Profit, Accumulation, and Crisis in Capitalism: Long-term Trends in the UK, US, Japan, and China, 1855–2018 9780367179786, 0367179784

Citation preview

Profit, Accumulation, and Crisis in Capitalism

Karl Marx hypothesized that there is a long-term tendency for the profit rate to fall in capitalist economies. Immanuel Wallerstein hypothesized that capitalist development tends to drive up labor cost, material cost, and taxation cost. This book evaluates Marx’s and Wallerstein’s hypotheses by studying the long-term movement of the profit rate and contributing factors in major capitalist economies. During the twentieth century, leading capitalist economies largely succeeded in stabilizing the profit rate. However, the current decline of the profit rate in China may precipitate the global capitalist economy into a new major crisis. As economic growth slows down in all major capitalist economies, Marx’s original hypothesis may be verified by the global economic events in the twenty-first century. Minqi Li is Professor of Economics at The University of Utah. He is the author of The Rise of China and the Demise of the Capitalist World Economy; Peak Oil, Climate Change and the Limits to China’s Economic Growth; and China and the 21st Century Crisis.

Routledge Frontiers of Political Economy

Inequality and Governance Andreas P. Kyriacou A New Approach to the Economics of Public Goods Thomas Laudal Marx’s Capital after 150 Years Critique and Alternative to Capitalism Edited by Marcello Musto The Political Economy of Prosperity Successful Societies and Productive Cultures Peter Murphy Macroeconomic Measurement Versus Macroeconomic Theory Merijn Knibbe Hayek’s Market Republicanism The Limits of Liberty Sean Irving The End of Individualism and the Economy Emerging Paradigms of Connection and Community Ann E. Davis Profit, Accumulation, and Crisis in Capitalism Long-term Trends in the UK, US, Japan, and China, 1855–2018 Minqi Li For more information about this series, please visit: www.routledge.com/ books/series/SE0345

Profit, Accumulation, and Crisis in Capitalism

Long-term Trends in the UK, US, Japan, and China, 1855–2018 Minqi Li

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 Minqi Li The right of Minqi Li 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 A catalog record has been requested for this book ISBN: 978-0-367-17978-6 (hbk) ISBN: 978-0-429-05881-3 (ebk) Typeset in Times New Roman by Apex CoVantage, LLC

Contents

List of figuresvii List of tablesx List of boxesxi Prefacexii 1 Capitalism and the profit rate

1

2 Profit, accumulation, and crisis in British capitalism: 1855–2018

19

3 Profit, accumulation, and crisis in American capitalism: 1900–2018

38

4 Profit, accumulation, and crisis in Japanese capitalism: 1955–2017

57

5 Profit, accumulation, and (the coming) crisis in Chinese capitalism: 1980–2018

71

6 China and the global labor arbitrage

90

7 The past and the future of the profit rate, 1855–2050 Appendix A: Estimating the profit rate in the United Kingdom, 1855–2018 Appendix B: Estimating the profit rate in the United States, 1900–2018

109

130 135

vi  Contents

Appendix C: Estimating the profit rate in Japan, 1955–2017 Appendix D: Estimating the profit rate in China, 1980–2018 Bibliography Index

138 141 145 152

Figures

1.1 Share of gross world product (current US dollars, 1960–2018) 1.2 Business capital-GDP ratio (1855–2018) 1.3 Equilibrium capital-output ratio (economic growth rate = 5%; net investment-output ratio = 10%) 1.4 Business net fixed investment (% GDP, 1950–2018) 1.5 Average annual economic growth rate (ten-year trailing averages, 1950/1960–2008/2018) 2.1 Profit and accumulation (UK economy, 1851/1855–1900) 2.2 Profit and accumulation (UK economy, 1900–1950) 2.3 Interest rate, economic growth, and unemployment (UK economy, 1900–1950) 2.4 Profit and accumulation (UK economy, 1950–1990) 2.5 Interest rate, economic growth, and unemployment (UK economy, 1950–2018) 2.6 Profit and accumulation (UK economy, 1980–2018) B2.1 Distribution of national income (UK economy, 1855–2018) 3.1 Profit and accumulation (US economy, 1900–1950) 3.2 Economic growth and government expenditures on consumption and investment (US economy, 1900–2018) 3.3 Contribution to total domestic profit (% GDP, US economy, 1929–1940) 3.4 Profit and accumulation (US economy, 1950–1990) 3.5 Unemployment rate and labor income share (US economy, 1960–1970) 3.6 Profit and accumulation (US economy, 1980–2018) 3.7 Contribution to total domestic profit (% GDP, US economy, 1980–2018)

2 6 9 11 12 21 27 28 32 34 35 37 39 41 44 46 49 51 52

viii  Figures 3.8 Unemployment rate and change in labor income share (US economy, 1980–2018) B3.1 US net exports of goods and services (% GDP, 2000–2018) 4.1 Index of per capita real GDP (% world average, 1870–2008) 4.2 Profit and accumulation (Japanese economy, 1955–1990) 4.3 Contribution to total domestic profit (% GDP, Japanese economy, 1955–1970) 4.4 Profit and accumulation (Japanese economy, 1980–2017) 4.5 Contribution to total domestic profit (% GDP, Japanese economy, 2000–2017) B4.1 Government debt-GDP ratio (selected economies, 2007–2017) 5.1 Contribution to global economic growth (major economies, 1990/2000–2008/2018) 5.2 The Chinese workers’ wage rates (% urban units average wage, 2000–2018) 5.3 China’s class structure (% total labor force, 1980–2017) 5.4 China’s labor income (% GDP, 1980–2018) 5.5 Profit and accumulation (Chinese economy, 1980–2018) 5.6 Business capital-GDP ratio (Chinese economy, 2000–2018) B5.1 Private non-financial sector debt (% GDP, 2000–2018) 6.1 China’s labor cost and productivity (as % of US manufacturing labor cost and productivity, 1998–2017) 6.2 US imports of Chinese goods (% US GDP and manufacturing value added, 1999–2017) 6.3 Saved labor cost through imports from China (% US GDP and manufacturing value added, 1999–2017) 6.4 Labor cost per 100-dollar value added in manufacturing (China, US, UK, and Japan, 1998–2017) 6.5 UK imports of Chinese goods (% UK GDP and manufacturing value added, 1999–2017) 6.6 Saved labor cost through imports from China (% UK GDP and manufacturing value added, 1999–2017)

53 55 59 62 63 66 67 69 72 80 81 83 84 86 88 91 93 94 98 99 100

Figures ix 6.7 China’s labor cost and productivity (as % of UK manufacturing labor cost and productivity, 1998–2017) 6.8 Japanese imports of Chinese goods (% Japan’s GDP and manufacturing value added, 1998–2016) 6.9 Saved labor cost through imports from China (% Japan’s GDP and manufacturing value added, 1998–2017) 6.10 China’s labor cost and productivity (as % of Japan’s manufacturing labor cost and productivity, 1998–2017) 7.1 The profit rate (1855–2018) 7.2 The profit share (1855–2018) 7.3 Labor income share and per capita GDP (1855–2018) 7.4 Taxation cost share and per capita GDP (1855–2018) 7.5 Capital consumption share and per capita GDP (1855–2018) 7.6 Economic growth rate (historical and projected, 1991–2050) 7.7 Business net fixed investment (% GDP, 1990–2050) 7.8 Business capital-GDP ratio (historical and projected, 1990–2050) 7.9 The profit rate (historical and projected, 1990–2050)

101 103 104 105 110 112 114 115 117 122 123 125 126

Tables

2.1 Distribution of gross domestic product (United Kingdom, 1855–1900, % GDP) 2.2 Distribution of gross domestic product (United Kingdom, 1900–1950, % GDP) 2.3 Distribution of gross domestic product (United Kingdom, 1950–2018, % GDP) 3.1 Distribution of gross domestic product (United States, 1900–1950, % GDP) 3.2 Distribution of gross domestic product (United States, 1950–2018, % GDP) 4.1 Distribution of gross domestic product (Japan, 1955–2017, % GDP) 5.1 China’s central government revenue as share of GDP (1890–1957) 5.2 China’s labor force structure, 1980–2017 (million workers) 5.3 Distribution of gross domestic product (China, 1980–2018, % GDP) 6.1 Labor productivity in the manufacturing industries, 2016 (measured by value added per employee, thousand US dollars) 7.1 Average annual growth rate of real GDP, employment, and labor productivity (United Kingdom and United States, 1990–2018) 7.2 Average annual growth rate of real GDP, employment, and labor productivity (Japan and China, 1990–2017/2018)

25 30 31 40 47 65 75 78 85 96 120 121

Boxes

1.1 2.1 3.1 4.1 5.1 6.1 7.1

Thomas Piketty’s “second fundamental law of capitalism” Distribution of the British national income, 1855–2018 Shale oil boom and the profit rate Is Japan’s government debt sustainable? China’s total social financing Global labor arbitrage, a special case: Apple’s iPhone Climate stabilization and limits to growth

18 36 55 68 87 107 127

Preface

In Capital, volume 3, Karl Marx proposed the famous “law of the tendency for the rate of profit to fall.” According to Marx’s hypothesis, capitalist technological progress tends to be capital-intensive, leading to rising “organic composition of capital” and falling profit rate. This tendency, if not checked, will eventually undermine the foundation of the capitalist economic system. A significant literature has been established that the fall of the profit rate played a crucial role in the structural crisis of global capitalism in the 1970s and 1980s and the revival of the profit rate contributed to the relative boom of the advanced capitalist economies from 1995 to 2007. Since then China has emerged as the center of global capital accumulation. An analysis of the movement of the profit rate and its contributing factors in the Chinese economy is essential for the understanding of the global capitalist economy today. Earlier studies on the long-term movement of the profit rate in the advanced capitalist economies include (but are not limited to) Gillman (1956); Armstrong, Glyn, and Harrison (1991); Moseley (1991); Dumenil and Levy (1993); Shaikh and Tonak (1994); Dumenil and Levy (2007). My intellectual interest in the long-term movement of the profit has been largely inspired by these earlier studies, from which I have learned and greatly benefited. This book is a substantial expansion and revision from an earlier paper published in the Chinese Economy (Li 2017). It compares the long-term movement of the profit rate in four major economies: the United Kingdom, the United States, Japan, and China. In the long run, the movement of the profit rate largely depends on the movement of the capital-output ratio (what Marx called “organic composition of capital”). One of the key arguments of this book is that the movement of the capital-output ratio is determined by the relative relationship between net investment-output ratio and economic growth rate (see Chapter 1). During the twentieth century, both British and American capitalism managed to stabilize the capital-output ratio and the profit rate. However, in recent years, rising capital-output ratio has led to

Preface xiii falling profit rate in the Chinese economy, a trend that may eventually result in a major crisis for both the Chinese economy and the global capitalist economy. In the twenty-first century, as economic growth slows down in the four major economies, Marx’s hypothesis on the rising “organic composition of capital” and falling profit rate may eventually be confirmed by the actual development of global economic events.

1 Capitalism and the profit rate

Capitalism is an economic system based on the pursuit of profit. Capitalist accumulation (investment of surplus value in new capital stock) is motivated by a capitalist’s desire to make profit on invested capital stock. The relative success or failure of accumulation depends on the profit rate, or the rate of return on invested capital stock. The pace of accumulation in turn helps to determine other aspects of capitalist economic performance such as economic growth, employment expansion, and technological progress. Historically, high and stable profit rates have contributed to rapid capital accumulation, rapid economic growth, relative prosperity, and stability in leading capitalist economies; low and falling profit rates have led to major crises or prolonged stagnation. This book studies the long-term movement of the profit rate and its interactions with capital accumulation in four major economies: the United Kingdom, the United States, Japan, and China. The United Kingdom was the hegemonic economy in the capitalist world system in the nineteenth century. The United States has been the global hegemonic power since the mid-twentieth century. In recent years, China has become the world’s largest economy measured by purchasing power parity and the second largest economy measured by market exchange rate. Japan is currently the world’s third largest economy measured by market exchange rate or the fourth largest economy measured by purchasing power parity. Figure 1.1 shows the combined share of UK, US, Japan, and China in the global economy (measured by current US dollars or market exchange rate) from 1960 to 2018. Since 1960, the four economies combined have accounted for about one-half of the global economic output (the combined share ranged between 42 and 53 percent from 1960 to 2018). In Capital, volume 3, Karl Marx proposed the famous hypothesis that capitalist technological progress had a bias towards capital-intensive technologies and rising “organic composition of capital” would lead to a long-term tendency for the profit rate to fall. Marx believed that unless the tendency for the profit rate to fall were checked, the falling profit rate would

2  Capitalism and the profit rate 60%

50%

40%

30%

20%

10%

0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 United Kingdom

United States

Japan

China

Figure 1.1 Share of gross world product (current US dollars, 1960–2018) Source: World Bank (2019).

eventually undermine the foundation of capitalist accumulation and deprive the system of its historical justification (Marx 1967[1894]: 211–266). Immanuel Wallerstein (the leading theorist of the world system school) argued that as the capitalist world system developed, wage costs, taxation cost, and material (ecological) costs had tended to rise in the core capitalist countries, reducing the capitalist profit relative to economic output. For Wallerstein, the long-term tendencies towards rising costs and falling profits (relative to economic output) will eventually result in a structural crisis that can no longer be resolved within the historical framework of capitalism, leading to the demise of the existing economic system and open up possibilities for the rise of new historical systems (Wallerstein 2007: 76–90). Wallerstein did recognize that, from time to time, geographical expansion of the capitalist world system had opened up new spaces for industrial relocation that had allowed the system to exploit new supplies of cheap and abundant labor and natural resources. China has been the main beneficiary

Capitalism and the profit rate  3 of the latest round of global capital relocation that has taken place since the late twentieth century. However, the rise of China as a global economic power has led to the formation of the world’s largest industrial working class as well as massive expansion of energy consumption. China’s economic rise has contributed to the acceleration of global ecological crisis and may have prepared conditions for the revival of global working-class militancy. The following chapters will evaluate Marx’s and Wallerstein’s hypothesis regarding capitalism’s long-term tendencies and consider the possibility that the hypothesis on the long-term tendency for the profit rate to fall may be confirmed by the global economic development in the twenty-first century.

Marx’s hypothesis: tendency for the rate of profit to fall In Capital, volume 3, Karl Marx proposed the hypothesis that in the long run, the average profit rate in a capitalist economy would tend to fall, undermining the foundation of capitalist accumulation (Marx 1967[1894]: 211–266). Marx defined the profit rate as the ratio of “surplus value” over “advanced total capital.” Marx’s “surplus value” is a broad measure of capitalist profit that includes all forms of capitalist property incomes (business profits, interests, and rents). Marx’s “advanced total capital” includes “constant capital” (capital invested on the means of production) and “variable capital” (capital invested on labor power). Marx argued that capitalist technological progress tended to be characterized by rising labor productivity made possible by mechanization (rising “technical composition of capital” or rising physical capital-labor ratio). Marx believed that rising “technical composition of capital” was likely to result in rising “organic composition of capital” (defined as the ratio of the value of invested means of production over the value of labor power). Let “S” be Marx’s surplus value, “C” be Marx’s constant capital, and “V” be Marx’s variable capital. Marx’s profit rate can be shown as the ratio of “S” over “C+V”: Marx’s Profit Rate = S/(C+V) = (S/V)/(C/V + 1) Where “S/V” is Marx’s rate of surplus value (reflecting the degree of capitalist exploitation) and “C/V” is Marx’s organic composition of capital. It is obvious that if the rate of surplus value remains relatively stable but the organic composition of capital keeps rising, the profit rate would tend to fall. Marx argued that the decline of the profit rate would prevent “the formation of new independent capitals” and threaten “the development of the capitalist production process.” “It breeds over-production, speculation,

4  Capitalism and the profit rate crises, surplus-capital alongside surplus-population” (Marx 1967[1894]: 241–242). For Marx, the tendency for the profit rate to fall was the ultimate proof that the capitalist economic system was not more than a “historical mode of production” that corresponded to a “definite limited historical epoch”: The rate of profit is the motive power of capitalist production. Things are produced only as long as they can be produced with a profit. Hence the concern of the English economists over the decline of the rate of profit. . . . Development of the productive forces of social labour is the historical task and justification of capital.  .  .  . What worries Ricardo is the fact that the rate of profit, the stimulating principle of capitalist production, the fundamental premise and driving force of accumulation, should be endangered by the development of production itself. And here the quantitative proportion means everything. . . . It comes to the surface here in a purely economic way – i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself – that it has its barrier, that it is relative, that it is not absolute, but only a historical mode of production corresponding to a definite limited epoch in the development of the material requirements of production. (Marx 1967[1894]: 259) Marx did point out that several counteracting influences could temporarily prevent the decline of the profit rate. One of the counteracting influences was “cheapening of elements of constant capital.” Marx recognized that rising labor productivity in the means of production sector would lower the “value” for a given physical volume of means of production (Marx defined the value of commodities as the “socially necessary labor time” embodied in commodities). Therefore, “the value of the constant capital does not increase in the same proportion as its material volume.” Marx even realized that in some cases, “the mass of the elements of constant capital may even increase, while its value remains the same, or falls.” But Marx believed that such developments were limited to “isolated cases” (Marx 1967[1894]: 236). Marx’s hypothesis on the tendency for the rate of profit to fall largely depends on the argument that capitalist technological progress tends to be biased towards capital-intensive technologies and the “organic composition of capital” tends to rise in the long run. However, if the “value of the constant capital” does not rise or does not rise sufficiently rapidly, the organic composition of capital may not increase. According to Marx, surplus value is the difference between the new value of commodities produced by a worker’s labor and the worker’s value of

Capitalism and the profit rate  5 labor power. Thus, the total new value of commodities can be represented by “V+S.” Dividing both the numerator and the denominator of organic composition of capital by “V+S”: C/V = [C/(V+S)]/[V/(V+S)] If the workers are paid according to their value of labor power, then “V” is the workers’ total wages and “V/(V+S)” is the wage share in the new value of commodities. Suppose the struggle between the workers and capitalists result in a movement of the wage share within a limited range. In the long run, the organic composition of capital should mostly move in the same direction as “C/(V+S).” In a modern capitalist economy, the value of the means of production is dominated by the stock of fixed capital. In conventional national accounting, economic output is usually measured by gross domestic product. Thus, the ratio of fixed capital over gross domestic product or “the capital-output ratio” can be used as a statistical proxy for Marx’s “C/(V+S).”

Capital-output ratio: empirical evidence Figure 1.2 shows the long-term movement of the capital-output ratio (measured by the business capital-GDP ratio, that is, the ratio of the business sector net stock of fixed assets over gross domestic product) in the United Kingdom, the United States, Japan, and China from the 1850s to the present. From the mid-nineteenth century to the early twentieth century, the British economy’s business capital-GDP ratio fluctuated within the range of 1.2–1.4. From 1920 to 1942, the business capital-GDP ratio declined from 1.56 to 0.88. In the early postwar years, the British business capital-GDP ratio generally tended to rise and peaked at 1.78 in 1974. In the 1980s, the business capital-GDP ratio fell sharply. Since 2000, the British business capital-GDP ratio has stabilized in the range of 1–1.05. In the early twentieth century, the US business capital-GDP ratio tended to rise and peaked at about 2 in 1917. At the trough of the Great Depression, the business capital-GDP ratio briefly surged to 2.06 in 1933 (reflecting the sharp decline of capacity utilization of capital stock as a result of collapse of aggregate demand). During the Second World War, military mobilization as well as adoption of new technologies led to rapid increase in capital productivity (and therefore declining capital stock per unit of economic output). The US business capital-GDP ratio fell to 0.8 by 1944. From 1966 to 1982, the business capital-GDP ratio rose from 0.98 to 1.39. During the economic boom in the late 1990s, the business capital-GDP ratio fell to about 1.1. Since 2010, the US business capital-GDP ratio has stabilized around 1.2.

6  Capitalism and the profit rate 2.5

2

1.5

1

0.5

0 1850

1870

1890

1910

1930

1950

1970

1990

UK (1855–2018)

US (1896–2018)

Japan (1955–2017)

China (1952–2018)

2010

Figure 1.2 Business capital-GDP ratio (1855–2018) Note: Business capital-GDP ratio is measured by the ratio of the business sector net stock of fixed assets over gross domestic product. On the data sources and estimates of business sector net stock of fixed assets and gross domestic product in the United Kingdom, the United States, Japan, and China, see Appendix A, B, C, and D.

During the rapid economic growth in the 1960s, Japan’s business capitalGDP ratio stayed around 0.6. From the 1970s to the early 2000s, Japan’s business capital-GDP ratio tended to rise and peaked at 1.24 in 2009. Since then, Japan’s business capital-GDP ratio has fallen slowly. During China’s early industrialization years (1953–1957), China’s business capital-GDP ratios were less than 1. The economic crisis in the early 1960s drove the business capital-GDP ratio up sharply. The ratio rose to 2.03 by 1963 before falling over the next several years. From 1969 to 1977, China’s business capital-GDP ratio rose from 1.51 to 2.09. During the early years of market reform, China’s business capital-GDP ratio tended to fall. By 2007, China’s business capital-GDP ratio fell to 1.45 (the lowest level since 1961). However, since 2007, China’s business capital-GDP ratio has

Capitalism and the profit rate  7 grown rapidly. By 2018, China’s business capital-GDP ratio reached 2.13, surpassing the highest capital-output ratio reached by the US economy at the trough of the Great Depression. Observed capital-output ratios in the four major economies over the past one and a half centuries suggest that there have not been definitive longterm trends. In the United Kingdom and the United States, the business capital-GDP ratio did tend to increase in certain periods. This happened from 1943 to 1974 in the UK and from 1896 to 1917 as well as from 1966 to 1982 in the US. However, the rises were followed by declines. In both the US and the UK, the business capital-GDP ratios in the early twenty-first century are lower than those in the early twentieth century. Japan’s business capital-GDP ratio rose strongly from the 1960s to the early 2000s but may have stabilized since then. China’s business capitalGDP ratio has mostly fluctuated within the range of 1.5–2 since the 1960s but the ratio may rise substantially above its historical range in the coming years. This raises the question what are the factors that help to determine the rises and falls of the capital-output ratio.

Growth, accumulation, and capital-output ratio Mathematically, it is obvious that capital-output ratio should rise if capital stock grows more rapidly than economic output and should fall if capital stock grows less rapidly than economic output. Let “ΔKt/Kt-1” be the capital stock growth rate and “ΔYt/Yt-1” be the economic growth rate. “ΔK” represents growth of capital stock which equals net investment, or gross investment less depreciation of capital stock. “ΔY” represents growth of economic output. Subscript “t” indicates the current year and “t-1” indicates the previous year. Growth rate of capital stock depends on the net investment-output ratio and the existing level of capital-output ratio: ΔKt/Kt-1 = [(ΔKt/Yt) * (Yt/Yt-1)]/(Kt-1/Yt-1) Where “ΔKt/Yt” is net investment-output ratio in the current year, “Yt/Yt-1” equals one plus the economic growth rate, and “Kt-1/Yt-1” is the capital-­ output ratio in the previous year. Thus, given a certain net investmentoutput ratio, capital stock growth rate is inversely related to capital-output ratio. Other things being equal, lower capital-output ratio results in higher capital stock growth rate and higher capital-output ratio results in lower capital stock growth rate. The net investment-output ratio tells the share of current economic output that is used for net increase in capital stock or accumulation of capital. It

8  Capitalism and the profit rate in turn depends on the share of capitalist profit in economic output and the share of capitalist profit that is used for capital accumulation (rather than for other purposes, such as capitalist consumption or financial speculation): ΔKt/Yt = (ΔKt/Πt) * (Πt/Yt) Where “Π” is the total capitalist profit and “Πt/Yt” is the profit share of economic output in the current year. According to the conventional neoclassical growth theory, economic growth is driven by population growth (which determines labor force growth), capital accumulation, and technological progress (measured by total factor productivity growth). But in the long run, growth rate of capital stock should converge with the economic growth rate and the long run “steady state” economic growth rate depends only on population growth rate and total factor productivity growth rate. In the Marxian economic literature, economic growth rate is usually treated as the sum of labor force growth rate and labor productivity growth rate and labor productivity growth is considered to be driven by capital accumulation or rising capital-labor ratio. Marx’s hypothesis on rising organic composition of capital implies that the capital-labor ratio should tend to rise more rapidly than labor productivity in the long run. Modern Marxian political economists mostly treat the relationship between labor productivity growth and capital-labor ratio growth as an empirical question. For now, consider the economic growth rate as an exogenous variable independent of the capital-output ratio. Figure 1.3 shows the determination of equilibrium capital-output ratio in a hypothetical economy where economic growth rate is assumed to be 5 percent and net investment-output ratio is assumed to be 10 percent. Capital stock growth rate is calculated using 10.5 percent divided by the capital-output ratio at various levels. 10.5 percent equals 10 percent multiplied by 1.05, that is, the net ­investment-output ratio multiplied by one plus economic growth rate. In this hypothetical economy, economic growth rate intersects with the capital stock growth rate when capital-output ratio is at 2.1. At the intersection, economic growth rate equals the capital stock growth rate and the capital-output ratio is in “equilibrium.” When capital-output ratio is less than the equilibrium level, capital stock grows more rapidly than economic output and capital-output ratio rises. When capital-output ratio is greater than the equilibrium level, capital stock grows less rapidly than economic output and capital-output ratio falls. At equilibrium, “ΔYt/Yt-1” equals “ΔKt/Kt-1”, or: ΔYt/Yt-1 = [(ΔKt/Yt) * (Yt/Yt-1)]/(Kt-1/Yt-1)

Capitalism and the profit rate  9 20% Economic and Capital Stock Growth Rate

15%

10%

5%

0% 0

0.5

1

1.5 2 2.5 Capital-Output Ratio

Economic Growth Rate

3

3.5

4

Net Investment-Output Ratio

Capital Stock Growth Rate Figure 1.3 Equilibrium capital-output ratio (economic growth rate  =  5%; net ­investment-output ratio = 10%) Source: The author’s construction using certain assumptions.

It follows that: (Kt-1/Yt-1)Equilibrium = [(ΔKt/Yt) * (Yt/Yt-1)]/(ΔYt /Yt-1) = (ΔKt/Yt)/(ΔYt /Yt) Thus, given a certain economic growth rate and net investment-output ratio, the capital-output ratio will converge towards an equilibrium level. The equilibrium capital-output ratio is determined by the net investmentoutput ratio divided by “ΔYt/Yt”, which is the economic growth to current output ratio or economic growth rate divided by “one plus economic growth rate.” “ΔYt/Yt” may be called “adjusted economic growth rate.” Note that (Kt-1/Yt-1)Equilibrium  = ΔKt/ΔYt, which is the ratio of the growth of capital stock over the growth of economic output. Thus, given a net ­investment-output ratio and an economic growth rate, the implied equilibrium capital-output ratio is also the marginal capital-output ratio.

10  Capitalism and the profit rate In the long run, for the capital-output ratio to rise, it would require either a long-term tendency for the net investment-output ratio to rise or a longterm tendency for the economic growth rate to fall. There are both mathematical and practical limits to how much net investment-output ratio can rise. Net investment is financed by capitalist profit and the capitalists will only use a fraction of their total income for productive investment. In fact, in the neoliberal era, net investment as share of economic output has tended to fall in the developed capitalist economies. Figure 1.4 compares the business net fixed investment as share of gross domestic product in four major economies from 1950 to 2017. The British net fixed investment was about 5 percent of GDP in 1960 and about 8 percent of GDP in 1970. Since then, the British net fixed investment has tended to fall as share of GDP. In the 1960s and 1970s, the business net fixed investment in the US fluctuated around 5  percent of GDP. The US business net fixed investment fell to about 2 percent of GDP by the early 1990s, followed by a brief recovery during the second half of the 1990s. Since 2000, business net fixed investment has averaged about 2 percent of GDP in the US and about 1.5 percent of GDP in the UK. Japan’s business net fixed investment was about 5 percent of GDP in the mid-1950s. It surged to 9–11 percent of GDP in the 1960s. In the 1980s, Japan’s net fixed investment stayed at the relatively high level of 6–7 ­percent of GDP. From 1990 to 2010, Japan’s business net fixed investment fell from 8 percent of GDP to –1 percent of GDP. By 2017, Japan’s business net fixed investment recovered to about 0.6 percent of GDP. Other things being equal, lower net investment-output ratio helps to stabilize the capital-output ratio at a lower level, preventing the rising “organic composition of capital” predicted by Marx. However, lower net investment does lead to lower economic growth. In the long run, low economic growth rates have geopolitical implications. A country cannot permanently keep both net investment and economic growth at low levels without undermining its own power status within the capitalist world system. Low net investment also raises political and social questions. Traditionally, a key ideological justification of the capitalist economic system has been that the capitalists use the surplus value in a productive manner that contributes to the long-term improvement of the overall social welfare. If the general public becomes increasingly aware that the capitalists have used only a small fraction of their total profit for productive investment and almost all of the capitalist profit has been wasted in luxury consumption or financial speculation, the existing income and wealth inequality will be difficult to justify. The decline of capitalist legitimacy will in turn contribute to the rise of political instabilities. Figure 1.5 compares the long-term economic growth performance in four major economies from 1950–1960 to 2008–2018, measured by ten-year trailing average economic growth rates.

Capitalism and the profit rate  11 25%

20%

15%

10%

5%

0%

-5% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 United Kingdom

United States

Japan

China

Figure 1.4 Business net fixed investment (% GDP, 1950–2018) Notes: For the United Kingdom, business net fixed investment from 1950 to 2018 is estimated using total economy net fixed investment multiplied by the business sector share. The business share in the total economy net fixed investment is assumed to be the same as the business sector share of the total economy net stock of fixed assets. Total economy net fixed investment is calculated as the difference between gross fixed capital formation and consumption of fixed capital. Gross fixed capital formation is from ONS (2019a, “National Accounts,” Worksheet 1.2). On the estimates of the business sector net stock of fixed assets and consumption of fixed capital, see Appendix A. For the United States, business net fixed investment from 1950 to 2018 is calculated as domestic business sector net investment less change in private inventories reported by BEA (2019a, Table 1.1.5 and Table 5.1). For Japan, business net fixed investment from 1955 to 2017 is estimated using total economy net fixed investment multiplied by business sector share. The business share in the total economy net fixed investment is assumed to be the same as the business sector share of the total economy net stock of fixed assets. Total economy net fixed investment is calculated as the difference between gross fixed capital formation and consumption of fixed capital. Gross fixed capital formation is from SBJ (2012, Table 3.1) and World Bank (2019). On the estimates of the business sector net stock of fixed assets and consumption of fixed capital, see Appendix C. On the estimates of China’s business net fixed investment from 1952 to 2018, see Appendix D.

