth 1688–1959: Trends and Structures. Cambridge: Cambridge University Press. Elsenhans, Hartmut (1981): Social Consequences of the NIEO. No Change for Continued Reformist Strategies in the Centre without Structural Change in the Periphery. In: Egbert Jahn and Yoshikazu Sakamoto (eds.): Elements of World Instability: Armaments, Communication, Food, International Division of Labour. Proceedings of the Eighth International Peace Research Association Conference. Frankfort on the Main: Campus, pp. 86–95. Elsenhans, Hartmut (2002): Macroeconomics in Globalization: Productivity, Wages, Profits, and Exchange Rates in an Era of Globalization. In: Brazilian Journal of Political Economy 22 (85), pp. 53–78. Elsenhans, Hartmut (2003): Les contribuables ont payé, les banques sont sauvées et le tiers monde s’engouffre dans la dette. Comment on gère une crise en gestation. In: Pierangelo Catalano and Abdelkader Sid Ahmed (eds.): La dette contre le développement. Quelle stratégie pour les peuples méditerranées. Paris: Publisud, pp. 323–343. Emmanuel, Arghiri (1972): Unequal Exchange [1969]. London: New Left Books. Feis, Herbert (1930): Europe. The World’s Banker, 1870–1914: An Account of European Foreign Investment and the Connection of World Finance With Diplomacy Before the War. New Haven, CT: Yale University Press.

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Frank, André Gunder (1998): ReOrient: Global Economy in the Asian Age. Berkeley, CA: University of California Press. Harvey, David (2003): The New Imperialism. Oxford: Oxford Universiy Press. Hobson, John Atkinson (1938): Imperialism: A Study [1902]. London: Allen & Unwin. Huberman, Michael and Meissner, Christopher (2010): Riding the Wave of Trade: The Rise of Labor Regulations in the Golden Age of Globalisation. In: Journal of Economic History 70 (3), pp. 657–685. Kautsky, Karl (1914): Der Imperialismus. In: Neue Zeit 32 (2), pp. 908–922. Lenin, Vladimir Ilyich (1964): Imperialism, the Highest Stage of Capitalism: A Popular Outline [1916]. Lenin Collected Works (22). In: Vladimir Ilyich Lenin (ed.): Collected Works 22. Moscow: Progress Publishers, pp. 187–304. Limaye, Madhu (1989): Indian National Movement: Its Ideological and Socio-Economic Dimensions. New Delhi: Radiant. Luxemburg, Rosa (1951): The Accumulation of Capital [1912]. London: Routledge & Kegan Paul. Marx, Karl and Engels, Frederick (1979): The Future Results of British Rule in India. In: Karl Marx and Friedrich Engels (eds.): Collected Works: Volume 12. Marx and Engels 1853–1854. Moscow: Progress Publishers, pp. 218–224. Pomeranz, Kenneth (2000): The Great Divergence: Europe, China, and the Making of the Modern World Economy. Princeton, NJ: Princeton University Press. Rodrik, Dani (2011): The Future of Economic Converge. NBER Working Papers Series 17400. New York: National Bureau of Economic Research. Warren, Bill (1980): Imperialism. Pioneer of Capitalism. London: NLB.

7

The globalisation of rent

Summary Financialisation is the expression of a crisis of capitalism. It results from increasingly scarce opportunities for investment in the real economy in relation to increasing amounts of financial surplus. Financialisation delinks financial profit from the health of the real economy. It exploits the role of mediation between the capacity of the banking system to create fiat money and the real economy’s need for financial resources. It can do so because of state protection, and its ability to coerce this protection from the state. Financialisation results in the creation of fictitious wealth. The collapse of the banking system due to a crisis of financial markets would have unacceptable results for the real economy. The state and the central bank are thus compelled to protect financial capital. Financialisation expands the realm of politically appropriated surplus – that is, of rent. It therefore strengthens the state, as do other contradictions which emerge due to low expansion of mass demand. Financial capital appears to be international. In fact, however, it needs the territorially grounded state for preserving the basis of fiat money. It is thus accompanied by increasing state responsibility in the international system. However, the state serves here not as a corrective to financial capital, but as its hostage and servant. This leads to a fragmented international system. A few major players operate a balance of power system. Within this system, states at international and national levels protect the fictitious wealth of finance capitalism by mobilising rents. Recent decades have witnessed the rise of financial capital, which is a separate entity to the real economy. This development has largely been hailed as indicative of the successful unfolding of capitalism. In this chapter, however, I argue that the rise of financial capital is, in fact, expressive of a profound crisis of capitalism. Moreover, it is a mechanism which deepens this crisis. Financialisation allows for the emancipation of finance capital from the discipline of the capitalist market. It accomplishes this by using the capacity of the banking system to create fiat money (Chapter 2, p. 38), detaching apparent profit from net investment spending in the real economy. This is achieved DOI: 10.4324/9781003182511-7

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through the creation of fictitious money. The value of this money nominally derives from the trust of its holders. In fact, it derives from state guarantees. In order to assure this guarantee, financial capital must hijack the state. Financial capital appropriates real surplus only on the basis of its political protection by the state. Financial capital is therefore not the most developed form of capitalism, but the most developed form of rent appropriation. The macroeconomics of capitalism are sacrificed and the microeconomic mechanisms of competition are decoupled from the real economic mechanism of competition – i.e. those which lead to increases in productivity and productive capacities. This process does not follow a preconceived plan. It emerges as the result of the decay of the basic capitalist mechanism of demand expansion triggering profit. When net investment declines, profit also declines. Surplus, however, does not necessarily decline. Capitalists will not simply surrender surplus if they are unable to appropriate it under the conditions of their efficiency on markets on the real economy. Instead, they will seek to acquire and preserve it by turning to financial markets. States frequently protect financial markets from breakdown, as we saw in 2008. Due to this protection, the instinctive behaviour of capitalists in search of profitable investments beyond the confines of the real economy allows for a self-reinforcing expansion of financial markets. The benefit to the real economy will be negligible, at best. I am not calling here for the abolition of financial markets. They are powerful and important instruments of mediation between the financial resources and requirements of enterprises in the real economy. The problem comes when they are detached from the real economy and become a law unto themselves. As noted, this space of mediation between holders of financial resources and companies in search of financial resources for real investment is crucial. Consequently, the main agents on financial markets – banks, insurance companies, hedge funds – also acquire great significance. Their bankruptcy would shatter financial markets. This would severely impair these markets in their proper role as financial intermediaries for the real economy. As the Great Recession showed, these agents are thus system relevant. The state (and the central bank) is compelled to protect them.

Fighting the decline of capitalism: fnancialisation and the rise of the state The possibilities for profitable investment in the real economy slow down because of insufficient demand – that is, because of insufficient consumption. Under such circumstances, capitalists capable of appropriating surplus because of market imperfections and limited price competition turn to financial markets in order to invest their financial resources. The shift to financial markets is thus a reaction to the increasing instability of the basic structures of capitalism (Krippner 2011).

176 The globalisation of rent

As mentioned, financial markets are partially delinked from the real economy. Consequently, the technical development, productivity and capital stock development of the real economy are irrelevant to the profitability of financial assets. This profitability rests on the development of stock prices. It is thus inextricably linked to the readiness of holders of financial resources to spend money on financial assets. The appropriation of surplus as profit on anonymous markets of the real economy is a fundamentally unstable situation. It runs into trouble whenever labour is disempowered. However, social structures do not merely dissolve into thin air. As long as something remains of society and institutions, human beings will take them, patch them up and try to maintain a functioning social system. Some of these mechanisms may deepen the crisis. They include wage restraint in an underconsumptionist crisis, or the pursuit of balance of trade surpluses. Other mechanisms will more efficiently address underconsumptionist tendencies. These effective mechanisms include government programmes of redistribution in order to maintain mass consumption. In their absence, social unrest is virtually inevitable. Government spending programmes for providing jobs to the marginalised are older than the dominance of capitalism. Asaf-ud-Daula, Nawab of Lakhnau (1775–1797), was famous for his spending on public monuments – and on the creation of incomes for those marginalised social forces engaged in constructing them. Furthermore, public works programmes in times of crisis were a well-known practice in the USA or France in the mid-nineteenth century. In those leading industrialised countries which can afford such programmes, contemporary globalisation is invariably accompanied by increased government spending on social affairs. Crises may trigger government programmes for promoting investment in production lines which, in the future, could prove innovative. To be sure, these production lines may not ultimately turn out to be as innovative as was hoped. Nonetheless, the spending on incomes which become demand for real products may lead to a weakening of underconsumptionist tendencies. The Keynesian recipe of government deficit spending accepts the unproductive use of the state’s financial resources for investment. These deficits aim at creating demand, which brings the economy back to high levels of employment. The neoclassical norm is restored. This is fiscal policy. Another possible solution lies in monetary policy. This can take the form of money creation through the expansion of financial markets. In this way, an outlet is provided for financial resources appropriated by market imperfections and beyond profits created by net investment spending. The increase in wealth is considered a source of additional consumption spending for the affluent. By multiplying financial assets in the hands of the rich, an even lower propensity to consume out of wealth accretion may provide substantial consumption demand. When capitalism crumbles, governments take on an increased economic role. This role is invariably financed by rents. Implementation of measures

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which are financed from rent is promoted by the size of protected markets, as we saw at the beginning of the twentieth century (Hilferding 1968 [1909]: 423 ff.). Those most successful governments are able to create protected economic zones. These exist on the basis of large internal, or at least regionally integrated markets. The world today is dominated by “agglomeration” powers which create regional spheres of influence. The interactions of these powers within and between such regions is determined partly by market relations. This, of course, is provided that such relations do not endanger the rent-based mechanisms of providing politically acceptable economic and social equilibria. Globalisation is maintained through state interventions which depend on the competitive position of the different agglomeration powers. In order to benefit from the opportunities provided by the world market, these powers pursue an overarching tactical goal. This goal consists in the utilisation of rents by these powers in order to improve their competitive positions by technical innovation, and in order to maintain internal social and political equilibria. This constitutes a globalisation of rent (Elsenhans 2019).

The rise of fnancialisation The last 30 years have been characterised by a tremendous growth of financial assets in relation to real assets. The Dow Jones represents the most important American companies. It increased tenfold between 1980 and 2019. This is vastly in excess of the rise of US Gross Domestic Product [GDP] (factor 7.5) during the same period (Table 7.1, line 1), and in capital invested in the US economy (Table 7.1, line 6). The total market value of American stock markets has increased yet more than this, by factor 24 (Table 7.1, line 4). The relations between the value of the US stock market and US GDP rose from 47% in 1980 to 151% in 2019 (Table 7.1, line 5). The relation between the US stock market value and the capital stock of the American economy (all sectors, including residential structures) rose from 12% in 1980 to 45% in 2019 (Table 7.2, line 6). An even greater increase could be observed in the relation between world stock market capitalisation and world GDP; from 12.1% in 1980 to 55.5% in 2015. By contrast, world GDP increased by factor 6.3. This means that, between 1980 and 2015, global stock market capitalisation increased by factor 29. The impact of financialisation on economic policies can be most keenly felt in the daily turnover of financial assets and financial markets. The last 30 years have been characterised by the development of new financial “products”. The most spectacular of these have included derivatives. They are traded on official stock exchanges, but also beyond the stock exchange “over the counter”. We have seen a dramatic rise in over-the-counter operations (Table 7.2).

4.36 13.57 3,514 2.30 52.78 13.70 33.10

12.00 12.10

1985

2.87 12.37 2,906 1.36 47.35

1980

19.73

13.65

5.99 22.97 5,122 3.09 51.60

1990

18.46

24.33

7.68 31.13 8,674 6.95 90.49

1995

28.11

42.00

10.31 33.62 16,139 15.11 146.47

2000

33.72

37.13

13.12 47.61 14,634 17.00 129.58

2005

35.11

31.52

15.09 66.23 13,742 17.28 114.53

2010

55.24

39.47

18.33 74.88 19,167 25.07 136.77

2015

43.56

20.68 85.69 24,355 30.44 147.17

2018

45.18

21.55 87.69 28,909 32.69 151.72

2019

1

Sources: Lines1and 2: UNCTAD Stat Line 3: Dow Jones Industrial Average https://www.google.com/search?client=firefox-b-d&ei=95XjX5mDFcvSkgWs9IjYCg&q=dow+jones+industrial+average&oq =dow+jones+&gs_lcp=CgZwc3ktYWIQARgFMggIABCxAxCDATIICAAQsQMQgwEyCAgAELEDEIMBMggIABCxAxCDATICCAAyCAgAELEDEIMBMggIA BCxAxCDATICCAAyAggAMgIIADoECAAQRzoHCCEQChCgAToFCCEQoAE6CAghEBYQHRAeOgQIIRAVOgQIABATOggIABAWEB4QEzoGCAAQFh AeUMhLWLuhAWCs1QFoAXACeACAAawBiAHrD5IBBDE3LjSYAQCgAQGqAQdnd3Mtd2l6yAEIwAEB&sclient=psy-ab Line 4: https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US and https://siblisresearch.com/data/us-stock-market-value/ Line 5 and Line 6 Own calculations on the basis of Penn World Tables. (2021) Version 10.0. Output-side real GDP at current PPPs. Capital Stock at current PPSs. Feenstra, Inklaar, and Roberts 2015 https://www.rug.nl/ggdc/productivity/pwt/?lang=entables Line 7: World Bank, quoted from https://fred.stlouisfed.org/series/DDDM011WA156NWDB

US GDP, trn. US$ World GDP trn. US$ Dow Jones Industrial Average Total market value of US stock market trn. US$ Relation between US stock market value and US GDP, % 6 Relation between US stock market value and US capital stock, % 7 Stock market capitalisation worldwide to world GDP %

1 2 3 4 5

Year

Table 7.1 Some indicators of financialisation1

178 The globalisation of rent

0.98

1995 1.33

1998 1.11

2001 1.70

2004 2.85

2007 3.37

2010 4.66

2013 4.44

2016

5.82

2019

Bank for International Settlement (2021) Triennial OTC Derivative Statistics. http://stats.bis.org:8089/statx/srs/tseries/TRIENNIAL/A:U:A:B:5J:A:5J:A:USD:TO1:A :A:3:C?t=D11.3&c=&m=&p=2019&i=1.21&x=DER_INSTR.2.CL_DER_INSTR.I:H:G:R:Z:E:B:A&f=CSV

0.67

Total all derivatives (daily average in trn. 0.49 US$)

1

1992

1989

Year

Table 7.2 Triennial OTC derivatives (daily turnover)1

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180 The globalisation of rent

An essential aspect of these financial “products” relates to foreign exchange. In fact, derivatives from foreign exchange futures do not reflect higher degrees of globalisation. Before World War I, global finance was organised into an international gold standard system. In such a system, exchange rates do not float. Consequently, no money can be earned from more accurately predicting changes in exchange rates. The expansion of this practice represents the limited institutionalisation of globalisation. It also contributes to the latitude available to governments in adapting to globalisation by currency devaluation.

On economic bases and mechanisms: limited price competition and ample credit supply Financial resources for financial market-based operations increase because of decreasing price competition on the markets for goods and services. Capitalist enterprises continuously fight against price competition by attaching specific characteristics to their products. The advertising industry is occupied by the attempt to create a perceived singularity for particular products. In this way, it is possible to establish loyalty to trademarks and brands. Keynesian critiques of price formation according to supply and demand focus on latitudes and contradictions of mark-up prices. So too do theories of oligopolistic competition. Profits are no longer appropriated under perfect competition. Instead, they come to be appropriated according to market imperfections. In this scenario, profits cease to be limited by net investment spending. There may also be an excess of financial resources in the enterprise sector beyond those spent on net investment. This increases the demand for assets to be purchased on financial markets. Such financial surpluses are by necessity assets in the banking system. The holders of such assets are inevitably interested in their use at interest rates which exceed those paid by banks on current accounts. Both banks and holders of financial resources look for new opportunities for placing such financial resources. They find these opportunities on financial markets. Occasionally, though rarely, the stock of a particular enterprise is bought in order to cash the following year’s dividend. Stocks are bought because the value of the stock is expected to rise. The estimation of the rise of the future stock market price may be influenced by the potential capacity of a company to innovate or to increase production. This estimation may also derive from the most diverse expectations. These include the development of the general business climate, new internal markets in the country where the relevant products had not yet been sold due to insufficiently high wages or the opening of new external markets. Expectations come to be shared by economic agents. Evaluations depend on a circular development of perceptions. Amidst widespread uncertainty, people feel reassured if their convictions are widely shared. A herd-like behaviour comes to drive the purchase of particular stocks. These rise in price, which tends to confirm the predictions of their buyers. They buy more. Ultimately,

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stock rises precisely because of the behaviour which results from the original prediction. In this way, company value ceases to be determined by efficiency in developing new products and new production technologies. Now it is determined by accurately predicting the most profitable placement of resources on financial markets. There may be only a negligible relationship between a given company’s stock price and its contribution to productivity and growth. This is casino capitalism (Strange 1986). Certainly, financial markets are an important instrument for centralising monetary savings. Most members of the salaried middle classes cannot proceed directly to their own investment spending. Their incomes are too low, and the risk too great, for them to finance even small enterprises. The usual strategy of this demographic is to diversify financial assets by having small shares in many companies. This protects them against the failure of any one firm. Savings increase among those income strata which do not directly proceed to spending on net investment. This further heightens the supply of money on financial markets. Similarly, with rises in middling incomes and reduced opportunities for net investment spending, the demand for financial assets increases. Rising stock prices are self-reinforcing; they lead to further rising stock prices. Sure enough, this depends on the expectation that stock prices will continue to rise. Investors will try to participate in the rise of the stock prices by buying additional stock. Inevitably, however, the danger emerges that the already achieved and expected stock prices will begin to appear unrealistic. Even minor events can give rise to this uncertainty. Anxious investors will sell their holdings in order to benefit from the high prices of their assets, which they expect to fall in the near future. Price rises will begin to slow. Less anxious, more experienced investors interpret this as a sign that the market has turned. If this perception comes to be widely shared, stock selling accelerates and broadens, at ever lower prices. And so proceeds the herd-like behaviour of speculators on financial markets. Some have argued that economics is, above all, about psychology. This belief reflects the dependency of financial market spending on moods, feelings and shared images of the future. As we have seen, such factors underpin the herd-like behaviour which conjures both massive increases and sudden precipitous declines in stock prices. The ebb and flow of financial market prices promises high earnings to those who can correctly predict the turn of the market. Many speculators thus assume that their predictive powers allow them to acquire initially cheap financial titles and hold them until the maximum price is reached. If they are able to convince banks of their predictive talents, they will be able to secure loans with which to play the market. A capitalist monetary system with credit money contributes to the herd-like behaviour of investors on financial markets. The monetary policies of central banks can block the expansion of credit, but only to a limited degree. It cannot always curb the readiness of speculators to incur further debts. They are

182 The globalisation of rent

attracted by increases in the stock price. These may be very high. If it wanted to, the central bank could raise the rate of interest for credits and increase the cost of refinancing commercial banks. However, the gains from speculation usually prove too tantalising for such a course of action. Rising stock prices on financial markets increase the debt of stock market speculators. These speculators are essentially buying additional stock with money they rent from the banking system. Declining stock market prices will lead to speculators becoming overindebted. The securities they offer to loangiving banks decrease in value. Their collateral depreciates. Banks reduce credit lines. If stock prices decline, they will reduce lending. Increasing credits impact the readiness to take on loans like any other increase in the money supply. The monetary mass increases. In the real economy, prices might increase. This might trigger investment – also in the real economy. An increasing mass of money also cheapens credit for the real economy. Economic activity is made more dynamic provided that business perceives an increase in demand. There are positive consequences for employment. When the prices of financial titles decrease, however, the opposite process plays out. Speculators becoming insolvent decreases credits. This has the same consequence as any increase in the price of credit enacted by the central bank. The monetary mass declines and the price of credit for the real economy increases. Real demand – and therefore also the propensity to invest – are reduced. Effective demand and employment take a hit. Financial markets tend to overexpand. Managers of financial titles do not directly compete with each other. They do not make more money because they decrease the expansion of the holdings of others – that is, because of their competitive efficiency. Instead, they make money as long as the price of the titles they hold increases. Managers in the real economy may also be interested in the extension of their market. In order to achieve this, their market shares usually have to increase. Rising market shares drive down the market shares of their competitors. Growth in the real economy is linked to competitive edge of some companies over other companies. By contrast, the financial markets managers see their performance improving without the performance of their “competitors” necessarily being reduced. However, degrowth of financial markets impacts the real economy. There is an asymmetric relationship here which renders overexpansion of financial markets dangerous for the real economy.

States become hostages of fnancial markets The shift to financial markets does not constitute capital accumulation in real terms of productive capacity. It is, in fact, the creation of fictitious money for which there may be no counterpart in the real economy. This money exists because its holders believe that they can use it to buy goods and assets in the real economy at the going rate. However, this accretion of financial wealth is not necessarily accompanied by the growth of the real economy. Given the

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amounts of money in the financial markets (Table 7.1, line 5), the attempt to transform it into real wealth inevitably would lead to inflation on the markets for real goods and assets. Many of those who hold financial assets fear inflation. They often possess fixed interest rate securities, such as government bonds. The stock prices of these papers are fixed, so their owners have only a limited interest in financial bubbles. Their fear of inflation is shared by that segment of the public which is capable of monetary savings held in bank accounts. Financial speculators fund the purchases of financial titles with money they rent from banks. Money is thus generated on the basis of the readiness of speculators to go into debt without spending on local factors of production. There are, however, inherent limits to the expansion of financial markets. They depend on unstable projections of the future development of stock prices. These are determined by aleatory factors. The only stabilising factors in this equation consist in past positive experience, as well as trust in the monetary authorities’ readiness to bailout major money-creating agents by increasing credit. But expectations about future stock prices can be reversed. Instead, the expectation can come to predominate that bull markets with rising prices will turn into bear markets with declining prices. Under such circumstances, investors on financial markets will withhold new spending. The consequences for the cost of acquiring finance are severe. Financial markets are more than mere providers of opportunities for placing otherwise unspent money on production factors of the real economy. They are also important providers of financial means for running economies. Companies which want to proceed to net investment spending do not normally have the cash to pay for these investments at the moment of their physical realisation. They need more than loans; they also need financial resources which participate in the risk associated with investment spending. They can issue new stock. The price of this new stock depends on the general mood on financial markets. When financial markets turn to bear markets, the real economy suffers because of rising costs of finance. During financial booms, the central bank has some scope for limiting the expansion of the monetary mass in order to slow down the rise of financial asset prices. The capacity of the central bank to halt the decline of financial asset prices by upholding the monetary mass is more limited, however. In fact, monetary policies are not very effective in countering the consequences of a turn in the financial market. Even cheap money does not trigger investment if effective demand is considered to be weak. Financial markets have a central importance for making money available for the real economy. However, they do not follow the development of the real economy, but rather the perception of this development on the basis of expectations. These expectations are linked to interpretations, and ultimately on the development of stock market prices which are triggered by these expectations.

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In recent years, the European Central Bank has experienced some success in injecting money into financial markets, thereby limiting the decline of stock prices. It did, however, not launch investment in the real economy. The money multiplier which the central bank can trigger by cheapening credit invariably passes through the propensity of speculators in financial markets and investors in the real economy to take money from the financial market. This money is earmarked either for speculation or for investment in the real economy. In the case of declining financial title prices, there is no readiness among speculators to shift from financial assets to investments in the producing: the real economy. The profit rate in the real economy also declines. Due to diminishing effective demand in the wake of rising costs of finance, the reduction of net investment in the real economy compresses the expectations of profits and gains. The negative consequences of a decline in effective demand for the real economy reduce the propensity of enterprises in the real economy to acquire new loans and the propensity of holders of financial assets to use them for investment in the real economy. How can the real economy be sheltered from the effects of the stock market cycle and the overexpansion of credit-financed speculation? For this to occur, the central bank must work to maintain stock market prices. The central bank cannot avoid overheating. As overheating will lead to declining stock prices at some point in the future, the central bank rightly fears the effects of a crash. Such a crash results in some speculators becoming insolvent. The central bank has to avoid generalised bankruptcies. It pumps money into the market, arguing that it defends the investment in the real economy. If it is successful, stock market speculators are able to transform the overvalued financial assets into other, more secure assets, such as real estate, because the real economy does not expand without the perspective of increasing final demand. However, the central bank cannot avoid supplying cheap money by quantitative easing. It is hostage to the strategy of speculators, unable to avoid overheating and unable to channel financial titles into spending on real investment or rising mass incomes. It rightly fears the impact of massively declining stock prices on the real economy in the form of rising interest rates and declining effective demand. The central bank is, however, unable to directly launch rising mass incomes. Financial market speculation offers high rewards. But the overextension of financial values through speculation can be corrected only by incurring high costs to the real economy. Monetary authorities are hostage to speculators. Financial capital is often criticised for its tendency to sanction governments through capital flight. Compared to the disestablishment of the capitalist process described above, however, capital flight is of little critical importance for governments in developed countries. It is, however, of great significance for underdeveloped countries where production does not flexibly react to rising import prices. The consequence of capital flight is an increase of the offer of the sanctioned economy’s currency. It results in falling international prices of the currency. In capitalist economies, production elasticity is assumed to be high,

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especially when additional investment goods are locally produced. Small falls in the external price of the foreign currency lead to higher exports and lower imports and therefore to higher employment and production. The introduction of the euro and the sceptical consideration of this new currency by the financial markets lowered the value of the new European currency. Indeed, it did so to such a degree that, between 1998 and 2000, the German unemployment rate decreased. In underdeveloped countries, the reduced import capacity does not automatically lead to higher local production. Capital flight can be triggered by the economic behaviour of economic agents considered unfavourable by financial capital. This may negatively impact the growth of the financial markets and the development of stock prices. The shift to a bear market may be facilitated. The above section on the development of derivative trading already emphasised the importance of short-term capital movements. Given this, small amounts of the implied daily turnover which are transferred to more favourable finance capital markets abroad may have an impact on the financial markets they abandon (McKenzie 2010). And so, for governments and companies, capital flight also holds the fear of an increase in the cost of financing investments. For the wealth owners, it holds the fear of a depreciation of the currency and a loss of value of their assets in international comparison. This anxiety is not shared by the majority of the population. Business in the real economy can expect rising demand and rising profit from devaluation as a result of increased investment spending.

The rise of short-term capital movements and the detachment of fnancial markets from the real economy The liberalisation of financial markets in the last four decades has led to the introduction of new financial products. The basic characteristic of these products consists in their capacity to increase leverage. Leverage is the relationship between the amount of money required to purchase additional titles and their potential for rising in price. Suppose there is a (male) speculator who wants to earn money by speculating on the future rise of a currency in relation to other currencies. He predicts that this currency will become more expensive than other currencies. If he expects a higher rise of this currency than predicted by other speculators, then he will buy. These rival speculators will be ready to sell their holdings of this currency at a lower price than our more pugnacious speculator. After all, he predicts that, in the future, he will be able to sell them for a much higher price. The capital he needs would be equivalent to the cost of this amount of currency at today’s rate. Let us assume that the deal is about $1 million. One lady speculator predicts a 3% increase at the rate of the dollar. Now suppose there is a second, more circumspect (male) speculator who predicts a lower rate of increase of 2%. Our lady speculator is able to convince her more cautious companion to sell to her not a million dollars, but only the increase in its value between today and the date of settling their accounts. Both are speculating on the future stock prices

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of a financial asset. The more cautious speculator projects a rise in value of $20,000; our risk-prone speculator, of say $30,000. On the date of sale, the lady agrees to pay her nervous friend $20,000 for the right to sell his $1 million. If our risk-prone lady speculator cannily predicted the future course of the dollar, shewins $10,000. Now let us make a financial title out of this deal. The more cautious speculator offers guaranteed access to his $1 million at an agreed future date. He does so with a paper that he sells at $20,000 to the more risk-prone speculator. On the future date, he gets an increase of the value of the dollar of 2%. Our risk-taking lady speculator may have accurately predicted an increase of the course of the dollar by 3%. And so, though she paid $20,000 for the contract, she earns from this contract in fact $30,000. Her act of accurate prediction has netted her an instant 50% increase on her original investment. Her leverage was double the expected gain. Stock market titles rarely have a similar increase over the course of a year, as shown by the more modest increase of the Dow Jones index (Table 7.1, line 3). Increasing leverage is particularly relevant here. Derivatives from futures trading (i.e. betting on the development of prices) has burgeoned largely due to trading in currencies. Under the Bretton Woods system, governments and central banks had to intervene in foreign exchange markets if currency parities moved beyond the narrow limits determined by the International Monetary Fund. In 1971, however, the Bretton Woods system broke down. This signalled the end of the principle that had, to all intents and purposes, been at the basis of the Western (and arguably the global) economy; the convertibility of the dollar into gold at the originally fixed rate. Since 1971, exchange rates float, unanchored by gold. The result is that export companies do not know the value of the foreign currency they ultimately will earn in their own national currency. From their point of view, this is most regrettable, because they use national currency to pay for their labour and suppliers. A US company may decide to sell 1000 helicopters to a Eurozone company at $1 million each, with an agreement to supply the vehicles in six months’ time. Payment is on delivery. At the rate of $1.25 to €1, this is €800 million. But the European party to this deal does not know how many euros they will need to pay $1 billion in six months. The Europeans turn to a bank, which soothingly tells them not to worry; we will sell you the necessary dollars at the date of payment at the rate of $1.25 to €1. The bank is in a position to do this. One of its customers is a second European company which has agreed to supply 10,000 luxury cars (costing $100,000 each) to an American car dealer in six months. The dealer is required to pay $1 billion. In order to cover its costs, the car-producing company needs €80,000 per car, or €800 million. Whatever the course of the dollar over the following six months, the bank is obliged to provide the helicopter-buying company with $1 billion. The bank receives $1 billion from the American car dealer. It pays €800 million to the European car producer and receives the same amount from the European importer of the helicopters.