In the 1960s, the British economic growth rate averaged 3.1 percent and the US economic growth rate averaged 4.3  percent. From 1995 to 2005, the British and the US economic growth rates remained relatively stable, averaging between 3.1 and 3.4 percent. Since the “Great Recession,” both

12  Capitalism and the profit rate 12%

10%

8%

6%

4%

2%

0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 United Kingdom

United States

Japan

China

Figure 1.5 Average annual economic growth rate (ten-year trailing averages, 1950/1960–2008/2018) Notes: For the United Kingdom, economic growth rates from 1950 to 2018 are calculated using real gross domestic product in constant volume measures reported by ONS (2019a, “National Accounts,” Worksheet 1.3). For the United States, economic growth rates from 1950 to 2018 are calculated using real gross domestic product quantity indexes reported by BEA (2019a, 1.1.3). For Japan, economic growth rates from 1960 to 2018 are calculated using real gross domestic product in constant prices reported by World Bank (2019). Japan’s economic growth rates from 1955 to 1960 are calculated using real gross domestic product reported by SBJ (2012, Table 3.1). For China, economic growth rates from 1952 to 2018 are calculated using indices of gross domestic product reported by China Data Center (2019, “National Accounts”).

economies seem to have settled on permanently lower growth rates. For the period 2008–2018, the British and the US economic growth rate averaged between 1.3 and 1.8 percent. The Japanese economy grew at an average annual rate of 9.4 percent in the 1960s. In the 1980s, Japan’s economic growth rate averaged 4.5 percent. By the 1990s, Japan’s average economic growth rate slowed down to 1.3  percent. For the period 2008–2018, Japan’s economic growth rate averaged 0.7 percent.

Capitalism and the profit rate  13 Why has the economic growth rate tended to fall in the developed capitalist economies? Economic growth depends on labor force growth and labor productivity growth. Labor force growth has slowed in the developed capitalist economies and total labor force is expected to decline in Japan in the coming decades. Labor productivity growth depends on capital accumulation and technological progress. Low net investment-output ratios have contributed to lower pace of capital accumulation. In addition, there has been some evidence suggesting that the pace of capitalist technological progress has slowed in recent years (to be further discussed in Chapter 7 of this book). In the coming decades, if economic growth rate keeps falling in the developed capitalist economies, will the developed capitalist economies manage to prevent the capital-output ratio from rising through further reduction of net investment-output ratio while maintaining economic and political stability? On the other hand, positive economic growth in the developed capitalist economies may have become fundamentally incompatible with global ecological sustainability. Historically, capitalist economic growth has been made possible by the massive consumption of fossil fuels. However, the consumption of fossil fuels results in greenhouse gas emissions that has led to long-term rises of global average temperature threatening to undermine the entire global ecological system. Unless the global energy foundation can be fundamentally transformed over the next few decades, there will be a fundamental conflict between the requirements of global ecological sustainability and the capitalist drive for endless economic growth (see Box 7.1).

Profit rate and crisis Modern Marxian economics defines the profit rate as the ratio of the total capitalist profit divided by the capital stock: Profit Rate = Total Profit/Capital Stock = Π/K The profit rate can be analyzed as the ratio of profit share over the capitaloutput ratio: Π/K = (Π/Y)/(K/Y) The profit share (Π/Y) is the share of capitalist profit in the economic output. It depends on class struggle and the relative balance of power between the workers, capitalists, and the state. The capital-output ratio (K/Y) is determined by the relative movement of the net investment-output ratio

14  Capitalism and the profit rate and the economic growth rate (discussed in the previous section). However, in the short run, the capital-output ratio is mainly driven by the level of effective demand. Higher effective demand results in fuller utilization of the existing capital capacity and lowers the capital-output ratio; lower effective demand results in under-utilization of the existing capital capacity and raises the capital-output ratio. Economic crises are sudden interruptions of processes of capitalist accumulation. As capitalist accumulation is motivated by the pursuit of profit, interruptions of capitalist accumulation are either caused by or closely correlated with the decline of the profit rate. The decline of profit rate may result from over-investment, a change in the balance of class power against the capitalists, insufficient effective demand, or a combination of these factors. Over-investment happens when the net investment-output ratio is excessively high in relation to the prevailing economic growth rate, leading to marginal capital-output ratios that are persistently higher than the existing capital-output ratios, driving up the capital-output ratio or Marx’s “organic composition of capital.” If not offset by other tendencies (such as rising profit share), rising capital-output ratio leads to sustained declines of profit rate and causes economic crisis or stagnation. Under certain historical conditions, rapid capitalist accumulation may generate excessive demand for labor, reducing the pool of unemployed or underemployed workers (what Marx called “industrial reserve army of labor,” see Marx [1967(1867): 574–606]). The reduction of “reserve army of labor” gives the workers stronger bargaining power, pushing up the wages and encouraging the workers to undertake militant struggles against capitalist exploitation. Higher wages and militant workers’ struggles reduce the profit share and profit rate, precipitating the economy into an accumulation crisis. On the other hand, if certain historical conditions allow the capitalists to be “too strong,” intense capitalist exploitation may lead to falling wage share of economic output. As the workers receive a progressively smaller share of the economic output, workers’ consumption will either decline or grow less rapidly than the overall economic output. As a result, the growth of effective demand will have to depend increasingly upon the unstable capitalist investment. If, for some reason, the capitalist confidence is shaken, the decline of capitalist investment will lead to an overall contraction of effective demand. In the profit rate formula, this will be reflected by a sharp rise of the capital-output ratio and a corresponding decline of the profit rate. Such an “under-consumption” crisis was more likely to happen in the preKeynesian small government capitalism when the government sector was too small to offset the decline of capitalist investment (on a summary of three tendencies of capitalist economic crisis, see Devine 1987).

Capitalism and the profit rate  15 For capitalist accumulation to proceed rapidly and stably, it requires a set of mutually supporting economic, political, and ideological institutions to maintain the proper balance between power relations that are favorable for capitalist extraction of surplus value and an adequate level of effective demand. Such institutions that help to maintain and support capitalist accumulation are known to some Marxian political economists as the “social structure of accumulation” (Gordon, Weisskopf, and Bowles 1987; Bowles, Edwards, and Roosevelt 2005: 158–164; Kotz 2015: 3–4). A social structure of accumulation provides necessary social, political, and ideological conditions for normal capitalist accumulation to take place. However, the progress of capitalist accumulation creates new historical conditions, new social forces, new technologies, and new ideas that become increasingly incompatible with the existing social structure. Such incompatibilities gradually erode the existing social structure and lead to a prolonged period of economic and social instabilities. Such a prolonged period of instability constitutes a structural crisis for the existing set of capitalist institutions. The crisis will last until a new social structure of accumulation emerges out of major conflicts between various social classes and groups.

Capitalism: secular trends According to Immanuel Wallerstein, all physical and social systems rely upon certain cyclical movements to maintain stability and restore equilibrium after disturbances. For the capitalist world system, cyclical movements include short-term business cycles, half-a-century-long “Kondratieff” long waves (named after the Soviet economist Nikolai Kondratieff who first proposed the concept of long waves), and the multi-century-long hegemonic cycles. However, each cyclical movement results in certain change in a system’s parameters that over time evolve into secular trends. As the secular trends approach certain asymptotes, they generate contradictions that can no longer be contained by the existing system. The system begins to experience larger and larger fluctuations, leading to chaos and bifurcations (Wallerstein 2000: 437, 2003: 57–58, 2007: 76). Capitalism is a unique historical system that distinguishes itself from the previous historical systems by its tendency towards “endless accumulation of capital” (Wallerstein 2007: 24). Capitalist accumulation is motivated by high profit rate that in turn requires cheap and abundant supply of labor and natural resources as well as low taxation costs. However, as capitalist accumulation proceeds, it transforms both social and environmental conditions, leading to the secular tendencies of rising wage, taxation, and material (ecological) costs (Wallerstein 2007: 76–90).

16  Capitalism and the profit rate Capitalist accumulation brings about social transformation. Urbanization and industrialization lead to the formation of proletarianized working classes (workers who depend on wage employment to make a living). Compared to other forms of labor force (such as slaves, serfs, or peasants), proletarianized workers are better educated and have greater capacity to organize. Growing working class organization tends to push up the wage cost and allow the workers to claim a bigger share of the economic output. Moreover, the workers have demanded the state to provide a growing range of social services (such as public education, public health care, and socialized pensions). The capitalists have demanded the state to provide economic infrastructure and help them to gain advantage in competition against capitalists in other states. To meet the rising demands from both the workers and the capitalists, the state has to collect larger tax revenue, raising the taxation cost. Over the past several centuries, capitalist accumulation has benefited from cheap and abundant supply of natural resources as well as a virtually “free” environmental space that have allowed the capitalists to dump the material wastes (pollution) generated in economic activities at little or no cost. However, by the early twenty-first century, global material consumption and waste generation have greatly exceeded the earth’s sustainable ecological capacity. Climate change and other ecological crises threaten to bring about unprecedented catastrophes that may fatally undermine the material foundation of human civilization. Historically, the core countries (the countries that specialize in “core” or monopolistic, high value-added activities) have responded to rising wage, taxation, and material costs by relocating capital to geographical areas with lower costs. Global capital relocation played a crucial role in the profit rate recovery in the late twentieth century. However, as capitalist accumulation takes place in the non-core areas, it eventually leads to rising wage, taxation, and material costs in wider geographical areas. China’s economic rise has already created a new set of social and environmental conditions that may eventually lead to a new wave of rising wage, taxation, and material costs on a global scale.

Measuring the profit rate In this book, profit rate is defined as the ratio of total domestic capitalist profit over the business sector capital stock (unless otherwise stated). Total domestic capitalist profit is defined as the after-tax total capitalist property incomes generated from domestic production and the business sector capital stock is measured by the business sector net stock of fixed assets. Total

Capitalism and the profit rate  17 national capitalist profit is defined as the sum of total domestic capitalist profit and net foreign profit (net property income from abroad). In the conventional national income and product accounts, gross domestic income (gross domestic product measured by the income approach) consists of compensation of employees, net operating surplus, taxes on production and imports less subsidies, and consumption of fixed capital (depreciation). Net operating surplus includes corporate profits, net interest, rental income, and proprietors’ income. Proprietors’ income (also known as entrepreneurial income or mixed income) includes both labor income (such as incomes of small business owners who participate in productive work) and capital income (such as profits of unincorporated capitalist businesses). Thus, capitalist property incomes include the corporate profits, net interest, rental income, and the capital component of the proprietors’ income. The property incomes that appear in the national income and product accounts are before income taxes. The after-tax total capitalist property incomes refer to the capitalist property incomes less the income taxes paid by the capitalists (including corporate income taxes and estimated income taxes paid by capitalist individuals). The total domestic capitalist profit so defined can be calculated as follows: Total Domestic Capitalist Profit = Gross Domestic Product (Gross Domestic Income) – Total Labor Income – Taxes on Capitalists – Consumption of Fixed Capital Taxes on capitalists include taxes on production and imports less subsidies (also known as “indirect taxes less subsidies”), corporate income tax, and estimated income taxes paid by capitalist individuals. Total labor income is the sum of compensation of employees and the labor component of the proprietors’ income. There are several commonly used methods to split the proprietors’ income between labor and capital. The first is to assign fixed weights to labor and capital income (with labor often assigned a weight of two-thirds and capital assigned a weight of one-third). The second is to assume that the self-employed workers earn the same wage rate as the employees in the rest of the economy. The third is to assume that the capital stock in the proprietor sector earns the same rate of return as in the corporate sector. The fourth is to assume that the labor and capital income share in the proprietor sector is the same as in the rest of the economy. These methods often yield similar results (Giovannoni 2014). In most cases, this book assumes that labor component is 70 percent of the proprietors’ income. In China, the income per person for rural self-employed persons is substantially below the urban workers’ average wage. This book assumes that China’s rural “entrepreneurial income” consists entirely of labor income.

18  Capitalism and the profit rate

Box 1.1  Thomas Piketty’s “second fundamental law of capitalism” In his major study on two centuries of wealth and income inequality, Piketty built his analysis partly on what he called the “second fundamental law of capitalism”: β = s/g, where “β” is capital-income ratio, “s” is saving rate, and “g” is economic growth rate (Piketty 2014: 164–198). The formula says that the long-term ratio of national wealth over national income is determined by the national saving rate divided by the economic growth rate. This formula is similar to the formula for equilibrium capital-­ output ratio discussed in Chapter 1. But Piketty’s capital includes not only business-sector fixed assets, but also houses, farmland, government fixed assets, and foreign assets and he measures capital by market values instead of replacement cost. Interestingly, Piketty predicts that as economic growth rate declines and the saving rate stays relatively high, the capital-income ratio will tend to rise over the twenty-first century. If this turns out to be true, it will validate Marx’s hypothesis on rising “organic composition of capital.” However, rather than predicting falling rate of profit as Marx did, Piketty argues that the rising capital-income ratio will result in greater income inequality. This conclusion derives from Piketty’s assumption and his “first fundamental law of capitalism,” which says that the capital share of national income equals the rate of return on capital multiplied by the capital-income ratio. Piketty assumes that the rate of return on capital will stay constant. Given the assumption, rising capitalincome ratio will have to drive up the capital share of national income. Using the Marxian language, in effect, Piketty is assuming that rising rate of surplus value will offset the future rise of organic composition of capital. However, if Wallerstein is correct in arguing that wage, taxation, and material costs tend to rise in the long run, perhaps both the capital share and the rate of return will tend to fall. The twenty-first century is going to judge whether Marx, Wallerstein, or Piketty will emerge as the winner of this “fundamental” debate.

2 Profit, accumulation, and crisis in British capitalism 1855–2018

Politically, the capitalist world system consists of hundreds of “sovereign” national states. Out of the several hundred states, one or two dozen may be said to be sufficiently important or powerful that their combined actions largely determine the movement of the global economy and geopolitics. The rivalry between multiple political units has not been simply a historical accident but an essential condition for the rise and expansion of the capitalist world system. Under the constant and intense pressure of interstate competition, national states are strongly motivated to support capitalist accumulation or undertake accumulation directly (Arrighi, Hui, Hung, and Selden 2003: 266–268). Before the mid-twentieth century, those who fail the game of accumulation were likely to suffer from catastrophic military defeats and cease to function as sovereign national states. Since the midtwentieth century, those that that have fallen behind in the global market competition have tended to suffer from major economic and political instabilities and be reduced to “failed states.” However, unrestrained and unregulated inter-state competition also involve major costs for the system. Historically, intensified inter-state conflicts led to “world wars” that destroyed enormous amounts of labor force and material capital stock. Financial imbalances between national economies and divergences between national economic policies have contributed to major global economic crises. In the twenty-first century, the absence of effective global governance has greatly weakened the world capacity to resolve the global ecological crisis, including the urgent task of achieving climate stabilization under conditions consistent with the preservation of human civilization. In the past, the capitalist world system has partially succeeded in reducing the excessive cost of inter-state competition through the cyclical rise of hegemonic powers. The Dutch “United Provinces,” the United Kingdom, and the United States had successively been the hegemonic powers in the capitalist world system from the seventeenth century to the twentieth century.

20  British capitalism A hegemonic power is not only more powerful than all the other national states but so powerful that, at the peak of its power, it is both able and willing to regulate the inter-state competition and provide “system-level solutions” to “system-level problems.” However, the very success of a hegemonic power in creating conditions for system-wide expansion tends to invite competition from other big powers and generate new social forces that the existing hegemonic power can no longer accommodate. The decline of the existing hegemonic power then paves the way for a prolonged period of chaos and instability (Arrighi and Silver 1999: 21–36). The British hegemonic power was consolidated after the defeat of Napoleon in 1815. Britain became the master of the European balance of power. Under the British hegemony, Europe enjoyed a “Hundred Years’ Peace” from 1815 to 1914 (interrupted only by a few short wars). By 1846 and 1849, the Corn Laws and the Navigation Acts were repealed. Britain opened up itself as the ultimate market for the raw material exporters. From 1850 to 1870, the British imports absorbed nearly one-third of the rest of the world’s exports. The “public goods” supplied by the British hegemonic power (“peace” between European powers and the unilateral free trade policy) created the necessary favorable conditions for the expansion of the global capitalist economy from 1850 to 1873 (Arrighi, Hui, Ray, and Reifer 1999: 58–66).

British hegemony from 1850 to 1873 The British hegemony rested upon the British dominance over the world industrial production as well as its global colonial empire. By the mid-­ nineteenth century, Britain had completed the first Industrial Revolution and became the “workshop of the world.” British share in the world manufacturing exports was 43 percent in 1853 and rose to 46 percent by 1870 (Mitchell 1988: 524, “External Trade,” Table 21A). Britain began to conquer the Indian subcontinent after its victory in the battle of Plassey in 1757. The East India Company imposed taxes on the people of the conquered territories and used the revenue to pay for British imports from India. The Indian “exports” to Britain thus were effectively Indian tributes to the British empire. According to Indian economic historians, at the beginning of the nineteenth century, Indian tributes to Britain amounted to about one-third of Britain’s gross domestic capital formation, making an indispensable contribution to the British Industrial Revolution (Mukherjee 2010). As Britain completed the Industrial Revolution, Indian manufactured goods were no longer needed for British consumption. Instead, India was transformed into a major raw material exporter and the largest market for

British capitalism  21 British cotton textiles. In 1850, imports by India accounted for about onethird of the British exports of cotton goods (Arrighi, Barr, and Hisaeda 1999: 119). By 1887, India imported 2,000  million yards of British cottons goods, absorbing about 40 percent of the British cotton good exports (Mitchell 1988: 356, “Textiles,” Table 16; Mukherjee 2010). From the 1850s to the early 1870s, British capitalism enjoyed high profits from both domestic production and overseas investment. Figure 2.1 shows the British national total profit (as % of gross domestic product or GDP, including both domestic profit and net property income from abroad), the domestic total profit (as % of GDP), and the profit rate (ratio of total domestic profit divided by the business sector net stock of fixed capital) from 1855 to 1900 and the rate of accumulation (growth rate of business sector real capital stock) from 1851 to 1900.

40%

30%

20%

10%

0%

-10% 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

Figure 2.1 Profit and accumulation (UK economy, 1851/1855–1900) Note: On the data sources and estimates of the British economy’s national total profit, domestic total profit, and business sector net stock of fixed assets, see Appendix A. Rates of accumulation from 1851 to 1900 are calculated using the estimated business sector capital stock deflated by the capital stock deflator, which is calculated from the net stock in current prices and in constant prices reported by Mitchell (1988: 864–865; “National Accounts,” Table 14B).

22  British capitalism From 1855 to 1871, the British economy’s total profit from domestic production rose from 24 percent of GDP to 27 percent of GDP. The total economy profit rate rose from 17 percent to 22 percent. The British net property income from abroad tripled between 1855 and 1871, rising from 13 million pounds (1.9 percent of GDP) to 39 million pounds (3.7 percent of GDP). From 1850 to 1873, the British business sector real capital stock grew at an average annual rate of 2.3 percent. This represents a continuation of the trend from 1820 to 1850, when real net stock of fixed assets in the Great Britain grew at an average annual rate of 2.5 percent (Mitchell 1988: 864, “National Accounts,” Table 14A), but a significant acceleration relative to rates of accumulation in earlier periods. From 1760 to 1820, Great Britain’s real net stock of fixed assets grew at an average annual rate of 1.2 percent (Mitchell 1988: 864, “National Accounts,” Table  14A). Compared to the growth rates during the first few decades of the Industrial Revolution, the British pace of capital accumulation had approximately doubled by the midnineteenth century. Industrial Revolution transformed the British society. In 1851, there were 1.9 million male and female persons employed in agriculture and fishing, accounting for 20 percent of the British economy’s total employment; 5.1 million persons were employed in mining, manufacturing, utilities, and transportation, accounting for 55 percent of the total employment; 2.4 million persons were employed in public administration, armed forces, and various services, accounting for 25  percent of the total employment. By 1871, total employed persons in agriculture and fishing declined to 1.8 million, accounting for 15 percent of the British economy’s total employment; 7.2 million persons were employed in mining, manufacturing, utilities, and transportation, accounting for 61 percent of the total employment; 2.7 million persons were employed in public administration, armed forces, and various services, accounting for 23 percent of the total employment (Mitchell 1988: 104, “Labor Force,” Table 2B). The industrial working class had become the majority in the British society. During the first half of the nineteenth century, there were workers’ riots and major social unrests. In the early 1830s, working class political mobilization reached pre-revolutionary conditions. The ruling class responded with limited social reforms (Silver and Slater 1999: 172–176). The Parliamentary reform in 1832 expanded the electorate to about one-tenth of the adult male population. In 1884, the British working class won universal suffrage for adult male population. At the beginning of the nineteenth century, the working class living standards fell to the lowest level since the late Middle Ages. However, the British workers’ real wage began to improve after about 1810. According to the available wage indexes, for full-time workers in England, average real

British capitalism  23 wage rose by about 140 percent from 1810 to 1851 (Mitchell 1988: 152, “Labor Force,” Table 22). From 1850 to 1873, for workers in the United Kingdom, average money wage rose by 55 percent and real wage rose by 28 percent (Mitchell 1988: 149, “Labor Force,” Table 21B).

From “material expansion” to “financial expansion” According to Giovanni Arrighi, the rise and fall of a hegemonic power can be divided into two distinct phases: material expansion and financial expansion (Arrighi 1994: 1–26). During the phase of “material expansion,” the rising hegemonic power emerges as the predominant industrial and commercial power in the capitalist world system and consolidates its monopolistic advantages. At its peak, the incumbent hegemonic power enjoys high, monopolistic profits in material production and trade. However, the high profits enjoyed by the hegemonic power inevitably invite emulation and competition by other national states. Rising social demands from workers and other social classes within the hegemonic state lead to rising wage and taxation costs. Squeezed between rising costs and growing intensity of competition, the hegemonic economy suffers from falling profit rate in material production and trade (Arrighi and Silver 1999: 21–26). As the profit rate in material production and trade declines, the hegemonic economy attempts to revive its power and wealth through a massive expansion of financial investment and speculation. Financial expansion helps the incumbent hegemonic power to temporarily reverse its economic and geopolitical decline. However, the accumulation of financial profits relies upon redistribution of income and wealth from the workers and debtors to the financial capitalists, leading to intensified social conflicts. Moreover, as the incumbent hegemonic power pursues financial rather than material expansion, its national interests begin to diverge from the systemic interests. The hegemonic power is no longer able or willing to provide effective “systemlevel solutions” to “system-level problems.” As the incumbent hegemony fails to regulate systemic interests, inter-state competition intensifies and eventually leads to system-wide collapse and chaos (Arrighi and Silver 1999: 31–35). Under the British hegemony, the transition from “material expansion” to “financial expansion” took place during the “Long Depression” of 1873–1896. During the “Long Depression,” the general price level declined throughout the Western capitalist world, unemployment surged, and business profits declined. The British total economy profit rate declined from 24 percent in 1871 to 18 percent in 1874 and stayed around 18 percent until 1893 (see Figure 2.1).

24  British capitalism As domestic profit rate declined, the British capitalists shifted investment from domestic production to acquisition of overseas assets. During the 1890s, the British average annual net capital exports (assumed to be the same as the current account surpluses) were 57 million pounds (Mitchell 1988: 871, “National Accounts,” Table 15B). This equals 3.8 percent of the British economy’s GDP in 1895 and is about the same as the British economy’s average annual net fixed capital formation during the 1890s (56 million pounds, including net fixed investment in the business, household, and government sector; calculated using gross fixed capital formation less capital consumption, see Mitchell 1988: 833, “National Accounts,” Table 5). In 1875, the British nationals’ net foreign assets were 1.2 billion pounds, an amount that equals 103 percent of the British GDP in 1875. In 1901, the British net foreign assets were 2.6 billion pounds, equaling 146 percent of GDP. By 1913, the British net foreign assets reached 4.2  billion pounds, equaling 182 percent of GDP (Piketty and Zucman 2014, Table 6f). The massive accumulation of overseas assets greatly enhanced the global power and wealth of the British capitalist class in the short run. However, financialization and withdrawal of capital from material production accelerated the decline of the British manufacturing industry. Towards the end of the nineteenth century, the United States and Germany had surpassed Britain to become the dominant industrial producers in the world economy. British share in the world manufacturing exports declined from 46 percent in 1870, to 31 percent in 1900 and 28 percent in 1913 (Mitchell 1988: 524, “External Trade,” Table 21A). The relative decline of the British industry paved the way for a new wave of intensified inter-state conflicts. In response to the late nineteenth century depression, the continental European countries and the United States adopted protectionist policies to raise domestic prices. The capitalist classes on continental Europe abandoned their commitment to free trade and demanded their respective national governments to obtain exclusive overseas colonies and spheres of influence to secure protected markets and privileged sources of raw materials (Silver and Slater 1999: 184–185). This led to the “scrambling for Africa” and a new era of imperialist rivalry. The “liberal” international order under the British leadership began to unravel. During the 1870s and 1880s, although the unemployment rate increased, the employed workers actually benefited from the price deflation. From 1873 to 1896, the British workers’ average money wage rose by 5 percent but the average retail prices declined by 32  percent and the average real wage increased by 38  percent (Mitchell 1988: 149–150; “Labor Force,” Table 21B). The share of labor income in the British GDP rose from 61 percent in 1870 to 65 percent in 1890.

British capitalism  25 Table 2.1 summarizes the distribution of the British GDP between labor income, taxes on capitalists, consumption of fixed capital, and total domestic profit from 1855 to 1900. Net foreign profit (net property income from abroad) is not a part of GDP but is also shown for comparison. After 1890, the capitalists counter-attacked by restructuring the labor processes. The American-style “scientific management” was introduced to Europe. The new management techniques helped to de-skill the workers and speed up the labor process. Financialization and the formation of large corporate enterprises gave the capitalists monopolistic power to raise prices (Silver and Slater 1999: 181). In Britain, the cost of living rose by 23 percent from 1896 to 1913 and the workers’ real wage stagnated (Mitchell 1988: 150–151, “Labor Force,” Table 21C). The working class defended their interests by organizing industrial unions that included unskilled, semi-skilled, and skilled workers. The British workers’ trade union membership surged from 1.6  million in 1892 to 4.1 million in 1913 (Mitchell 1988: 137, “Labor Force,” Table 13). On the eve of the First World War, British and European capitalism were threatened by a new wave of working class militancy (Silver and Slater 1999: 186–187). The average annual number of industrial labor disputes in Britain and Ireland rose from 437 during 1901–1095 to 491 during 1906–1910, and 1,086 during 1911–1913. The average annual number of working days lost through disputes surged from 2.8  million days during 1901–1905 to 5.7 million days during 1906–1910, and 21 million days during 1911–1913 (Mitchell 1988: 144, “Labor Force”, Table 17A).

Table 2.1 Distribution of gross domestic product (United Kingdom, 1855–1900, % GDP)

1855 1860 1865 1870 1875 1880 1885 1890 1895 1900

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

62.6 61.8 62.0 61.2 63.4 62.5 63.0 65.4 63.5 62.8

9.1 9.4 7.7 7.8 7.1 7.5 7.9 7.1 7.5 7.4

4.7 4.5 4.6 4.7 5.5 5.6 5.6 5.0 4.8 5.3

23.6 24.3 25.8 26.3 24.0 24.3 23.5 22.6 24.2 24.5

1.9 2.6 2.7 3.5 5.0 5.2 6.2 6.8 6.4 5.8

Source: See Appendix A.

26  British capitalism

Demise of the British hegemony Under the British hegemony, European capitalism enjoyed about a century of relative peace and industrial expansion. But the triumph of industrial capitalism had created new social forces that could no longer be accommodated by the British-led global capitalist structure. By the early twentieth century, large industrial working classes had been formed in Western Europe and North America. Workers were increasingly organized, demanding higher wages as well as a widening range of political and social rights. In continental Europe, working classes were organized into Marxist political parties, challenging the very existence of the capitalist system (Silver and Slater 1999: 181–185). In 1918, the British Labour Party adopted a socialist program committing the Party to work towards “the common ownership of the means of production, distribution, and exchange” (see Gani 2015). The spread of industrialization in the late nineteenth century intensified the global competition for overseas markets and sources of raw material supplies. The imperialist rivalry led to a new wave of colonization that expanded the capitalist world system to the entire globe. By 1920, Britain had a global empire with a combined territory of 13.7 million square kilometers, accounting for almost a quarter of the world’s total land area (Taagepera 1997). In the long run, the invasion of Western capitalism had transformed the non-Western societies, undermining the traditional social structures and helping to create new social forces, such as the industrial working class, modern middle class, and national bourgeoisie. By the early twentieth century, these new social forces began to form mass-based national liberation movements. After the Russian Revolution in 1917, the nationalist movements in Asia and Africa increasingly merged with social revolutions that began to mobilize the great majority of the population (especially the peasants). The radicalized national liberation movements demanded not only national independence but also fundamental social changes (Silver and Slater 1999: 197–202). As Germany became the predominant military-industrial power in continental Europe, Britain’s traditional mastery of the European balance of power was fatally undermined. Britain had to respond to Germany’s imperial ambition by committing not only all the financial resources at its disposal but also millions of soldiers. During the First World War, taxes were raised to finance the greatly expanded army and navy. Material shortage and depreciation of the British pound led to a dramatic increase in the cost of living by about 150 percent from 1914 to 1920 (Mitchell 1988: 739, “Prices,” Table 10B). But the workers were able to demand higher money wages to compensate for the retail price inflation. From 1914 to 1920, the British workers’ average money wage rose by 170 to 180 percent (Mitchell 1988: 150–151, “Labor Force,”

British capitalism  27 Table  21C, note 4 and Table  21D, note 5). Total labor income rose from 62 percent of GDP in 1913 to 71 percent of GDP in 1920. Capitalist profits were squeezed by higher taxes and higher wages. Figure 2.2 shows the national total profit (as % of GDP), the domestic total profit (as % of GDP), the profit rate, and the rate of accumulation for the British economy from 1900 to 1950. From 1913 to 1920, the British total national profit fell from 33 percent of GDP to 14  percent of GDP, total domestic profit fell from 24  percent of GDP to 10 percent of GDP, and the total economy profit rate fell from 18 percent to 6 percent. The British ruling class responded to the profit rate crisis by pursuing deflationary fiscal and monetary policies. Gross public expenditures were 40%

30%

20%

10%

0%

-10% 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

Figure 2.2 Profit and accumulation (UK economy, 1900–1950) Note: On the data sources and estimates of the British economy’s national total profit, domestic total profit, and business sector net stock of fixed assets, see Appendix A. Rates of accumulation from 1900 to 1950 are calculated using the estimated business sector capital stock deflated by the capital stock deflator. For the period 1900–1938 and 1949–1950, capital stock deflator is calculated from the net stock in current prices and in constant prices reported by Mitchell 1988: 866–867; “National Accounts,” Table  14B). For the period 1939–1948, gross fixed capital formation deflator is used as the capital stock deflator; gross fixed capital formation deflator is calculated from gross fixed capital formation in current and constant prices reported by Mitchell (1988: 834, “National Accounts,” Table 5; 840, “National Accounts,” Table 6).