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This example may be fictitious, but it is by no means far-fetched, and it is designed to illustrate a basic principle of financial markets. In short, we are not talking here about real net transfers between different economies. We are talking about mere hedging operations. Because of the floating exchange rate, an exporter (perhaps a German company) cannot reliably predict their income from exports to, say, the USA, in the currency (euros) that they use to pay for their operating costs. However, a bank can provide the necessary security. It can easily guarantee the expected exchange rate, because the bank has US customers selling to Europe and European customers selling to the USA. The German importer supplies the bank with euros; the American importer, with dollars. The bank pays both exporting firms in their national currencies – and, naturally, makes a profit based on a superior prediction of the future exchange rate. Amidst all of this, the net flow of short-term capital between the two countries may be precisely zero. This increase in short-term financial operations is the only real difference between contemporary and nineteenth-century globalisation. Its roots lie in floating exchange rates; its effects owe to a deficit of globalisation. Future trading and exchange rates with derivatives are not the only source of increasing short time financial capital movements. Financial liberalisation has also led to considerable futures trading in, for example, raw materials. Financial markets comprise capital movements between different currency zones. Consequently, they influence the mood around the financing possibilities of these financial markets. The discipline of the real economy is superseded; now, the real economy is itself subjected to the whim of financial markets. The development of financial markets depends partly on an intangible mood. Ultimately, it depends on a particular interpretation of the capitalist growth process being shared by a majority of financial capitalists (i.e. speculators). From their perspective, rising mass incomes represent a threat to profit. This is despite the fact that their fictitious financial profits bear no relationship – either positive or negative – to wages. Speculators will interpret “unwise” increases in mass incomes as a threat to the profitability of the companies whose shares they buy. They will also view rising mass incomes as detrimental to the institutions, public or private, whose fixed interest securities they hold in their portfolios. The empirical evidence reveals that increasing financialisation is invariably accompanied by a deteriorating distribution of income and low increases in mass incomes (Onaran, Stockhammer and Grafl 2011; Duenhaupt 2012; Hein 2010). The mood of the speculators deteriorates when labour succeeds in realising the conditions for real capital accumulation. Labour triggers reactions on the financial markets which are inimical to labour’s interest in raising mass incomes. They do this simply because the holders of financial assets consider rising mass incomes to be a threat to, rather than a condition for, capitalist growth. Interpretations matter, and are always based on biases. Some interpretations may comprise a moralistic critique of capitalism and an advocacy of something

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completely different (and which some refer to as “socialism”). In 1989, such interpretations lost greatly in credibility. Today, the view apparently predominates in the Global South, the West and the former Eastern Bloc that state intervention in the economy must necessarily be limited. The self-governing function of markets and economic growth is assumed to be dependent on the availability of money. The basic aim is to improve competitiveness in those production lines which are projected to imminently experience high increases of demand. It is therefore reasonable to expect only a limited propensity to increase mass consumption, but a high propensity to increase business incomes and business promotion. Equally unsurprising is the close cooperation of government and business in the definition of means and targets.

The ultimate state guarantee for fnancial markets: overcoming instability by extending rent Increases of the price of financial assets have no counterpart in the real economy. For this reason, the continued expansion of financial markets requires protection from the non-profit sector of the economy – that is, from the state. In the real economy, a decline in net investment spending leads to a decline of profit. In the financial realm, surpluses are politically protected against this mechanism of diminution. The political appropriation of surplus basically equates to inevitable financial market expansion as a mechanism of rent appropriation. Additional financial wealth created by rising stock prices only serves to create the impression of wealth. In relation to this wealth, there are no increases in real assets. A bubble of stocks does not increase the wealth in real assets such as plant and equipment. According to the neoclassical model, value is deduced from utility. Assets may thus be trust-based, perhaps just as trademarks. Such immaterial values have no counterpart in spending on assets in the real economy. The increase of such immaterial values is not based on income generated on spending on investment goods, which is realised through the production of labour. This is the complete opposite of net investment in the real economy, where investment spending contributes to the empowerment of labour. Financial markets are unstable. They may break down even if they are supplied with enough cash. Events of seemingly negligible importance – such as the excessive indebtedness of American households in the early twenty-first century, or impending conflicts in the international state system – may trigger spectacular crisis. The herd-like behaviour of speculators can lead to dramatic deteriorations of stock prices. The propensity to take credit suddenly dissolves, with a subsequent destruction of credit money in the bank system. The provision of outlets for profitable investment on financial markets removes the macrolevel discipline imposed by the real economy. The microeconomic discipline of agents on financial markets trying to maximise returns on monetary investment does not result in new products or improved production processes in the real economy. Financial markets do not trigger the

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positive effects that mainstream economists associate with capitalism. They are, in fact, vast gambling machines which entirely lack the power to bring about corresponding increases in the production capacities of the real economy. Indeed, financial markets mirror high profit rates which often inhibit investors from putting their money into the real economy. The development of financial markets may therefore crowd out spending on real capital accumulation. Decreasing real investment limits the demand for and disempowers labour. Conversely, spending out of increasing wealth earned on financial markets has no effect on labour markets (beyond a possible increase in luxury consumption out of increased financial wealth). Like any credit money expansion, this monetary expansion is ultimately dependent on the state. In the first instance, the state and the central bank are required to guarantee money. Moreover, both must be ready to bail out the banks in case of a sudden and catastrophic loss of trust. The growth of financial markets is possible because of an ultimate state guarantee. This has become glaringly apparent from the monetary policies of central banks since the financial crisis of 2008. It essentially comprises the creation of fictitious resources. These can exist only because state monetary policies permanently permit the rise of the monetary mass in the wake of speculators increasing their debt. At times, the central bank even increases the money supply through open market operations (purchase of underperforming financial assets). At times, the capitalist mechanism of mass consumption supporting profit fails. During such periods, the crumbling elements of still available surplus, and the compensatory institutional mechanisms developed because of the availability of that surplus, all continue to operate. But this is so only because the state, government and central bank continue to play its role as guarantor. This is obvious in the case of support for mass incomes due to lack of employment, or subsidies to not-yet-profitable investment, but also in the case of money creation by the central bank. Such intervention does not require any coherent theory of the relation between state and market. The state intervenes like a fire brigade, extinguishing fires in a flagging capitalist economy to prevent its complete immolation. This has a politico-economic basis. Actual or potential surplus is no longer appropriated by capitalist entrepreneurs with a capacity to earn as much as they spend by realising investment spending. Consequently, there is surplus available, and this can be appropriated as rent. Those in control of rent are free from the discipline of the market. Their spending behaviour is determined by discretionary power. Discretionary power is exercised on the basis of interpretations of reality. These interpretations may vary. They are not necessarily corrected by reality. On financial markets, this absence of correction is realised through the expansion of credit and financial resources by government and central bank. In the real economy capitalists suffer the consequences of their errant judgements by losing money. In 2008, we witnessed the abject failure of financial

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analysts to predict a major crisis of financial markets. But this failure was merely the logical result of the fact that these analyses are more art than science, because they are unmoored from the tangible reality of the real economy. We are departing the terra firma of a labour-based economy for the airy nebulousness of an essentially persuasion-based economy. Suppose that the holders of financial assets are able to launch a bubble on the financial markets. The risk is that this bubble will be temporary. However, state monetary policy supports the financial market value through expansionary measures. But the holders of financial assets come to fear an impending decline, for whatever reason. Consequently, they might transform their wealth into products for the real economy. They buy additional products out of their financial resources. The amount of their purchasing power is higher than the initial cost of the corresponding financial assets. Total supply would increase only by the amount of unused existing or readily available capacities of production. The likely result would be inflation. The net result is that holders of financial assets receive purchasing power by imposing inflation. Inflation implies a loss of purchasing power to labour. The holders of financial assets would not have acquired this purchasing power without the support of state monetary policy for the stock prices of financial assets. Their purchasing power beyond the original cost of the assets is guaranteed by state monetary and fiscal policies. This income is political; it is rent. Financial capitalism as a solution for maintaining effective demand depends on the commitment of the state to transforming fictitious resources into potential access to goods to be produced in the real economy. These are created by speculation and increased indebtedness. In real terms, the transformation of these fictitious resources into goods of the real economy without inflation is not impossible. But for this to happen, untapped capacities of production must be available in the real economy. It is sufficient that this transformation does not occur simultaneously, but only step by step. Holders of financial assets therefore assume that their financial resources constitute real purchasing power, because having a counterpart in real production. This can be assumed as long as crisis does not break out. If governments can maintain the credibility of the supply of cheap money, there is no indication of a sudden transformation of fictitious wealth into products of the real economy. This constellation is revealing of the origin of rent. In the case of a configuration of low investment and low consumption growth, surplus capacities of production may emerge. In some circumstances, there is no mechanism for appropriation of the additional potential surplus by political instruments as rent. Under these conditions, the real economy will be characterised by laid off or unrealised capacities of production. This was the case in economic crises up until the 1930s. These crises were characterised by rapidly falling prices, low or even negative net investment (lower than amortisation), and obviously the massive fall of stock prices.

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Allowing surplus to be appropriated as rent appears today as a remedy. It is accompanied by the argument that this creates employment if market competition is weakened. In the USA and Germany during the 1930s, the massive fall of prices no longer occurred in industry due to (politically) tolerated “market imperfections”; that is, the emergence of market power. In the Great Recession of 2008, the official guarantee of a sufficient supply of credit money was added to the mix. The weakness of the expansion of mass demand and the importance of politically protected financial markets results in the replacement of capitalism by a rent-based system. Provided that the state guarantee for appropriate monetary expansion can be maintained, financial capitalism stabilises the system. However, it thereby disestablishes the system’s progressive tendencies. These comprise an increase in the availability of goods in relation to the work effort. This can translate into higher consumption or lower work time. There are two possibilities for maintaining high levels of returns on capitalist assets. A first solution consists in tolerating the expansion of financial markets. This leads to satisfactory returns for the holders of financial assets. For obvious reasons, financial capitalists favour this solution. The alternative solution comprises a maintenance of productivity-related increasing mass consumption and thorough restrictions on casino capitalism – that is, on financial markets. Addressing the lack of available investment opportunities through a state-led expansion of mass demand is, obviously, a political option. But so is expanding financial markets. The preservation of capitalism thus comes down to a political struggle between labour and financial capital. This struggle turns over the pattern of integrating rising surpluses into the capitalist process. A victory for labour would mean that these surpluses take the form of rising mass incomes, with a virtuous circle of rising mass incomes raising production and spending on net investment in the real economy. A victory for capital would mean that they take the form of a significant appropriation of surplus by political means as rent by a small number of financial speculators. This would entail minimal expansion of the real economy, limited incentives to spend on net investment and ultimately low profit rates in the real economy. The expansion of financial markets demonstrates that the behavioural rules capitalists follow do not, ironically enough, necessarily lead to capitalism. By capitalism I mean a mode of organisation for increasing production and productivity through impersonal competition among the holders of financial resources, the stock of which forms the basis for investment. Capitalism must be saved by embedding it into social structures which empower labour. If this is achieved, the rich and powerful will lose their rents, but not those profits they earn by net investment spending in the real economy.

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Implications of a rise of rent in the global system of states I have already sketched here an image of a social and economic system which is, in part, crumbling due to the weakening of capitalism’s structural links. It is easy to see that this crumbling triggers a thoroughgoing “politicisation” of the economic process. Some of the relevant measures, such as welfare measures for laid off workers or state subsidies for not-yet-profitable innovations in the form of national innovation systems, have already been mentioned here (Chapter 7, p. 176). Under capitalism, a marginal product higher than the cost of subsistence for a worker and his family creates economic citizenship. However, in a system predominantly managed with political instruments, the contradictions of politicisation apply. Michels (1925) has pertinently described the oligarchical tendencies of such systems, irrespective of their specific ideological background. This danger is reflected in the strenuous efforts of all new political movements in the West, from the Green parties to NGOs, to limit this ongoing oligarchisation. The civilisational achievement of capitalism consisted in avoiding or weakening such tendencies. Access to surplus among the privileged and access to income among the propertyless (i.e. workers) did not depend on political relations, but on anonymous market mechanisms. When this capitalist mechanism is weakened or even removed, the most important political intervention consists in a substitution or completion of the mechanisms guaranteeing innovation. The local market may not trigger enough innovation. Let us return here to the international context of the doomsday model of globalisation. In this model, an economy that falls behind is not necessarily compensated by the promise of excelling in the next innovation. Launching most innovative technologies is facilitated if there is a protected market which allows for the development costs of the technology to be earned. These costs can then be kept relatively low because of large production batches. Economies of scale allow the producers to proceed more rapidly to cost degression. If they want to launch a comparable technology, late-coming, catching up enterprises face high costs. They cannot earn these costs if markets are captured by companies that have already entered cost degression. All governments attempt to be present in major new technologies. Temporary falling behind is fearfully equated with permanent falling behind. Governments will thus endeavour to develop technologies identified in other countries as promising for the future. Leading countries will also opt for such industrial policies of state promotion of innovation. As we saw in Chapter 6 (pp. 149–151), export-oriented industrialisation does not follow factor proportions; it follows relative lags in productivity. Economies which were long considered backward may thus acquire comparative advantage in most modern technologies. There is no debate to be had about East Asia’s catching up in electronics, particularly in the cases of Japan, Korea and Taiwan. The argument about the low level of technology in the

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People’s Republic of China is null and void, because China is still in an earlier phase of such a process. Economies which are considered leading in older technologies will realise the necessity of “modifying” their comparative advantage by industrial policies which favour the most modern industries. Given the high exchange rates, they are not competitive in relation to the same industries from “emerging” countries. This remains the case even if these industries are initially less productive than in the old leading economies. The ensuing shift of financial resources to industrial policies will depend on political procedures which are prone to corruption and distortion. The economy becomes yet more politicised, in the industrial West, but also in the emerging industrial countries. There will be attempts to cope with imports from more advanced companies. Local production of such technologies by foreign companies will be viewed as an opportunity to leapfrog technologies. This will be especially visible in the catching up economies. My argument has emphasised the importance of technology, and the relative lack of importance of financial resources. Given this, countries that risk falling behind will attract foreign investment less for their contribution to the financing of investment. They will offer relatively favourable possibilities for earning and transferring company profits to their home countries, provided that there is a complementary transfer of knowledge. To be sure, financial transfers to the home company of foreign affiliates still constitute a drain on the host country’s balance of payments. Nonetheless, within the overall debate about the positive or negative impact of transnational companies, the critique of this behaviour has lost importance. Indeed, the debate on the relationship between transnational companies and host countries has been totally transformed. The multiplier effects and the learning effects on the host economy have taken centre stage; questions around the share of additional income have taken a backseat. The larger the market (and the country), the easier it will be to spread development costs over a larger number of customers (Hilferding 1968 [1909]: 423 ff.). If the country is sufficiently large, lagging behind does not preclude a sufficient number of customers for innovative products. The larger a country, the earlier it can try to leapfrog most modern technology. This is despite – admittedly important – lags in average productivity development. Certainly, larger internal markets may not guarantee being first, and thus a leading role in the transition to cost degression by economies of scale. However, large internal markets are always an instrument to reach cost regression by economies of scale more quickly. In this way, initial backlogs can be overcome. Smaller economies may attempt to spread development costs by occupying vanguard positions on the world market. They may even be able to benefit from their leading position by exploiting the technologies of larger countries. For this, they need comparative advantage in most modern technologies, despite their possibly overall lagging productivity.