28  British capitalism reduced from 1.67  billion pounds in 1920 (about 30  percent of GDP) to 751  million pounds in 1925 (about 18  percent of GDP) (Mitchell 1988: 590, “Public Finance,” Table 4). Money supply declined from 2.89 billion pounds in 1920 to 2.43 billion pounds in 1925 (measured by “M3” or the sum of cash in circulation and all bank deposits, see Mitchell 1988: 674, “Financial Institutions,” Table 10). Contraction of money supply kept the nominal interest rate at relatively high levels. Nominal yield on Consols averaged 4.6  percent in the 1920s while the British economy’s nominal GDP declined at an average annual rate of 2 percent from 1920 to 1930. High nominal interest rates combined with persistent deflation of the general price level led to a surge of the real interest rate. Figure 2.3 shows the real interest rate, real GDP growth rate, and the rate of unemployment for the British economy from 1900 to 1950.

30%

20%

10%

0%

-10%

-20% 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 Real Interest Rate

Economic Growth Rate

Unemployment Rate

Figure 2.3 Interest rate, economic growth, and unemployment (UK economy, 1900–1950) Note: Real interest rate is yield on Consols deflated by retail price index. Yield on Consols and retail price index from 1900 to 1950 are from FRED (2019a) and ONS (2019b). Real GDP growth rates from 1900 to 1950 are calculated using real GDP in constant 1990 international dollars from Maddison (2010). Unemployment rates from 1900 to 1950 are from Mitchell (1988: 124, “Labor Force,” Table 8).

British capitalism  29 Real interest rate (measured by yield on Consols deflated by the retail price index) surged to 16 percent in 1921 and 29 percent in 1922 and stayed at elevated levels through the rest of the 1920s and early 1930s. High real interest rate depressed domestic investment. The business sector real capital stock barely increased between 1920 and 1925 and grew only at a sluggish pace from 1925 to 1938 (with an average annual rate of 0.8 percent). The British ruling class insisted on restoring the pound–dollar exchange rate to its prewar “parity.” As a result, the pound was overvalued and the British trade balance deteriorated despite contraction of domestic demand. Unemployment rates stayed above 7  percent through the 1920s and peaked at 16 percent in 1932. Sustained high unemployment undermined the workers’ bargaining power. Total labor income as share of GDP fell from 71 percent in 1920 to 62 percent in 1938. Fiscal and monetary austerity did succeed in restoring the profit rate and profit share. By 1930, the total national profit recovered to 24 percent of GDP and the total domestic profit recovered to 19  percent of GDP. The economy stagnated through the 1920s and 1930s. However, real GDP managed to grow more rapidly than the business sector capital stock and the business capital-GDP ratio declined from 1.56 in 1920 to 1.13 in 1930 (see Figure 1.2). The combination of falling capital-output ratio and rising profit share led to a strong profit rate recovery. The profit rate rose from 6 percent in 1920 to 17 percent in 1930. When the Great Depression began, the British government initially responded by reducing public-sector spending in the vain hope of restoring budget balance. This led to further contraction of real output and surging unemployment. By September 1931, Britain abandoned the gold standard, allowing the pound to devalue and the interest rate to fall. General Tariff was introduced to protect domestic industries. The manufacturing sector grew strongly from 1932 to 1937 (Kitson and Michie 2014). By 1938, the profit rate rose to 18 percent. The British capitalist response to the profit rate crisis after the First World War anticipated the neoliberal restructuring in the late twentieth century. Fiscal and monetary austerity led to sustained high unemployment that helped to turn the balance of power between classes to the favor of the capitalists. Economic stagnation discouraged capital accumulation and contributed to the decline of the capital-output ratio. Overall, the policies had succeeded in restoring the profit share and profit rate. However, the austerity policies also involved high costs for British capitalism. Surge of capitalist profits during a period of high unemployment and stagnating real wages led to intense social conflicts and radicalization of the working class that threatened the political stability of the capitalist system. Stagnation in capital accumulation accelerated the long-term

30  British capitalism Table 2.2 Distribution of gross domestic product (United Kingdom, 1900–1950, % GDP)

1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

62.8 61.3 61.6 69.1 70.5 64.8 63.4 64.4 66.5 66.8 65.7

7.4 8.7 8.2 8.0 12.3 11.6 11.3 12.2 13.4 18.0 14.7

5.3 5.6 5.9 6.1 7.7 6.4 6.3 6.3 6.7 6.4 7.5

24.5 24.5 24.3 16.8 9.4 17.3 18.9 17.1 13.4 8.8 12.2

5.8 6.7 8.3 6.1 4.4 5.2 4.7 3.8 2.4 0.8 2.9

Source: See Appendix A.

decline of the British manufacturing industry. By 1937, the British share of the world manufacturing exports fell to 21 percent (Mitchell 1988: 524, “External Trade,” Table 21B). As the Second World War started, the capitalist class had to make concessions to the working class to mobilize their support for the war. During the war, the capitalists accepted higher taxes and lower profits. In 1942, the British government published the Beveridge Report (drafted by William Beveridge) that promised to eradicate five “Giant Evils” in capitalist society (squalor, ignorance, want, idleness, and disease) through the development of welfare state institutions. At the end of the war, Britain had depleted its gold reserves and liquidated most of its overseas assets and the once enormous British net foreign profit had all but disappeared. British capitalism was reduced to a junior partner to the newly consolidated American hegemony. Table 2.2 summarizes the distribution of the British GDP between labor income, taxes on capitalists, consumption of fixed capital, and total domestic profit from 1900 to 1950. Net foreign profit (net property income from abroad) as share of GDP is also shown.

From “golden age” to Thatcherism The much-weakened British capitalism made major concessions both internally and externally. Externally, Britain adopted the policy of de-­ colonization and accepted the national independence by India and other former colonies. Internally, a welfare state with national health care, pensions,

British capitalism  31 and social security was created. A welfare state helps to socialize some of the costs and risks of labor power reproduction and gives the working class some stake in the existing capitalist system. Table 2.3 summarizes the distribution of the British GDP between labor income, taxes on capitalists, consumption of fixed capital, and total domestic profit from 1950 to 2018. Net foreign profit (net property income from abroad) as share of GDP is also shown. Figure 2.4 shows the national total profit (as % of GDP), the domestic total profit (as % of GDP), the profit rate, and the rate of accumulation for the British economy from 1950 to 1990. Both the profit share and the profit rate rose during the 1950s. Domestic profit as share of GDP peaked at 19 percent and the profit rate peaked at 16 percent in 1960. The financial institutions were heavily regulated and the British government kept control over capital flows. Real interest rates were negative in the early 1950s and stayed at low levels in the 1960s. Both the Labour and the Conservative governments regularly used Keynesian polices to expand domestic demand. The nationalization of traditional industries such as coal and steel allowed capitalists to transfer capital to new manufacturing sectors (such as automobile, chemical, and electrical engineering). From 1950 to 1973, real business sector capital stock grew at the fastest pace in British industrial history (with an average annual growth

Table 2.3 Distribution of gross domestic product (United Kingdom, 1950–2018, % GDP)

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2018

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

65.7 63.8 61.9 62.7 59.3 65.4 57.6 51.8 51.6 50.4 53.3 54.0 55.0 53.1 53.9

14.7 13.3 11.9 12.9 16.3 11.1 14.9 16.1 15.2 15.4 17.5 16.1 15.8 16.8 16.5

7.5 7.9 7.7 8.1 8.2 10.2 10.8 13.3 14.3 14.3 13.1 13.3 14.4 14.3 14.6

12.2 15.0 18.5 16.2 16.1 13.3 16.8 18.8 18.9 19.8 16.0 16.7 14.7 15.8 15.0

2.9 0.8 0.8 1.1 0.9 0.2 –0.9 –0.6 –0.7 –0.1 0.3 1.3 0.1 –2.2 –1.3

Source: See Appendix A.

32  British capitalism 40%

30%

20%

10%

0%

-10% 1950

1955

1960

1965

1970

1975

1980

1985

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

1990

Figure 2.4 Profit and accumulation (UK economy, 1950–1990) Note: On the data sources and estimates of the British economy’s national total profit, domestic total profit, and business sector net stock of fixed assets, see Appendix A. Rates of accumulation from 1950 to 1980 are calculated using the estimated business sector capital stock deflated by the capital stock deflator. Capital stock deflator is calculated from the net stock in current prices and in constant prices reported by Mitchell 1988: 866–868; “National Accounts,” Table 14B). For the period 1981–1990, gross fixed capital formation deflator is used as the capital stock deflator; gross fixed capital formation deflator is calculated from gross fixed capital formation in current and constant prices reported by ONS (2019a, “National Accounts,” Worksheet 1.2 and 1.3).

rate of 4.8 percent). During the same period, the manufacturing sector output doubled (Kitson and Michie 2014). The period from 1950 to 1973 is often remembered as the “golden age” of capitalism. In Britain, unemployment rates were as low as 1–2 percent. The working class enjoyed rising living standards and paid holidays. Many working class families owned cars and televisions, and became regular visitors to shopping malls. However, after 1960, the profit share began to be eroded by rising labor and taxation costs. The capitalists responded by passing the rising costs to

British capitalism  33 consumers. After 1967, accelerating inflation helped to offset wage growth and restore the profit share. By 1973, domestic profit as share of GDP recovered to 19 percent. However, the gains in profit share were mostly offset by rising capital-output ratio. The British economy’s business capital-GDP ratio rose from 1.07 in 1950 to 1.78 in 1974 (see Figure 1.2). In 1975, consumer price inflation surged to 24 percent and the profit rate sank to 8 percent, the lowest since 1921. By the end of the 1970s, Britain was paralyzed by economic stagnation, double-digit inflation, rising unemployment, and nationwide strike waves. With the election of Margaret Thatcher in 1979, the British capitalist class began its counter-offensive. The new economic policies included monetarism, privatization, and deregulation. The monetarist policy was essentially deflationary macroeconomic policy designed to undermine workers’ bargaining power by creating persistently high unemployment. Real interest rate surged and stayed above economic growth rate through the 1980s and 1990s. The unemployment rate stayed above 10 percent from 1982 to 1987 and remained at high levels until the mid-1990s. The defeat of the coal miners’ strike in 1984 accelerated the decline of trade unions. Figure 2.5 shows the real interest rate (yield on long-term government bonds deflated by the consumer price index), economic growth rate, and unemployment rate in the British economy from 1950 to 2018. From 1980 to 1996, Britain’s real business sector capital stock barely increased. The British economy experienced deindustrialization and financialization. The manufacturing output essentially stagnated, but the financial corporations’ gross operating surplus as share of the total corporate gross operating surplus rose from 2  percent to 12  percent (ONS 2019a, “National Accounts,” Worksheet 1.2). During the 1980s and 1990s, British capitalism achieved a spectacular profit rate recovery. By 1996, the profit share rose to the highest level since the First World War. Stagnation in capital accumulation contributed to sharp declines of capital-output ratio. Business capital-GDP ratio fell from 1.67 in 1980 to 1 in 1996. The profit rate doubled, surging from 10 percent in 1980 to 21 percent in 1996. Figure 2.6 shows the national total profit (as % of GDP), the domestic total profit (as % of GDP), the profit rate, and the rate of accumulation for the British economy from 1980 to 2018. During the twentieth century, British capitalism struggled with successive major crises and, for several times, suffered from large and sustained declines of the profit rate (during 1913–1920; 1938–1947; and 1960–1975). After the Second World War, the British capitalist class responded to the crisis by making concessions to the domestic working class and the national liberation movements in Asia and Africa. The postwar social compromise contributed to the expansion of the British material production sectors in the

34  British capitalism 15%

10%

5%

0%

-5%

-10% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Real Interest Rate

Economic Growth Rate

Unemployment Rate

Figure 2.5 Interest rate, economic growth, and unemployment (UK economy, 1950–2018) Note: Real interest rate is yield on long-term government bonds deflated by retail price index. Yields on Consols from 1950 to 1959 are from FRED (2019a). Yields on ten-year government bonds from 1960 to 2018 are from FRED (2019b). Retail price index from 1950 to 2018 is from ONS (2019b). Real GDP growth rates from 1950 to 2018 are calculated using real gross domestic product in chained volume measures (ONS 2019a, “National Accounts,” Worksheet 1.1). Unemployment rates from 1950 to 1969 are from Mitchell (1988: 124, “Labor Force,” Table 8). Unemployment rates from 1970 to 2018 are from ONS (2019a, “National Accounts,” Worksheet 1.5).

1950s and 1960s but also enhanced the working class power and created the conditions that led to the profit rate crisis by the 1970s. By contrast, during the interwar years and in the 1980s, the capitalist class was able to mobilize sufficient political will to impose austerity policies on the working class, achieving profit rate recovery at the expense of working class living standards. In both cases, British capitalism experienced stagnating real capital accumulation and relative (or absolute) industrial decline. The transfer of income and wealth from the workers to the capitalists and from material production sectors to financial capital led to intensified social conflicts.

British capitalism  35 40%

30%

20%

10%

0%

-10% 1980

1985

1990

1995

2000

2005

2010

2015

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

2020

Figure 2.6 Profit and accumulation (UK economy, 1980–2018) Note: On the data sources and estimates of the British economy’s national total profit, domestic total profit, and business sector net stock of fixed assets, see Appendix A. Rates of accumulation from 1980 to 2018 are calculated using the estimated business sector capital stock deflated by the gross fixed capital formation deflator. Gross fixed capital formation deflator is calculated from gross fixed capital formation in current and constant prices reported by ONS (2019a, “National Accounts,” Worksheet 1.2 and 1.3).

In the early twenty-first century, British capitalism appears to have achieved a degree of relative “equilibrium” in which the capitalists enjoy relatively high profit share and profit rate, but the economy suffers from low investment and stagnation. But how long can such a temporary “equilibrium” be maintained?

36  British capitalism

Box 2.1  Distribution of the British national income, 1855–2018 Chapter  2 discusses the long-term movement of the profit rate and distribution of gross domestic product between labor income, taxes, consumption of fixed capital, and total profit in British capitalism. Table 2.1, 2.2, and 2.3 shows that labor income as share of GDP stayed in the range of 61–65  percent from the mid-nineteenth century to the early twentieth century. The labor income share surged to about 70 percent after the First World War and then stabilized around 65 percent from the 1920s to the 1940s. From 1950 to 1995, labor income share fell from 66  percent to 50  percent. The relative economic boom and falling unemployment rates during the second half of the 1990s contributed to a limited recovery in the labor income share. Since 2000, labor income share of GDP has fluctuated around 53–55 percent. From 1855 to 2018, the labor income share of GDP fell from 63 percent to 54 percent. The long-term movement of labor income share seems to contradict Immanuel Wallerstein’s hypothesis that as a result of capitalist development and working class organization, wage cost as share of economic output tends to rise in the long run. However, the profit share of GDP also declined from 24 percent in 1855 to 15  percent in 2018. On the other hand, taxes on capitalists rose from 9  percent of GDP in 1855 to 17  percent of GDP in 2018 and consumption of fixed capital rose from 5 percent of GDP in 1855 to 15 percent of 2018. The long-term movement of taxation cost and depreciation of fixed capital appears to be consistent with Wallerstein’s hypothesis that taxation and material costs tend to rise in the long run. In the nineteenth century and the early twentieth century, the British capitalists made large profits through overseas investment. Overseas profits are a part of the British “national income” but not a part of gross domestic product. Figure B2.1 shows the distribution of the British national income between labor income and property income from 1855 to 2018. National income is defined as gross national product less consumption of fixed capital and indirect taxes (less subsidies). The labor income and property income shown in Figure B2.1 are total incomes before income taxes. During the second half of the nineteenth century and the early twentieth century, labor share of the British national income tended to fall.

British capitalism  37 100%

80%

60%

40%

20%

0% 1850

1870

1890

1910

Total Labor Income

1930

1950

1970

1990

2010

Total Property Income

Figure B2.1 Distribution of national income (UK economy, 1855–2018) Source: See Appendix A.

From 1855 to 1913, the labor share declined from 71 to 65 percent and the property share rose from 29 percent to 35 percent. The labor share rose sharply during the First World War. From 1915 to 1980, labor share of national income fluctuated between 72 percent and 82 percent and the property share fluctuated between 18 percent and 28 percent. During the early neoliberal years, labor share of national income fell back to levels that were last seen in the early twentieth century. In 1996, the labor share was 67 percent and the property share was 33  percent. Since then, the labor share has gradually recovered. In 2018, labor share of the British national income was 76 percent and property share was 24 percent.

3 Profit, accumulation, and crisis in American capitalism 1900–2018

By 1900, the United States had surpassed Britain to become the world’s largest industrial economy. In 1900, the US economy was about 70 percent larger than Britain’s and accounted for 16 percent of the gross world product. The US per capita GDP reached 91 percent of the British level and the United States would soon overtake Britain to become the world’s wealthiest capitalist nation (Maddison 2010). In the early twentieth century, the United States became the world leader of the Second Industrial Revolution. Economic growth was driven by electrification, internal combustion engines, and mass production technologies. From 1900 to 1929, the US economy grew at an average annual rate of 3.3 percent, per capita GDP grew at an average annual rate of 1.6 percent, and the business sector real capital stock grew at an average annual rate of 3.2 percent (Carter et al. 2006: 3–25, “Economic Structure and Performance,” Table Ca 9–19; Goldsmith 1956: 14, Table W-3). The American capitalist society was transformed. Nonfarm employment rose from 16 million in 1900 to 36 million in 1929. The agricultural share of total employment fell from 41 percent in 1900 to 23 percent in 1929 (Carter et al. 2006: 2–82, “Work and Welfare,” Table Ba 470–477). The United States became a country with working class majority. Mass production technologies increased labor productivity but also contributed to homogenization of the working class by reducing the importance of skilled workers. The American Federation of Labor was founded in 1886 and grew rapidly in the early twentieth century. Radical worker activists formed “Industrial Workers of the World” that helped to organize hundreds of strikes from 1905 to 1920 (Gregory 2019). The workers’ struggle forced the capitalists to make concessions. The nonfarm workers’ real wage rose by 54  percent between 1900 and 1929 (Carter et  al. 2006: 2–265, “Work and Welfare,” Table Ba 4280–4282). Some capitalists also advocated g­ iving the workers higher wages in order to create a mass consumer market (in 1914, Henry Ford introduced the five-dollar daily wage for his

American capitalism  39 assembly line workers, about twice the market wage rate at the time, see Gross 2014). During the “Progressive Era” (from the 1890s to the 1920s), the urban middle class and small businesses demanded government regulations of corporate business to protect the interest of consumers, farmers, and other small businesses. In 1913, the Sixteenth Amendment to the US Constitution allowed the Federal Government to tax all incomes. Both the wage cost and the taxation cost rose during the early twentieth century. Figure 3.1 shows the total national profit (as percent of gross domestic product, or GDP, including both domestic profit and net property income 40%

30%

20%

10%

0%

-10% 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

Figure 3.1 Profit and accumulation (US economy, 1900–1950) Note: On the data sources and estimates of the US economy’s national total profit, domestic total profit, and business sector net stock of fixed assets, see Appendix B. For the period 1900– 1925, rates of accumulation are the growth rates of private non-residential, non-­institutional fixed assets in constant 1929 prices. In Goldsmith (1956: 14, Table W-3), private non-residential, non-institutional net stock of fixed assets in constant 1929 prices equals column 4 plus column 12 less column 5, 9, and 10. For the period 1925–1950, rates of accumulation are the growth rates of real business sector net stock of fixed assets in constant 2012 prices. Real business sector net stock of fixed assets is constructed using quantity indexes of net stock of fixed assets of corporate businesses, sole proprietorships, and partnerships weighted by their share in the business sector capital stock in 2012 (BEA 2019b, Table 6.2).

40  American capitalism from abroad), total domestic profit (as percent of GDP), the profit rate (ratio of total domestic profit over the business sector net stock of fixed capital), and the rate of accumulation (growth rate of the business sector real net stock of fixed capital) in the US economy from 1900 to 1950. Table 3.1 summarizes the distribution of the US gross domestic product between labor income, taxes on capitalists, consumption of fixed capital, and total domestic profit from 1900 to 1950. Net foreign profit (net property income from abroad) is not a part of gross domestic product but net property income from abroad as percent of GDP is also shown for comparison. The US economy’s profit share and profit rate were very high at the beginning of the twentieth century. Profit share of GDP fluctuated between 29 and 37 percent and the profit rate fluctuated between 18 and 25 percent from 1900 to 1907 (the US had small deficits in net property income from abroad in these years). After the financial panic of 1907, the economy contracted sharply (real GDP fell by 13 percent from 1907 to 1908). From 1908 to 1929, the profit share fluctuated in the range of 18–30  percent and the profit rate mostly fluctuated in the range of 15–18 percent (with the exception of 1914 and 1917 when the profit rate fell to 11 and 9 percent respectively). While the European industries were devastated by the First World War, the United States emerged from the war as the world’s predominant industrial power as well as the largest net creditor in the international capital market. American capitalism boomed during the “roaring 1920s.” However, the profit rate peaked in 1926. When the Great Depression began, decline

Table 3.1 Distribution of gross domestic product (United States, 1900–1950, % GDP)

1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

51.1 53.4 59.7 60.1 56.0 57.4 59.2 60.1 60.2 66.0 61.8

6.5 5.5 6.0 6.1 7.1 8.2 8.8 11.6 12.0 12.2 14.3

9.3 9.0 9.8 10.7 11.6 10.3 11.0 11.4 10.4 10.3 11.2

33.1 32.1 24.5 23.1 25.4 24.1 21.0 16.9 17.4 11.5 12.7

–0.5 –0.3 –0.2 0.2 0.5 0.8 0.8 0.5 0.3 0.2 0.5

Source: See Appendix B.

American capitalism  41 of investment and profit reinforced each other sending American capitalism into a vicious downward spiral.

Small government capitalism and the Great Depression Before the Great Depression, American capitalism had a relatively small government sector. In 1929, the US government consumption and investment expenditures accounted for 9 percent of the US gross domestic product. By comparison, from 1951 to 1980, the US government expenditures on consumption and investment averaged 23 percent of GDP. Figure 3.2 compares the US economic growth rate from 1900 to 2018 and the US government consumption and investment expenditures as share of GDP from 1929 to 2018.

50% 40% 30% 20% 10% 0% -10% -20% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Economic Growth Rate

Government Expenditures (% GDP)

Figure 3.2 Economic growth and government expenditures on consumption and investment (US economy, 1900–2018) Note: Economic growth rates from 1900 to 1929 are calculated from real GDP in constant 1996 dollars from Carter et al. (2006: 3–25, “Economic Structure and Performance,” Table Ca 9–19). Economic growth rates from 1929 to 2018 are calculated from real GDP in chained 2012 dollars (BEA 2019a, Table  1.1.6). Government consumption and investment expenditures and GDP in current prices from 1929 to 2018 are from BEA (2019a, Table 1.1.5).

42  American capitalism According to Hyman Minsky, the post-Keynesian economist, “small government” capitalism was fundamentally unstable (Minsky 2008). From 1900 to 1940, the US experienced recurrent boom and bust cycles and economic growth rates fluctuated in the range of –13 to 17 percent. There were several deep depressions before the First World War. The economy contracted by 5 percent in 1904, 13 percent in 1908, and 8 percent in 1914. From 1929 to 1933, the US economy suffered a cumulative decline of 26  percent. By comparison, from 1950 to 2018, the US economic growth rates fluctuated in the range of 0 to 7 percent in most years and recessions have been relatively mild. During the deep recession of 1982, the economy contracted by 1.8 percent. During the “Great Recession” of 2008–2009, the economy experienced a cumulative decline of 2.7 percent. The instability of small government capitalism can be explained by the excessive dependence of capitalist profit on private investment and consumption spending. In The General Theory of Employment, Interest, and Money, John Maynard Keynes argued that investment spending in a capitalist economy was liable to large and violent fluctuations. According to Keynes, capitalist investment depends on expectation about rates of return in the future but the future is fundamentally uncertain. Therefore, it is impossible for the capitalists to make “rational” calculations about their future rates of return. Instead, investment is largely driven by the capitalist individuals’ “animal spirit” which may collapse abruptly if the capitalists lose confidence about the future (Keynes 1964[1936]: 147– 164). A similar argument can be made about debt-financed private consumption. Because the supply of credit depends on expectations of future income flows, it can be argued that the supply of credit also depends on the lenders’ “animal spirit” that is subject to sudden and abrupt changes. From the demand perspective, it can be shown that, under the small government capitalism, the level of capitalist profit is largely determined by the sum of capitalist investment and private consumption in excess of labor income. Gross domestic product measured by income approach (gross domestic income) equals the sum of total labor income, total domestic profit, taxes on capitalists, and consumption of fixed capital. In the US National Income and Product Accounts, gross domestic product measured by expenditures approach is composed of personal consumption expenditures, gross private domestic investment (which includes residential fixed investment, nonresidential fixed investment, and change in inventories), government consumption expenditures and gross investment, and net exports of goods and services.

American capitalism  43 If there were no statistical discrepancies, GDP measured by income approach should equal GDP measured by expenditures approach and it can be derived that: Total Domestic Profit = (Gross Private Domestic Investment – Private Consumption of Fixed Capital) + (Personal Consumption Expenditures – Total Labor Income) + (Government Consumption Expenditures and Gross Investment – Government Consumption of Fixed Capital – Taxes on Capitalists) + Net Exports Or, Total Domestic Profit = Net Private Investment + Net Private Consumption + Net Government Expenditures + Net Exports Thus, from the demand perspective, total capitalist profit can be seen as the sum of how much the capitalists spend on business and residential investment (net of depreciation), how much the households spend on consumption in excess of labor income, how much the government spends on goods and services in excess of taxes on capitalists, and trade balance (which is how much the foreigners buy from a country in excess of how much the country buys from the foreigners) (see Minsky 2008: 160–171). “Net private consumption” includes the capitalist consumption and the part of the working class consumption that is financed by debt. Working class households also finance their consumption using government transfer payments (such as social insurance and unemployment benefits). But these are more than offset by individual income taxes and social insurance contributions paid by working class households. Thus, net private consumption is essentially capitalist-financed consumption. “Net government expenditures” is partly financed by individual income taxes paid by working class households and partly financed by borrowing from the domestic and foreign capitalists. Under small government capitalism, net government expenditures was a small fraction of the total economy. In the 1930s, the US trade account was close to balance in most years. Thus, total domestic profit in the 1930s was largely determined by the sum of capitalist investment and capitalist-financed consumption. Figure 3.3 shows the contribution to the total domestic profit in the US economy by net private investment, net private consumption, net government expenditures, and net exports as share of GDP from 1929 to 1940. In 1929, net private investment was 7.4  percent of GDP, net private consumption was 15  percent of GDP, net government expenditures was

44  American capitalism 25% 20% 15% 10% 5% 0% 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 -5% -10% Net Private Investment

Net Private Consumption

Net Government Expenditures Net Exports

Figure 3.3 Contribution to total domestic profit (% GDP, US economy, 1929–1940) Note: Net private investment, net private consumption, and net government expenditures are calculated using data from BEA (2019a, Table 1.1.5 and Table 1.10). Net exports from 1929 to 1940 is from BEA (2019a, Table 1.1.5).

–0.1 percent of GDP, net exports was 0.4 percent of GDP, and total domestic profit was 22.7 percent of GDP. Thus, from the demand perspective, net private investment accounted for 33 percent and net private consumption accounted for 66 percent of the US capitalist profit in 1929. By 1932, net government expenditures as share of GDP rose to 1.5 percent but net exports as share of GDP fell to 0 percent. Net private investment in 1932 was –9.5 percent of GDP. As share of GDP, net private investment fell by about 17 percentage points from 1929 to 1932. The collapse of private investment was partly offset by net private consumption. In current US dollars, net private consumption declined from 15.6 billion dollars to 13.7 billion dollars from 1929 to 1932, or by 13 percent. However, the overall GDP declined from 104.6 billion dollars to 59.5 billion dollars, or by 43 percent. As share of GDP, net private consumption rose to 23.1 percent by 1932. The net effect of the changes listed earlier is to reduce the total

American capitalism  45 domestic profit to 15.1 percent of GDP by 1932, a decline by almost 8 percentage points from its share in 1929. The Great Depression in the 1930s provides a classical example of the vicious cycle between unstable private investment and capitalist profit under small government capitalism. A collapse of private investment leads to collapse of profit that in turn brings about further decline of investment and consumption. Without effective and powerful government intervention, the vicious cycles between profit and private spending led to progressively more devastating crises during the era of small government capitalism.

“New Deal” capitalism: big government and capital-labor accord During the first half of the twentieth century, the capitalist world system was challenged by new social forces (Western industrial working classes and non-Western national liberation movements), increasingly more destructive economic instabilities, and intensified inter-state conflicts that nearly destroyed the system. With its victory in the Second World War, the United States became the indisputable hegemonic power. The US led the restructuring of the capitalist world system. Through the Marshall Plan and private investment by American corporations, the US lent capital to Europe and Japan helping them to achieve rapid economic recovery. A  set of fixed exchange rates between national currencies were established, centered around the US dollar (known as the “Bretton Woods” fixed exchange rate system). The system of fixed change rates provided the stable monetary background for the expansion of international trade. The US also pressured Britain and France to accept decolonization that helped to accommodate the demands by national liberation movements. Within the US, the government sector was greatly expanded. By the 1960s, the US government began to deliberately use Keynesian macroeconomic policies to stabilize and expand effective demand. During the 1930s, modern welfare state institutions (social security and unemployment benefits) were created. The National Labor Relations Act of 1935 (The Wagner Act) provided the private-sector employees with the basic right to organize labor unions. By the 1950s, a “capital-labor accord” had emerged between organized labor and big corporations. Under the “accord,” the organized labor would not challenge the capitalist corporations over managerial decision-making. In return, the workers expected to share the benefits of rising labor productivity through steady increase in real wages, improved ­working conditions, and greater job security (Gordon, Weisskopf, and Bowles 1987).

46  American capitalism The restructuring of American capitalism in the mid-twentieth century constituted a “new deal” that redefined internal relations between social classes and external relations between various parts of the capitalist world system. Under the “new deal” capitalism, the American capitalists made major concessions to the domestic working class. The concession helped to de-radicalize the American labor movement and maintain high levels of effective demand. Figure  3.4 shows the total national profit (as percent of GDP), total domestic profit (as percent of GDP), the profit rate, and the rate of accumulation in the US economy from 1950 to 1990. Table 3.2 summarizes the distribution of the US gross domestic product between labor income, taxes on capitalists, consumption of fixed capital,

40%

30%

20%

10%

0%

-10% 1950

1955

1960

1965

1970

1975

1980

1985

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

1990

Figure 3.4 Profit and accumulation (US economy, 1950–1990) Note: On the data sources and estimates of the US economy’s national total profit, domestic total profit, and business-sector net stock of fixed assets, see Appendix B. For the period 1950–1990, rates of accumulation are the growth rates of real business-sector net stock of fixed assets in constant 2012 prices. Real business-sector net stock of fixed assets is constructed using quantity indexes of net stock of fixed assets of corporate businesses, sole proprietorships, and partnerships weighted by their share in the business-sector capital stock in 2012 (BEA 2019b, Table 6.2).