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Catching up economies may have comparative advantage, despite being backward. They may use this comparative advantage for entering the markets of more advanced economies and to leapfrog these economies’ leading companies. This explains foreign investment drives from more advanced developing economies, such as China or India. These trigger increasingly industrial policies and therefore protectionism in the West. The necessity to maintain a relatively favourable place in the race for innovation must be married to industrial policy. This inevitably entails a search for markets large enough to reach early cost degression. This is where the principles of chaos theory come into play. Some countries will serve as agglomeration points for creating regional markets where differences in benefits acquired in innovative technologies can be somehow compensated between participating economies. The participation of smaller countries in a larger region dominated by a continental economy can be assured by a restrained regional hegemon. In the contemporary international system, there are several such points of agglomeration. These include the USA, China, India, perhaps the European Union if it can continue its integration process, and maybe Brazil and Russia. Smaller countries will defend their sovereignty. The larger countries may exercise political clout in their respective regions, especially because of their capacity to wage conventional wars. However, such endeavours are risky, given the danger of such wars escalating and drawing in bigger powers from other regions. All regional hegemons will try to maintain some harmonious coexistence within their region in order to project their power more effectively in the regions of rival hegemons. The costs of dominating any given region rise, and all regional hegemons fear the prospect of a rival making incursions into their “sphere of influence”. Not all powers of the global system are equally able to pursue the route of rising mass incomes guaranteeing profit, or catching up by market forces after temporarily falling behind. This leads to the predominance of a politically organised system of states. The leading states subsidise their blocked catching up processes. The possibility of rent-financed catching up is highly probable. It seems likely that the internal structures of the states in this emerging system will prove unfavourable to the struggles of labour to increase mass incomes. The cosmopolitan orientation of labour is a cultural legacy of the international socialist movement of the nineteenth century. But there is nothing historically inevitable about working class internationalism. In fact, labour’s specific foreign policy orientation in any historical constellation reflects a fundamental interest. This comprises the following: labour from other, technically backward countries with lower price levels must be prevented from transforming these lower internal price levels into significantly lower international labour costs. This interest derives from the fear that labour which has access to cheap wage goods can have a low international price and outcompete labour from countries with higher price levels. More advanced countries have such higher price levels because of their general advance in productivity.

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There are two solutions for solving this problem: international solidarity or nationalist, frequently racist detachment from any kind of international labour movement. In the middle of the nineteenth century, the British working class opted for the former. The result, in 1864, was the First International (van der Linden 2003: 14). In the late nineteenth century, the European working classes addressed this problem by imposing freedom of organisation on the trade agreements concluded by different high customs duty countries (Hubermann and Meissner 2010: 678–681). The contrast with the twenty-first century is acute. Trade unions are nominally committed to fair labour standards. In reality, they consistently attempt to block immigration. Blocking immigration and cheap imports constitutes the nationalist solution to the problem sketched out above. In such a scenario, the weakness of global labour is deepened by parallel patterns of labour behaviour in nearly all countries. Here, the working classes and their organisations aim to secure jobs while making extremely limited demands with respect to remuneration. The hope is to preserve jobs by being cheap on the world market. The impact of such a strategy on rising mass incomes does not need to be pointed out. We are witnessing a concerted march into the destruction of capitalism through the launch of an underconsumptionist crisis. In fact, such a strategy has been tried before, albeit in cruder forms. Devaluation races between the major industrialised countries during the 1930s spring to mind here (Great Britain and the USA). Concerted wage depression cannot end any other way. Keynes wanted to punish those countries which unreasonably limited their demand in an effort to achieve foreign trade surpluses. And thus we are left with our current constellation: underconsumptionist blockages in the capitalist sector; expansion of finance capitalism; and increasing state responsibility, especially for promoting innovation and maintaining social peace despite underemployment. It is obvious that such a system will experience periodical crises. And yet these crises will not lead to the empowerment of labour, because they will be accompanied by intensified job losses. Underconsumptionist tendencies, the mass of financial assets as an unrealised claim on the real economy, increased dependence of both labour and capital on the state; all of this points in one unmistakeable direction: the dominance of rent. Capitalists have an immediate and short-term interest in avoiding redistribution. Their pursuit of this interest means that they opt, and will continue to opt, for financialisation and government support. I do not believe that the interests of big business face meaningful opposition from the countervailing, prospective interests of rival capitalist enterprises which have more difficulty in benefiting from the complex of financialisation and state intervention. The only force capable of counteracting these tendencies would be the same force which represents mass consumption – that is, labour. However, this fact plays almost no role in public debate. The reason is obvious: labour’s basic rationale would have to comprise the attempt to make capitalism viable by counteracting the interests of the capitalists and increasing mass consumption.

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Such a position has no place within the major cleavages of public opinion in the industrialised West. Wages may fall below potential marginal productivity of labour in the case of lack of demand. During slack periods, unions defend the purchasing power of labour by political means. It is tempting to argue that real wages thus also have a rent-oriented dimension. It becomes even more tempting to argue this if high rising real wages depend on the closure of national labour markets. This impulse is at play in the contemporary defence against migratory movements. The financialisation option sketched out in this chapter comprises a channelling of rent via market imperfections, expanding financial markets and the protection by state monetary policies in favour of the privileged few. The alternative is an acceptance of rent’s appropriation by the mass of the population in the form of rising mass incomes, even if these are politically imposed. In this way, the link between capitalism and the bourgeois revolution becomes apparent. The famous slogan of the French revolutionary armies of the 1790s was “War on the castles, peace for the huts” (Guerre aux châteaux, paix aux chaumières).1 This can be reformulated in the (somewhat more civilised) context of contemporary political economy thus: “Competition for the privileged, rising mass incomes for the many”. The defenders of capitalism proclaim the following benefits of the system: profits increase production; productivity liberates labour; this liberation improves material standards of living. But rents for the privileged negate these benefits. Conversely, rents to the many increase mass incomes and facilitate profit through macroeconomic structures. This allows for a trickling down of profit at the microeconomic level to the most efficient producers. The capitalist goal of increasing productivity and production is realised.

Note 1 Nicolas Chamfort, French revolutionary writer (1741–1794).

References Duenhaupt, Petra (2012): Financialization and the Rentier Income Share: Evidence from the USA and Germany. In: International Review of Applied Economics 26 (4), pp. 465–487. Elsenhans, Hartmut (2019): The Impending Threat of Globalisation of Rent and the Defence of Capitalism by Labour. In: International Studies 56 (2), pp. 109–128. Feenstra, Robert C., Inklaar, Robert and Timmer, Marcel P. (2015): The Next Generation of the Penn World Table. In: American Economic Review 105 (10), S. 3150–3182. Hein, Eckhard (2010): Shareholder Value Orientation, Distribution and Growth: Shortand Medium-Run Effects in a Kaleckian Model. In: Metroeconomica (Oxford) 61 (2), pp. 302–332.

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Hilferding, Rudolf (1968): Das Finanzkapital. Eine Studie über die jüngste Entwicklung des Kapitalismus [1909]. Frankfort on the Main: Europäische Verlagsanstalt. Huberman, Michael and Meissner, Christopher (2010): Riding the Wave of Trade: The Rise of Labor Regulations in the Golden Age of Globalisation. In: Journal of Economic History 70 (3), pp. 657–685. Krippner, Greta R. (2011): Capitilizing on Crisis: Political Origins of the Rise of Finance. Cambridge, MA: Harvard University Press. McKenzie, Rex A. (2010): Casino Capitalism with Derivatives: Fragility and Instability in Contemporary Finance. In: Review of Radical Political Economics 43 (2), pp. 198–215. Michels, Robert (1925): Zur Soziologie des Parteiwesens in der modernen Demokratie. Untersuchungen über die oligarchischen Tendenzen des Gruppenlebens. Leipzig: Kröner. Onaran, Özlem, Stockhammer, Engelbert and Grafl, Lucas (2011): Financialisation, Income Distribution and Aggregate Demand in the USA. In: Cambridge Journal of Economics 35 (3), pp. 637–661. Strange, Susan (1986): Casino Capitalism. Oxford: Basil Blackwell. van der Linden, Marcel (ed.) (2003): Transnational Labour History. Explorations. Aldershot: Ashgate.

8

The alternative Defending mass interests and capitalism through rising mass demand: some concluding considerations

Summary Any strategy for countering the tendencies toward an inegalitarian, rentbased system at both the national and international levels must be realisable, at least potentially. In my concluding comments, I therefore concentrate on the possibilities of heightening mass consumption in a world which is becoming increasingly unstable. Increasing material consumption is triggering an increasing importance of new demands. Future needs are gaining in visibility, as are new “post-materialist” needs. I argue that the satisfaction of such needs requires their embeddedness in collective structures, especially with respect to social security. Preserving capitalism requires its complementation with collectivist structures which many refer to as “socialist” in character. This also applies to the climate crisis. Degrowth of consumption as felt by private households may be accompanied by increased consumption in relation to capital accumulation at the macroeconomic level. Higher environmental standards work, as do defensive investments in the wake of rising wages. The shift to environmentally safer production thus constitutes no threat to capitalism; in fact, it is the most advanced frontier of capitalist growth. The new competitiveness of labour from the Global South does not eliminate the marginality of large segments of its population. Preserving capitalism at the centre – and thus relatively autonomous civil societies and a limited role for government – requires the overcoming of marginality in the South. I propose a solution which is, from an administrative point of view, relatively simple. Certainly, it will be difficult to implement, primarily because there is no solidarity among the underprivileged at the global level. The proletarians of the world have not united. They are increasingly distinct in their socio-cultural orientation. Solidarity is no longer an international solidarity of class, but a solidarity oriented to cultural commonality. This splintering of the global working class along cultural lines cannot be addressed by appealing to the purported progressiveness of particular cultures. However, it can be overcome – at least to some extent – through pragmatism in cooperation for parallel or even shared economic goals. DOI: 10.4324/9781003182511-8

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A heterodox political economy must demonstrate that the interests of the underprivileged in the Global South and in the West are not entirely contradictory. On the contrary, they are sufficiently complementary to allow for concerted transnational action. By arguing in favour of the defence of capitalism, I also reject the widespread criticisms of alienation; a phenomenon which is frequently attributed to capitalism.

The capitalist countries and rising mass incomes Overcoming labour’s underconsumptionist tendencies in developed countries entails a fight for increased wages among this segment of the population. Three questions are relevant here. First, will Western labour come to accurately perceive its own interests and unreservedly enter into a struggle for higher wages rather than following neoliberal business arguments that wage restraint is a condition for job security? Second, is increasing mass consumption desirable, given the intensified environmental footprint of such increases in consumption? Third, will increased mass incomes translate into demand in the capitalist economy? This question is relevant because the level of income achieved in today’s advanced capitalist countries increasingly allows the great mass of the population to pursue post-materialist interests. Moreover, these high-paid workers assume that their future economic situation can be secured through restraint in consumption. Labour will never opt for a strategy of wage increases which strengthen internal demand if it continues to follow the basic principles of neoliberal economics. The fact that it follows these principles has a certain logic, once we recognise the isomorphous relationship between neoliberalism and the remnants of Marxist thought. These two apparently hostile worldviews actually facilitate the continued submission of working people to neoliberal recipes of wage restraint. The first point of convergence is that profits as a source of investment are assumed to decline in the case of wage increases. Scared workers therefore accept wage restraint in order to maintain the profit which they expect to finance their jobs. I am not aware of any trade union leadership in the West which explains rising mass incomes as a condition for profit. Wages are justified as constituting the necessary demand for production. However, it is almost never pointed out that wage increases constitute the basis of net investment spending. This is the only source of profit in the real economy. More “radical” trade union leaders argue for the moral necessity of higher wage increases in the face of the condemnable greed of capitalists. Their hearts may be in the right place, but they are missing the point, which is that wage increases are the determinative condition for capitalist profit. There exists an ideological blockage against a perception of capitalism in which wages and profits are discussed without moral considerations. The practical economic question of necessary limits to profit is transposed to the battleground of morality, where the very existence of profits is called into question.