American capitalism  47 Table 3.2 Distribution of gross domestic product (United States, 1950–2018, % GDP)

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2018

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

61.8 61.8 61.9 60.7 63.5 61.6 61.9 59.7 61.2 60.1 61.7 59.3 58.3 57.9 58.2

14.3 13.6 13.2 13.0 12.4 11.9 11.1 10.4 10.7 11.3 11.0 11.2 10.1 11.0 9.6

11.2 11.6 12.5 11.9 12.8 14.3 15.2 14.9 15.1 14.9 14.6 15.1 16.0 15.8 15.9

12.7 13.0 12.3 14.5 11.3 12.2 11.7 15.0 12.9 13.7 12.8 14.5 15.5 15.3 16.3

0.5 0.6 0.6 0.7 0.6 0.8 1.2 0.6 0.6 0.4 0.4 0.7 1.4 1.3 1.3

Source: See Appendix B.

and total domestic profit from 1950 to 2018. Net foreign profit (net property income from abroad) is not a part of gross domestic product but net property income from abroad as percent of GDP is also shown for comparison. At the beginning of the twentieth century (1900–1907), total labor income as share of the US GDP fluctuated in the range of 48–55 percent and total domestic profit as share of GDP fluctuated in the range of 29–37 percent. In the 1920s, the labor income share fluctuated in the range of 52–59 percent and the profit share fluctuated in the range of 21–29 percent. By comparison, in the 1950s, the labor income share stabilized around 62–63 percent and the profit share stabilized around 12–13 percent. The profit share fell by about two-thirds compared to the levels at the beginning of the twentieth century and by about one-half compared to the levels in the 1920s. What the capitalists lost through lower profit share was partly compensated by higher effective demand and more efficient use of capital stock. The business sector capital-GDP ratio fell sharply during the Second World War and stabilized at about 1.1 in the 1950s (compared to the capital-output ratios around 1.5 in the 1920s, see Figure 1.2). In the 1950s, the economy-wide profit rate was relatively low, fluctuating around 11  percent. By comparison, the profit rate was in the range of 14–18 percent in the 1920s and 18–25 percent at the beginning of the twentieth century. The profit rate climbed over the first half of the 1960s

48  American capitalism and peaked at 14.7  percent in 1965. Rising profit rate and stable effective demand encouraged rapid accumulation of productive capital. The ­business-sector real net stock of fixed assets grew at an average annual rate of 2.8 percent in the 1950s and 4 percent in the 1960s. However, by the mid-1960s, the various economic and social conditions that had contributed to the success of the “new deal” capitalism began to be eroded. Growing working class power, over-accumulation, and intensified international competition led to sustained decline of the profit rate. In response to the crisis, the capitalist class organized a counter-offensive that paved the way for the rise of neoliberal capitalism.

The rise of neoliberalism In the early postwar years, there was still a sizeable reserve of labor force in the American rural areas that could provide relatively cheap labor to the expanding capitalist industries. In 1948, about 23  percent of the US labor force was employed in the farm sector. By 1970, farm employment as a share of total employment fell to 10 percent (Carter et al. 2006: 2–83, “Work and Welfare,” Table Ba 470–477). Depletion of the rural surplus labor force gave the workers stronger bargaining power. The working class was further encouraged by the security provided by the welfare state institutions and the strong economic expansion in the 1960s. During the 1960s, the official unemployment rate fell steadily and the workers’ wages began to grow more rapidly than labor productivity after the mid-1960s. Figure 3.5 shows the relationship between the official unemployment rate and the labor income share of GDP in the US economy from 1960 to 1970. In the early 1960s, the unemployment rate remained relatively high. As the unemployment rate fell from 6.7 percent in 1961 to 4.5 percent in 1965, labor income share fell from 61.8 percent to 60.7 percent. The capitalists were the main beneficiaries in the early phase of the economic expansion. After 1965, as the labor market further tightened, the workers were able to demand rapid growth of wages and higher labor income share. By 1969, the unemployment rate fell to 3.5 percent and labor income share rose to 62.8 percent. In 1970, despite the mild recession, labor income share rose further to 63.5 percent. In the early postwar years, American corporations had a virtual monopoly over the world manufacturing market. By the 1960s, the American corporations began to face growing competition from Japan and Western Europe. Squeezed between rising labor cost and intensified international competition, the profit rate in the US economy declined from near 15  percent in 1965 to 10 percent in 1970.

American capitalism  49 64% 63%

Labor Income Share of GDP

62% 61% 60% 59% 58% 57% 0%

1%

2%

3%

4% 5% 6% 7% Unemployment Rate

Labor Income Share

1960

8%

9%

10%

1970

Figure 3.5 Unemployment rate and labor income share (US economy, 1960–1970) Note: On estimates of the labor income share, see Appendix B. Unemployment rates from 1960 to 1970 are from ERP (2019, Table B-22).

As the US gold reserve became depleted, the Federal Reserve could no longer honor its obligations under the Bretton Woods fixed exchange rate system which collapsed in 1971. Through the 1970s, the US economy struggled with “stagflation” (combination of high unemployment rate and rising inflation) that traditional Keynesian policies were unable to manage. The profit rate stayed around 10 percent from 1974 to 1982. In response to the profit rate crisis, the American capitalist class abandoned the Keynesian policies and shifted their support to neoliberal economic policies (Kotz 2015: 67–81). In 1979, the Federal Reserve began to raise the interest rate. Surge of interest rate precipitated the economy into recession in 1980, followed by a deeper recession during 1981–1982. In 1981, the Reagan administration defeated the Federal air controllers’ strike. Unemployment rate rose to 9.7 percent in 1982. Persistent high unemployment weakened the working class in their struggle against the capitalist

50  American capitalism offensives. The workers’ power was further undermined by the threat of neoliberal globalization. As the American corporations began to relocate industrial capital or subcontract production to China and other parts of Asia, the American workers had to compete with the Asian workers who were paid a small fraction of the American workers’ wages. Other neoliberal policies include financial liberalization, deregulation, privatization, and tax cuts for the capitalists. Financial liberalization, deregulation, and privatization of public sector functions reduced capitalist costs and opened up new profit opportunities. Tax cuts for the corporations and the wealthy increased the capitalist profits directly (Kotz 2015: 14–26). The neoliberal policies succeeded in partially reviving the profit rate. The US profit rate recovered to about 12 percent by 1985 and rose further to near 13 percent by 1997. Although the profit rate recovered, the American workers’ real wages declined and economic and social inequality surged. The expansion of aggregate demand had to rely upon debt-financed household consumption. Figure  3.6 shows the total national profit (as percent of GDP), total domestic profit (as percent of GDP), the profit rate, and the rate of accumulation in the US economy from 1980 to 2018. Figure 3.7 shows the contribution to the total domestic profit in the US economy by net private investment, net private consumption, net government expenditures, and net exports as share of GDP from 1980 to 2018. The US economy ran trade deficits through the entire period shown in Figure 3.7. In the figure, trade deficit is represented by the solid dark line at the bottom of the stacked areas. In 1985, the US economy had a trade deficit of 2.6 percent of GDP which was roughly offset by net private consumption (2.9 percent of GDP). Net private investment accounted for 7.5  percent of GDP, net government expenditures accounted for 7.2  percent of GDP, and total domestic profit accounted for 15 percent of GDP. Unlike the US economy before the Great Depression, the US economy in the neoliberal era has a big government sector. In 1985, net government expenditures accounted for 48 percent of the US domestic capitalist profit (from the demand perspective). The modern American capitalist economy can no longer operate without the stabilization function performed by big government. In 1997 (when the profit rate peaked during the 1990s business cycle), the US economy’s trade deficit was 1.2 percent of GDP, net private consumption was 4.8 percent of GDP, net private investment was 7.1 percent of GDP, net government expenditures narrowed to 3.7 percent of GDP, and total domestic profit was 14.3 percent of GDP. From the demand perspective, net private investment accounted for about 50 percent of the total domestic profit, net private consumption accounted for 34  percent of the total domestic

American capitalism  51 40%

30%

20%

10%

0%

-10% 1980

1985

1990

1995

2000

2005

2010

2015

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

2020

Figure 3.6 Profit and accumulation (US economy, 1980–2018) Note: On the data sources and estimates of the US economy’s national total profit, domestic total profit, and business-sector net stock of fixed assets, see Appendix B. For the period 1980–2018, rates of accumulation are the growth rates of real business sector net stock of fixed assets in constant 2012 prices. Real business-sector net stock of fixed assets is constructed using quantity indexes of net stock of fixed assets of corporate businesses, sole proprietorships, and partnerships weighted by their share in the business sector capital stock in 2012 (BEA 2019b, Table 6.2).

profit, and net government expenditures accounted for 26  percent of the total domestic profit. The total contribution from net private investment, net private consumption, and net government expenditures is greater than 100 percent because trade deficit subtracts from the total domestic profit. By 2006 (the peak year of the early 2000s business cycle), the US economy became heavily dependent on net private consumption. In 2006, trade deficit reached 5.6  percent of GDP, which was mostly offset by net government expenditures (4.6  percent of GDP). Net private investment was 7.1 percent of GDP, net private consumption was 8.4 percent of GDP, and total domestic profit was 14.5  percent of GDP. Net private consumption accounted for 58 percent of the US domestic profit in 2006.

52  American capitalism 25% 20% 15% 10% 5% 0% 1980

1985

1990

1995

2000

2005

2010

2015

-5% -10% Net Exports

Net Private Consumption

Net Private Investment

Net Government Expenditures

Figure 3.7 Contribution to total domestic profit (% GDP, US economy, 1980–2018) Note: Net private investment, net private consumption, and net government expenditures are calculated using data from BEA (2019a, Table 1.1.5 and Table 1.10). Net exports from 1929 to 1940 is from BEA (2019a, Table 1.1.5).

After the Great Recession As the debt-financed consumption boom became unsustainable, the US economy sank into the “Great Recession” (the deepest economic crisis since the Second World War). Private investment collapsed. Net private investment turned into –0.2  percent of GDP in 2009. However, the big government sector was able to stabilize the capitalist economy. Net government expenditures rose to 8.4  percent of GDP and government transfer payments helped to keep net private consumption at 9 percent of GDP (in 2009, ­government payments of social insurance benefits exceeded social insurance contributions and individual income taxes paid by working class households by 209 billion dollars). As a result, the US economy’s total domestic profit actually rose from 12.9  percent of GDP in 2008 to

American capitalism  53 14.5 percent of GDP in 2009 (trade deficit subtracted 2.7 percent of GDP from total profit in 2009). The official unemployment rate surged to 9.3  percent in 2009 and 9.6 percent in 2010. As millions of workers stayed unemployed in the post-­ recession years, the decline of labor income share accelerated. Figure 3.8 shows the relationship between the annual change in labor income share and the official unemployment rate from 1980 to 2018. The linear trend indicates that there is a negative relationship between the unemployment rate and change in labor income share. It is interesting that even in the neoliberal era, the traditional relationship between reserve army of labor and the workers’ bargaining power continues to hold. Generally speaking, labor income share tends to rise when the unemployment rate falls below 5 percent and tends to fall when the unemployment rate stays above 6 percent. The linear relationship has a slope of –0.12. That is, for

Labor Income Share Change from One Year Ago

2%

1%

0%

-1%

-2% 3%

4%

5%

6% 7% Unemployment Rate

Labor Income Share Change

1980

8%

2018

9%

10%

Trend

Figure 3.8 Unemployment rate and change in labor income share (US economy, 1980–2018) Note: On estimates of the labor income share, see Appendix B. Unemployment rates from 1980 to 2018 are from ERP (2019, Table B-22).

54  American capitalism each increase in the unemployment rate by one percentage point, the annual change in labor income share tends to fall by 0.12 percentage point. From 2008 to 2014, the US economy’s labor income share fell from 60.2 percent to 57.7 percent. The cumulative decline of labor income share from 2008 to 2014 implied by the observed unemployment rates and the trend line in Figure 3.8 is 2 percentage points. Thus, the decline of the US labor income share after the “Great Recession” can be mostly explained by the observed high unemployment in the post-recession years. By 2017, the US labor income share recovered to 58.6 percent. However, in 2018, despite the lowest official unemployment rate since the 1960s (3.9  percent), the labor income share fell by 0.4 percentage points. The US economy’s profit share and profit rate recovered strongly after the “Great Recession.” By 2012, the economy-wide profit share reached 16 percent and the profit rate exceeded 13 percent. Both the profit share and profit rate have stayed at relatively high levels from 2013 to 2017. In 2018, the tax reduction policy by the Trump administration raised profit share to 16.3 percent and the profit rate to 13.5 percent. The profit share reached the highest level since 1940 and the profit rate was the highest since the 1960s. In 2018, net private consumption was 9.8  percent of GDP, net private investment was 4.4  percent of GDP, net government expenditures was 5.1  percent of GDP, and net exports was –3.1  percent of GDP. From the demand perspective, net private consumption accounted for 60  percent of the total domestic profit, net private investment accounted for 27  percent, and net government expenditures accounted for about 31 percent. Net exports made a negative contribution of 19 percent. Low investment levels have led to economic stagnation. From 2010 to 2018, the US business sector real capital stock grew at an average annual rate of 1.8 percent and the economy grew at an average annual rate of 2.2 percent. Long-term economic stagnation undermines the relative position of American capitalism in the capitalist world system. As the global economic center of gravity continues to shift away from the United States, it is a matter of time before American capitalism loses its hegemonic status completely. Traditionally, the capitalist ideology has justified economic inequality and the concentration of wealth in the hands of capitalists by arguing that as the capitalists are likely to invest their profits in capital accumulation and technological progress, the capitalist wealth provides the economic foundation for long-term social prosperity. However, in the modern American capitalist economy, only a small fraction of the capitalist profit is absorbed by productive investment. The rest is used for capitalist consumption and various forms of financial speculation. Such a development undermines the legitimacy of the capitalist economic system and may have already contributed to rising social tensions and political instabilities.

American capitalism  55

Box 3.1  Shale oil boom and the profit rate Trade deficit subtracts from the domestic capitalist profit. Before the “Great Recession,” the US trade deficit was more than 5 percent of GDP. Without the trade deficit, the US domestic capitalist profit would have been higher by about one-third. Since then, the US trade deficit has narrowed and has stayed around 3 percent of GDP in recent years. This is largely because of the spectacular growth of the US oil production and the reduction of energy imports that started in 2008. Figure B3.1 shows the US overall net exports of goods and services and the net exports of crude oil and petroleum products as percent of GDP from 2000 to 2018. Before the “Great Recession,” the US non-oil trade deficit peaked at 3.8  percent of GDP in 2005. In 2009, the US domestic demand contracted and the non-oil trade deficit fell to 1.3 percent of GDP. As

1%

0% 2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

-1%

-2%

-3%

-4%

-5%

-6% Other Net Exports

Crude Oil and Petroleum Products

Figure B3.1 US net exports of goods and services (% GDP, 2000–2018) Note: US trade balances for all goods and services and for crude oil and petroleum products are from BEA (2019c, Table 1.1 and 2.1).

56  American capitalism the US economy recovered, the non-oil trade deficit began to widen. In 2018, the non-oil trade deficit reached 2.9 percent of GDP. The US oil trade deficit peaked at 2.7 percent of GDP in 2008 and has declined steadily since 2012. By 2018, the US oil trade deficit was reduced to 0.2 percent of GDP. Had the US oil trade deficit in 2018 been as high as it was in 2008, it would have subtracted 2.5 percent of GDP from the US domestic capitalist profit and the US profit rate recovery since 2008 would have been much less impressive. The dramatic decline of US oil trade deficit was partly caused by the decline of the oil price. The US West Texas Intermediate oil price fell from 100 dollars per barrel in 2008 to 43 dollars per barrel in 2016 before recovering to 65 dollars per barrel in 2018 (BP 2019). But the most important factor has been the US “shale oil” boom. “Shale oil” is the oil contained in shale rocks with very low permeabilities that are not accessible using conventional drilling technologies (Heinberg 2013: 48). Since 2008, US oil producers have used new technologies such as “horizontal drilling” and “hydraulic fracturing” to produce shale oil on large scales (Heinberg 2013: 41–44). US oil production surged from 6.8 million barrels per day in 2008 to 15.3 million barrels per day in 2018 and the US net oil imports fell from 10.9 million barrels per day to 2.8 million barrels per day (BP 2019). The US oil production growth from 2008 to 2018 accounted for about three-quarters of the world oil production growth in this period. Without the US contribution, the world oil price is likely to remain at elevated levels. However, according to David Hughes, a Canadian geologist, the US shale oil boom may be short-lived. Shale oil wells have high decline rates, “production from individual wells falls 70–90% in the first three years, and field declines without new drilling typically range 20–40% per year.” Hughes finds that the US official projections of the future shale oil production are “highly to extremely optimistic” and are “very unlikely to be realized.” According to Hughes, the shale oil boom has provided no more than a short-term reprieve before US oil production enters into permanent decline (Hughes 2018). Perhaps, the US profit rate revival partly made possible by the shale oil boom will also prove to be short-lived.

4 Profit, accumulation, and crisis in Japanese capitalism 1955–2017

The capitalist world system consists of three structural positions: core, semi-periphery, and periphery. The core countries specialize in high valuedadded, monopolistic economic activities. The peripheral countries specialize in low value-added, competitive economic activities. The trade between the core countries and the peripheral countries involves “unequal exchange” in the sense that, for the same monetary value, commodities exported by the periphery embody comparatively more labor than the commodities exported by the core (Wallerstein 1979: 71). Unequal exchange is one of the major mechanisms that contributes to the concentration of world income and wealth in the core (historically, conquest and plunder was the other mechanism that had allowed the core countries to exploit the periphery). During the twentieth century, the core countries included about one-sixth of the world population and more than one-half of the global economic output (Li 2015: 65–72). The concentration of wealth in the core allowed the core countries to function as centers of global capital accumulation and maintain internal social peace (by providing working classes in the core countries with high living standards) without compromising capitalist profits. However, from time to time, the core countries would suffer from decline of profit rate because of rising wage and taxation costs and intensified competition. To restore the profit rate, the core countries need to develop new, monopolistic industries and relocate the old, obsolete industries to geographical areas with lower costs. The semi-peripheral countries have lower wage and taxation costs than the core and have developed the necessary industrial infrastructure. Thus, the semi-peripheral countries have been the primary locations to receive the relocated industrial capital. In this way, the semi-periphery plays an indispensable and crucial role for the stabilization of the global capitalist economy (Wallerstein 1979: 69–71). Despite their important functions for the global capitalist economy, few semi-peripheral countries have ever succeeded in eventually “graduating”

58  Japanese capitalism into the core. Although the semi-peripheral countries have more sophisticated industrial infrastructure than the peripheral countries, they cannot compete with the core countries on the technology frontier. As a semiperipheral country industrializes, its internal social structure is transformed. The newly formed industrial working class and urban middle class demand higher material living standards as well as a widening range of political and social rights. Sooner or later, the semi-peripheral country will be squeezed between rising domestic wage and taxation costs and its inability to have access to high value-added activities in the global market. Historically, most semi-peripheral countries have struggled with this dilemma that in the conventional economic literature has been known as the “middle income trap” (World Bank 2013: 12). Japan has been the major exception to the “middle income trap.” In the 1850s, under the threat of American gunboat, Japan abandoned the “seclusion” policy (official ban of foreign trade) and became integrated into the global capitalist division of labor. By the early twentieth century, Japan had secured its position as a semi-peripheral industrializing nation within the capitalist world system. The Japanese ruling class attempted to resolve the internal contradictions of Japanese capitalism through imperialist expansion. Japan’s catastrophic defeat in the Second World War reduced Japan to a semi-sovereign state under the US military occupation. However, the new East Asian order under the US hegemony also created favorable geopolitical conditions for Japan’s capitalist accumulation. By the 1970s, Japan had completed the spectacular transition from the semi-periphery to the core.

Japanese capitalism before 1945 Figure  4.1 shows the index of per capita gross domestic product (GDP) of the United Kingdom, the United States, Japan, and China from 1870 to 2008. Each country’s per capita GDP is shown as percent of the world average per capita GDP. In 1870, the United Kingdom was at the peak of its hegemonic power and had a per capita GDP about 370 percent of the world average. The United States was a rapidly industrializing capitalist economy that had recently entered into the core of the capitalist world system. Its per capita GDP was about 280 percent of the world average. In the 1850s, Japan signed a series of unequal treaties with Western capitalist powers and abandoned the “seclusion” policy that had been pursued by the Tukugawa shoguns for two and a half centuries (Tukugawa Shoguns were the largest warlords who were Japan’s de facto rulers from the early seventeenth century to the mid-nineteenth century; in theory, the Tukugawa Shogun ruled on behalf of the Emperor). Japan’s opening-up to the global

Japanese capitalism  59 500%

400%

300%

200%

100%

0% 1870

1890

1910

United Kingdom

1930

1950

United States

1970

1990

Japan

2010

China

Figure 4.1 Index of per capita real GDP (% world average, 1870–2008) Source: Maddison (2010).

capitalist market led to major economic and social instabilities that forced sections of the Japanese ruling elites to respond by undertaking internal reforms. Conflicts between the conservatives and the pro-reform sections within the ruling class resulted in the downfall of the Tukugawa Shogun and the Meiji Restoration in 1868 (“Meiji Restoration” was supposed to restore the proper power to the Meiji Emperor) (Stavrianos 1981: 354–356). At the time of the Meiji Restoration, Japan’s per capita GDP was about 85 percent of the world average. This was higher than the income levels in much of the rest of Asia at the time. But the gap was not very large. China in 1870 had a per capita GDP that was about 60 percent of the world average. The new Meiji state financed the industrialization by heavily taxing the peasants. In the 1870s, land taxes accounted for about 90  percent of the Japanese government’s tax revenue. Workers had to work 15–16 hours daily and their wages were barely above subsistence. Child labor was prevalent. Social services and labor protection regulations were kept at minimal levels,

60  Japanese capitalism leaving the workers at the mercy of capitalist employers (Stavrianos 1981: 359–361). The government used the surplus extracted to finance the growth of heavy industries. The government established or sponsored mining, steelmaking, shipbuilding, railways, and telegraph lines that were needed for a strong military. Lacking both technology and natural resources, Japan needed foreign exchange to import raw materials and industrial machinery. The foreign exchange revenues were generated mainly by the textile industry (Stavrianos 1981: 359). The combination of cheap labor and strong state support helped Japan to become one of the world’s leading cotton textile manufacturers in the early twentieth century (Beckert 2015: 401–408). The government actively regulated foreign trade to ensure that foreign exchange revenues were not wasted on imports of luxury consumer goods but used for essential productive inputs. To protect the domestic industries, the Japanese government bought back the few foreign owned enterprises that were established and rid itself of all foreign investments by the 1880s (Stavrianos 1981: 360). Japanese capitalism in the early twentieth century had its contradictions. Being an economic model based on exploitation of cheap labor, domestic consumer market was limited and economic growth had to depend on export markets. Moreover, Japan had limited natural resources at home and its industrialization depended on access to cheap and abundant overseas raw materials. The search for overseas markets and raw materials supply provided the primary motives for Japan’s imperialist expansion (Stavrianos 1981: 361). Initially, the imperialist strategy worked well for Japanese capitalism. Japan’s victory in the Sino-Japanese War in 1894–1895 was rewarded by an enormous war indemnity that amounted to more than one-third of Japan’s gross national product. After defeating Russia at the Russo-Japanese War in 1904–1905, Japan became “a respectable participant in the game of imperialist politics” (Arrighi, Hui, Hung, and Selden 2003: 298). China became the largest market for Japan’s textile industry. During the First World War, as the British manufactured goods withdrew from the Asian market, the Japanese cotton textile industry made deep penetrations. By 1937, Japan had captured 37 percent of the global traded cotton cloth market (compared to the British market share of 27 percent) and became the world’s leading cotton cloth exporter (Becker 2015: 406–408). In 1940, Japan’s per capita GDP advanced to about 140 percent of the world average. However, Japan’s attempt to conquer China, turning China into its exclusive overseas market and sources of raw materials supply, led to a general awakening of the Chinese nationalism that Japan’s limited military capacity could not overcome. Japan’s pursuit of a dominant position in East Asia

Japanese capitalism  61 brought it into inevitable conflicts with not only the declining British imperialism but also the emerging American hegemonic power. Japan’s final attempt at military adventure (the gamble on Pearl Harbor in the desperate hope that the United States might somehow come to terms with the Japanese-led “East Asian Sphere of Co-Prosperity”) ended with Japan’s catastrophic defeat and military occupation by the United States (Arrighi, Hui, Hung, and Selden 2003: 299).

Japanese economic miracle After the victory of the Chinese Revolution and the Korean War, the East Asian geopolitics was defined by the strategic confrontation between the People’s Republic of China and the US-centered military alliance. Within the US-centered alliance, Japan, South Korea, Taiwan, and the Philippines were effectively semi-sovereign vassal states that were incapable of independent defense and foreign policy initiatives. The United States had a domestic market as well as a military-industrial complex that were incomparably larger than the East Asian vassal states. In this context, Japan and other East Asian vassal states accepted the American military protection and political domination in exchange for the access to the much larger US domestic market. As the United States specialized in the pursuit of regional and global power, Japan and other vassal states were able to specialize in the pursuit of trade and profit. Freed from the economic burden of defense spending, Japan could spend all of its available resources on capital accumulation (Arrighi, Hui, Hung, and Selden 2003: 300–301). Figure 4.2 shows the total national profit (as percent of gross domestic product or GDP, including both domestic profit and net property income from abroad), total domestic profit (as percent of GDP), the profit rate (ratio of total domestic profit over the business-sector net stock of fixed capital), and the rate of accumulation (growth rate of the business sector real net stock of fixed capital) in the Japanese economy from 1955 to 1990. Japan’s economy-wide profit share was about 15 percent and the profit rate was about 18 in 1955. By 1960, the profit share rose to 21 percent and the profit rate surged to 33 percent. The profit rate stayed at very high levels through the 1960s. The rate of accumulation began to accelerate in the late 1950s. From 1960 to 1970, Japan’s real business sector net stock of fixed assets grew at an average annual rate of 14 percent. This is about two and a half times as high as the British economy’s rate of accumulation and three and a half times as high as the US economy’s rate of accumulation during the same period. Figure 4.3 shows the contribution to the total domestic profit in the Japanese economy by net private consumption, net government consumption

62  Japanese capitalism 40%

30%

20%

10%

0%

-10% 1950

1955

1960

1965

1970

1975

1980

1985

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

1990

Figure 4.2 Profit and accumulation (Japanese economy, 1955–1990) Note: On the data sources and estimates of the Japanese economy’s national total profit, domestic total profit, and business-sector net stock of fixed assets, see Appendix C. Rates of accumulation are the growth rates of real business sector net stock of fixed assets. Real business sector net stock of fixed assets is calculated using the business sector net stock of fixed assets deflated by gross fixed capital formation deflator. For the period 1955–1969, gross fixed capital formation deflator is calculated from gross fixed capital formation in current and constant prices reported by SBJ (2012, Table 3.1). For the period 1970–1990, gross fixed capital formation deflator is calculated from gross fixed capital formation in current and constant prices reported by World Bank (2019).

(government consumption less taxes on capitalists), net capital formation (including net private investment and net government investment), and net exports as share of GDP from 1955 to 1970. In the conventional national income and product accounting, “government consumption” includes mainly the government purchase of the services provided by the government itself (primarily payment of government employees’ wages and salaries). From 1955 to 1970, Japans’ “net government consumption” stayed consistently in the negative territory (ranging from –2.0 percent of GDP in 1955 to –5.1 percent of GDP in 1961). That

Japanese capitalism  63 25% 20% 15% 10% 5% 0% 1955

1957

1959

1961

1963

1965

1967

1969

-5% -10% Net Government Consumption Net Private Consumption Net Capital Formation

Net Exports

Figure 4.3 Contribution to total domestic profit (% GDP, Japanese economy, 1955–1970) Note: Net capital formation is gross capital formation less consumption of fixed capital. Net private consumption is private final consumption expenditures less total labor income. Net government consumption is government final consumption expenditures less taxes on capitalists. On the data sources and estimates of consumption of fixed capital, labor income, and taxes on capitalists, see Appendix C. Gross capital formation, private final consumption expenditures, government final consumption expenditures, and net exports from 1955 to 1970 are from SBJ (2012, Table 3.1).

is, for this period, taxes on capitalists was more than enough to cover the government’s current consumption expenditures. In Figure 4.3, net government consumption is represented by the solid dark line at the bottom of the stacked areas. In 1955, net private consumption was 3.8  percent of GDP, net capital ­formation was 12.6 percent of GDP, net exports was 0.5 percent of GDP, and total domestic profit was 14.9  percent of GDP. From the demand ­perspective, net private consumption accounted for about 26 percent of the total domestic profit and net capital formation accounted for 85 percent.

64  Japanese capitalism By 1960, net capital formation rose to 21.9  percent of GDP and total domestic profit rose to 21.1 percent of GDP; net capital formation equaled 104  percent of the total domestic profit. In 1970, net capital formation accounted for 22.1 percent of GDP and total domestic profit was 19.7 percent of GDP; net capital formation equaled 112 percent of the total domestic profit. Throughout the 1960s, Japan’s domestic capitalist profit was completely absorbed by productive investment. Japan had trade deficits in 1956–1957, 1961, and 1963–1964. From 1965 to 1973, Japan ran trade surplus every year. Japan’s trade surplus reached 2.7 percent of GDP in 1971 and 2.3 percent of GDP in 1972. In other years, the trade surplus was less than 2 percent of GDP (SBJ 2012, Table 3.1). The relatively small size of the trade surplus (as share of GDP) understates the important contribution of exports to Japan’s economic growth. From 1960 to 1973, Japan’s merchandise exports in current US dollars grew at an average annual rate of 18.5  percent (World Bank 2019). The United States provided Japan with privileged access to its domestic market. As the Vietnam War escalated, the US dramatically increased imports from Japan to lower the cost of military supplies. From 1964 to 1970, Japan’s exports to the US tripled (Arrighi 1994: 341). Rapid growth of exports not only generated trade surpluses but also allowed Japan to import advanced foreign technology and key industrial inputs to match the rapid pace of accumulation. During the 1960s, Japan’s manufacturing sector was modernized with imported capital goods. Japan’s machinery industry was equipped with the latest machine tools that were younger than those in Britain or the United States (Armstrong, Glyn, and Harrison 1991: 131). By 1973, Japan’s per capita GDP reached 280 percent of the world average. By 1980, Japan surpassed Britain in the level of per capita GDP (see Figure 4.1). Japan had advanced into the core of the capitalist world system.

Falling profit rate and crisis After 1970, Japan’s profit rate was squeezed by rising wage cost and overaccumulation. From 1970 to 1973, Japan’s accumulation accelerated and the real business sector capital stock grew at an average annual rate of 19  percent. But the average annual growth rate of real GDP decelerated from 9.4 percent during 1960–1970 to 7 percent during 1970–1973. Japan’s business sector capital-GDP ratio rose from 0.6 in 1968 to 0.88 in 1973 (see Figure 1.2). By 1970, Japan’s social structure had been transformed. The newly urbanized labor force demanded rapid improvement in living standards. The workers were encouraged by the tight labor market. Available job vacancies surged. The oil price shock in 1974 sent the Japanese economy into its first

Japanese capitalism  65 recession since the Second World War. From 1970 to 1974, Japan’s labor income share rose from 52 percent to 59 percent, the profit share declined from 20 percent to 11 percent, and the profit rate declined from 30 percent to 12 percent. Table 4.1 summarizes the distribution of Japan’s gross domestic product between labor income, taxes on capitalists, consumption of fixed capital, and total domestic profit from 1955 to 2017. Net foreign profit (net property income from abroad) as percent of GDP is also shown for comparison. During 1974–1984, Japan’s capital accumulation slowed down but the rates of accumulation remained relatively high by international comparison. Real business sector capital stock grew at an average annual rate of 5.2 percent. As real GDP grew at an average annual rate of 4.1 percent during this period, capital-output ratio continued to rise. Business capital-GDP ratio rose to 0.99 by 1984. After recovering to about 14 percent in 1978, the profit rate fell back to under 12 percent by 1984. During the second half of the 1980s, the Japanese economy was artificially inflated by real estate and stock market bubbles. The rate of accumulation temporarily re-accelerated. From 1984 to 1991, real business sector capital stock grew at an average annual rate of 6.9 percent but real GDP decelerated to an average annual growth rate of 2.2 percent. As the bubbles collapsed, the Japanese economy entered into permanent stagnation. From 1991 to 2017, Japan’s real GDP grew at an average annual rate of 0.6  percent. The profit rate hovered around 10  percent during the Table 4.1  Distribution of gross domestic product (Japan, 1955–2017, % GDP)

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2017

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

61.9 55.4 57.4 51.8 61.6 59.1 57.5 54.7 55.9 54.6 52.2 52.6 51.2 51.8

12.1 12.6 11.6 11.6 10.0 11.7 12.7 14.4 10.9 10.7 11.3 10.1 12.3 12.5

11.1 10.9 13.3 16.9 16.5 16.6 17.0 18.2 21.4 22.4 22.3 23.8 22.6 22.2

14.9 21.1 17.7 19.7 12.0 12.6 12.8 12.7 11.8 12.4 14.3 13.5 13.9 13.4

–0.3 –0.3 –0.4 –0.3 –0.2 –0.0 0.4 0.6 0.9 1.4 2.1 2.6 3.8 3.6

Source: See Appendix C.

66  Japanese capitalism 1990s. After recovering to about 13 percent in 2004, the profit rate tended to fall from 2004 to 2009. Since then, the profit rate has fluctuated around 11 percent. From 2010 to 2017, the business sector’s average annual rate of accumulation slowed down to 0.7 percent. With dwindling opportunities to make profitable investment at home, Japanese capitalists have expanded their overseas investment. In 2015, Japan’s net foreign assets rose to 64 percent of GDP and net property income from abroad rose to 3.8 percent of GDP (SBJ 2019, “Foreign Trade, Balance of Payment and International Cooperation,” Table 6–9). Figure  4.4 shows the total national profit (as percent of GDP), total domestic profit (as percent of GDP), the profit rate, and the rate of accumulation in the Japanese economy from 1980 to 2017.

40%

30%

20%

10%

0%

-10% 1980

1985

1990

1995

2000

2005

2010

2015

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

2020

Figure 4.4 Profit and accumulation (Japanese economy, 1980–2017) Note: On the data sources and estimates of the Japanese economy’s national total profit, domestic total profit, and business sector net stock of fixed assets, see Appendix C. Rates of accumulation are the growth rates of real business sector net stock of fixed assets. Real business sector net stock of fixed assets is calculated using the business sector net stock of fixed assets deflated by gross fixed capital formation deflator. Gross fixed capital formation deflator from 1980 to 2017 is calculated from gross fixed capital formation in current and constant prices reported by World Bank (2019).

Japanese capitalism  67 As the profit rate declines and domestic capital accumulation stagnates, the Japanese economy has become increasingly dependent on net government consumption (financed mostly by government borrowing) to sustain the level of aggregate demand and domestic profit. Figure  4.5 shows the contribution to the total domestic profit in the Japanese economy by net private consumption, net government consumption (government consumption less taxes on capitalists), net capital formation (including net private investment and net government investment), and net exports as share of GDP from 2000 to 2016. In 2000, net government consumption was 6.2 percent of GDP, net capital formation was 4.9 percent of GDP, net exports was 1.4 percent of GDP, and 25% 20% 15% 10% 5% 0% 2000

2002

2004

2006

2008

2010

2012

2014

2016

-5% -10% Net Exports

Net Capital Formation

Net Private Consumption

Net Government Consumption

Figure 4.5 Contribution to total domestic profit (% GDP, Japanese economy, 2000–2017) Note: Net capital formation is gross capital formation less consumption of fixed capital. Net private consumption is private final consumption expenditures less total labor income. Net government consumption is government final consumption expenditures less taxes on capitalists. On the data sources and estimates of consumption of fixed capital, labor income, and taxes on capitalists, see Appendix C. Gross capital formation, private final consumption expenditures, government final consumption expenditures, and net exports from 2000 to 2017 are from World Bank (2019).

68  Japanese capitalism total domestic profit was 12.4 percent of GDP. From the demand perspective, net government consumption accounted for 50 percent of the domestic profit and net capital formation accounted for 40 percent. In 2009, in the middle of the global economic crisis, net government consumption was 10 percent of GDP, net private consumption was 4.7 percent of GDP, net exports was 0.6 percent of GDP, and net capital information turned to –3.5 percent of GDP. Total domestic profit was 11.8 percent of GDP. Net government consumption absorbed 85 percent of Japan’s domestic capitalist profit in 2009. In 2017, net government consumption was 7.1  percent of GDP, net private consumption was 3.6  percent of GDP, net capital formation was 1.7 percent of GDP, net exports was 0.9 percent of GDP, and total domestic profit was 13.4 percent of GDP. Net government consumption remained the most important contributor to domestic profit and absorbed 53 percent of the domestic capitalist profit. Unlike the Japanese economy in the 1960s when almost the entire capitalist profit was spent on capital accumulation, contemporary Japanese capitalist economy has evolved to depend on consumption to sustain aggregate demand and domestic profit. Unlike the American capitalist economy where domestic capitalist profit is mainly absorbed by capitalist and debt-financed personal consumption, the Japanese economy has used most of its profit to finance net government consumption. This has led to the massive increase of Japan’s government debt.

Box 4.1  Is Japan’s government debt sustainable? In recent years, as many advanced capitalist economies struggle with economic stagnation, these economies have relied upon government deficit spending to sustain aggregate demand and prevent the economy from falling into depression. As a result, government debt as ratio of GDP has surged in several advanced capitalist countries. Figure B4.1 shows the general government debt-GDP ratio in selected economies. Japan’s general government debt surged from 157 percent of GDP in 2007 to 221 percent of GDP in 2014. Since then, Japan’s debt-GDP ratio has leveled off. Japan’s current debt-GDP ratio is the highest among the advanced capitalist economies and significantly above the debt-GDP ratio of Greece, the country that was hit by a major

Japanese capitalism  69 250%

200%

150%

100%

50%

0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 France

Greece

Italy

Japan

UK

US

Figure B4.1 Government debt-GDP ratio (selected economies, 2007–2017) Note: General government debt as percent of GDP from 2007 to 2017 is from OECD (2019, “Public Sector, Taxation and Market Regulation,” Public Finance and Economics).

financial crisis and suffered from a prolonged economic depression from 2007 to 2016 (Greece’s real GDP contracted by 24 percent during the period). Will Japan’s government debt remain sustainable in the foreseeable future? In the short run, the answer is probably “yes.” About 90 percent of Japan’s government debt is currently held by domestic investors and only 10 percent is held by foreign investors (Miyazaki and Onji 2017). This makes Japan’s debt position less vulnerable than those of southern European countries such as Italy and Greece. Moreover, the Japanese central bank has directly purchased government bonds and kept the interest rate on government debt at very low levels (currently about 1 percent). With low interest rate, government interest expenses are limited to a manageable proportion of the government tax revenue.

70  Japanese capitalism However, as Japan’s government debt continues to grow, interest expenses will absorb a growing proportion of Japan’s tax revenue. According to some analyst, interest expenses could exceed Japan’s entire government tax revenue by 2040. Moreover, as Japan’s population ages and declines, domestic private saving will shrink over the coming decades. Japan will have to depend on foreigners to finance a growing proportion of the debt. Foreign investors are likely to demand higher interest rate, which could accelerate the default of the Japanese government debt (Pham 2017).

5 Profit, accumulation, and (the coming) crisis in Chinese capitalism 1980–2018

Measured by purchasing power parity, China surpassed the United States and reclaimed the title to the world’s largest economy in 2014, 124 years after China lost the title to the United States in 1890. In 2018, China’s gross domestic product reached 22.5 trillion dollars, accounting for 19 percent of the world economic output (measured in constant 2011 international dollars, World Bank 2019). Since the global financial crisis of 2008–2009, China has established itself as the center of global capitalist accumulation. Figure 5.1 compares the contribution to global economic growth by the world’s major economies (the United States, European Union, China, and India) over successive tenyear periods from 1990–2000 to 2008–2008. In the 1990s, the US and the European Union were still the leading drivers of global economic growth. For the period 1990–2000, the US contributed 23 percent of the global economic growth and the European Union contributed 18  percent. Both the US and the European Union experienced deep recessions during 2008–2009. Before they fully recovered from the Great Recession, the southern European countries were hit by another financial crisis during 2011–2013. For the period 2008–2018, the US contribution to global economic growth was about 9 percent and the European contribution was about 6 percent. For the period 1990–2000, China accounted for 18 percent of the global economic growth. China’s contribution to global economic growth surged to 29 percent during 2000–2010. For the period 2008–2018, China accounted for 36  percent of the global economic growth. In the foreseeable future, the development of the global capitalist economy will largely be shaped by China’s economic and social transformation. As the Chinese economy grows rapidly, China’s internal social structure has been fundamentally transformed and China’s capitalist accumulation has created new contradictions. Rapid increase in capital-output ratio (see

72  Chinese capitalism 40%

30%

20%

10%

0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 United States

European Union

China

India

Figure 5.1 Contribution to global economic growth (major economies, 1990/2000– 2008/2018) Note: World Bank (2019). An economy’s contribution to global economic growth is calculated as the ratio of the economy’s cumulative growth over a ten-year period over the global economy’s cumulative growth over the same ten-year period.

Figure  1.2) and the growing social pressure on the capitalist profit have led to sustained decline of China’s economy-wide profit rate since 2007, threatening to produce a major crisis similar to what has happened to other capitalist economies under comparable circumstances. Given China’s central role in the global capitalist economy, the coming crisis of the Chinese economy will have global implications.

Early modern China and the capitalist world system For many centuries before modern times, China had accounted for about one quarter of the global economic output. From 1500 to 1820, the Chinese population nearly quadrupled and the economy expanded under the relatively peaceful conditions of the early Qing dynasty.

Chinese capitalism  73 By 1820, China accounted for 33 percent of the global economic output (­ Maddison 2010). By the early nineteenth century, the United Kingdom had established itself as the hegemonic power of the capitalist world system. The exploitation of India’s enormous demographic and financial resources provided an indispensable foundation for the British hegemonic power. However, the British profitability in Asia was undermined by the persistent trade deficits against China. Opium trade helped to provide a convenient way for the British East India Company to transfer the Indian tributes to Britain without having to pay the Chinese millions of taels of silver. This was accomplished by exchanging Indian opium for Chinese tea for which there was a large demand in the British market (Arrighi, Hui, Hung, and Selden 2003: 287–293). The Qing government’s decision to ban the opium trade led to two Opium Wars in the 1840s and 1850s. China’s defeat paved the way for China’s integration into the capitalist world system. From the mid-nineteenth century to the mid-twentieth century, successive ruling regimes (from the Manchurian Qing dynasty, early Republican warlords, to the Nationalist government) had failed to respond effectively to the challenges imposed by the capitalist world system. By the mid-twentieth century, China was reduced to one of the poorest countries in the world. During the late Qing years (1870–1913), the Chinese economy grew at an average annual rate of 0.6 percent and China’s per capita GDP “grew” at a negligible average annual rate of 0.1  percent. During the relatively peaceful early Republican years (1913–1936), the Chinese economy grew at an average annual rate of 1.0 percent and the per capita GDP grew at an average annual rate of 0.3 percent (Maddison 2010). China’s per capita GDP as a ratio of the world average per capita GDP fell from 61  percent in 1870, to 36  percent in 1913, and 21  percent in 1950. In 1870, China’s per capita GDP was about 70 percent of Japan’s. Given China’s enormous size, the wealthier part of China (such as the lower Yangzi Valley) probably had living standards comparable to Japan’s at the time. By 1913, Japan’s per capita GDP became two and a half times as large as China’s. Although Japan suffered catastrophic defeat in the Second World War, the gap between Japan and China widened further from the 1920s to the 1940s. In 1950, Japan’s per capita GDP was about four times China’s (see Figure 4.1). By comparison, in the Maoist era (1952–1978), the Chinese economy grew at an average annual rate of 4.4 percent and the per capita GDP grew at an average annual rate of 2.3 percent (Maddison 2010). An annual growth rate of 2.3 percent translates into a doubling of per capita income over a period of 30 years. China’s per capita GDP as a ratio of the world average

74  Chinese capitalism per capita GDP fell slightly from 24 percent in 1952 to 22 percent in 1978. The Maoist era largely succeeded in stabilizing China’s relative position in the capitalist world system, bringing China’s long-term decline to an end and preparing the economic and social conditions for the Chinese economic miracle that started in the late twentieth century. One of the most important failures of the pre-1949 regimes had to do with their incapacity to mobilize the available economic surplus for capital accumulation. According to Carl Riskin, in the early 1930s, the Chinese economy had a sizable economic surplus (defined as the actual and potential economic output that was over and above the population’s basic consumption) that amounted to 37  percent of China’s national income (net domestic product). About two-third of the economic surplus originated from the agricultural sector and was controlled by the traditional landlords who used the surplus resources for various non-productive purposes such as land purchase, worship of ancestors, and luxury consumption (Riskin 1975). Riskin cited the research of Liu and Yeh (1965) and argued that a very small fraction of China’s economic surplus in the early 1930s was used for productive capital accumulation. In 1933, personal consumption accounted for 94  percent of China’s net domestic expenditures and net domestic investment accounted for less than 2 percent. The failures of the pre-1949 regimes can be further illustrated by their limited fiscal extractive capacities. Table 5.1 compares the fiscal extractive capacities (measured by the central government revenue as share of GDP) of the late Qing Dynasty, the nationalist government, and the early People’s Republic. In the late nineteenth century, the Qing Dynasty’s fiscal revenue was less than 2 percent of China’s GDP. In the 1930s, the Nationalist government’s fiscal revenue was in the range of 2–3 percent of GDP. About one-quarter to one-third of the Nationalist government’s fiscal expenditures was precommitted as indemnity and debt service payments; about two-fifth was used for military spending, leaving about one-third or less than 1 percent of GDP for all other purposes (Zhang 1997). Such limited fiscal extractive capacities made it impossible for either the Qing Dynasty or the nationalist government to maintain a sufficiently strong military force to meet national defense challenges, let alone providing financial resources for a wide range of public goods (health care, education, infrastructure) required for economic modernization. By comparison, in 1953 and 1957, the Chinese central government was able to collect a revenue that equaled about 21 percent of GDP and “accumulation” in fixed assets (net fixed investment) reached 12–15 percent of China’s national income (NBS 1992: 32, Table 2–13; 45, Table 2–26).

Chinese capitalism  75 Table 5.1  China’s central government revenue as share of GDP (1890–1957) Political regime

Year

GDP (million 1933 Yuan)

Central gov. revenue (million 1933 Yuan)

Central gov. revenue as % of GDP

Late Qing Late Qing Nationalist Nationalist People’s Republic People’s Republic

1890 1899 1932 1936 1953

20,538 21,815 29,020 30,015 32,976

347 406 537 828 7,081

1.7% 1.9% 1.9% 2.8% 21.5%

1957

42,858

8,918

20.8%

Note: China’s GDP in constant 1990 international dollars in 1890 and 1900 is from Maddison (2010); GDP in 1899 is assumed to be the same as in 1900. Constant 1990 international dollars are converted to constant 1933 Yuan using the approximate conversion ratio: 10 “1990 international dollars” = 1 “1933 Yuan.” The Qing central government’s fiscal revenue in taels of silver in 1890 and 1899 is from Shen (2002). Taels of silver in 1890–1899 are converted into constant 1933 Yuan using the approximate conversion ratio: 1 “1890–1899 tael”  =  4 “1933 Yuan” (see Chang 1962: 324; the average rice price was 1.28 taels per picul in the 1880s and was 4 Yuan in 1933 but the picul in the 1880s was somewhat larger than that in 1933). China’s GDP and central government fiscal revenue in constant 1933 Yuan in 1932 and 1936 are from Rawski (1989: 15). China’s GDP and central government fiscal revenue in 1953 and 1957 in current Renminbi Yuan are from China Data Center (2019, “National Accounts” and “Government Finance and Banking”). The “Renminbi Yuan” in 1953 and 1957 is converted to constant 1933 Yuan using the approximate conversion ratio: 2.5 “Renminbi Yuan” = 1 “1933 Yuan.”

From socialism to capitalism Without fundamental social transformation, it was not possible for China to mobilize economic surplus to accumulate productive capital and build a viable nation-state. The Chinese Revolution accomplished this historical task by mobilizing the lowest social classes (mainly the peasants) and rebuilding the state structure. The post-revolutionary Chinese state mobilized economic surplus to pursue capital accumulation and industrialization. Urban workers and peasants were expected to contribute their labor to “socialist construction” while accepting low levels of material consumption. In return, the state and the collectives (such as the “people’s communes”) would provide a minimum but comprehensive social safety net to the workers and peasants. In the long run, it was promised that the short-term material hardship would eventually pay off by transforming China into a highly egalitarian and materially prosperous communist society. These post-revolutionary arrangements in effect constituted a “socialist social contract” (Li 2015: 17–18).

76  Chinese capitalism However, even in the 1950s, significant inequalities already emerged. Rather than sharing low levels of material consumption with the masses, many Party and state officials demanded a wide range of privileges to distinguish themselves from the masses. By the early 1960s, serious conflicts emerged between the radical revolutionaries led by Mao Zedong on the one hand, and the majority of the Party elites led by Liu Shaoqi and Deng Xiaoping on the other. While Mao argued for “continuing revolution under the dictatorship of the proletariat,” Liu and Deng advocated “developing the material productive forces” as the Party’s top priority. The real question was about whether the Communist Party should honor the “socialist social contract” and continue to work towards a more egalitarian society, or accept widening inequality in the name of prioritizing economic growth. The struggle between the Maoists and the Party elites culminated in the Cultural Revolution, which officially lasted from 1966 to 1976 (Meisner 1999: 291–412). In the Maoist era, China remained a part of the capitalist world system. For both economic and geopolitical reasons, China was compelled to play the game of economic growth in order to improve her relative position in the capitalist world system. Despite two decades of national effort in socialist industrialization, China was still in desperate need of Western technology if China wanted to match the economic growth miracles of its East Asian neighbors. But to import Western capital and consumer goods, China had to find ways to compete effectively in the global capitalist market. China was obviously unable to compete with the Western capitalist economies in hightech, high value-added economic activities. On a per capita basis, China does not possess abundant natural resources either. A cheap labor force was basically the only “comparative advantage” that China could rely upon in the global capitalist market. Mao’s death in 1976 paved the way for China’s transition to capitalism. The Party and state elites were convinced that the “socialist social contract” established in the 1950s was incompatible with the new economic reality that required globally competitive export-oriented industries. China began the market-oriented economic reform in the early 1980s. Agricultural production was privatized and the central planning system was gradually replaced by market mechanisms. By the 1990s, most small and mediumsized state owned enterprises were privatized and tens of millions of state workers were laid off. They were replaced by hundreds of millions of “migrant workers” (who have their official residence in the rural areas but work primarily outside their home areas) employed in capitalist sweatshops. By the beginning of this century, the Chinese economy had been transformed into one that was dominated by the capitalist relations of production (Burkett and Hart-Landsberg 2005; Li 2009: 24–66).

Chinese capitalism  77 In 2000, state-controlled industrial enterprises (referring to the industrial enterprises in which the state owned capital has a “controlling stake”; a “controlling stake” is usually defined as being the single largest equity owner, not necessarily owning more than 50  percent of the equity) still accounted for 50.2 percent of the total sales revenue of all industrial enterprises “above designated sizes” (referring to industrial enterprises with an annual sales revenue of 20 million Yuan or above). By 2010, the share of the state-controlled enterprises in the industrial sales revenue fell sharply to 27.9 percent. By 2017, the state-controlled share fell further to 23.4 percent (NBS 2018, Tables 13–3 and 13–5). In 2017, state owned units accounted for 21.7 percent of the total fixed investment, officially recognized domestic private enterprises accounted for 31.7 percent, self-employed enterprises accounted for 1.8 percent, foreign invested enterprises accounted for 1.8 percent, and enterprises with investments from Hong Kong, Macao, and Taiwan together accounted for 2.1 percent; the rest is accounted for by various mixed ownership enterprises (NBS 2018, Table 10–3). In 2017, China’s total employment was 776  million. The agricultural workforce was 209  million, consisting mainly of self-employed laborers farming on small private plots. State owned units (mainly government and government agencies) employed 61  million, collective units employed 4 million, corporations and share-holding companies employed 82 million (including about 20 million employed in “state-controlled” industrial and construction enterprises), officially recognized domestic private enterprises employed 199 million, urban and rural non-agricultural self-employed was 142 million, foreign invested enterprises employed 13 million, and enterprises with investments from Hong Kong, Macao, and Taiwan employed 13 million (NBS 2018, Table 4–1). The remaining 43 million workers are considered to be employed in the official statistics but are not included in any of the previously mentioned categories. Thus, after three decades of market-oriented “reform,” the Chinese economy has been fundamentally transformed and domestic and foreign private capitalist enterprises have become the dominant forces in China’s industrial production, investment, and employment.

China’s evolving class structure Several decades of rapid economic growth and capitalist transition have transformed the Chinese society. Table 5.2 shows the evolution of China’s labor force by employment categories from 1980 to 2017. In the 1980s, there were no officially recognized capitalists. The urban employment structure was still dominated by socialist elements. Most

Table 5.2  China’s labor force structure, 1980–2017 (million workers) 1980

1990

2000

2010

2017

0 5 6

0 11 11

4 11 31

18 14 48

26 17 72

Private investors Public administration Professional and technical workers “Urban units” and private units workers Urban self-employed Urban unclassified workers Urban unemployed Rural laborers Rural unemployed

94

119

85

116

194

1 0 5 318 0

6 23 4 477 2

21 81 6 488 13

45 111 9 409 14

86 21 10 352 21

Total labor force

429

653

740

784

807

Note: Total labor force (economically active population), total urban and rural employment, and total unemployment from 1980 to 2017 are from NBS (2019a, “Employment and Wages”). Urban and rural private investors from 1992 to 2014 are from NBS (2019a, “Employment and Wages”). For the period 2015–2017, total number of private investors is estimated using the percentage of employers in total employment provided by the World Bank (2019) and all private investors are assumed to be urban private investors. Total “urban units” employment (in official statistics, “urban units” refer to China’s formal economic sector that includes stateowned units, incorporated enterprises, and foreign invested enterprises), and total employed persons in “government, political parties, and social organizations” from 1980 to 1990 are from NBS (1990: 120, Table 4–8). Total “urban units” employment and total employed persons in “government, political parties, and social organizations” from 1989 to 2002 are from NBS (2003: 130–131, Table 5–6). Total “urban units” employment and total employed persons in “public administration and social organizations” from 2003 to 2017 are from NBS (2019a, “Employment and Wages”). Total number of urban professional and technical workers from 1980 to 1994, from 1995 to 1998, from 1999 to 2007, and from 2008 to 2016 is from NSTC (1995, Table  1–16 and 1–18), NBS (2019a, “Science and Technology”), NBS (2000, Table 5–14; 2001, Table 5–14; 2002, Table 5–14; 2003, Table 5–14; 2008, Table 4–11), and MHRSS (2009: 109, Table 1–68; 2010: 83, Table 1–50; 2011: 71, Table 1–41; 2012: 82, Table  1–50; 2013: 84, Table  1–52; 2014: 85, Table  1–53; 2015: 87, Table  1–53; 2016: 87; Table 1–52; 2017: 91, Table 1–52) respectively. For 2017, professional and technical workers are assumed to be 17 percent of urban employment. Total number of “urban units” and private units workers is the sum of total “urban units” employment and urban private units employment less the number of employed persons in public administration and social organization, the number of urban professional and technical workers, and the number of urban private investors. Urban private units are not a part of “urban units.” Total urban private units employment from 1990 to 2017 is from NBS (2019a, “Employment and Wages”). Total number of urban self-employed from 1980 to 2017 is from NBS (2019a, “Employment and Wages”). Urban unclassified workers refer to the part of urban employment that is not classified as “urban units” employment, urban private units employment or urban self-employed in the official statistics. Urban “registered” unemployment from 1980 to 2017 is from NBS (2019a, “Employment and Wages”). Total number of rural laborers is total rural employment less the number of rural private investors. For the period 2015–2017, rural private investors are assumed to be zero. Rural unemployment is total unemployment less urban “registered” unemployment.

Chinese capitalism  79 urban workers were employed in the urban formal sector, known as the “urban units” (including the government sector, state-owned enterprises, and “collective”-owned enterprises). From 1990 to 2000, the total number of “urban units” and private units workers fell from 119 million to 85 million, reflecting the shrinking of the state sector as a result of privatization. Moreover, the “urban units” were redefined to include “mixed ownership” corporations, foreign invested enterprises, and enterprises invested by residents from Hong Kong, Macau, and Taiwan. During this period, the self-employed rose from six million to 21  million and the urban unclassified workers surged from 23  million to 81 million. In reality, most of the unclassified workers were employed by the urban sections of “township and village” enterprises or other forms of de facto private enterprises. In 2000, there were four million officially recognized capitalists in urban and rural private capitalist enterprises. The total number of rural laborers (including agricultural laborers and non-agricultural workers employed in rural areas) peaked at 490  million in 1995. By 2017, the total number of rural laborers fell to 352  million. The decline of rural laborers reflects China’s rapid industrialization and urbanization. Figure  5.2 compares wage rates for workers in different sectors of the Chinese economy from 2000 to 2018. All wage rates (or incomes per worker) are shown as percent of the “urban units” average wage. Urban state owned units include mainly the government sector and government-owned non-profit institutions (such as public health care and education). Urban private units are officially recognized domestic private capitalist enterprises. Urban “other units” include mixed ownership corporations and foreign invested enterprises. Average income for urban self-employed persons is calculated using the urban households’ total “entrepreneurial income” divided by the total number of urban selfemployed persons. Average income for rural laborers is calculated using the rural households’ total labor income (including wage income and entrepreneurial income) divided by the total number of rural laborers. Workers in the state owned units and urban “other units” have been paid the highest wages among the Chinese workers. Wages for the urban private units workers have fluctuated around 60 percent of the “urban units” average wage. Average income for the rural laborers was 38 percent of the “urban units” average wage in 2000. By 2009, the ratio between the average income for the rural laborers and the “urban units” average wage fell to 23 percent. Since then, it has stabilized around 23–25 percent. The average income for the urban self-employed persons rose from 57  percent of the “urban units” average wage in 2000 to 87 percent in 2008. By 2018, it fell to 43 percent of the “urban units” average wage. In the Chinese context,

80  Chinese capitalism 120% 100% 80% 60% 40% 20% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Urban State Units

Urban Private Units

Urban Other Units

Urban Self-Employed

Rural Laborers

Figure 5.2 The Chinese workers’ wage rates (% urban units average wage, 2000–2018) Note: “Urban units” average wage, urban state owned units average, and urban “other units” average wage from 2000 to 2018 are from NBS (2019a, “Employment and Wages”). Urban private units average wage from 2009 to 2018 is from NBS (2019a, “Employment and Wages”). For the period 2000–2008, urban collective units average wage is used as the proxy for urban private units average wage. Average income for urban self-employed persons is calculated using urban households’ total self-employed income divided by the number of urban selfemployed persons. Urban households’ total self-employed income is calculated using urban population multiplied by the urban households’ disposable entrepreneurial income per person. Urban population from 2000 to 2018 is from NBS (2019a, “Population”). Urban households’ disposable entrepreneurial income per person from 2000 to 2018 is from NBS (2019a, “People’s Livelihood”). Average income for rural laborers is calculated using rural households’ total labor income divided by the number of rural laborers. Rural households’ total labor income is calculated using rural population multiplied by the sum of the rural households’ disposable wage income and entrepreneurial income per person. Rural population from 2000 to 2018 is from NBS (2019a, “Population”). Rural households’ disposable wage income and entrepreneurial income per person from 2000 to 2018 are from NBS (2019a, “People’s Livelihood”).

both the rural laborers and the urban self-employed persons have incomes substantially below wages rates in the urban formal sector. They are best characterized as semi-proletarians who in effect serve as a reserve army of labor that can be absorbed into wage workers in the capitalist sector during

Chinese capitalism  81 economic boom, but can be left to take their own chances during economic downturns. Figure  5.3 shows China’s evolving class structure from 1980 to 2017. Each social class is showed by its total number as percent of China’s total labor force. In Figure 5.3, the capitalist class includes China’s officially recognized private investors. In 2017, there were 26 million capitalist investors accounting for 3 percent of China’s labor force. Party and state bureaucrats include all employed persons in public administration and social organizations. The top echelon of this social group has accumulated enormous amounts of wealth through privatization and corruption. It was estimated that during the process of privatization and market liberalization, about 30 trillion Yuan (five trillion US dollars) of state and collective assets were transferred to individuals with strong government connections (Qi 2006). In 2006, there were 3,200 Chinese individuals each with a personal wealth greater than 100 million Yuan (about 15 million US dollars). Ninety percent of the 3,200 people were family members of senior

100% 90% 80% 70% 60%

Capitalists Party and State Bureaucrats Urban Middle Class

50% Urban Proletariat 40% 30% 20%

Urban Semi-Proletariat Rural Semi-Proletariat

10% 0% 1980 1985 1990 1995 2000 2005 2010 2015

Figure 5.3 China’s class structure (% total labor force, 1980–2017) Note: See Table 5.2. See the main text for definitions.