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Labour must play the role of guaranteeing effective demand by increasing its incomes. To do this, it must accept the instrumental character of profits and their derivation from net investment spending. Profits are justified and necessary, not on moral grounds, but because of the crucial role they play within the system. On that note, however, profits beyond the level resulting from net investment are not really profits at all. These are rents. The definition of profit in the debate about the worsening distribution of income following the publication of Piketty (2014) highlights a central fact. To a large extent, capitalists or other surplus-appropriating classes in really existing capitalism acquire rents on the basis of politically or legally created market imperfections, such as oligopolies. By failing to distinguish between profit and rent, labour passes up the opportunity to place itself and its material interests as capitalism’s absolute point of origin. Labour is in fact the guarantor of profit. Of course, this assumes a definition of profit as a form of surplus which is appropriated on competitive markets. Other surpluses which require political or legal privileges for its appropriators are rents, not profits. There is no obstacle to capitalist growth if rising wages diminish rents. Under current conditions, and given the experience of Soviet-style socialism, any perspective for change must maintain market regulation. The left condemns itself to a minority position if it sticks to an antiquated and discredited economic project in which microeconomic relations are largely planned. Market regulation under conditions of surplus investment into productive capacities requires a measure of utility of the different possibilities of investment. This must be carried out in order to rationally distribute the surplus between different utilisations. We must assume that the price system reliably measures differences in costs of production and social utility. If it does so, then relative prices represent synchronised labour costs. Capital as representing produced inputs is part of these synchronised labour costs (Weizsäcker and Samuelson 1971). The profit rate measures the relative usefulness of different applications of scarce surplus. Alternative rules of allocation of scarce surplus can be designed, but only if it can be shown that externalities preclude prices from representing usefulness. The rejection of market principles implies the rejection of rationality in the use of scarce resources. Its replacement comes in the form of power games within politically organised apparatuses which evince various degrees of centralisation. Labour movements which do not respect this mechanism will fail even after having taken power. This is reflected in the reform discussion which played out in – especially – East Germany during the 1960s. Some Eastern Bloc economists proposed the introduction of accounting rules which followed the principle of the formation of prices, including investment funds and their price (Roesler 1993). This has given neo-Marxists such as Immanuel Wallerstein (2002) or André Gunder Frank (1994) cause to conclude that the socialist countries were actually capitalist. The overall direction of the investment process was not geared by market signals, but by political decisions.

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The existence of profits should not be a source of controversy. The real question is about maintaining the capitalist mechanism of limiting the amount of profit to net investment spending. This obviously implies an acceptance of the basic mechanism of capitalism, competition among the privileged. It also implies that the essential goal is not the elimination of capitalism, but the preservation of its corrective mechanisms and its proper regulation. An increasingly problematic factor consists in the reduction of the homogeneity of the working population. The growth of capitalism is accompanied by growth of the diversity of products and technologies. The negotiating power of small groups may increase. Branches differentiate with respect to their price setting power. Workers in branches which enjoy such power are favoured. The socialist and egalitarian option was discredited by its failure in the Eastern Bloc. This allowed the upper middle classes to occupy the public sphere, especially in the West. Empowerment of the lower orders has become a secondary issue. Income differences are justified with reference to productivity differences. For example, the middle class feminist women demand equal pay for women and men at the same levels of the employment hierarchy. However, they are less known for engaging in a struggle for the reduction of income differences between levels of the employment hierarchy. Marx’s insight was that productive labour does not create more labour value – in contrast to more intensive labour. But this notion has given way to the middle-class argument that labour should be paid according to its productivity. It is pretended that it is paid that income (paid at the going rate). This is obviously implemented in a rather systematic way by rendering employment precarious. The corona crisis has demonstrated that workers with high price setting power are not necessarily those perceived by the public as the most important for running society. This applies especially to higher income groups. Managers do not have their high negotiating power because they are considerably more productive than other workers. They basically fill their address books with other managers who, due to interpersonal factors and intensive “networking”, more readily enter into contracts with them. Managers acquire these interpersonal connections over the course of fulfilling their tasks, in much the same way that other workers acquire learning by doing. An egalitarian policy in this area would entail a proliferation of the holders of relevant address books in relation to management posts required for organising the economy. For this purpose, the potential managers must have the chance of networking by exercising management roles, just as workers have the chance of acquiring learning by doing. This can be achieved if a circulation model of elites is adopted. After some time, tax rates for highly earning managers will increase to such levels that they prefer to go on leave, “sabbaticals”, or spend their time engaged in other pursuits such as arts or sciences. Who knows? Maybe they will find themselves on assembly lines. They would be replaced by younger managers, who would proceed to expand their address books. After some time, any manager is confronted by

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high tax rates. There are thus always vacancies for managers ending their “sabbaticals”. This extensive system of leave-taking would create a market for access of managers with address books. During the financial crisis of 2008, the banks shed many highly competent managers. These managers then found themselves in a position where, possibly for the first time, they were forced to offer their services on competitive markets, instead of simply calling up their golf partners for a raise or a new job. Their price seems to have frequently been less than 50% of their previous salaries. In fact, the salaries of private managers are much higher than the incomes of owners of middle enterprises in competitive situations. They even frequently exceed the salaries of eminent and democratically elected political leaders, chosen in competitive elections. This seems to indicate that management salaries – probably even among middle managers – are anti-capitalist and rent-based. The second argument concerns the dangers of a loss of competitiveness in the wake of wage increases. In Chapter 5 (p. 138), I showed in some detail how comparative advantage is transformed into competitive advantage. Before the collapse of Bretton Woods, this was realised by movements of the general price levels of trading partners. Now it is moved through the exchange rate. Nominal wage increases can therefore only temporarily influence the competitiveness of a national economy. It is national because it is sheltered from the world market by movements of its unified exchange rate and internal factor mobility, especially when this occurs between regions and production lines. This explains the operation of the mechanisms of homogenisation of these rates, as described in Chapter 1 (pp. 30–32). Capitalists can always make profit on the basis of the creation of purchasing power through net investment spending. Real wage increases can reduce “capitalist” rents and those of other surplus-appropriating classes. They do not threaten profit; they even facilitate profit by launching investment spending due to increasing mass demand. The wage deal is a permanent struggle against capitalists, who are prevented from reducing capitalism to a rent-based structure. They aim to do this by increasing the surplus which accrues to them beyond the level of net investment spending. To accomplish this, they draw on “market imperfections”, such as oligopolies. Real wage increases change the distribution of income between wages and rent. However, they do not endanger either profit or the international competitiveness of the economy. In the case of excessively rising real wages, devaluation of the currency will exercise sufficient compensation. Before the introduction of the euro, Italy and France did not suffer from growth because of excessively high wages, but because of high credit costs. These occurred when holders of financial assets feared currency devaluation and were able to prevent their impending losses by freely exporting their money to non-depreciating countries such as Germany. A failure or refusal to increase nominal wages despite continuous foreign trade surpluses will either lead to currency appreciation, or it will have to be compensated by capital exports. Germany offers a vivid illustration. Prior to

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the introduction of the euro, the German mark periodically appreciated in relation to its main partners in the European Community, especially France and Italy. After the introduction of the euro, Germany financed capital exports. A considerable amount of this capital has been devalued, either by the appreciation of the euro or by credit losses. Rising mass incomes are neither a threat to profit nor a threat to competitiveness. Capitalism provides sufficient mechanisms for maintaining the Kaleckian profit, the real capitalist profit.

The saving trap At the current level of mass incomes, it is by no means certain that additional mass income will be transformed into demand within the capitalist economy. The Kaleckian model is based on the assumption that all household incomes are spent on products of the real economy. With increasing mass incomes, present consumption desires can be expected to decrease in relation to future, or anticipated consumption desires. These are not specified, and they may lead or not to savings for higher-priced consumer durables. In Chapter 2 (p. 46), I showed that the tendency to save money out of private household incomes depresses profits below net investment spending. If net investment decreases because of slow growth of consumption demand, the readiness of business to engage in further net investment spending will decline. Financing extensions of plant and equipment, launching new products, opting for more capital-intensive technologies in order to replace ever-increasing wage costs; all of this will decrease relative to overall GDP. In the case of market imperfections, liquidity will increase due to enterprise earnings beyond their costs of production and their share in profit created by net investment spending. Consequently, the business sector as a whole will not resort to bank loans for investment financing. It will certainly not do so to a degree where private household savings are compensated by debt increases in the business sector. This is even more the case if the capital output ratio does not increase. Under such circumstances, financing from amortisation becomes important. In Chapter 6 (p. 170), I provided numbers for an ever-greater share of amortisation in the financing of gross private business investment. We cannot expect that increased savings will be compensated by increased business sector spending on investment if the growth of demand and of the capital stock is low. At low GDP growth, the capital-saving pattern of rationalisation investment prevails. Such a constellation might well occur in a foreseeable stage of capitalism characterised by dematerialisation. Few advanced capitalist countries achieve a private net investment of or around 20%. But such a rate, coupled with a low-wage share of 50%, implies that private household savings of around 10% would require a rise of the share of net investment spending to 25% of GDP, or an increase in net investment spending by 25%. In such a situation, and in order to maintain the overall balance between consumption and production, the state would have to increase

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its spending beyond its income (taxes). In our example, this income would be around 3% of GDP. But its spending would have to be 35% of GDP, with a net deficit of 12%. Increasing government indebtedness may well appear as undisciplined spending. However, it is a necessity if households increase their savings without a corresponding readiness among enterprises to increase their indebtedness. There are two basic reasons for increased household savings. These consist in: • •

An increased sense of insecurity Post-materialist orientations

Households will succumb to a diffuse sense of danger if they are experiencing the threat of unemployment, health risks or the prospect of insecure incomes in their old age. It may be that, during periods of crisis, the propensity to save declines due to wage depression. Increasing the number of people on low levels of unemployment relief may lead to a decline of the propensity to save out of these incomes. Overall, however, wage decreases due to increasing unemployment and decreasing unemployment relief lead to a higher propensity to save. Strategies of aggressive reduction of labour’s claims to “protected” jobs and decreasing mechanisms of social support can only succeed if the economy is geared toward maximising export surpluses. Germany’s recent history offers a striking example of such neo-mercantilism. At the national level, wage restraint is thus implemented as an instrument for maintaining price competitiveness of exports on the world market. Its result is to strengthen underconsumptionist tendencies on the world market, as laid out in the argument that Germany’s imports are too low. Moreover, it serves to strengthen underconsumptionist tendencies in the wage cutting economy. Savings are certainly linked to the fear of possible future misfortune. The major anticipated threat to welfare comes from doubts about the established systems of old age pensions and insurance in case of sicknesses or work-related accidents. The amounts handed out to those unfortunate enough to be economically dependent come from the contributions of the economically active. Neoliberal ideology insists that these contributions are more secure if they are paid out of accumulated financial resources, such as contributions to insurance companies active in this field. However, the insurance companies can hand out money with purchasing power only if the economy produces a surplus of products over its costs of production. What capital pays out is redistribution of contemporary production. The emoluments that follow from old age pension rights are guaranteed only by the productive capacity of the economy at the time they are given. A national economy can save only by handing out credit to other national economies. One reaction to this basic mechanism can be seen in the project of using contributions to social security systems for investment in countries

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with high demographic growth. These countries are in need of international purchasing power for financing the import of growth-increasing investment goods. Shifting the responsibility for old age support to pension funds or capitalbased insurance companies is but one aspect of the expansion of financial markets. These will have an uncertain impact on the growth of production and productivity in the real economy. With all of this said, it seems reasonable to conclude that the tendencies for increasing financial surpluses are stronger than the tendencies for increasing physical capital formation.

Environmental protection as the new frontier of capital accumulation The environmental impact of capitalist growth is a hot topic. Under these conditions, rising mass income may not mean rising individual incomes. It may instead take the form of collective consumption. Technologies which serve to decrease capital costs may be environmentally harmful. For the less harmful production of the same goods, higher labour values must be engaged, in the form of higher capital costs or lower labour productivity. Increasing consumption follows environmental targets, taking the form of lower quantities but higher qualities. Private households can articulate the consumption of such new rising products only to a limited degree because of bandwagon effects and indivisibilities. Private households cannot make fundamental changes to mass transport systems, central heating infrastructures or settlement patterns. This requires changes in collective structures, such as the performance of rail traffic or the establishment of a centralised loading system for electrical cars. The formulation of such production targets results from political bargaining processes. Delegation and unequal participation – the well-known problems of political decision-making – induces an even deeper politicisation of capitalism from the supply side. Increasing environmental standards may constitute a whip for accelerating capitalist growth. When environmental standards are tightened, there is a substantial modification to the law of any technology – unit costs no longer must be reduced. Higher environmental standards may require higher inputs in capital or labour. This may result in an increase in total demand for the environmentally superior product. Chapter 2 (p. 47) set out the Bortkiewicz criterion. According to this model, under capitalist conditions, technologies characterised by a higher spending on investment than savings in other costs do not become cost-effective. Consequently, they are viable only if real wages rise. The same holds, if stronger environmental standards are in place, so that products are burdened by additional costs of production. This is either because some technologies are no longer allowed, or because their exploitation is no longer possible, if additional compensatory measures are not taken.

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If it gets banned, the less environmentally friendly technology is simply no longer available. It cannot set unit prices for competitors to adjust to. The environmentally friendly technology can have higher unit costs of production. Higher unit costs of production imply either more labour or more inputs consumed and/or investment goods applied during the production process. Higher environmental standards have the same consequence as rising wages. They render cost-effective and thus competitive precisely those technologies which, given less rigorous environmental standards, would have been too expensive. They trigger defensive investment. Environmentally friendly technologies do not reduce labour input in relation to less environmentally friendly technologies. Those technologies which harm the environment are believed to externalise the costs of production. Otherwise, environmentally friendly technologies would be chosen by the entrepreneurs without additional incentives. Ending the externalisation of such costs implies either costlier technologies with increasing capital output ratios, or demand for compensatory technologies. This implies that the “degrowth” of private consumption may be a necessity. The external costs of our actual pattern of consumption may be so high that even the continuation of this pattern is unsustainable. In the macroeconomic model presented in this book, such degrowth would nevertheless constitute increasing consumption. Consumption of better goods with higher unit costs or which require compensatory production can still be considered consumption (as opposed to capital investment, which such consumption may also trigger). Total demand can thus be high. This is because the acceptability of the production process can only be aligned with environmental standards through higher capital output ratios or increasing requirements of compensatory products. Investment in environmental protection, like defensive investments, absorbs surplus capital (Chapter 2, p. 48). The implied possible rise of the capital output ratio entails a shift between profit and private consumption. This induces an increase in the share of profit in total income. Consequently, protecting the environment may become the new frontier of capitalist growth. It may allow capital accumulation to proceed more rapidly than private (and other forms of) consumption. Higher environmental requirements thus present no threat to capitalism. In fact, they merely offer a substitute to the model of individual consumption which capitalism has relied on since its inception. In place of this model, they advance collective consumption. Capitalist profit is perfectly safe under these new conditions. The shift from individual to collective consumption does not constitute a threat to the interests of capitalists. The requirements for higher investment in order to produce in an environmentally safer manner may even guarantee growth of the capital stock in excess of the growth of consumption and GDP. This would result from an increase in the capital output ratio. The consequences would be macroeconomically comparable to the railway boom of the second half of the nineteenth century. This triggered employment and capital accumulation.