82  Chinese capitalism Party and state officials. Their combined assets were estimated to be 20 trillion Yuan (about 3 trillion US dollars), about the same size as China’s GDP in 2006 (Zhang and Jiang 2010). Thus, the top layer of China’s Party and state elites should be considered a part of the capitalist class. The lower and middle-rank Party and state bureaucrats have economic and social positions similar to the urban middle class. In 2017, there were 17 million Party and state bureaucrats, accounting for 2 percent of China’s labor force. The urban middle class includes professional and technical workers (such as managers, engineers, technicians, scientific researchers, doctors, lawyers, and professors) that are highly skilled workers who perform important economic and social functions for the capitalist system. To ensure their loyalty, the capitalists often pay them a “loyalty rent,” keeping their incomes substantially above the incomes of other workers. The “loyalty rent” makes the “new middle class” one of the relatively privileged classes in the capitalist society (Wright 1997: 1–34). In 2017, there were 72 million professional and technical workers, accounting for about 9  percent of China’s labor force. The urban proletariat includes workers who depend completely or almost completely on wage employment to maintain their socially acceptable living standards. In Figure 5.3, the urban proletariat includes China’s “urban units” workers (excluding professional and technical workers and persons employed in public administration and social organizations) and urban private units workers. In 1980, urban proletariat accounted for 22 percent of China’s labor force. By 1990, the share of urban proletariat fell to 18 percent. During the 1990s, as a result of massive privatization, the size of urban proletariat shrank severely. By the early 2000s, urban proletariat accounted for about 11 percent of China’s labor force. Since then, China’s urban proletariat has resumed expansion as the Chinese society industrializes and urbanizes. In 2017, there were 194  million proletarianized wage workers accounting for 24 percent of China’s labor force. The urban semi-proletariat includes the urban self-employed, urban unclassified workers, and the urban unemployed. During the 1990s and early 2000s, China’s urban semi-proletariat expanded rapidly, providing capitalist industries with a large cheap labor force. The size of urban semiproletariat peaked in 2010 at 165 million (21 percent of the labor force). In 2017, there were 125 million urban self-proletarians accounting for 15 percent of China’s labor force. The rural semi-proletariat includes the agricultural laborers, the rural non-agricultural workers, and the rural unemployed. In the early 1980s, the rural semi-proletariat accounted for about three-quarters of China’s labor force. This rural labor force provided a massive reserve of cheap labor that helped to underpin China’s capitalist accumulation based on sweatshop

Chinese capitalism  83 60%

50%

40%

Labor Insurance and Welfare Urban Units Total Wages

30%

20%

Urban Private and Unclassified Wages Urban Entrepreneurial Labor Income Rural Labor Income

10%

0% 1980 1985 1990 1995 2000 2005 2010 2015 Figure 5.4 China’s labor income (% GDP, 1980–2018) Source: See Appendix D.

exploitation. By 2000, China’s rural semi-proletariat peaked at 501 million and its share of labor force fell to 68 percent. Since then, the size of rural semi-proletariat has declined steadily. In 2017, China had a rural labor force of 373 million (46 percent of the labor force). As the rural labor force shrinks and the urban proletariat expands, the Chinese workers have started to organize effective struggles, demanding higher wages as well as social rights. Figure 5.4 shows China’s labor income as share of GDP and its composition from 1980 to 2018.

China: towards economic crisis? Figure 5.5 shows the total national profit (as percent of gross domestic product or GDP, including both domestic profit and net property income from abroad), total domestic profit (as percent of GDP), the profit rate (ratio of total domestic profit over the business sector net stock of fixed capital), and

84  Chinese capitalism 40%

30%

20%

10%

0%

-10% 1980

1985

1990

1995

2000

2005

2010

2015

National Profit (% GDP)

Domestic Profit (% GDP)

Profit Rate

Rate of Accumulation

2020

Figure 5.5 Profit and accumulation (Chinese economy, 1980–2018)

the rate of accumulation (growth rate of the business sector real net stock of fixed capital) in the Chinese economy from 1980 to 2018. Table 5.3 summarizes the distribution of China’s gross domestic product between labor income, taxes on capitalists, consumption of fixed capital, and total domestic profit from 1980 to 2018. Net foreign profit (net property income from abroad) as percent of GDP is also shown for comparison. In 1980, China’s profit share was 29 percent and profit rate was 15 percent. In the next two years, the Chinese government drastically increased the state procurement prices of agricultural goods, in effect transferring income from the urban sector to the rural sector. In 1984, another reform redefined some state sector profits as taxes. By 1985, the profit share fell to 15 percent and the profit rate fell to about 10 percent. From 1985 to 1995, several waves of high inflation redistributed income from labor to capital. By 1995, the profit share peaked at 39 percent and the profit rate reached 25 percent. From 2000 to 2010, China’s profit share

Chinese capitalism  85 Table 5.3  Distribution of gross domestic product (China, 1980–2018, % GDP)

1980 1985 1990 1995 2000 2005 2010 2015 2018

Total labor income

Taxes on capitalists

Capital consumption

Domestic profit

Net foreign profit

49.1 51.7 52.2 39.7 38.8 37.5 35.8 42.9 42.7

12.5 22.4 14.8 9.6 11.9 14.3 16.7 17.2 16.1

9.9 10.6 8.6 11.3 14.9 15.8 13.7 13.9 14.8

28.5 15.3 24.3 39.4 34.4 32.4 33.8 26.1 26.5

0.0 0.3 0.3 –1.6 –1.2 –0.8 –0.6 –0.6 –0.5

Source: See Appendix D.

remained at very high levels, fluctuating around 33–34 percent, more than twice as high as the US profit share in the same period. The profit rate stayed above 20 percent from 1994 to 2010. China’s high profit rate was translated into a very rapid pace of capital accumulation. Real business-sector net stock of fixed assets grew at an average annual rate of 9.6 percent from 1990 to 2000 and 10.9 percent from 2000 to 2010. Despite rapid accumulation, business capital-GDP ratio declined from 1.84 in 1993 to 1.45 in 2007 (see Figure 1.2). However, since 2010, a fundamental change has occurred. From 2010 to 2016, China’s profit share fell from 35 percent to 26 percent, a decline of 9 percentage points. During the same period, the labor income share rose from 36 percent to 43 percent, an increase of 7 percentage points. Thus, the decline of profit share can be largely explained by the rise of labor income share. In 2017, a small decline of the labor income share, government tax cut initiatives, and a downward adjustment of consumption of fixed capital together contributed to an increase in the profit share by 1.1 percentage points. In 2018, labor income share stabilized and additional tax cuts for capitalists were more than offset by rising share of fixed capital consumption. As a result, profit share fell by 0.5 percentage points. China’s population is aging rapidly and the total working-age population has been in decline. In the future, a shrinking labor force and the depletion of rural surplus force are likely to further strengthen the urban workers’ bargaining power. Labor income share is likely to resume growth in the 2020s, imposing growing pressure on China’s capitalist profit. In addition to falling profit share, the Chinese economy has also been struggling with rising capital-output ratio. Chapter  1 explains that the equilibrium capital-output ratio is also the marginal capital-output ratio

86  Chinese capitalism (the ratio of business net fixed investment as share of GDP over adjusted economic growth rate). If the marginal capital-output ratio is lower than the current capital-output ratio, it would drag down the capital-output ratio and help to raise the profit rate. If the marginal capital-output ratio is higher than the current capital-output ratio, it would pull up the capital-output ratio and drive down the profit rate. Figure 5.6 compares China’s business capital-GDP ratio and the marginal business capital-GDP ratio from 2000 to 2018. Figure 5.6 shows that since 2008, China’s marginal business capital-GDP ratio has stayed consistently above the business capital-GDP ratio. The business capital-GDP ratio rose from 1.45 in 2007 to 2.13 in 2018. China’s business capital-GDP ratio has already exceeded the US business capital-GDP ratio at the trough of the Great Depression in the 1930s (see Figure 1.2). China’s marginal business capital-GDP ratio has stayed at high levels because of high shares of business-sector net fixed investment in GDP. Business sector net fixed investment rose from 13 percent in 2000 to 21 percent

3.5 3 2.5 2 1.5 1 0.5 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Business Capital-GDP Ratio

Marginal Business Capital-GDP Ratio

Figure 5.6 Business capital-GDP ratio (Chinese economy, 2000–2018) Source: See Appendix D.

Chinese capitalism  87 in 2010 (see Figure 1.4). Business net fixed investment share has declined since then but remains at relatively high levels (the business net fixed investment share was 19 percent in 2018). On the other hand, China’s economic growth rate declined from 14.2 percent in 2007 to 6.6 percent in 2018. The growth rate is likely to continue trending down in the coming years. The combination of rising capital-output ratio and falling profit share has led to accelerated decline of China’s profit rate. In 2018, China’s economywide profit rate fell to 12.4 percent. Historically, the British, American, and Japanese economy had struggled with major crises when their economywide profit rate fell below 10 percent for several years. China’s profit rate briefly fell below 10 percent in 1985. That was caused by a temporary surge of business income tax charged on profits of state-owned enterprises. At the time, China’s urban sector was still dominated by state-owned enterprises. A transfer of revenue from the state-owned enterprises to the government had little impact on the state sector accumulation. By the early twenty-first century, China has been transformed into a capitalist economy. If China were to follow essentially the same economic laws as other capitalist economies, a decline of the profit rate should be followed by deceleration of capital accumulation that eventually would develop into a major economic crisis. The downward trend of China’s rate of accumulation that has emerged since 2010 seems to confirm this new reality. If the current trend of falling profit rate is not reversed, one should expect that it will precipitate the Chinese economy into a major crisis in the coming years. Given the dependence of China’s current political regime on rapid economic growth to sustain its legitimacy, a collapse of economic growth may soon be followed by major political instabilities.

Box 5.1  China’s total social financing In the mainstream economic literature, the greatest concern for the Chinese economy has to do with the rapid growth of private-­sector debt that threatens to produce a financial implosion in the near future. On July 28, 2018, Martin Wolf wrote an article for Financial Times, discussing China’s “debt threat.” Wolf explored four possible scenarios on how China’s debt surge could come to an end: a crisis, followed by lower growth; a crisis, not followed by lower growth; no crisis, but reduced growth; and no crisis and no reduction in growth. Wolf argued that crisis followed by reduction in growth

88  Chinese capitalism both in the short run and in the long run would be the most likely outcome (Wolf 2018). Figure B5.1 compares China’s “total social financing” (a rough measure of China’s private non-financial sector debt) with the US private non-financial sector debt as share of GDP from 2000 to 2018. China’s private non-financial sector debt was relatively stable from 2002 to 2008 (at around 120 percent of GDP). In response to the global economic crisis in 2008–2009, the Chinese government encouraged debt-financed investment to stabilize the economy. China’s private non-financial sector debt surged to 147 percent of GDP in 2009 and has tended to rise since then. In 2018, China’s private non-financial sector debt rose to 223 percent of GDP. By comparison, the US private non-financial sector debt peaked at 169  percent of GDP in 2007.

250%

200%

150%

100%

50%

0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 United States

China

Figure B5.1 Private non-financial sector debt (% GDP, 2000–2018) Note: The US private non-financial sector debt is the sum of household and nonfinancial business liabilities (Federal Reserve 2019). China’s total social financing from 2002 to 2017 is from NBS (2018, Table 18–4). Total social financing in 2018 is from NBS (2019c).

Chinese capitalism  89 From the Marxian perspective, rising private debt has been a reflection of the decline of the profit rate caused by inherent contradictions of capitalist accumulation. As capitalist businesses struggle with falling profit rate in material production, some try to maintain the pace of accumulation by borrowing funds to invest and others try to search for higher rates of return by speculating on non-productive assets (such as real estate). In a modern capitalist economy, a big government sector usually has the macroeconomic policy tools to stabilize the economy if the economy is hit by a purely internal debt crisis. However, if the underlying cause of the debt crisis has been falling rate of profit in the material production sector, conventional Keynesian macroeconomic policies would prove to be largely ineffective. This was the case during the “stagflation” crisis that affected all advanced capitalist economies in the 1970s. Similarly, expansionary policies have failed to lift Japan out of its prolonged stagnation since the 1990s. In the worst case, if a debt crisis leads to massive capital flight, the highly-­ leveraged economy could suffer from a depression-like meltdown. This is what has happened to many so-called “emerging economies” in the neoliberal era. China has so far managed to avoid such an outcome. But if the Chinese government continues to pursue its current policy of privatization and financial liberalization, it may not be long before China follows the footsteps of other “emerging economies.”

6 China and the global labor arbitrage

Since the 1990s, China has emerged as the leading driving force of global trade. China’s exports of goods and services accounted for only 0.5 percent of the world exports in 1980. China’s share in the world exports rose to 1.3 percent in 1990, 3.1 percent in 2000, 8.5 percent in 2010, and 11.4 percent in 2015. In 2017, China accounted for 10.5 percent of the world exports (World Bank 2019). China’s deepening integration into the global capitalist economy has had the effect of supplying the world with a massive cheap labor force. Stephen Roach, former Morgan Stanley chief economist, named this effect as the “global labor arbitrage” (Roach 2004). According to Roach, through outsourcing and foreign direct investment, Western transnational corporations were able to take advantage of lower Chinese and Indian wages that were 10–25 percent of those workers of comparable quality in the United States and the rest of the developed world. This led to large savings of labor cost for the transnational corporations but was at the expense of the working classes in the developed world, who suffered from lost jobs and lower wages. In the neoliberal era, the United States, the United Kingdom, and Japan have experienced substantial declines of labor income share. In the US and UK, decline of labor income share has contributed to rising profit share and profit rate. Has the “global labor arbitrage” played a significant role in the decline of labor income share in the core capitalist countries?

China-US trade and the labor arbitrage China is the world’s leading manufacturing exporter. Figure 6.1 shows the Chinese manufacturing sector’s labor cost per worker and valued added per worker as percent of the US manufacturing sector’s labor cost per worker and value added per worker.

60%

50% Labor Productivity (Foreign Invested Enterprises)

40%

Labor Cost (Foreign Invested Enterprises) 30% Labor Productivity (American Affiliates) 20% Labor Cost (American Affiliates) 10%

0% 1998

2002

2006

2010

2014

2018

Figure 6.1 China’s labor cost and productivity (as % of US manufacturing labor cost and productivity, 1998–2017) Note: Labor productivity is measured by valued added per employee. Value added of China’s foreign invested industrial enterprises from 1998 to 2007 is from NBS (2008, Table 13–16). For the period 2008–2017, value added is assumed to be 25.6 percent of the foreign invested industrial enterprises’ sales revenue. Sales revenue of China’s foreign invested industrial enterprises from 2008 to 2017 and average annual number of employees from 1998 to 2017 are from NBS (2018, Table 13–9). Average wage of employees in China’s foreign invested enterprises is calculated as the weighted average of the wage rate of enterprises with foreign investments and the wage rate of enterprises with investments from Hong Kong, Macau, and Taiwan. Wage rates of enterprises with foreign investments and enterprises with Hong Kong, Macau, and Taiwan and their employment levels from 2000 to 2017 are from NBS (2019a, “Employment and Wages”). Wage rates in 1998 and 1999 are from NBS (2005, Table 5–33). Employment levels in 1998 and 1999 are from NBS (2018, Table 4–3). The average compensation of employees in China’s foreign invested enterprises is then assumed to be 135 percent of the average wage to account for employers’ contribution to social insurance fund and nonwage benefits. The US manufacturing valued added from 1998 to 2017 is from BEA (2019d, “Value Added by Industry”). The US manufacturing employment from 1998 to 2017 is from BEA (2019a, Table 6.4C and 6.4D). The US manufacturing compensation of employees from 1998 to 2017 is from BEA (2019a, Table 6.2D). Employment, value added, and compensation of employees of majority-owned affiliates of US multinational corporations in China from 2009 to 2016 are from BEA (2019e, “China”).

92  China and the global labor arbitrage Foreign invested enterprises play a major role in China’s merchandise trade (in this chapter, China’s “foreign invested enterprises” include both enterprises with foreign investments and enterprises with investments from Hong Kong, Macau, and Taiwan). In 2017, foreign invested enterprises accounted for 43 percent of China’s total merchandise exports and 47 percent of total merchandise imports. In this chapter, I use the labor productivity and labor cost of foreign invested industrial enterprises in China to represent the productivity and cost of China’s manufacturing enterprises (GAC 2019). In 1998, labor productivity (measured by valued added per employee) of foreign invested industrial enterprises in China was about 8 percent of the labor productivity in the US manufacturing sector. Since then, Chinese industrial enterprises have narrowed the productivity gap against the US. By 2017, labor productivity of China’s foreign invested industrial enterprises rose to 26 percent of the productivity in the US manufacturing sector. In 1998, China’s labor cost per worker (measured by labor compensation per employee for China’s foreign invested enterprises) was 4 percent of the labor compensation per employee in the US manufacturing sector. Since 2007, the Chinese workers’ wages have grown rapidly. By 2017, China’s labor cost per worker rose to 19 percent of the compensation per employee in the US manufacturing sector. Despite the growth of the Chinese workers’ wages, the relative wage gap between the Chinese workers and the American workers remains larger than their relative productivity gaps. Thus, the Chinese manufacturing sector continues to enjoy a considerable labor cost advantage relative to the American manufacturing sector. Figure 6.2 shows the US imports of Chinese goods as percent of the US gross domestic product and the manufacturing sector value added. In 1999, American imports of Chinese goods were 82  billion dollars (0.9 percent of the US GDP). In 2010, the US imported 366 billion dollars of Chinese goods (2.4 percent of the US GDP). By 2017, American imports of Chinese goods rose to 506 billion dollars (2.6 percent of the US GDP). Thus, imports from China amount to a relatively small proportion of the US total economy. However, the American imports from China have had a major impact on the US domestic market of manufactured goods. In 2017, the imported Chinese goods had a market value that equaled 23 percent of the US manufacturing sector’s value added. Imports from China help the American capitalists to lower labor cost and raise the profit rate. By how much has American businesses saved through rising imports from China? An easy and convenient method is to calculate how much labor input would be required to produce the imported Chinese goods and multiplied the required labor input by the labor cost gap between China and the United States:

China and the global labor arbitrage  93 25%

20%

15%

10%

5%

0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 As % of GDP

As % of Manufacturing Value Added

Figure 6.2 US imports of Chinese goods (% US GDP and manufacturing value added, 1999–2017) Note: US imports of Chinese goods from 1999 to 2017 is from BEA (2019c, Table 2.2). US gross domestic product from 1999 to 2017 is from BEA (2019a, Table 1.1.5). US manufacturing value added from 1999 to 2017 is from BEA (2019d, “Value Added by Industry”).

Total Saved Labor Cost through US Imports from China = Labor Input Required to Produce the Imported Chinese Goods * (US Labor Cost per Worker – Chinese Labor Cost per Worker) Assuming that all goods imported from China are produced by foreign invested enterprises in China, it can be estimated that the Chinese goods imported by the US were produced by about 3  million Chinese workers in 1999, 4.8  million Chinese workers in 2005, and 4.9  million Chinese workers in 2006. Since then, the required labor input has steadily declined (reflecting China’s rising labor productivity). In 2017, American imports from China were produced by 2.8 million Chinese workers. If these Chinese workers were paid American workers’ wages and benefits, then American businesses would have to spend 143  billion dollars of extra cost (1.5  percent of GDP or 9.6  percent of manufacturing value

94  China and the global labor arbitrage added) in 1999 and 303 billion dollars of extra cost (2.2 percent of GDP or 16.9 percent of manufacturing value added) in 2006. Figure 6.3 compares the hypothetical total saved labor cost through imports from China relative to the US GDP and manufacturing sector’s value added from 1999 to 2016. Figure 6.3 shows that the saved labor cost through imports from China relative to the size of the US economy and the US manufacturing sector peaked in 2005–2006. By 2017, the calculated labor cost saving fell to 1 percent of the US GDP or 8.9 percent of the US manufacturing sector’s value added. It may be argued that the calculation shown in Figure 6.3 may have overestimated the labor cost saving for the American businesses by substituting imports from China for domestically manufactured goods. Because the

18%

15%

12%

9%

6%

3%

0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 As % of GDP

As % of Manufacturing Value Added

Figure 6.3 Saved labor cost through imports from China (% US GDP and manufacturing value added, 1999–2017) Note: Saved labor cost is calculated using labor input required to produce the imported Chinese goods, US labor cost per worker, and the Chinese labor cost per worker. Labor input required is calculated using imports from China divided by sales revenue per employee of China’s foreign invested industrial enterprises. The Chinese foreign invested industrial enterprises’ sales revenue and average annual employment from 1999 to 2017 are from NBS (2018, Table 13–9). On the US and China’s labor cost per worker, see the sources for Figure 6.1.

China and the global labor arbitrage  95 American manufacturing sector has an average labor productivity several times higher than the Chinese manufacturing sector, if the same goods were produced in the US, they could be produced at higher labor productivity and require smaller labor input. This would reduce the calculated labor cost saving. However, there are several counteracting factors that may help to offset the measured higher labor productivity in the US manufacturing sector. First, if the American manufacturing enterprises produce with substantially higher labor productivity the same goods that are currently exported by the Chinese enterprises, it may require the American manufacturing enterprises use more capital-intensive technologies. Thus, the cost advantage that could result from higher labor productivity may be partially or completely offset by higher capital input. Secondly, millions of Chinese workers are working under sweatshop conditions and it is not uncommon for the Chinese workers in the export industry to work up to 60 hours a week. If certain manufacturing activities are relocated from China to the US, then the working hours per worker will be reduced. This will reduce the measured labor productivity per worker. Thirdly, the US manufacturing sector and the Chinese manufacturing sector produce different types of goods. The much higher measured labor productivity in the US partly reflects the specialization of American enterprises in high value-added activities and does not necessarily result from higher physical labor productivity for the same economic activity or identical physical output. Table 6.1 compares the labor productivity (measured by value added per employee) between the Chinese foreign invested industrial enterprises and the American enterprises in various manufacturing industries in 2016. Table 6.1 shows that although labor productivity of the Chinese enterprises remains lower than that of the American enterprises in every manufacturing industry, the relative productivity gap between the US productivity and the Chinese productivity varies from about 8:1 in computer and electronic products to about 1.4:1 in primary metals (mainly the steel industry). In several industries, including primary metals, motor vehicles, wood products, food and beverage, and textile, Chinese productivity has reached more than 40  percent of the US level. Table  6.1 does not take into account that the Chinese enterprises and the American enterprises may be producing different physical products or engaged in different types of activities within the same industry. For example, in the computer industry, the American enterprises may specialize in research and development and the Chinese enterprises may specialize in the physical assembling of the final product. In Figure 6.1, the labor cost and productivity of foreign invested industrial enterprises in China are also compared with the labor cost and productivity

96  China and the global labor arbitrage Table 6.1 Labor productivity in the manufacturing industries, 2016 (measured by value added per employee, thousand US dollars) Industry

China (FIE)

US

China as % of US

Primary metals Motor vehicles and parts Wood products Food, beverage, and tobacco Textile Paper products Apparel and leather products Printing and support activities Machinery Furniture and related products Fabricated metal products Chemical products Plastic and rubber products Nonmetallic mineral products Electrical equipment Other transport equipment Petroleum and coal products Computer and electronic products Total manufacturing

109 98

152 163

72% 60%

40 60

90 145

45% 41%

32 54 21

78 156 59

40% 35% 35%

30

89

33%

41 23

134 77

31% 30%

29

102

28%

115 29

426 115

27% 25%

36

141

25%

37 42

151 214

25% 20%

125

807

16%

31

258

12%

44

169

26%

Note: Labor productivity of China’s foreign invested industrial enterprises is measured by sales revenue per employee. Sales revenue and average annual number of employees are from NBS (2017, Table 13–8). Labor productivity of the US manufacturing industries is measured by gross output value per employee. Gross output value is from BEA (2019d, “Gross Output by Industry”). Employment in manufacturing industries is from BEA (2019d, Table 6.4D).

of the Chinese affiliates of American-owned multinational manufacturing enterprises. The American invested enterprises in China are likely to use technologies similar to American enterprises in the US. American invested enterprises in China do have higher labor productivity than China’s average foreign invested enterprises. But the gap is not very large. In 2016,

China and the global labor arbitrage  97 the American invested enterprises had a value added per worker that was 14 percent higher than the average foreign invested enterprises in China. Thus, if the calculated labor cost saving shown in Figure 6.3 overstates the actual labor cost saving, the extent of overstatement is likely to be limited. If one assumes that the Chinese enterprises have a physical labor productivity that is at least 50 percent of the US productivity for those products exported from China, then for the period 1999–2017, the labor cost savings through imports from China should amount to at least 0.5–1 percent of the US GDP. This means that the direct labor cost savings through imports from China may be small relative to the size of the US economy (although the saving is a much larger fraction of the US consumption of manufactured goods). What is likely to be more important than the direct saving is the indirect competitive pressure caused by imports from China. As the goods imported from China capture a relatively large fraction of the US domestic market for manufactured goods (a value that equals about one-fifth of the US manufacturing value added), the relatively cheap Chinese goods imposes strong competitive pressure on the American manufacturing businesses. The American businesses are both pressured and motivated to use the “threat” of Chinese competition to force American workers to accept lower wages and benefits. This indirect effect cannot be easily measured. But it can be observed through the relative convergence between Chinese and American labor costs per 100-dollars of manufacturing value added (see Figure 6.4). Figure 6.4 compares the labor cost per 100-dollar of value added in manufacturing for China (represented by China’s foreign invested industrial enterprises), the United States, the United Kingdom, and Japan from 1998 to 2017. In 2000, the labor cost in the American manufacturing sector was 60 dollars per 100-dollar of value added. By 2013–2015, the American manufacturing labor cost fell to 47 dollars per-100 dollar of value added. This is equivalent to a decline of labor income share by 13 percentage points. The gap between the American and the Chinese labor cost per-100 dollar was narrowed from 34 dollars in 2000 to 12 dollars in 2015, suggesting relative convergence. From 2000 to 2015, the US compensation of employees as share of GDP declined from 57 percent to 53.2 percent, or by 3.8 percentage points (BEA 2019a, Table 1.10). During the same period, the compensation share in the manufacturing sector declined from 59.2 percent to 47.4 percent (by 11.8 percentage points) and in the non-manufacturing sectors declined from 56.4  percent to 54  percent (by 2.4 percentage points) (compensation of employees by industry is from BEA 2019a, Table 6.2C and 6.2D). Thus, the

98  China and the global labor arbitrage 70 60 50 40 30 20 10 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 China (foreign invested enterprises)

US

UK

Japan

Figure 6.4 Labor cost per 100-dollar value added in manufacturing (China, US, UK, and Japan, 1998–2017) Note: Labor cost per 100-dollar valued added is calculated using labor cost per worker divided by manufacturing value added per employee. For labor cost per worker and manufacturing value added per employee in China and the United States, see sources of Figure 6.1. For labor cost per worker and manufacturing value added per employee in the United Kingdom, see sources of Figure 6.6 and 6.7.

decline of labor income share was concentrated in the manufacturing sector. Holding the manufacturing share of GDP at its level in 2000, the decline of labor income share in manufacturing is responsible for 1.8 percentage points or 47  percent of the cumulative labor income share decline in the total economy from 2000 to 2015.

China-UK trade and the labor arbitrage Figure  6.5 shows the British imports of Chinese goods as percent of the British gross domestic product and the manufacturing sector value added from 1999 to 2017.

China and the global labor arbitrage  99 25%

20%

15%

10%

5%

0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 As % of GDP

As % of Manufacturing Value Added

Figure 6.5 UK imports of Chinese goods (% UK GDP and manufacturing value added, 1999–2017) Note: British imports of Chinese goods from 1999 to 2017 is from ONS (2019c). British gross domestic product from 1999 to 2017 is from ONS (2019a, “National Accounts,” Worksheet 1.1). British manufacturing value added from 1999 to 2017 is from World Bank (2019).

In 1999, British imported 4 billion pounds of Chinese goods (0.4 percent of the British GDP). In 2017, Britain imports of Chinese goods rose to 43 billion pounds (2.1 percent of the British GDP). British imports of Chinese goods have had a major impact on the British market for manufactured goods. As percent of the British manufacturing value added, ­British imports of Chinese goods surged from less than 3 percent in 1999 to 21 percent in 2010. In 2017, the imported Chinese goods had a market value that equaled 23  percent of the British manufacturing sector’s value added. Assuming that all goods imported from China are produced by foreign invested enterprises in China, it can be estimated that the Chinese goods imported by Britain were produced by about 240,000 Chinese workers in 1999 and 540,000 Chinese workers in 2007. Since then, the required labor

100  China and the global labor arbitrage input has steadily declined. In 2017, British imports from China were produced by about 310,000 Chinese workers. If these Chinese workers were paid British workers’ wages and benefits, then British businesses would have to spend 4.3 billion pounds of extra cost (0.4  percent of GDP or 3.1  percent of manufacturing value added) in 1999 and 12.4  billion pounds of extra cost (0.8  percent of GDP or 8.9  percent of manufacturing value added) in 2007. Figure  6.6 ­compares the hypothetical total saved labor cost through imports from

18%

15%

12%

9%

6%

3%

0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 As % of GDP

As % of Manufacturing Value Added

Figure 6.6 Saved labor cost through imports from China (% UK GDP and manufacturing value added, 1999–2017) Note: Saved labor cost is calculated using labor input required to produce the imported Chinese goods, British labor cost per worker, and the Chinese labor cost per worker. Labor input required is calculated using imports from China divided by sales revenue per employee of China’s foreign invested industrial enterprises. The Chinese foreign invested industrial enterprises’ sales revenue and average annual employment from 1999 to 2017 are from NBS (2018, Table  13–9). British labor cost per worker is calculated using compensation of employees divided by the level of employment in the manufacturing industry. Compensation of employees in the manufacturing sector is estimated using the manufacturing sector’s value added multiplied by the compensation share in the production industry (ONS 2019a, “Industry Analysis,” Worksheet 2.1). Employment level in the manufacturing sector is from ONS (2019d). On China’s labor cost per worker, see sources for Figure 6.1.