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Provided that the Kaleckian mechanism functions, higher outlays of capital will lead to higher profits and thus easier access to profit. A decline in capital productivity thus constitutes a motor for demand and growth. Employment will be maintained and may even grow. However, private household consumption might well decline – not just relatively to GDP, but even absolutely. If this enjoys even moderate increases, however, then labour might accept such a shift in distribution as a consequence of the limits to growth.

The contribution of the marginality-ridden world to maintaining world demand in line with world productive capacities Let us first overlook the anomalous examples of Singapore and Hong Kong. These two city states were able to limit immigration from surrounding marginality-ridden areas. Generally, export sectors allow for the absorption of marginal labour and contribute to employment growth only under certain conditions. In countries where this has worked, export orientation was complemented by economic reforms in favour of the marginal. The Tiger nations, South Korea and Taiwan, both implemented thoroughgoing land reforms. So too did their apparent ideological opposites, the People’s Republic of China and Vietnam. All four exhibited the same positive results on high multiplier effects of additional manufactured exports. The decisive element consists in the creation of conditions in which marginal labour is employed and absorbed in surplus-producing work. Marginal labour must be given the chance to earn an income for which there are complementary wage goods available in the short term. These possibilities must provide incomes which trigger investment decisions in wage goods production by small-scale entrepreneurs and farmers who do not benefit from government-sponsored development programmes. Let us assume that at least some of the capitalist countries agree on a kind of commodity money which can only be collected in a labour-intensive manner. The participating countries would charter helicopter pilots to throw bulky, clearly identifiable, unforgeable logs across remote areas. For a country like Bangladesh, this could be bulky logs with the specific weight of the Ganga water. In a desert country, logs could be dropped in areas sufficiently remote to require a day’s journey for gathering and bringing them to densely populated areas. The participating countries may announce that this money will be converted in a central location. The exchange will occur at a rate at which the average collection made by the poorest will meet the cost of satisfying the basic material needs of a nuclear family plus the handling costs of local intermediaries. We assume that this is lower than the incomes of poor peasants with plots sufficiently large to guarantee their subsistence. The marginalised would then set out to gather these logs. The gainfully employed or economically active would not forego their respective sources

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of income because of the low returns of these gathering activities. The newly created group of gatherers would exchange the logs against local purchasing power and buy wage goods, especially food and some simple manufactured goods. They do not have to personally carry these logs to the agency which pays for them. There may be lorry drivers in market villages who buy the logs and carry them to the central agency. However, these drivers must pay the labour value, the cost of reproduction of the gatherer and his nuclear family. Otherwise, the gatherer will try to find alternative sources of survival. Whether or not he is successful, he would no longer be available for log-gathering. Naturally, the same logs can be dropped multiple times once the exchange is realised. In contrast to so-called helicopter money, which are mere banknotes or credit lines dropped to the population, this log-collecting enterprise constitutes a production process which generates a labour value. The fact that it is completely artificial is beside the point. The result is that products can be sold, and these require the expense of labour time. In contrast to the mere distribution of rents, the labour power of the gatherers cannot be reproduced if they are cheated by the buyers. In order to make money out of this additional demand, farmers with small plots and small-scale manufacturers will increase their demand for labour as the level of marginality may increase due to rising demand for food. Naturally, they will first increase the working time of their own large families and friends – an “industrious revolution”. Even this gives rise to shortages of labour, however. In order to increase their incomes, informal sector manufacturers and farmers will introduce some innovation and opt for investment. Let us assume that the exchange rate is set at a level where local technologies – and ultimately labour in the traditional sectors of industry and agriculture – are competitive. Under these circumstances, they will order locally produced technology and enlarge the market for such products. Local manufacturers – and especially local agriculture – may not be able to immediately satisfy the additional demand. The development assistance of participating countries is paid in international currency. Consequently, shortages and inflationary pressures can be avoided through additional imports, assuming that development assistance is maintained. Such imports do not crowd out local agricultural production if the price of foreign currency is high enough for local prices covering the costs of local agriculture. The Green Revolution has resulted in the development of yields, even in peasant agriculture. It is thus probable that food production will be increased. When engaging in export-oriented manufacturing, China, the two smaller Tiger nations and Vietnam were all able to increase agricultural production to levels where they met self-sufficiency. Investment decisions by these small producers will not be oriented to labour-saving technologies. In contrast to labour for landlords or labour in units employing salaried workers, their labour does not constitute costs for them. If there are no other remunerative jobs, they will provide this

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additional labour, in much the same way that an egalitarian land reform leads to mobilisation of labour (Chapter 5, pp. 122–124). Therefore, the demand for investment goods will be limited to production-increasing – rather than labour-displacing – technologies. If the market sets the right signals, development assistance can dispense with the rather costly staff which manages development projects. This includes most of the local middle-class staff which, especially in NGOs, enjoys relatively high incomes. Foreign development agencies can be reduced to the staff of companies which contribute to satisfying local demand for appropriate technology under conditions of market competition. This is a target which these agencies have always declared to be their priority. In such technologies, the kind of multiplier and accelerator effects of demand described in Chapter 5 (pp. 66–69) may indeed be substantial. Initial local content is high and will subsequently increase. Local producers capable of manufacturing technology will react to an expanding market by increasing production. They will learn how to improve their own technologies also from foreign suppliers. Agencies converted to producers of appropriate technology may contribute to reducing the search costs of such improvements. This of course remains an artificial industry. State-sponsored strategies apparently pursue more ambitious developmental goals. These claim to more efficiently use development assistance transferred to the marginality-ridden countries. However, the disinterested development agents required for this do not dominate day-to-day and long-term development policies. The same reasons apply here that I have already given in my analysis of the state class (Chapter 5, pp. 125–128). According to my strategy, agents are driven by microeconomic incentives for improving their economic advantages. They will thus perform better than members of state classes, even if, for cultural reasons, they are basically striving for prestige and political power rather than monetary enrichment. Economic self-interest comes to erode the hurdles represented by cultural tradition. Chapter 2 showed that capitalism is successful not because of the moral qualities of those in control of the surplus. It is successful because, under capitalist conditions, increases in production via rising productivity are transferred to the mass of the population because of their scarcity. This scarcity of labour is triggered by increasing (mass) demand. Increases in mass demand create a space in the economy in which returns on efforts – in this case, investment – are higher than in other activities. Productive investment offers better access to surplus than property in other assets if mass demand increases. Consequently, a sizeable proportion of those who depend on markets for profit become interested in disempowering those who appropriate rent through market imperfections. Only the key characteristic of a functioning capitalist economy – scarcity of labour – ensures that the transfer of production increases to labour become the result of market mechanisms. Such a system entails the imposition of competition on the rich and powerful, and the empowerment of labour through its scarcity.

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In the developed West, a particular international constellation is contriving to disestablish the mechanism of the market-regulated transfer of production increases to the man in the street. This constellation comprises the existence of cheap labour in marginality-ridden economies. This labour may be rendered cheap by low exchange rates. Either way, it outcompetes scarce – and thus expensive – Western labour. The empowerment of labour is the condition for maintaining capitalism at the centre. The empowerment of labour in the marginality-ridden economies has become the condition for maintaining the empowerment of labour in the capitalist economies. I have suggested two solutions here: high levels of employment in the capitalist world, and artificially increased employment in the marginality-ridden world. These solutions are structurally similar. They organise the transfer of rent to the labouring masses. The short-term elimination of marginality and therefore joblessness cannot be expected from economic mechanisms in the Global South. By contrast, the development of artificial industries helps to manage marginality by creating the internal market from which local capitalism can emerge. The artificial industry creates the conditions for capitalism to unfold in not-yet capitalist structures. Taxing rents in these economies would also provide the resources for eliminating marginality, as has been shown for the case of land reform (Chapter 5, p. 123). Internal resources exist. The West, however, is unable to impose such redistributive reforms. The danger is that marginality will preclude the empowerment of labour in the Global South. If this is so, then this region will continue to be managed by social groups which, whatever their avowed political persuasion, are united by their appropriation of rent. A rent-based ruling class that tries to prevent the log-dropping programme of a Western development agency would certainly encounter significant difficulties in maintaining its grip on power. After all, Western agencies would be handing out development assistance directly to the labour-value-producing gatherers. Those who aspire to middle-class status would soon realise that they no longer require the patronage of the state classes. For 70 years, those agents capable of allocating politically generated income (i.e. rents) have not been sufficiently available. The proposal presented here implies a low-cost mechanism of channelling rent to particular social actors. As a result of their own interests, and despite their hunger and poverty, these actors will use their new resources for articulating exactly the demand which is required for launching the labour-intensive production of consumption goods and appropriate investment goods. This will create employment and empowerment of labour. Obviously, the mechanisms described in Chapter 5 (p. 139) on deepening the impact of export-oriented manufacturing on local labour markets and income structures also apply here. Such an apparently bizarre scenario – in effect, the construction of an artificial industry – is really not as fanciful as it might seem. After all, doubling the income of that section of the global population identified by the World Bank as “poor”

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(in 2020, 689 million people below $1.90 per day) would cost less than the subsidisation of the American banks during the early phase of the financial crisis ($3 trillion between Sept. 2008 and April 2010, Anderson and Gascon 2011: 5). This can be applied to particular countries which are ready to cooperate. They will lose competitive advantage in the industries they started to use for creating employment, if at all, only after reaching scarcity of labour. Individual countries engaging in this type of marginality elimination will soon become model cases. This would contribute to changing the political situation in countries with more reluctant ruling state classes, as well as other rent-based classes such as oligarchies. Globalisation renders visible the fact that capitalism has to be based on an efficient taming of rents. The spontaneous reactions of capitalist and marginality-ridden economies to the challenges of globalisation reveal a sobering fact; globalisation negates this taming of rents. These re-emerge in multiple ways, as described here. The allocation and appropriation of rent are political processes. Managing rent thus depends on political coalitions. Capitalism in the developed world had a foolproof, rent-managing mechanism; labour creating its own scarcity because of its unruliness. Globalisation disestablishes this mechanism because labour in the potentially high-employment industrialised countries has lost control over international prices of labour. This has resulted from the entry of millions of – perhaps less skilled, but certainly cheaper – workers onto the international labour market. The price of this labour remains low, at least until its success and thus its competitiveness lead to labour scarcity also in the Global South. Preserving capitalism at the global level thus implies cooperation between labour in the industrialised West and political organisations in the Global South. These organisations must draw their power from their credibility in representing the interests of labour – especially of not-yet-employed, marginalised labour – in the Global South.

Alienation is acceptable and liberating My apparent support for capitalism will surely attract much criticism. Words such as “reification” and “alienation” will be invoked. Such terms describe the purported psychological effects of labouring in an economy of exchange which produces for anonymous markets. The analytical validity and usefulness of such terms is dramatically overstated. Any couple or family demonstrates the necessity of equality – or at least attempted equality – in undesirable work. It is difficult to imagine a society with a (productivity-increasing) division of labour in which unpleasant labour is not measured. We may even “objectivise” ourselves while undertaking certain activities that we otherwise enjoy. We do not “self-realise” when undertaking labour we do not enjoy. And, certainly, such labour can become the basis for an exchange of objects. It can thus constitute a kind of “objectivisation”.

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Nonetheless, we supply this unpleasant labour only to the extent that we consider it to be fairly distributed among our group of reference. This always implies certain criteria that we are not in complete control of (in a couple or between parents and children, it is the result of a process of familial negotiation). In a hierarchical structure, the boss can define the importance of the unpleasant work he does, as do managers when they justify their high salaries with reference to the “high psychological burden” attached to them. The rule of distribution under capitalism is the convergence of wages to averages, as shown in Chapter 1 (pp. 30–32). This principle is acceptable to a good majority of the population, as is this imposition of competition on the aspirational. Both principles imply equality. Alienation is the condition for a fair distribution of incomes among salaried labour. Alienation is an inevitable implication of any recognition of the value of the result of the productive process. Indeed, it arises more generally from any activity undertaken for recognition. Such activity may (or may not) be evaluated on impersonal markets. This state of affairs is positively liberational when compared to the evaluation of the “object” within the context of personalised groups. Such a structure was alluded and aspired to by Marx and Engels (1969 [1845/46]: 33) when they wrote about precapitalist communities. Unfortunately, history tells us that this apparent realm of emancipation is rather hierarchical in practice. This has been clear since the emergence of surplus during the introduction of agriculture and cattle raising during the Neolithical revolution. However, it may be that alienation is imposed not only by the organisation of the capitalist production process – that is, by the strategy of reducing concrete labour to abstract labour which has a value in the market (Chapter 1, p. 12). In fact, it may occur because of the search for distinction. Online influencers and celebrities quite voluntarily determine the evaluation of their standing, in much the same way as do anonymous product markets for goods and services. The basis of alienation is not the capitalist process of value formation, but rather the individual’s desire for recognition in ever-greater social groups. Culturalist and psychoanalytical evaluations of capitalism thus miss the point. In fact, evaluation on anonymous markets presents more degrees of personal liberty. This is not least because it holds out the possibility of escape through concentration on “niche” markets. I will not speculate further on the cultural or psychological consequences of competition for the few and scarcity-based entitlement for the many. Either way, I doubt that the mechanism of market regulation exerts a spiritually deleterious effect on most of those who are subjected to it. The realm of liberty may exist outside the realm of necessity, perhaps under the condition of giving up the desire for recognition. I have never met anybody who enjoyed cleaning dishes or even filling the dishwasher. I have argued that the conditions for capitalist growth are rising mass incomes, as well as the reduction of working hours as one form of channelling productivity increases to the many.

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And so Marx’s realm of liberty can be more easily extended for the masses if competition is maintained among the “palaces”. This is certainly a more effective solution than transforming the palaces into benevolent bureaucracies. Even under conditions of widespread participation, the necessary delegation of powers leads to oligarchisation of organised institutions and forces. Nongovernmental organisations demonstrate this trajectory in abundance. They frequently begin as idealistically oriented organisations; they invariably develop into hierarchically structured entities. Scarcity of labour with access to markets for employment is the guarantee of “exit” as an option of resistance. “Voice” can provide a substitute for this only if some possibility of exit continues to exist (Hirschman 1970: 35).