China and the global labor arbitrage  101 China relative to the British GDP and manufacturing sector’s value added from 1999 to 2017. The saved labor cost through imports from China relative to the size of the British economy and the British manufacturing sector peaked in 2007. By 2017, the calculated labor cost saving fell to 0.4 percent of the British GDP or 3.8 percent of the British manufacturing sector’s value added. Figure  6.7 shows the Chinese manufacturing sector’s labor cost per worker and value added per worker as percent of the British manufacturing sector’s labor cost per worker and value added per worker. In 1998, the Chinese foreign invested enterprises’ labor productivity (measured by value added per employee) was 11.5  percent of the labor productivity in the British manufacturing sector. By 2004, China’s labor productivity rose to about 16 percent of the British level. Since then, the

60%

50%

40% Labor Productivity (Foreign Invested Enterprises)

30%

Labor Cost (Foreign Invested Enterprises) 20%

10%

0% 1998

2002

2006

2010

2014

2018

Figure 6.7 China’s labor cost and productivity (as % of UK manufacturing labor cost and productivity, 1998–2017) Note: On China’s labor cost per worker and value added per employee, see sources for Figure  6.1. On the British labor cost per worker, see sources for Figure  6.6. British labor productivity in the manufacturing sector is measured by value added per employed person. Manufacturing value added from 1998 to 2017 is from World Bank (2019). Level of employment in the manufacturing sector from 1998 to 2017 is from ONS (2019d).

102  China and the global labor arbitrage productivity gap between China and Britain has narrowed rapidly. By 2017, China’s labor productivity rose to 55 percent of the British level. In 1998, China’s labor cost per worker (measured by labor compensation per employee for China’s foreign invested enterprises) was 6 percent of the labor compensation per employee in the British manufacturing sector. The ratio was 7 percent in 2004 and 9 percent in 2007. Since then, the Chinese workers’ wages have grown rapidly. By 2017, China’s labor cost per worker rose to 35 percent of the compensation per employee in the British manufacturing sector. Figure  6.4 shows the labor cost per 100-dollars of value added in the British manufacturing. Before 2007, there was little evidence of relative convergence between the British labor cost and the Chinese labor cost. The labor cost in the British manufacturing sector stabilized around 60 dollars per 100-dollars of value added from 2001 to 2007. However, from 2007 to 2017, the relative labor cost in the British manufacturing sector declined from 59 dollars to 56 dollars and the gap between the British and the Chinese labor cost per-100 dollars was narrowed from 33 dollars in 2007 to 20 dollars in 2017. From 2007 to 2017, the British compensation of employees as share of GDP declined from 50.5 percent to 49.1 percent, or by 1.4 percentage points (ONS 2019a, “National Accounts,” Worksheet 1.2). During the same period, the compensation share in the manufacturing sector declined from 58.8 percent to 55.6 percent, or by 3.2 percentage points. The manufacturing sector accounted for 10 percent the British GDP in 2007. Holding the manufacturing share of GDP at its level in 2007, the decline of labor income share in manufacturing is responsible for 0.32 percentage points or 23 percent of the cumulative labor income share decline in the total economy from 2007 to 2017.

China-Japan trade and the labor arbitrage Figure  6.8 shows the Japanese imports of Chinese goods as percent of Japan’s gross domestic product and the manufacturing sector value added from 1998 to 2016. Japanese imports of Chinese goods grew from 0.7  percent of GDP in 1998 to 3.1 percent of GDP in 2015. In 2016, Japan imported 129 billion dollars of Chinese goods (2.6 percent of Japan’s GDP). As percent of the Japanese manufacturing value added, Japan’s imports of Chinese goods surged from about 3 percent in 1998 to about 16 percent in 2014. In 2016, the imported Chinese goods had a market value that equaled 12 percent of the Japanese manufacturing sector’s value added.

China and the global labor arbitrage  103 25%

20%

15%

10%

5%

0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 As % of GDP

As % of Manufacturing Value Added

Figure 6.8 Japanese imports of Chinese goods (% Japan’s GDP and manufacturing value added, 1998–2016) Note: Japanese imports of Chinese goods (Chinese merchandise exports to Japan) from 1998 to 2016 is from NBS (2019a, “Foreign Trade”). Japan’s gross domestic product and manufacturing value added from 1998 to 2016 are from World Bank (2019).

Assuming that all goods imported from China are produced by foreign invested enterprises in China, it can be estimated that the Chinese goods imported by Japan were produced by about 1.2  million Chinese workers in 1998 and 1.7 million Chinese workers in 2005. Since then, the required labor input embodied in Japanese imports from China has declined. In 2016, Japanese imports from China were produced by about 750,000 Chinese workers. If these Chinese workers were paid Japanese workers’ wages and ­benefits, the Japanese businesses would have to spend about 6200 billion Yen of extra cost (1.2  percent of GDP or 5.1  percent of manufacturing value added) in 1998 and 7800 billion Yen of extra cost (1.5 percent of GDP or 6.9  percent of manufacturing value added) in 2005. Since then,

104  China and the global labor arbitrage the calculated labor cost savings through imports from China has declined. Figure 6.9 compares the hypothetical total saved labor cost through imports from China relative to Japan’s GDP and manufacturing value added from 1998 to 2016. Figure  6.10 shows the Chinese manufacturing sector’s labor cost per worker and value added per worker as percent of the Japanese manufacturing sector’s labor cost per worker and value added per worker. In 1998, the Chinese foreign invested enterprises’ labor productivity (measured by value added per employee) was less than 10 percent of the

18%

15%

12%

9%

6%

3%

0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 As % of GDP

As % of Manufacturing Value Added

Figure 6.9 Saved labor cost through imports from China (% Japan’s GDP and manufacturing value added, 1998–2017) Note: Saved labor cost is calculated using labor input required to produce the imported Chinese goods, Japanese labor cost per worker, and the Chinese labor cost per worker. Labor input required is calculated using imports from China divided by sales revenue per employee of China’s foreign invested industrial enterprises. The Chinese foreign invested industrial enterprises’ sales revenue and average annual employment from 1998 to 2016 are from NBS (2018, Table 13–9). Japanese workers’ average annual wage from 1998 to 2016 is from OECD (2019, “Labour,” Average Annual Wages). This is multiplied by a ratio of the total economy compensation of employees over the total economy wages and salaries to provide an estimate of compensation per worker. Total economy compensation of employees and wages and salaries are from OECD (2019, “National Accounts,” Detailed Non-Financial Sector Accounts”). On China’s labor cost per worker, see sources for Figure 6.1.

China and the global labor arbitrage  105 60%

50%

40% Labor Productivity (Foreign Invested Enterprises)

30%

Labor Cost (Foreign Invested Enterprises) 20%

10%

0% 1998

2002

2006

2010

2014

2018

Figure 6.10 China’s labor cost and productivity (as % of Japan’s manufacturing labor cost and productivity, 1998–2017) Note: On China’s labor cost per worker and value added per employee, see sources for Figure 6.1. On Japan’s labor cost per worker, see sources for Figure 6.9. Japan’s labor productivity in the manufacturing sector is measured by value added per employed person. Manufacturing value added from 1998 to 2016 is from World Bank (2019). Level of employment in the manufacturing sector from 2003 to 2016 is from OECD (2019, “Labour,” Employment by Activities and Status). For the period 1998–2002, Japan’s manufacturing employment is assumed to be 66.3 percent of Japan’s industry employment (OECD 2019, “Labour,” Annual Labour Force Statistics Summary Tables).

labor productivity in the Japanese manufacturing sector. By 2015, China’s labor productivity surged to about 50 percent of the Japanese level. In 2016, China’s labor productivity was 45 percent of the Japanese level. The relative decline of the Chinese productivity in 2016 mainly reflected the Yen’s large appreciation from 2015 to 2016. In 1998, China’s labor cost per worker (measured by labor compensation per employee for China’s foreign invested enterprises) was less than 5 percent of the labor compensation per employee in the Japanese manufacturing sector. The ratio surged to 37 percent by 2015. In 2016, China’s labor cost per worker was 33 percent of Japanese levels.

106  China and the global labor arbitrage Figure  6.4 shows the labor cost per 100-dollars of value added in the Japanese manufacturing. Japan’s labor cost per 100-dollars of value added declined from 61 dollars in 1998 to 47 dollars in 2016. The gap between Japan’s labor cost per 100-dollars of value added and the Chinese labor cost narrowed from 31 dollars in 1998 to 13 dollars in 2016. Since 2000, Japan’s labor compensation as share of GDP has remained relatively stable, fluctuating within the range of 49–51  percent (OECD 2019, “National Accounts,” Simplified Non-Financial Accounts”). During the same period, the compensation share in the non-manufacturing sector actually rose from 48.8  percent to 50.7  percent. The non-manufacturing share of the Japanese GDP has fluctuated within the range of 78–81 percent. If the labor income share in the manufacturing sector had been held constant at its level in 2000, Japan’s total labor compensation as share of GDP would have increased from 51.3 percent to 52.6 percent over this period. China’s deeper integration into the global capitalist division of labor since the 1990s has provided the global economy with a new large cheap labor force. In recent years, imports from China have reached values that equal about 2–3 percent of GDP in the US, the UK, and Japan. Imported goods from China have had a major impact on the markets for manufactured goods in the countries just mentioned. Imports from China amount to more than one-fifth of the manufacturing sector’s value added in the US and UK and about one-seventh of the manufacturing sector’s value added in Japan. The direct labor cost saving relative to GDP through imports from China peaked in 2005–2007. The estimated labor cost saving in 2005–2007 was about 2 percent of GDP in the US and 1 percent of GDP in Japan and Britain. The indirect effect caused by the competitive pressure imposed by the cheap Chinese imports is probably more important than the direct labor cost saving. Since the late 1990s, manufacturing labor cost per unit of value added has tended to converge between China, the US, the UK, and Japan. In the US, the UK, and Japan, the decline of labor income share has concentrated in the manufacturing sector. Without the decline of labor income share in the manufacturing sector, the total economy labor income share in the previously mentioned countries might not have declined or might have declined by a much smaller extent over the period 2000–2016/2017. In the late 1990s, labor productivity in China’s export sector was about 8 percent of the labor productivity in the American manufacturing sector and about 10 percent of the labor productivity in the British and the Japanese manufacturing sector. By 2016/2017, the Chinese labor productivity rose to about one-quarter of the US level and about one-half of the labor productivity in the British and the Japanese manufacturing sector. In the late 1990s, wages of the Chinese workers in the export sector were about 4–6 percent of the wages in the US, the UK, and Japan. Since about

China and the global labor arbitrage  107 2007, the Chinese workers’ wages have grown rapidly. By 2016/2017, the Chinese workers’ wages rose to about one-fifth of the American workers’ wages and about one-third of the British and the Japanese workers’ wages. In the coming years, as the Chinese workers continue to demand higher living standards and organize more effectively, the Chinese workers’ wages are likely to keep growing at a relatively rapid pace. Moreover, as the Chinese labor force declines and rural surplus labor force continues to deplete, the Chinese workers may take advantage of their stronger bargaining power and push up the labor income share of GDP. In the neoliberal era, the massive imports of Chinese goods produced by low-wage Chinese workers have played a major role in undermining the manufacturing workers’ bargaining power in the core capitalist countries. What Stephen Roach named as “global labor arbitrage” has been perhaps one of the decisive factors in lowering the labor income share in manufacturing in the US, the UK, and Japan and much of the decline of labor income share in these economies can be explained by the decline of labor income share in the manufacturing sector. If the Chinese workers’ wages continue to grow rapidly in the coming years, it would be very interesting to find out if the growing Chinese workers’ power might not help to create a reverse “global labor arbitrage” through which the global balance of power between the workers and the capitalists is again turned to the favor of the international working classes.

Box 6.1  Global labor arbitrage, a special case: Apple’s iPhone The calculations shown in this chapter suggest that the direct labor cost saving through imports from China may represent a relatively small share of the GDP of advanced capitalist economies. However, for the manufacturing sector and for some transnational corporations, the labor cost saving through outsourcing to China may be particularly important. The Apple Corporation is one of the most profitable corporations. According to a study of the global supply chain of Apple iPhone in 2010, while millions of iPhones were assembled in China and exported to the US, the Chinese workers’ wages accounted for only 1.8 percent of iPhone’s global total valued added and Apple Corporation’s gross profits accounted for 58.5 percent (Kraemer, Linden, and Dedrick 2011).

108  China and the global labor arbitrage In 2010, an American manufacturing worker’s labor compensation was about nine times a Chinese worker’s labor compensation. Assuming that the Chinese workers who assembled the iPhones were paid American rather than Chinese wages, the Apple Corporation would have to pay an extra labor cost that should equal 16.2 percent of the iPhone global value added. As a result, the Apple Corporation’s gross profits would have to be reduced by about 28  percent (16.2/58.5 = 27.7%). In this special case, labor cost saving through outsourcing to China accounts for more than a quarter of iPhone’s total profit.

7 The past and the future of the profit rate, 1855–2050

Capitalist accumulation is motivated by the pursuit of profit. The profit rate is one of the most important indicators that helps to determine the performance of a capitalist economy. Historically, high and stable profit rates have contributed to rapid economic growth and relative stability of capitalist institutions. On the other hand, large and sustained decline of profit rate has led to major economic and social instabilities in capitalist economies. In Capital, volume 3, Karl Marx hypothesized that capitalist technological progress had a bias towards capital-intensive technologies and rising “organic composition of capital” would lead to a long-term tendency for the profit rate to fall. The fall of the profit rate, if not checked, would eventually undermine the foundation of capitalist accumulation and lead to the terminal crisis of the capitalist economic system. Immanuel Wallerstein argued that as the capitalist world system developed, wage costs, taxation cost, and material costs had tended to rise in the core capitalist countries, reducing the capitalist profit relative to economic output. The long-term tendencies towards rising costs and falling profits would eventually result in a structural crisis that could no longer be resolved within the existing historical system. The previous chapters have studied the long-term movement of the profit rate in the world’s leading economies and discussed the historical interactions between the profit rate, class struggle, capital accumulation, and economic crisis. What can we learn from the currently available empirical evidence regarding Marx’s and Wallerstein’s hypothesis about the profit rate? Have there been long-term tendencies towards rising “organic composition of capital” or rising wage, material, and taxation costs?

Profit rate: historical trends Figure  7.1 summarizes the long-term movement of the profit rate in the United Kingdom, the United States, Japan, and China from 1855 to 2018.

110  Past and future of the profit rate 40%

30%

20%

10%

0% 1850

1870

1890

1910

United Kingdom

1930

1950

United States

1970 Japan

1990

2010 China

Figure 7.1 The profit rate (1855–2018) Sources: See Appendix A, B, C, and D.

From 1855 to 1913, the British economy’s profit rate stayed at relatively high levels, fluctuating between 16 and 22  percent. The First World War brought the global capitalist order under the British hegemony to an end. As British capitalism struggled with the postwar economic and political crisis, the profit rate fell below 10 percent during 1919–1921. The British profit rate fell below 10 percent again during 1945–1947. The British capitalism enjoyed a period of relative prosperity during the 1950s. However, rising working class militancy and over-accumulation led to decline of the profit rate after 1960. The profit rate fell below 10 percent in the middle of the 1970s. From 1980 to 1994, the British profit rate experienced a spectacular recovery, rising above 20 percent during 1996–1997. Since 2010, the British profit rate has stabilized around 14–16 percent. During 1900–1907, the US profit rate fluctuated at the high levels of 18–25 percent. During the “roaring 1920s,” the US profit rate was in the

Past and future of the profit rate  111 range of 15–18  percent. At the trough of the Great Depression, the US profit rate fell below 10 percent during 1932–1934. The US profit rate was relatively low in the 1950s (in the range of 10–12  percent) but rose during the economic boom in the 1960s and peaked at about 15  percent in 1965. The profit rate fell below 10  percent during 1979–1982 as the US economy struggled with high inflation and deep recession. In the neoliberal era, the US profit rate has tended to rise. In 2018, the US profit rate rose to 13.5 percent. Both the British and the American economy experienced several major declines of the profit rate during the twentieth century. In the 1970s, both economies had profit rate substantially below that in the early twentieth century. Both economies suffered from major economic and political instabilities when their profit rates fell below 10 percent. However, in the neoliberal era, both economies have succeeded in reviving the profit rate. In the 1990s, the British profit rate briefly returned to levels last seen in the late nineteenth century. Since the “Great Recession,” the American profit rate has risen to the highest level since the 1960s. Japan’s profit rare was very high during the “economic miracle” in the 1960s. In 1968–1969, Japan’s profit rate peaked at 34 percent. The profit rate fell sharply from 1969 to 1974. After recovering to 14 percent in 1978, the profit rate declined steadily during the 1980s. The profit rate fluctuated around 10 percent in the 1990s as the Japanese economy entered into its prolonged stagnation. Since the “Great Recession,” Japan’s profit rate has hovered around 11  percent. Despite economic stagnation, low profit rate, and rising debt, Japan’s economic and political system has remained ­relatively stable. How long can the relative stability in the United States, the United Kingdom, and Japan be maintained? The answer to this question will partly depend on what happens to the Chinese economy in the coming years. China’s profit rate rose sharply from 1985 to 1995 and peaked at about 25 percent. The Chinese economy’s profit rate stayed at relatively high levels in the early 2000s and reached another peak in 2007. However, since 2007, China’s profit rate has declined rapidly. The decline was caused by both rising capital-output ratio and falling profit share.

The profit share: historical trends Figure 7.2 shows the long-term movement of the profit share in the United Kingdom, the United States, Japan, and China from 1855 to 2018. From 1855 to 1913, the British profit share had stayed at the high levels of 23–27  percent in most years. By comparison, from 1914 to 2017, the British profit share had mostly fluctuated between 13 and 20 percent. There

112  Past and future of the profit rate 40%

30%

20%

10%

0% 1850

1870

1890

1910

United Kingdom

1930

1950

United States

1970 Japan

1990

2010 China

Figure 7.2 The profit share (1855–2018) Sources: See Appendix A, B, C, and D.

were several important exceptions. During 1919–1921 and 1943–1948, the profit share fell below 13 percent. During 1993–1997, the profit share rose above 20 percent. Since the “Great Recession,” the British profit share has stabilized around 15 percent. From 1900 to 1907, the US economy’s profit share fluctuated at the very high levels of 29–37 percent. During 1908–1926, the US profit share mostly fluctuated between 18 and 30 percent. In 1929, the profit share was 23 percent. The Great Depression and the “New Deal” reform led to major redistribution from capital to labor. In the 1950s, the profit share fell to 11–13 percent. The profit share rose during the early 1960s and peaked at 14 percent in 1965. In the 1970s, the profit share fell to 11–12 percent. In the neoliberal era, the US profit share has tended to rise. Since the “Great Recession,” the US economy’s profit share has risen to 15–16 percent, the highest level since 1940.

Past and future of the profit rate  113 In the 1960s, Japan’s profit share was at the relatively high levels of 18–21 percent. The profit share fell sharply from 1969 to 1974. Since then, Japan’s profit share has mostly fluctuated between 11 and 15 percent. The rise of profit share in the neoliberal era mainly reflects the fall of the labor income share. Chapter 6 shows that the decline of labor income share in the US, Britain, and Japan has been concentrated in the manufacturing sector. The decline of labor income share in the manufacturing sector has coincided with the “global labor arbitrage” or the relocation of industrial capital to China to take advantage of China’s massive cheap labor force. As imports from China rise to more than 20 percent of the British and American manufacturing sector’s value added and about 15  percent of Japan’s manufacturing sector’s value added, manufacturing enterprises in the US, Britain, and Japan are under strong pressure to reduce labor costs. Their success in cost reduction has been reflected by the observed relative convergence of labor cost per unit of value added between China and the three advanced capitalist economies. China’s profit share peaked in 1995 at 39 percent. From 2000 to 2010, China’s profit shares stayed at the very high levels of 32–34 percent. However, since 2010, China’s profit share has declined rapidly. The decline of profit share has been caused by the Chinese workers’ growing militancy and rising labor income share. Historically, working classes in Britain, the US, and Japan had succeeded in demanding higher wages and an extensive range of economic and social rights at certain stages of capitalist development. A similar development is currently taking place in China.

Labor income, taxation cost, and capital consumption: historical trends Figure 7.3 shows the long-term historical movement of labor income share of gross domestic product (GDP) in the United Kingdom, the United States, Japan, and China in relation to per capita GDP (measured in constant 2011 international dollars) from 1855 to 2018. The British labor income share mostly fluctuated between 60 and 65 percent as per capita GDP rose from about 4,000 dollars to 20,000 dollars (from 1855 to 1976). In the early neoliberal era, the labor income share collapsed (falling by about 13 percentage points between 1976 and 1988). From 2000 to 2017, as the British per capita GDP rose from about 33,000 dollars to 40,000 dollars, the labor income share stabilized in the range of 53–55 percent. The US labor income share rose sharply during the early twentieth century. Labor income share of GDP rose from about 50 percent to about 60 percent as per capita GDP rose from about 6,500 dollars to about 8,000

114  Past and future of the profit rate 80%

Labor Income Share of GDP

60%

40%

20%

0% 0

10000

20000

30000

40000

50000

60000

Per Capita GDP (constant 2011 international dollar) United Kingdom

United States

Japan

China

Figure 7.3 Labor income share and per capita GDP (1855–2018) Note: On estimates of labor income share of GDP in the United Kingdom, the United States, Japan, and China, see Appendix A, B, C, and D. Per capita GDP in constant 2011 international dollars from 1990 to 2017 is from World Bank (2019), extended back to earlier years using per capita GDP in constant 1990 international dollars from Maddison (2010).

dollars (from 1900 to 1915). From 1950 to 2008, as the US per capita GDP rose from about 15,000 dollars to 50,000 dollars, the labor income share mostly fluctuated between 60 and 63 percent. The US labor income share has stayed below 60 percent since 2009. Japan’s labor income share fell by about 10 percentage points during the economic boom from 1955 to 1970. As per capita GDP rose from about 4,500 dollars to 16,000 dollars, labor income share fell from about 62 percent to about 52  percent. In the early 1970s, Japan’s labor income share rose sharply. In 1976, Japan’s per capita GDP rose to about 19,000 dollars and labor income share recovered to 62 percent. Since then, Japan’s labor income share has declined steadily. In 2017, Japan’s labor income share was about 52 percent.

Past and future of the profit rate  115 China’s labor income share declined sharply during the early years of capitalist transition. In 2010, China’s per capita GDP reached 9,500 dollars and labor income share fell to 36 percent. Since then, China’s labor income share has tended to rise. In 2016–2018, China’s labor income share stabilized around 42–43 percent. China’s current labor income share is substantially below the labor income share in other major capitalist economies at a similar stage of economic development. In the future, as China’s rural surplus labor force continues to deplete, the Chinese workers are likely to have stronger bargaining power and push the labor income share to a significantly higher level. Figure  7.4 shows the long-term historical movement of taxation cost share of GDP in the United Kingdom, the United States, Japan, and China in relation to per capita GDP (measured in constant 2011 international dollars) from 1855 to 2018. “Taxation cost” is defined as taxes on capitalists.

25%

20% Taxation Cost Share of GDP

15%

10%

5%

0% 0

10000

20000

30000

40000

50000

60000

Per Capita GDP (constant 2011 international dollar) United Kingdom

United States

Japan

China

Figure 7.4 Taxation cost share and per capita GDP (1855–2018) Note: On estimates of taxation cost (taxes on capitalists) share of GDP in the United Kingdom, the United States, Japan, and China, see Appendix A, B, C, and D. Per capita GDP in constant 2011 international dollars from 1990 to 2017 is from World Bank (2019), extended back to earlier years using per capita GDP in constant 1990 international dollars from Maddison (2010).

116  Past and future of the profit rate The British taxation cost was about 7–8 percent of GDP from 1870 to 1900 (when per capita GDP rose from about 5,000 dollars to 7,000 dollars). Over the first half of the twentieth century, the British taxation cost rose substantially as the British state battled with intensified interstate conflicts and rising social demands at home. In 1960, the British per capita GDP was about 14,000 dollars and taxation cost was about 12 percent of GDP. Since then, the British taxation cost has generally tended to increase. In 2018, British per capita GDP was about 40,000 dollars and taxation cost was about 16.5 percent of GDP. The US taxation cost share rose sharply at the beginning of the twentieth century. From 1900 to 1916, the US taxation cost was in the range of 5–6 percent of GDP (when per capita GDP rose from about 6,500 dollars to 8,700 dollars. After the First World War, taxation cost rose to about 8 percent of GDP. During the Second World War, taxation cost peaked at about 14  percent of GDP in 1941. From 1941 to 1981, as per capita GDP rose from about 13,000 dollars to 30,000 dollars, taxation cost share declined steadily. Since 1981, the US taxation cost has fluctuated in the range of 10–11 percent. Japan’s taxation cost fluctuated within the range of 11–13 percent of GDP from 1955 to 1969 (when per capita GDP rose from about 4,500 dollars to 14,000 dollars). It rose from about 10 percent in 1975 to about 15 percent in 1989 (when per capita GDP rose from about 18,000 dollars to 29,000 dollars). The taxation cost share fell back to about 11 percent in 1994 and fluctuated in the range 10–11 percent from 1994 to 2013 (as per capita GDP rose from 32,000 dollars to 37,000 dollars). In 2017, Japan’s per capita GDP rose to 39,000 dollars and taxation cost was about 12.5 percent of GDP. In 1996, China’s taxation cost fell to about 9 percent of GDP, the lowest point in the era of capitalist transition. From 1993 to 2013, as China’s per capita GDP rose from about 2,100 dollars to 12,000 dollars, taxation cost rose from 9 percent of GDP to near 18 percent of GDP. In 2018, China’s per capita GDP rose to about 16,000 dollars and taxation cost was about 16 percent of GDP. The conventional GDP accounting treat most material inputs as intermediate inputs, which are not included in gross domestic product. However, GDP does include depreciation of fixed capital (or fixed capital consumption) that reflects a part of the material input cost. Figure  7.5 shows the long-term historical movement of capital consumption share of GDP in the United Kingdom, the United States, Japan, and China in relation to per capita GDP (measured in constant 2011 international dollars) from 1855 to 2018. The capital consumption share demonstrates a relatively clear pattern of a long-term tendency to rise across the major economies. The British capital consumption was about 4–5 percent of GDP during 1855–1870 (when Britain’s per

Past and future of the profit rate  117 25%

Capital Consumption Share of GDP

20%

15%

10%

5%

0% 0

10000

20000

30000

40000

50000

60000

Per Capita GDP (constant 2011 international dollar) United Kingdom

United States

Japan

China

Figure 7.5 Capital consumption share and per capita GDP (1855–2018) Note: On estimates of capital consumption share of GDP in the United Kingdom, the United States, Japan, and China, see Appendix A, B, C, and D. Per capita GDP in constant 2011 international dollars from 1990 to 2017 is from World Bank (2019), extended back to earlier years using per capita GDP in constant 1990 international dollars from Maddison (2010).

capita GDP rose from about 4,200 dollars to 5,200 dollars). From 1870 to 1985, the British capital consumption share had risen steadily. From 1985 to 2018, as Britain’s per capita GDP rose from about 23,000 dollars to 40,000 dollars, the capital consumption share had fluctuated in the range of 13–15 percent. The US capital consumption share generally tended to increase from 1900 to 1980. As per capita GDP rose from 6,500 dollars to 30,000 dollars, capital consumption rose from 9  percent of GDP to 15  percent of GDP. Since then, the US economy’s capital consumption share has fluctuated in the range of 14–16 percent. Japan’s capital consumption share was about 11  percent in the late 1950s. From 1960 to 1994, Japan’s capital consumption share rose from about 11 percent to 22 percent (as Japan’s per capita GDP rose from about

118  Past and future of the profit rate 6,500 dollars to 32,000 dollars). In 2009, Japan’s capital consumption share surged to 25 percent. Since then, the capital consumption share has fallen back to about 22 percent. China’s capital consumption share rose sharply from less than 9 percent in 1990 to almost 16 percent in 2003 (as China’s per capita GDP rose from about 1,500 dollars to 4,700 dollars). China’s capital consumption share fell to about 13 percent in 2013 and has fluctuated around 13–15 percent since then. China’s capital consumption share is comparable to Japan’s but much higher than that of the US or the UK at a similar level of economic development.

Economic growth and the profit rate: future scenarios What will happen to the future of the profit rate? This depends on the future movement of the capital-output ratio and the profit share. Chapter 1 demonstrates that the movement of the capital-output ratio will be determined by the ratio of business sector net fixed investment to GDP ratio and the economic growth rate. According to the neoclassical growth theory, long-term economic growth rate is determined by the combined effects of labor force growth rate, rate of capital accumulation (the growth rate of physical capital stock), and technological progress (statistically reflected by the growth of “total factor productivity”). The growth rate of capital stock in turn depends on the initial capital-output ratio and the ratio of investment to GDP. For Marxist political economists, economic growth rate is simply determined by the labor force growth rate and the labor productivity growth rate. Labor productivity growth rate is primarily driven by capital accumulation or the growth of capital-labor ratio (what Marx referred to as the “technical composition of capital”). Marx’s hypothesis of the long-term tendency for organic composition of capital to rise implies that normally the technical composition of capital should rise more rapidly than labor productivity. However, Chapter 1 shows that although the capital-output ratio did tend to rise in some countries in certain periods, there has not been a definitive trend for the capital-output ratio to rise in the long run. Thus, within the Marxist political economy, there has not been a generally accepted theoretical position regarding the relationship between labor productivity growth and capital-labor ratio growth. Marxist political economy rejects the neoclassical marginal productivity theory which provides the theoretical justification for the neoclassical growth accounting. However, one may use the neoclassical growth accounting simply to analyze the observed empirical relationship between economic growth and inputs growth without presuming neoclassical ideological

Past and future of the profit rate  119 positions. According to neoclassical growth accounting, economic growth rate can be decomposed into contribution from labor input growth, contribution from capital input growth, and a residual (usually explained as contribution from “total factory productivity” growth): Economic Growth Rate = Labor Input Growth Rate * Labor Income Share + Capital Input Growth Rate * Capital Income Share + Residual (Total Factor Productivity Growth Rate) Because the labor income share and capital income share adds up to one (in growth accounting, capital income includes both capitalist profit and depreciation of fixed capital), the previous equation can be rewritten as: Economic Growth Rate = Labor Input Growth Rate + Capital Intensity Growth Rate * Capital Income Share + Residual “Capital intensity” is the capital-labor ratio. According to the neoclassical theory, labor and capital are rewarded by their respective marginal product and it can be demonstrated that labor income share should equal labor elasticity of output and capital income share should equal capital elasticity of output under conditions of competitive markets. Real world capitalist markets rarely meet the conditions of perfect competition elaborated in neoclassical economics textbooks. An alternative explanation of the “labor contribution” to growth is that labor input growth rate multiplied by the labor income share tells people the minimum amount of economic growth that is needed to match the employment growth while paying the workers according to their existing real wage. For example, assume that there is an economy with a gross domestic product of 10 trillion dollars and a labor income share of 50 percent. Thus, the total wages are 5 trillion dollars. Suppose the total employed persons are 500 million and the average wage is 10,000 dollars. If the employment growth rate is 1 percent, then total wages need to rise by at least 50 billion dollars a year in order to match the employment growth while paying the workers the average wage of 10,000 dollars. The growth of total wages by 50 billion dollars implies a minimum economic growth rate of 0.5 percent, which equals 1 percent multiplied by 50 percent, or labor input growth rate multiplied by labor income share. Similarly, an alternative explanation of the “capital contribution” to growth is that capital input growth rate multiplied by the capital income share tells people the minimum amount of economic growth that is needed to match the capital input growth while paying the capitalists according to their existing gross profit rate.