On preserving capitalism by labour There is no need for Western labour to create jobs for the marginalised populations of the Global South. The goal should be more limited: the enablement of high multipliers and accelerators in the economies of the South through more modest measures. These include export-oriented manufacturing, as well as development assistance in strategically decisive points of the economy, especially agriculture and local technology production. Such aspects were described in the analysis of development policies in Chapter 5. Cooperation can occur on a piecemeal basis. I have already shown here that many apparently unrelated measures can lead to synergetic effects. The question is thus not so much What is to be done?, but rather Who can cooperate? On the one hand, we have a clear weakening of Western labour. There has been a growing loss of class consciousness and coherent representation among this demographic. Some of its constituent elements have even turned to the far right. On the other hand, we have a large, marginalised mass in the Global South. This group is in precarious employment, or it is unemployed. It has great difficulty in forming representative organisations. Unfortunately, the Western left’s recent relationship to labour in the Global South is likely to severely compromise any initiative it undertakes in this area. The major force of the Western Left after World War II comprised social democratic or Fabian movements. These organisations generally did not show committed support for the claim to national self-determination of the awakening peoples of Asia, Africa and Latin America. At best, such support was half-hearted. In much the same way, the representatives of Western labour have not shown much understanding for the economic claims of the Global South. They have generally cold-shouldered the call for rents to be transferred South as a source of finance for overcoming underdevelopment. Of course, there is some veracity to the objection that the Southern elites comprise wasteful state classes who would simply use such transfers for self-privileging while neglecting the mass of the population. Nonetheless, and especially after the oil crisis, nowhere in the West has there ever been much enthusiasm for the prospect of

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deepening such transfers to the South. There is simply no audience within the Western labour movement for the idea of systemic reforms in the interest of mass employment of the marginalised population of the South in exchange for mass-oriented development. This would entail rapid increases in production for this population’s needs.1 The representatives of Western labour considered the implied deterioration of the terms of trade as a threat to rising mass incomes in the West. More Social Democratic – but nonetheless neo-liberal – Western politicians have generally viewed such an option as a threat to employmentcreating investment. Communist movements have generally indulged in a predominantly political discussion about the class character of the state classes. According to this school of thought, the “national intelligentsia” would be required to apply rent appropriation for rent allocation in the interests of economic restructuring. Historically, the main criteria for evaluating such elites was actually geopolitical; that is, their attitude to the “real existing socialism” of the Eastern Bloc. Given their analysis of capitalism, Communists could obviously not even entertain the idea that more capitalism could actually be a progressive force. The only exception is Baran (1952), who correctly saw capitalism as an instrument against the centuries-old self-privileging of elites via rent appropriation (which he defined as feudalism). After the victory of the anti-Hitler coalition, there prevailed a broad consensus around secularism and state responsibility for maintaining full employment. This consensus has since broken down. In the Global South, new cultural identitarian movements have emerged. They are frequently criticised by Western liberals. However, they are also taken as proof for the dubious position that social science can effectively dispense with political economy. Supposedly, culture can be determinative. The widespread acceptance of this highly questionable position results in a regression of social science. Unfortunately, some social scientists are most pleased about being liberated from the onerous responsibility to engage in interdisciplinarity. These new nativist, or cultural identitarian political movements (Elsenhans, Ouaissa, Schwecke and Tetreault 2015), are able to mobilise desperate and marginalised people. They achieve this despite their manifest inability to present economically coherent perspectives of overcoming underdevelopment and integrating the poor into labour markets. A key characteristic of capitalism comprises strong mass movements opposing politically less organised capital. This is replaced by a social structure which can only be likened to the ancient empires of antiquity, though of course a more modernised variant. We might define such social structures as modernised tributary modes of production. The basic difference between welfare capitalism and these modernised tributary modes of production is political in origin. In capitalism, labour is empowered by its scarcity; in a modernised tributary mode of production, it is not. At stake here are the use of rents. In such a political struggle, providing labour with the proper ideological weaponry is essential. Historically, labour’s

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success was based on its rejection of classical economics. The only important factors here were the negotiating power of labour in the wage deal, and the legal regulation of the labour contract. But the requirement now is to coordinate mass-oriented market-regulated development in both advanced capitalist and marginality-ridden economies. Consequently, it is essential to understand the mechanisms of capitalism without resorting to a moralistic critique about the greediness of capitalists. Without the countervailing power of labour to keep them in check, capitalists will inevitably become rentiers, protected from competition. This has always been their goal. Under these conditions, a critique of mainstream positions becomes more than a mere academic exercise. Such a critique can serve to equip those political forces which are on the side of the masses. The basic argument of such forces must be that capitalism can in fact support, and does not necessarily have to suppress, mass interests. And yet these forces will fail if they are opposed by an unholy alliance of neoliberals and Marxists. Indeed, under such circumstances, orthodox Marxism serves as a testimony to what Herbert Marcuse (1969) called “repressive tolerance”. The dominant system in the West is so liberal that it can accept the flourishing of Marxist discourses. Indeed, it actually benefits from their existence, insofar as orthodox non-realistic “critical” theories are permitted to occupy public space. This allows for a safe discrediting and marginalising of much more effective and materialist critiques of the status quo. Capitalism is permanently under threat. Whatever the specific twists and turns of policy and history, whether the key factor is globalisation, the deepening of underdevelopment, or the struggle against financialisation, the overarching goal remains always the same: maintaining the negotiating power of labour where it exists, and creating it where it does not. This goal can be achieved by avoiding a dogmatic commitment to any particular school of economics. Neoclassical economists emphasise the production function, but this does not reflect the role of mass consumption for investment. Marxist thought concentrates on the role of exploitation. It stresses the emergence of surplus which labour does not control and which accrues to capitalists. Monetary Keynesians overestimate the possibility of maintaining effective demand by performing monetary tricks. Instead, they should acknowledge that Keynes’ argument allows for only one adequate interpretation: the necessity of maintaining and defending the empowerment of labour (Elsenhans 2019).This does not constitute a threat to capitalism – it is the basis for capitalism’s maintenance, and for its progression to a more satisfactory structure. If this book contributes to an acceptance of this basic position, then it will have served its purpose. I reject Marx’s (1972 [1843]: 356) early argument that capitalism is unable to realise the promise of the bourgeois revolution of 1789. In fact, the legacy of that revolution – and capitalism – are endangered by the prospect of a total retreat to precapitalist “feudal” structures. In order to overcome this danger,

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capitalists must be prevented from following their instinct to deprive labour of participation in technical progress. This requires a macrosociological structure in which labour is empowered. In this way, the coalition that brought about 1789 is restored. Indeed, this book hopes to provide a theoretical basis for cooperation between labour and a bourgeoisie which has finally accepted the reality of the true conditions of capitalism. Whether or not we decide to refer to this arrangement as “socialism” is, from my point of view, largely immaterial. Samir Amin (2018: 223), the most penetrating Marxist of the 1960s, nonetheless offered no real perspective in this area. He defined socialism as the “fantasy about the future”, an economy beyond profit and market competition, and thus consigned its realisation to a very remote future. This very remoteness renders meaningless political practice in the present. By contrast, a spirited defence of capitalism as outlined in this book rests to a decisive degree on political practice. Capitalism was not imposed due to the intellectual demonstrations of eminent economists. It resulted from successful class struggle on the part of the masses. By the same token, only political struggle can help achieve a shift to “another” form of growth, one that is friendlier both to the environment and to labour. This struggle is manifestly political, given that it is largely a struggle over the allocation of rents. If it fails, more rent appropriation and inequality will follow. Labour will be pacified just as were the unquiet masses of the Roman Empire – with panem et circenses. Let this book make some small contribution to avoiding such an outcome. Let it also contribute to a debate which will provide the basis for a political defence of a reinvigorated capitalism. Such a system will certainly be friendlier to the environment and to labour than the regression to precapitalist, tributary, rent-based modes of production which is continuing apace across much of the globe.

Note 1 On the occasion of a French German conference on the impending oil crisis in May 1973, I suggested such a solution, because oil prices were clearly threatening to go up. The German head of delegation excluded me from further discussions because of this argument. I was re-invited by the French participants, as far as I see senior professors close the left-wing tendencies of the Gaullist movement, cf. Levi 1973: 356.

References Amin, Samir (2018): Modern Imperialism, Monopoly Finance Capital, and Marx’s Law of Value. New York: Monthly Review Press. Anderson, Richard G. and Gascon, Charles S. (2011): A Closer Look: Assistance Programs in the Wake of the Crisis. In: The Regional Economist (St. Louis) January, pp. 5–10. Baran, Paul A. (1952): On the Political Economy of Backwardness. In: Manchester School of Economic and Social Studies 20 (1), pp. 66–84.

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Elsenhans, Hartmut (2019): Rising Mass Incomes as a Condition of Capitalist Growth: Preserving Capitalism through the Empowerment of Labor in the Past and the Present. In: Journal of Post Keynesian Economics 36 (2), pp. 1–36. Elsenhans, Hartmut, Ouaissa, Rachid, Schwecke, Sebastian and Tétreault, Mary Ann (eds.) (2015): The Transformation of Politised Religion. Zealots Turned into Leaders. Aldershot: Ashgate. Frank, André Gunder (1994): Soviet and East European ‘Socialism’: A Review of the International Political Economy on What Went Wrong. In: Review of International Political Economy 1 (2), pp. 316–343. Hirschman, Albert O. (1970): Exit, Voice and Loyality: Responses to Decline in Firms, Organizations and States. Cambridge, MA: Harvard University Press. Levi, Mario (1973): Colloque franco-allemand sur l'énergie, Rouen. In: Politique étrangère 38 (3), pp. 343–364. Marcuse, Herbert (1969): Repressive Tolerance. In: Robert Paul Wolff, Barrington Moore and Herbert Marcuse (eds.): A Critique of Pure Tolerance. Boston: Beacon, pp. 95–137. Marx, Karl (1972): Zur Judenfrage [1843]. In: Karl Marx and Friedrich Engels (eds.): Marx Engels Werke. vol. 1. Berlin: Dietz, pp. 347–377. Marx, Karl; Engels, Friedrich (1969): Die deutsche Ideologie. Kritik der neuesten deutschen Philosophie in ihren Repräsentanten Feuerbach, B. Bauer und Stirner, und des deutschen Sozialismus in seinen verschiedenen Propheten. [1845/46] In: Karl Marx and Friedrich Engels (eds.): Marx-Engels-Werke vol. 3. Berlin: Dietz, pp. 9–530. Piketty, Thomas (2014): Capital in the Twenty-First Century (Electronic Version). Cambridge: Belknap. Roesler, Jörg (1993): Das Neue Ökonomische System – Dekorations- oder Paradigmenwechsel. Berlin: Helle Panke. Wallerstein, Immanuel Maurice (2002): A Left Politics for an Age of Transition. In: Monthly Review 54 (8), pp. 17–24. Weizsäcker, Carl Christoph and Samuelson, Paul A. (1971): A New Labor Theory of Value for Rational Planning Through Use of the Bourgeois Profit Rate (Golden-rule State/ Marxian Values/Technical Progress). In: Proceedings of the National Academy of Sciences of the United States of America 68 (6), pp. 1192–1194.

Index

accelerator 65–70, 84, 92–93; see also capital output ratio accumulation, primitive 56 advertising and publicity 14, 57, 67, 180 agglomeration powers 177, 194 Algeria 121, 129, 158 alienation 11, 211–212; see also cultural factors Amin, S. 61n7, 87, 113, 210 amortisation as source of finance 170, 203 artificial industry 208–209 autonomous investment 65–70, 93 average costs 23–29 banknote 38–39 Bortkiewitsch, L. v. 47–51, 56, 75–77, 205 bourgeois revolution 196 budget line 15 capital: immaterial 89 capital exports 147, 148, 202–203; illegal capital exports 168; and imperialism 156–162; see also capital flight capital exports 19th century regional 147 capital flight 184–185 capitalists reduce competition 5, 19, 37, 54–56, 212–215; want to become rentiers 36, 113 capital output ratio 47–53, 61, 69–70, 169; and accelerator 59, 69, 93; declining 64, 65, 87, 89, 160; Germany 79–80, 88; Green growth 206; promoting growth 91; in underdeveloped countries 121; USA 79–80, 89; see also new products capital saving 64–65 catching up and overtake 27, 30, 134–138, 192–194; developing countries 134–138, 153–155, 192–194; industrial countries 14, 34, 152–155; and state 194

centrally planned economies see real socialism cheapening of products 17–23, 47, 73–75; and growth 100–108; see also Say, Jean-Baptiste China 137, 139, 147, 155, 159, 167; antipoverty 164; devaluation 165; export surplus 166; food self-sufficiency and devaluation 208; land reform 92, 207; terms of trade deterioration 112, 166 civil society, autonomy of 47 class, social 31 class conscience 31, 170, 201 colonialism 19th century 161 commercial capital 105 comparative advantage 21, 99, 107, 109; comparative advantage of the Southern countries high productivity in capital intensive products 138; and devaluation 131–138, 149–155, 169 complementary products 15 constant capital 9, 23, 57–59, 61n3, 94–95; imperialism 157–158; see also capital output ratio; schemes of reproduction; tendential fall of the rate of profit convergence of productivities 7, 32; dependent on scarcity of labour 32, 113 corporatism and neo-corporatism 70 credit see monetary policy crisis, nineteenth century 95n1, 95n3 cross price elasticity of demand 15 cultural factors 212; origin of capitalism 29, 119–120; position of labour in wage struggle 27; precapitalist 102, 209; see also alienation; post-materialist values dead labour 79 debt 14, 41, 45, 57, 157, 161, 203–204; debt crisis 167, 172n4; financialisation

220 Index 81, 167–168, 181–183, 189; government debt 45–46; international debt 45, 57, 114, 122, 132, 161; nineteenth century imperialism 161; private households 14, 188; Soviet type countries 122, 132, 167–171; see also Keynes, J. M. decolonisation and USA 122–123, 131 deflation 23, 82–85 degrowth 198, 206 deindustrialization 109 demand constrained 68, 85, 113, 175, 196 democratization 139, 202; of consumption 48, 54 demographic growth 100, 105, 109, 123, 205 dependencia theory 162; colonial bridgeheads 105, 119 depression, real wages increase 171 derivatives see financialisation deskilling 90 devaluation driven export-oriented manufacturing 135–136, 152, 162; below purchasing power parity 117, 134, 142; devaluation races 195; West Germany 165; see also China; exportoriented manufacturing; food self sufficiency for devaluation development assistance 161, 208–210; reverse development assistance 90, 119 development balanced 120; import substitution 117–125; informal sector 120, 124, 135–136, 208; inputoutput-tables 121; microfinance 7; shadow prices 121 diminishing returns (agriculture) 100 direct labour 8, 26, 28, 42, 48, 87 Dow Jones 177–178 Dutch disease 112, 162, 193, 210 economies of scale 89–92; decreasing costs 26, 54, 89, 107, 192–193; mass incomes 58, 156; underdeveloped countries 121, 136–137 effective demand 55, 83, 143, 147, 171, 182–184; see also financialisation Emmanuel 61n1, 162 empowerment of labour 32–33, 47, 55–57, 91–92, 210, 215; financialisation 188, 195; political resistance 56; underdeveloped countries 92, 99, 104–105, 139–140; see also labour in the South; labour scarcity as source of empowerment enabling state 71, 83

endogenous growth theory 26, 90 endogenous money 37–39 enlarged reproduction 79–80 environment 198–199, 205–207 Eurodollar market 84, 168; see also financialisation exchange rate: and competitiveness 28, 138–140, 149–151, 169; floating 149, 186–187, 202 exit 55 expectations 23, 29, 83, 121, 161, 180–184 exploitation, irrelevance of exploitation for growth 40, 134, 162 export-oriented manufacturing 117–118, 131–132; depends on devaluation 135–137, 140; mobilises a rent 136–137; promotes equality 125, 139, 164; share of underdeveloped countries in manufacturing exports 133; and state 137, 140; and wage restraint 166, 170; see also price elasticity of demand export surpluses and role for growth 28, 45, 57, 67, 166; mercantilism 202–204; see also China; Keynes, J. M. Feminism and mobilisation of female labour 124–201 financial capital see financialisation financialisation 46, 77, 84, 171–177, 180–187; casino capitalism 181–191; crowd out real investment 189; derivatives 177–180, 185–187; herdlike behaviour 180–181, 188; hostage taking 174–175, 182–184; leverage 185; limited effective demand 90, 215; offshore markets 84, 168; profits financial 174–176, 185, 191; as rent 175, 190; short-term capital movements 147, 179–180, 185–187; and state 174, 190; see also debt; empowerment of labour; rent fixed costs 23–26 flexibility 7–8, 29–32, 68–70, 113, 128 food self sufficiency for devaluation 100–101, 135–142, 169, 208; see also China food surplus see South Korea; Taiwan foreign direct investment 145–147, 159, 167 France 28, 83, 106, 121, 176, 202–203 free trade 20–21 get your prices right 83 globalisation 19th century 147, 185

Index globalisation benign 142, 149–156, 163–164, 168–169; doomsday pattern 154–156, 168, 192; limited transformation through capitalism 139; replacement of well-paid labour by cheap labour 143, 163 Gotha programme 29 Great depression (1930ies) 81–84, 110, 171 great divergence 104–106, 154 great recession 175, 189, 191, 202, 211 Green growth 54, 91, 205–207; see also capital output ratio Green Revolution 100, 124, 134–135 Haavelmo, T. 68, 93 haircutter 31, 168 harmonious development 30–31 Hayek, F. 81–86 helicopter money 211 Hilferding, R. 83, 177, 193 Hirschman, A. O. 55, 120, 213 Hobson, J. A. 163 Hong Kong 132, 135, 207 human capital 90, 154 imperialism 109, 114, 162–163; see also capital exports; constant capital; debt; Lenin, V. I.; Luxemburg, Rosa; precapitalist structures; real wages rising imported inflation 140 income elasticity of demand 14, 18–22, 111, 143, 155, 169 India: antipoverty struggle 135, 164; colonial India 21, 27, 107, 109–110, 158, 162; development policy 15, 90, 166–167, 194; land reform 122; public works 124–125; state class 129 indifference curve 15 indirect labour see direct labour induced investment see accelerator industrial policy and planning 26, 118–121, 194 industrial revolution Great Britain 17–18, 33, 103, 111, 154, 164 innovation systems 155 intensity of labour 12–13, 201 interest rate: colonial 158; monetary vs. real 81–83 international trade: importance of being first 26, 155, 193 investment 95n1, 203; defensive 47–50, 65, 91, 169, 198, 206; investment ratio 95n1, 170; rationalization 65, 89–91, 169, 203; and rising mass incomes 37,

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47–50, 65, 70, 191, 199, 203; see also export-oriented manufacturing; export surpluses iron law of oligarchy 55, 192 Japan 131, 140, 192; nineteenth century 19, 109, 153, 161 Kalecki, M. 41, 78, 203 Kautsky, K. 163 Keynes, J. M., Keynesianism: bastardised Keynesianism 12; deficit spending and profit 45–46, 57, 68, 82, 176; forced savings 44, 50; military spending 66–68, 106; monetary Keynesians 80, 84–85, 215; Postkeynesianism automatic stabilisers and saving on the dole 68; price formation 170, 180; state and investment 44, 68, 176; state regulation against enabling state 71, 83; struggle against export surpluses 171, 195 knowledge revolution 138, 154 Labour homogeneity 150, 170, 198, 201, 213 labour in the South: empowerment 139, 166, 210; empowerment through export-oriented industrialization 139 labour movement: condition for growth 55, 83, 199–200, 211, 213–214; and cosmopolitanism 151, 194; and democracy 55; labour aristocracy 139, 158–159, 165; relation to South 213–214 labour scarcity as source of empowerment 31–33, 56, 76, 90–91, 99, 113, 139–140, 163, 168–169, 215 labour surplus 99–101 labour theory of value 8–13, 208; and intensity of labour 13; marginal productivity 27, 196; and productivity of labour 13, 73–75, 201; see also Marx labour turnover 165 landlord, precapitalist 56, 101–105, 123–124 land reform in underdeveloped countries 117–118, 122–125, 139, 207–210; middle farmers 122–123, 125; see also China; India learning by doing 151–154, 201 Lenin, V. I. 50, 125; theory of imperialism 157–163 Lewis, W. A. 99 liquidity 84, 203 living labour 79

222 Index local content 137, 149, 209 low international labour costs and real wages 146–149 Luxemburg, Rosa 41, 45, 77, 88; theory of imperialism 160–162 luxury products: customers 36–37, 54–55; price elasticity 14, 19–22; tributary modes of production 102–109; unequal specialisation 189 machine building 10, 18, 22, 28, 109, 152, 155–156; comparative advantage 109, 137–138; production in the South 133–135; promoted by industrial policy 137; requires demand for standardized products 18, 37, 54, 103–104; special purpose machines 155 machinery, special purpose 155 manager circulation 201 manufacturing delocalisation 19th century 109, 134 manufacturing share of South in world production 146; share of South in world exports 133 marginal costs 23–27 marginality 99–102, 213; marginality cum rent 99–103, 123; pattern of growth 103 market imperfections 36–37, 175–180, 191, 196, 200–203 marketing boards 112, 114, 125 Marx: cost of labour 27, 54, 201; departments of production 40, 61; price 7–12; unequal specialization 153; see also accumulation; labour theory of value; real wages rising; schemes of reproduction; tendential fall of the rate of profit Marxism, and neoliberalism: wages diminish profits 50, 77–80, 85, 199, 215 Marxism, sociological Marxists 156 middle-class: and capitalists 161; and non-governmental organisations 209; postmaterialist values 67, 201; salaried middle classes 127, 181, 210; see also state class migration 13, 90, 104, 124 monetarists 83–84; see also Keynes, J. M.; monetary Keynesians monetary policy 80–83, 176, 182–183, 189–190; cheap money 84–85, 183–191 money multiplier 38–39 multiplier 65–70, 92–93; exports 57; government spending 57, 65–68; investment 65, 209; underdeveloped economies 127, 139, 146, 166, 193, 207

national liberation movements (in the South) 110, 122–123, 131–132, 162; Bandung conference 131 natural conditions of production 75, 106, 159 natural resources 114, 131, 159 neoliberalism 8, 64, 68–71, 79–85 new cultural identitarian political movements 214 new financial products 177, 185 new products 29–30, 48, 54, 77, 89, 108–111; capital output ratio 50, 76; development costs 26; financialization 21, 181, 188, 203; mass demand 54, 65, 77, 111; in underdeveloped countries 137, 167 Non-governmental organisations 192, 213; see also middle-class oil/OPEC: oil price crisis 1973 131–134, 146, 157, 166; oil rents 114, 122 oligarchy 55, 117, 131, 192, 211–213 oligopoly 89 optimal plant size 25 organic composition of capital 64, 73–77, 79, 94–95, 157–160 organic composition of capital in the South 158 overaccumulation 64, 82, 96n5; on financial markets 182–184 Over-the-counter 177–179 parochialism of capitalists 2–3; all 187 periphery of the world system 139, 156, 161–162, 165 Phillips-curve 69 plunder 106 poor laws, England 102 popular pole of industry 106 post-materialist values 67, 70, 80, 198–199, 204, 215 poverty reduction 164 precapitalist structures: and development 38, 100, 105–106; and imperialism 88; inequality 32, 56, 203, 212; long-distance trade 105–108; rent 113–130; slavery 56; tributary modes of production 30, 33, 36, 38; Western future 216; see also cultural factors price elasticity of demand 14; exportoriented manufacturing 136, 143; mass consumption goods 154; rent appropriation through cartels 21, 111, 113; see also luxury products

Index product cycle 55, 111 production function 28 productivity growth outstrips production growth 166–169 profit: appropriated on anonymous markets 33, 47; in business cycle 27; definition 27, 40, 47; depends on net investment spending 36–43, 46–50, 199; limited by saving 46; tendency of the profit rate to fall 47, 64, 71–78, 87, 159 profit socially desirable 201 proletarian 55, 198 propensity to consume 66, 70, 92–93, 176 public works 176; in history 83 purchasing power parity 117, 134, 142, 168 raw material production 108, 159; cartels 131; integrated programme for commodities 114, 131, 160; and rent 99, 122, 131–132; terms of trade 22, 110; and unequal specialisation 108 real socialism Soviet type 76, 80, 132; East Germany 85, 89, 130, 200–201 real wages rising: and capital goods 86–87; as a condition for growth 33, 48–49, 54– 58, 65, 86–91, 149–152; in crisis 171, 191, 196; and globalisation 166–168; and imperialism 158–159, 162–164; and Marx 74–75, 79; in the South 76–77, 134, 143; see also Marx; rent relative prices 15, 30–33; convergence 31, 50, 68, 113, 200 rent: as part of the surplus 36, 113; consumer rents 113–115; definition 36–39, 200; differential rents 114–115, 146, 159; from financialisation 175, 188–191, 200; globalisation of rent 89, 177–180, 189, 195; manager income as rent 202; manufacturing exports 125– 128, 131–137; newly emerging 112; real wages as rent 196; taming off rent 211; taxing rent see tax; see also oil/OPEC; precapitalist structures; price elasticity of demand; state class reproduction cost of labour 27 resistance, popular 92, 106, 110, 121–122, 213; see also South Korea resource constrained 72, 85 Röpke, Wilhelm 83 savings household 46, 66, 203–204 Say, Jean-Baptiste 37, 77, 81–82 schemes of reproduction 79–80; see also Marx

223

Second Industrial Revolution 152 shedding of labour 28, 56, 100–104, 123, 139 simple goods and growth 18, 37, 102–104, 124, 135–136, 155–156 Singapore 132, 135, 207; mobilises a rent 137 Singer, H. W. 110, 112, 115n1 socialism 29, 46, 75, 198 socialism Soviet type 201; see also debt social policies in underdeveloped countries 125 social security see welfare state socio-cultural see cultural factors South Korea 90–92, 122–124, 132; food surplus 135; labour resistance 139; mobilises rent 137; see also devaluation specialisation depending on internal structure 21, 155; unequal specialization 99, 106, 112–115, 154; see also luxury products; raw material production speculation 39, 181–185, 190 standardised products 18–21, 54–55; Ford car 30, 103 state bourgeoisie 126 state class 125–131, 209–213; chance for development 126–127; ex-Soviet Union 80; inefficient 127–129; and middle class 112–119; military 119, 127; and rent 125–128; resources 130; sticky information 128–130; see also India; middle-class strategic trade theory 26; importance of being first 155, 193 structural heterogeneity, homogeneity 31, 113 structure of demand and growth 15–17, 22 substitute products 15–16, 77 surplus appropriation capitalist 28–33, 36–37; non-capitalist 36 synchronised labour costs 61n5, 200 system of relative prices 15, 30–31, 50, 68, 84, 113 Taiwan 90–92, 122–124, 132, 192, 207; food surplus 135 tax 36, 38–39, 57, 68, 93; profit sharing 126; tax havens 168; taxing of rents in underdeveloped countries 101–102, 112, 135–137 technical progress orientation 22, 27, 103, 108; disembodied 153–155 technology transfer 137–138, 151

224 Index tendential fall of the rate of profit 72–78; see also constant capital; Marx terms of trade 76, 99, 110–112, 114–115, 166–169; and development 112; result of underdevelopment and 111; and transport costs 110; unequal exchange 162; unequal specialization 104–108, 154; see also China transnational enterprises 137, 193; seven sisters in oil industry 131 tributary modes of production see luxury products; precapitalist structures UNCTAD 119 underconsumption (crisis) 64, 142–147, 163–166, 170–172, 176, 195 underdevelopment because of exploitation 99, 110, 162–163, 215 United States: balance of trade 147–149; capital output ratio 79, 88–89; de facto Keynesianism 147; development assistance 123; hegemony 132, 138, 161; reverse technical assistance 90; saving ratio 95n2; technical leadership 30, 90; see also capital output ratio

United States history depressions 95n3, 171, 191; investment ratio 95n1; New deal 67; nineteenth century mass market 25, 92, 106; oil price crisis 114, 131–132; public works 176; technical leadership 152–153; underconsumption 171 utility theory of value 8–9, 12; diminishing marginal utility 14–17, 21 variable capital 9, 61n3, 86, 94; cost of reproduction of labour 27 variable costs 23–25 voice 55, 213 wage differentials international 19th century 134, 158 wage restraint 96, 143, 147, 166–171, 195, 199, 204; see also export-oriented manufacturing wages against profit 35–36, 44, 48–50, 85 wages against rent 191, 200–202 Washington consensus 132 Weber, Max 19, 119 welfare state 33, 67, 135, 198