120  Past and future of the profit rate Table 7.1 shows the neoclassical growth accounting for the United Kingdom and the United States from 1990 to 2018. In Table 7.1, the sum of capital intensity contribution and the “residual” equals labor productivity growth rate. In the 1990s, the “residual” (or total factor productivity growth rate) contributed 1.8 percentage points to the British economic growth and 1.5 percentage points to the American economic growth. The residual accounted for 81 percent of the British labor productivity growth and 75  percent of the American labor productivity growth during 1990–2000. However, by the period 2010–2018, the contribution from the “residual” collapsed to 0.35 percentage points in the British economy and 0.6 percentage points in the US economy. Table 7.2 shows the neoclassical growth accounting for Japan and China from 1990 to 2017/2018. During 1990–2000, Japan’s labor productivity grew at an average annual rate of 0.98  percent and “residual” accounted for 19  percent of the labor productivity growth. For the period 2010–2017, Japan’s labor productivity growth rate slowed down to 0.76 percent (although the contribution from the “residual” rose to 0.6 percentage points). In China, the contribution to economic growth from the “residual” declined sharply from 4.3 percentage points during 1990–2000 to less than 1 percentage point during the period 2010–2018. During 1990–2000,

Table 7.1 Average annual growth rate of real GDP, employment, and labor productivity (United Kingdom and United States, 1990–2018) Real GDP

Employment growth rate

Capital intensity contribution

Residual

United Kingdom: 1990–2000 2000–2010 2010–2018

2.49% 1.61% 1.93%

0.23% 0.62% 1.31%

0.44% 0.45% 0.26%

1.82% 0.54% 0.35%

United States: 1990–2000 2000–2010 2010–2018

3.44% 1.74% 2.20%

1.43% 0.16% 1.43%

0.49% 0.58% 0.15%

1.49% 0.99% 0.61%

Note: Real GDP and total employment from 1990 to 2018 are from World Bank (2019). Total employment is calculated as the difference between total labor force and unemployment. Capital intensity contribution is capital-labor ratio growth rate multiplied by capital income share. On data sources and estimates of business sector capital stock in the United Kingdom and the United States, see Appendix A and B.

Past and future of the profit rate  121 Table 7.2 Average annual growth rate of real GDP, employment, and labor productivity (Japan and China, 1990–2017/2018) Real GDP

Employment growth ate

Capital intensity contribution

Residual

Japan: 1990–2000 2000–2010 2007–2017

1.29% 0.64% 1.07%

0.31% –0.19% 0.31%

0.79% 0.56% 0.16%

0.19% 0.27% 0.60%

China: 1990–2000 2000–2010 2010–2018

10.43% 10.55% 7.44%

1.08% 0.54% 0.24%

4.96% 6.44% 6.22%

4.29% 3.51% 0.97%

Note: Real GDP and total employment from 1990 to 2017/2018 are from World Bank (2019). Total employment is calculated as the difference between total labor force and unemployment. Capital intensity contribution is capital-labor ratio growth rate multiplied by capital income share. On data sources and estimates of business sector capital stock in Japan and China, see Appendix C and D.

capital intensity contribution accounted for 54 percent of China’s labor productivity growth. For the period 2010–2018, capital intensity contribution accounted for 87 percent of China’s labor productivity growth. Measured by “residual,” the pace of capitalist technological progress has slowed down sharply since the 1990s in the US, the UK, and China. Measured by labor productivity, each of the four major economies has experienced deceleration of technological progress since the 1990s. The United Nations makes projections of regional and national workingage population (population that ages between 15 and 64) from 2015 to 2050 (United Nations 2019). Using United Nations’ projections, one can project the employment growth between 2018 and 2050 in the United Kingdom, the United States, Japan, and China. One can also make projections about business capital stock growth in the four major economies using assumptions about the business sector’s gross fixed capital investment as ratio of GDP and depreciation rate. Adding assumptions about “residual” contribution to labor productivity growth, one can then project the future economic growth rates in the four major economies. Figure 7.6 shows the historical and projected economic growth rates in the four major economies from 1991 to 2050. The basic assumptions are: employment grows in proportion with the working-age population; business sector gross fixed investment is assumed to have a constant ratio in relation to previous year’s GDP; depreciation rate is held constant at the

122  Past and future of the profit rate 15%

10%

5%

0%

-5% 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 United Kingdom

United States

Japan

China

Figure 7.6 Economic growth rate (historical and projected, 1991–2050) Note: Historical economic growth rates from 1991 to 2017 are from World Bank (2019). On projection of future economic growth rates, see the main text.

average level during 2010–2017/2018; the “residual” contribution to labor productivity growth is assumed to be the same as the “residual” contribution during 2010–2017/2018. From 2018 to 2050, the United Kingdom and the United States are projected to maintain slow economic growth. The US is projected to maintain economic growth rates of 1.3–1.4 percent. Britain is projected to have growth rates that decline from about 0.8–0.9 percent in the early 2020s to about 0.5–0.7 percent in the 2040s. The projections rest upon the assumptions that the two countries will maintain positive “residual” contribution and the US will benefit from slow but steady expansion of labor force between now and the mid-twenty first century. By contrast, Japan is projected to enter into negative growth after about 2035. This is caused by the permanent decline of Japan’s labor force, which

Past and future of the profit rate  123 is projected to fall by 30 percent between 2018 and 2050. The decline of labor force is projected to more than offset the small positive growth of labor productivity, leading to negative economic growth. China’s labor force is projected to fall by 18 percent between 2018 and 2050. As depreciation claims a progressively bigger share of China’s economic output, the contribution from capital intensity growth gradually declines. The combination of shrinking labor force and declining contribution from capital intensity growth results in a decline of China’s economic growth rate from about 5 percent in the early 2020s to about 2 percent in the late 2040s. Chapter 1 shows that the long-term movement of the capital-output ratio depends on the interaction between the economic growth rate and the business sector’s net fixed investment to GDP ratio. Figure 7.7 shows the historical and projected business sector net fixed investment to GDP ratio in the four major economies from 1990 to 2050. 25%

20%

15%

10%

5%

0%

-5% 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 United Kingdom

United States

Japan

China

Figure 7.7 Business net fixed investment (% GDP, 1990–2050) Note: On historical business net fixed investment, see sources of Figure 1.4. On projections of future business net fixed investment, see the main text.

124  Past and future of the profit rate For the United Kingdom, the business sector’s gross fixed investment is assumed to have a constant ratio of 8.7  percent relative to the previous year’s GDP for the period 2018–2050 (8.7 percent is the average ratio of business sector gross fixed investment to previous year’s GDP for the period 2011–2018). Business net fixed investment is business gross fixed investment less consumption of fixed capital (the depreciation rate of the business sector net stock of fixed assets is assumed to be 7.4 percent). Net fixed investment is projected to decline slowly from about 0.9 percent of GDP in the early 2020s to 0.7 percent of GDP in the late 2040s. For the United States, the business sector’s gross fixed investment is assumed to have a constant ratio of 13.1  percent relative to the previous year’s GDP for the period 2018–2050 (13.1 percent is the average ratio business sector gross fixed investment to previous year’s GDP for the period 2011–2018). Business net fixed investment is business gross fixed investment less consumption of fixed capital (the depreciation rate of the business sector net stock of fixed assets is assumed to be 8.7 percent). Net fixed investment is projected to decline from about 2.4 percent of GDP in the early 2020s to 1.8 percent of GDP in the 2040s. For Japan, the business sector’s gross fixed investment is assumed to have a constant ratio of 9.3 percent relative to the previous year’s GDP for the period 2018–2050 (9.3 percent is the average ratio business sector gross fixed investment to previous year’s GDP for the period 2011–2017). Business net fixed investment is business gross fixed investment less consumption of fixed capital (the depreciation rate of the business sector net stock of fixed assets is assumed to be 7.4 percent). Net fixed investment is projected to decline from 0.5 percent of GDP in the 2020s to almost zero in the 2040s. In the UK, the US, and Japan, the very low net investment ratios not only contribute to economic stagnation but also undermine the capitalist legitimacy by removing a key traditional ideological justification for capitalism: the argument that the capitalists appropriate surplus value to make investment that produces long-term public good for the society as a whole. It remains to be seen how long this new type of non-investing capitalism where almost all of the capitalist profit has been used for luxury consumption or financial speculation can remain politically stable. By comparison, China has acted as the ideal “good” capitalism where most of the surplus value has been used for productive investment. China’s business sector’s gross fixed investment is assumed to have a constant ratio of 31.3  percent relative to the previous year’s GDP for the period 2018– 2050 (31.3 percent is the average ratio business sector gross fixed investment to previous year’s GDP for the period 2011–2018). Business net fixed investment is business gross fixed investment less consumption of fixed capital (the depreciation rate of the business sector net stock of fixed assets is assumed to be 5 percent). As depreciation claims an increasingly larger

Past and future of the profit rate  125 part of China’s economic output, net fixed investment as share of GDP is projected to fall from about 19 percent in 2018 to 12 percent in 2050. However, economic growth rate is projected to fall more rapidly than the net investment ratio. As a result, China’s capital-output ratio is projected to surge over the coming decades. Figure 7.8 shows the historical and projected business capital-GDP ratio in the United Kingdom, the United States, China, and Japan from 1990 to 2050. The British business capital-GDP ratio is projected to rise slowly from 1.05 in 2018 to 1.07 in 2050. The US business capital-GDP ratio will rise from 1.21 in 2018 to 1.29 in 2050. Japan’s business capital-GDP ratio will rise from 1.18 in 2018 to 1.25 in 2050. China’s business capital-GDP ratio will surge from 2.13 in 2018 to 3.77 in 2050. In 1933, at the bottom of the Great Depression, the US business capital-GDP ratio was 2.06. China’s projected capital-output ratio in 2050 will be 83 percent higher than the US capital-output ratio in 1933. 4

3

2

1

0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 United Kingdom

United States

Japan

China

Figure 7.8 Business capital-GDP ratio (historical and projected, 1990–2050) Note: On the data sources and estimates of historical business capital-GDP ratios, see ­Appendix A, B, C, and D. On projections of future business net stock of fixed assets, see the main text.

126  Past and future of the profit rate Rising capital-output ratio drives down the profit rate. To project the future profit rate, one needs to know both the future capital-output ratio and the future profit share. The profit share depends on the labor income share, taxation cost share, and capital consumption share. There is a high degree of uncertainty regarding the future movement of the labor income share and taxation cost share. However, if the Chinese working class does succeed in organizing effectively to demand higher material living standards as well as a range of economic and social rights, it may create a favorable global environment for the international working classes to recover some of the grounds lost to the capitalists in the neoliberal era. On the other hand, the capital consumption share of GDP can be calculated using the projected capital-output ratio. Assuming that the labor income shares and taxation cost shares will stay at their levels in 2018 and the capital consumption shares will change in proportion with the change of capital-output ratios, one can project the future profit share and profit rate. Figure  7.9 shows the historical and projected profit rate in the United Kingdom, the United States, China, and Japan from 1990 to 2050. 30%

25%

20%

15%

10%

5%

0% 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 United Kingdom

United States

Japan

China

Figure 7.9 The profit rate (historical and projected, 1990–2050) Note: On the data sources and estimates of historical profit rates, see Appendix A, B, C, and D. On projections of future profit rates, see the main text.

Past and future of the profit rate  127 In the United Kingdom, the United States, and Japan, the profit rate is projected to decline slowly, falling to 13.6 percent, 11.7 percent, and 9.9 percent respectively by 2050. Under the current projection, China’s profit rate will decline rapidly. By the mid-2020s, China’s profit rate is projected to fall below 10 percent. By 2050, China’s economy-wide profit rate will be reduced to 4 percent. Historically, when the profit rate in the British and American economy fell below 10 percent, both tended to suffer from major crises. Thus, as the profit rate in the Chinese economy falls below 10 percent, it is highly unlikely that China can remain stable and maintain normal economic growth. If China is hit by a major economic crisis, the entire global capitalist economy will be destabilized. In that event, the global economy in the twenty-first century may turn out to be the ultimate testing ground for Marx’s hypothesis on the tendency for the rate of profit to fall.

Box 7.1  Climate stabilization and limits to growth Chapter 7 assumes that the major capitalist economies will be able to maintain relatively normal economic growth from now to the mid-twenty first century. However, the global material consumption and pollution generation have already exceeded the earth’s ecological limits. In particular, under the current path of economic growth, the world is headed towards climate catastrophes that will destroy the global ecological systems and undermine the foundation of civilization. A scientific consensus has been established that if global average surface temperature rises to and stays above 2°C higher than the pre-industrial global average temperature, dangerous climate change with catastrophic consequences cannot be avoided. According to Hansen et al. (2016), global warming by more than 2°C (two degrees Celsius) will lead to the melting of west Antarctica’s ice sheets, causing the sea level to rise by 5–9 meters over the next 50–200 years. Bangladesh, European lowlands, the US eastern coast, North China plains, and many coastal cities will be submerged. Further increase in global average temperature may eventually lead to runaway warming, making much of the world unsuitable for human inhabitation.

128  Past and future of the profit rate According to the Intergovernmental Panel on Climate Change’s Fifth Assessment Report, cumulative carbon dioxide emissions will largely determine the global mean surface warming by the late twenty-first century and beyond (IPCC 2013: 27–29). Historical relationship between the cumulative carbon dioxide emissions from fossil fuels burning and the global surface temperature anomalies over the period 1880–2017 indicates that for an increase of cumulative carbon dioxide emissions by one trillion metric tons, global surface temperature will rise by 0.68°C. Currently, the global average temperature is about 1°C higher than the pre-industrial time. To prevent the global average temperature from rising above 2°C higher than the pre-industrial temperature, the global emissions budget (or the cumulative carbon dioxide emissions) from 2018 to 2100 should be no more than 1.47 trillion metric tons (Li 2018). The global emissions budget will have to be divided among the national states based on politically reasonable principles. Peters et al. (2015) proposed two approaches: the “inertia” approach and the “equity” approach. Under the inertia approach, the global emissions budget is divided among countries based on their current shares of global carbon dioxide emissions. Under the “equity” approach, the global emissions budget is divided among countries based on their current shares of the world population. In 2017, total carbon dioxide emissions by the OECD (Organisation for Economic Co-operation and Development) countries were 12.4 billion metric tons, accounting for 37 percent of the world carbon dioxide emissions. Under the inertia approach, OECD countries are entitled to 37.2  percent of the global emissions budget or 548 billion metric tons of cumulative carbon dioxide emissions from 2018 to 2100. By comparison, under the equity approach, OECD countries would be entitled to 17.3 percent of the global emissions budget or 255 billion metric tons of cumulative carbon dioxide emissions from 2018 to 2100. Under the inertia approach, OECD’s carbon dioxide emissions will need to decline at a uniform rate of 1.7 percent from 2018 to 2100 to stay within its “fair” share of the global emissions budget. Under the equity approach, OECD’s carbon dioxide emissions will have to decline at a uniform rate of 4.6 percent from 2018 to 2100. From 1990 to 2017, the OECD countries’ total GDP grew at an average annual rate of 2.16 percent and total carbon dioxide emissions

Past and future of the profit rate  129 grew at an average annual rate of 0.26 percent. Given the historical relationship between economic growth rates and the carbon dioxide emissions growth rates from 1990 to 2017 in the OECD countries, it can be calculated that, if OECD’s carbon dioxide emissions were to decline in accordance with the inertia approach, then OECD’s economic growth rate would have to fall to 0.4 percent. Given that the OECD population is still growing at about 0.7 percent a year, an economic growth rate of 0.4  percent would translate into absolute decline of per capita GDP. If OECD’s carbon dioxide emission were to decline in accordance with the equity approach, then the OECD countries would have to accept a uniform economic decline rate of 2.2 percent from 2018 to 2100. It is inconceivable that the OECD economic and political systems can survive such a massive and sustained economic decline (Li 2018).

Appendix A Estimating the profit rate in the United Kingdom, 1855–2018

United Kingdom, 1855–1947 For the period 1855–1947, gross domestic product by income approach is calculated as the sum of gross domestic product at factor cost and “factor cost adjustment” (which is defined as taxes on expenditures less subsidies”). Gross domestic product at factor cost is from Mitchell (1988: 828–830, “National Accounts,” Table 4). “Factor cost adjustment” is from Mitchell (1988: 832–834, “National Accounts,” Table 5). Total labor income is the sum of income from employment and the estimated labor component of the income from self-employment. British Historical Statistics reports “Gross National Product and Factor Cost and Its Component Incomes” for the period 1855–1980 (Mitchell 1988: 828–830, “National Accounts,” Table 4). I use the income from employment reported by Table 4 for the period 1855–1947. For the period 1855–1888, income from self-employment, gross trading profits of companies, and gross trading surplus of public enterprises are combined together into one column in Table 4. For this period, I assume that the labor component of the self-employed income is 48.7 percent of the sum of income from self-employment, gross trading profits, and gross trading surplus of public enterprises. The proportion 48.7 percent is used so that the labor component of the self-employed income estimated in this way equals 70 percent the income from self-employment in 1889. For the period 1889–1913, income from self-employment is reported separately. For this period, I assume that the labor component is 70 percent of the income from self-employment. For the period 1914–1919, income from self-employment and gross trading profits of companies are combined together. For 1913, 70 percent of self-employed income equals 37  percent of the sum of income from self-employment and gross trading profits. For 1920, 70  percent of self-­ employment equals 38.3 percent of the sum of income from self-employment

Appendix A: Estimating the profit rate in the UK  131 and gross trading profits. Between 1913 and 1920, the proportion of labor component of self-employed income in the sum of income from selfemployment and gross trading profits is linearly interpolated. For the period 1920–1947, labor component is assumed to be 70 percent of the income from self-employment. Taxes on capitalists are the sum of taxes on expenditures less subsidies, profits tax, and the property and income tax paid by capitalists. Taxes on expenditures less subsidies or “factor cost adjustment” from 1855 to 1947 is from Mitchell (1988: 832–834, “National Accounts,” Table 5). Excess profits tax and corporation profits tax from 1917 to 1927 are from Mitchell (1988: 586, “Public Finance,” Table  3, footnote(a)). Profits tax from 1938 to 1947 is from Mitchell (1988: 584, “Public Finance,” Table 3). For the period 1855–1916 and 1928–1937, there was not profits tax. Property and income tax levied on individuals from 1855 to 1947 is from Mitchell (1988: 582–584, “Public Finance,” Table  3). The proportion of property and income tax paid by the capitalists is assumed to be the same as the property income share in the personal factor income, which equals net domestic income at factor cost less net saving (net retained earnings) by trading companies and public enterprises. Net domestic income at factor cost equals gross domestic product at factor cost less capital consumption. Gross domestic product at factor cost and capital consumption from 1855 to 1947 are from Mitchell (1988: 828–830, “National Accounts,” Table 4). For the period 1855–1888, net saving by trading companies and public enterprises is assumed to be 9.1 percent of the sum of income from selfemployment, gross trading profits, and gross surplus of public enterprises. The proportion 9.1 percent is used so that the net saving estimated in this way equals 30 percent of the sum of gross trading profits of companies and gross surplus of public enterprises in 1889. For the period 1889–1913 and for the period 1920–1947, net saving by trading companies and public enterprises is assumed to be 30  percent of the sum of gross trading profits of companies and gross surplus of public enterprises. The proportion 30 percent is roughly comparable to the average proportion of corporate net saving in the total corporate sector gross operating surplus in the 1980s. In 1913, the estimated net saving by trading companies and public enterprises equals 15 percent of the sum of income from self-employment and gross trading profits. For 1920, the estimated net saving equals 14 percent of the sum of income from self-employment and gross trading profits. The proportion of net saving in the sum of income from self-employment and gross trading profits is linearly interpolated between 1913 and 1920.

132  Appendix A: Estimating the profit rate in the UK The property income component in the personal factor income is the personal factor income calculated earlier less total labor income. Domestic total profit is gross domestic product by income approach less total labor income, taxes on capitalists, and capital consumption. National total profit is domestic total profit plus net property income from abroad. Net property income from abroad from 1855 to 1947 is from Mitchell (1988: 828–830, “National Accounts,” Table 4). British Historical Statistics provides net stock of total fixed assets from 1855 to 1938 (Mitchell 1988: 864–866, “National Accounts,” Table 14B). Net stock from 1939 to 1947 can be estimated using the perpetual inventory method and data of gross domestic fixed capital formation and capital consumption in current and constant prices (Mitchell 1988: 834, “National Accounts,” Table 5; 840, “National Accounts,” Table 6). The calculated net fixed capital formation is adjusted downwards to make the implied net stock in 1948 consistent with the reported net stock. For the period 1855–1919, I assume that the business sector capital stock is 69.6 percent of the total net stock of fixed assets. For the period 1920– 1938 and 1948, the business sector capital stock is assumed to be 86 percent of the total net stock less dwellings. These proportions are assumed to make the estimates in different periods compatible with each other as well as with the estimated business sector capital stock in the modern time. In 1938, the business sector capital stock is estimated to be 56.5 percent of the total net stock of fixed assets. In 1948, the business sector capital stock is estimated to be 53.1 percent of the total net stock of fixed assets. Between 1938 and 1948, the proportion of business sector capital stock in the total net stock is linearly interpolated and the interpolated proportions are used to estimate the business sector capital stock in this period.

United Kingdom, 1948–2018 Gross domestic product by income approach from 1948 to 2018 is from ONS (2019a, “National Accounts,” Worksheet 1.2). Total labor income is the sum of compensation of employees and 70 percent of the mixed income. Compensation of employees and mixed income from 1948 to 2017 are from ONS (2019a, “National Accounts,” Worksheet 1.2). Taxes on capitalists are the sum of taxes on production and imports less subsidies, profits tax or corporation taxes, and individual or household income taxes paid by capitalists. Taxes on production and imports less subsidies from 1948 to 2018 is from ONS (2019a, “National Accounts,” Worksheet 1.2). Profits tax from 1948 to 1964 is from Mitchell (1988: 584–585, “Public Finance,” Table 3).

Appendix A: Estimating the profit rate in the UK  133 Taxes on corporate incomes, profits, and capital gains from 1965 to 2017 is from OECD (2019, “Public Sector, Taxation, and Market Regulation,” Details of Tax Revenue). Corporation tax in 2018 is from ONS (2019a, “Public Sector Supplementary Tables”). Property and income tax levied on individuals from 1948 to 1964 is from Mitchell (1988: 584–585, “Public Finance,” Table 3). Taxes on individual incomes, profits, and capital gains from 1965 to 2017 is from OECD (2019, “Public Sector, Taxation, and Market Regulation,” Details of Tax Revenue). Household income tax in 2018 is from ONS (2019a, “Public Sector Supplementary Tables”). The proportion of individual income taxes paid by the capitalists is assumed to be the same as the property income share in the personal factor income, which equals gross domestic product by income approach less consumption of fixed capital, taxes on production and imports less subsidies, taxes on corporations, and net saving (net disposable income) by financial and non-financial corporations. Net corporation saving from 1948 to 1986 is assumed to be 30 percent of the gross operating surplus of non-financial and financial corporations (ONS 2019a, “National Accounts,” Worksheet 1.2). Net saving by the corporate sector from 1987 to 2018 is the sum of net disposable income of non-financial corporations and financial corporations (ONS 2019a, ­“Non-financial Corporations,” Worksheet 3.1.4; “Financial Corporations,” Worksheet 4.1.4). The property income component in the personal factor income is the personal factor income calculated previously less total labor income. Capital consumption from 1948 to 1980 is from Mitchell (1988: 830, “National Accounts,” Table 4). Consumption of fixed capital from 1987 to 2018 is from ONS (2019a, “National Accounts,” Worksheet 1.6.3). In 1980, consumption of fixed capital is 10.8 percent of GDP. In 1987, consumption of fixed capital is 14.3 percent of GDP. Between 1980 and 1987, the proportion of consumption of fixed capital in GDP is linearly interpolated. Domestic total profit is gross domestic by income approach less total labor income, taxes on capitalists, and capital consumption. National total profit is domestic total profit plus net property income from the rest of the world. Net property income from the rest of the world from 1948 to 2018 is from ONS (2019a, “National Accounts,” Worksheet 1.2). For the period 1948–1979, the business sector capital stock is assumed to be 86 percent of the total net stock less dwellings (Mitchell 1988: 866–867, “National Accounts,” Table 14B). For the period 1995–2018, the business sector capital stock is defined as the sum of non-financial corporate sector fixed assets, financial corporate sector fixed assets, and household sector fixed assets less household ­sector dwellings (ONS 2019a, “National Balance Sheet,” Worksheet 9.3, 9.6

134  Appendix A: Estimating the profit rate in the UK and 9.10). In 1995, the calculated business sector capital stock is 57.7 percent of the total net stock of fixed assets. For the period 1980–1994, the business sector capital stock is assumed to be 57.7 percent of the total net stock of fixed assets. Total net stock from 1980 to 1995 can be estimated using the perpetual inventory method and data of gross domestic fixed capital formation and capital consumption. Gross fixed capital formation in current and constant prices is from ONS (2019a, “National Accounts,” Worksheet 1.2 and 1.3). The calculated net fixed capital formation is adjusted downwards to make the implied net stock in 1980 consistent with the reported net stock. In 1980, the calculated business sector net stock is 86 percent of the total net stock less dwellings. This proportion is then used to estimate the business sector capital stock before 1980 (see earlier).

Appendix B Estimating the profit rate in the United States, 1900–2018

United States, 1900–1928 The US gross domestic product from 1900 to 1928 is from Historical Statistics of the United States (Carter et al. 2006: 3–25, “Economic Structure and Performance,” Table Ca 9–19). Labor income is estimated as the sum of nonfarm sector workers’ total labor income and the labor component of the farm sector personal income. Nonfarm sector workers’ total labor income from 1900 to 1928 is calculated using the nonfarm sector’s employment multiplied by the nonfarm workers’ average annual earnings (Carter et  al. 2006: 2–82, “Work and Welfare,” Table Ba 470–477; 2–265, “Work and Welfare,” Table Ba 4280–4282). The farm sector’s personal income from 1900 to 1928 is from Goldsmith (1956: 431, Table N-3, column 5). Labor component is assumed to be 87.3 percent of the farmer sector’s personal income so that the estimated total labor income is compatible with the labor income calculated from the modern National Income and Product Accounts. Total taxes on capitalists are the sum of indirect business tax and nontax liabilities, corporate profit tax liability, and estimated individual income taxes paid by capitalists. Indirect business taxes and nontax liabilities from 1900 to 1928 is from Goldsmith (1956: 435, Table N-5, column 5). Corporate profit tax liability is also from Goldsmith (1956: 435, column 9). Federal personal income tax from 1914 to 1928 is from Goldsmith (1956: 441, Table N-8, column 9). Goldsmith (1956: 441, Table N-8, column 7) estimated the personal tax payments to state and local government from 1900 to 1928. Total personal taxes from 1900 and 1928 is estimated as the sum of the Federal personal income tax and 34 percent of the personal tax payments to state and local governments estimated by Goldsmith so that the total personal current taxes estimated is compatible with the modern personal current taxes series reported by the US Bureau of Economic Analysis.

136  Appendix B: Estimating the profit rate in the US Personal current taxes paid by capitalists are then estimated as personal current taxes multiplied by property income share of personal factor income. Personal factor income is defined as gross domestic product less consumption of fixed capital, indirect taxes less subsidies, corporate income tax, and undistributed corporate profits. Undistributed corporate profits from 1900 to 1928 is from Goldsmith (1956: 437, Table N-6, column 4). Property component of the personal factor income is the difference between personal factor income and total labor income. Consumption of fixed capital at replacement cost from 1900 to 1928 is from Goldsmith (1956: 437, Table N-6, column 1). Domestic total profit is gross domestic product less total labor income, taxes on capitalists, and capital consumption. National total profit is domestic total profit plus net property income from abroad. Net investment income from abroad from 1900 to 1928 is from Carter et al. (2006: 5–454, “Governance and International Relations,” Table Ee 1–21). For the period 1900–1924, the business sector net stock of fixed assets is estimated as the private non-residential non-institutional fixed assets in current values multiplied by a constant ratio of 1.357. Private non-residential non-institutional net stock of fixed assets equals the sum of total structures and producer durables less the residential, institutional, and government structures. In Goldsmith (1956: 14, Table W-1), this equals column 3 plus column 11 less column 4, 8, and 9. For the period 1925–1928, the business sector net stock of fixed assets is calculated as the sum of net stock of fixed assets of corporate businesses, sole proprietorships, and partnerships (BEA 2019b, Table 6.1).

United States, 1929–2018 Gross domestic income (income approach of GDP) from 1929 to 2018 is from BEA (2019a, Table 1.10). Labor income is the sum of compensation of employees and 70 percent of the proprietors’ income (BEA 2019a, Table 1.10). Total taxes on capitalists is the sum of taxes on production and imports less subsidies, taxes on corporate income, and personal current taxes paid by the capitalists. Personal current taxes from 1929 to 2018 is from BEA (2019a, Table 3.4). Personal current taxes paid by capitalists is estimated as personal current taxes multiplied by property income share of personal factor income. Personal factor income is defined as gross domestic product less consumption of fixed capital, taxes on production and imports less subsidies, corporate income tax, and undistributed corporate profits. Property component of the

Appendix B: Estimating the profit rate in the US  137 personal factor income is the difference between personal factor income and total labor income. Consumption of fixed capital, taxes on production and imports less subsidies, corporate income tax, and undistributed corporate profits are from BEA (2019a, Table 1.10). Domestic total profit is gross domestic product less total labor income, taxes on capitalists, and consumption of fixed capital. National total profit is domestic total profit plus net property income from abroad. Net investment income from abroad from 1929 to 1947 is from Carter et al. (2006: 5–455, “Governance and International Relations,” Table Ee 1–21). Income receipts on US assets abroad less income payments on foreign assets in the US from 1948 to 2018 is from BEA (2019a, Table 4.1). For the period 1929–2018, the business sector net stock of fixed assets is calculated as the sum of net stock of fixed assets of corporate businesses, sole proprietorships, and partnerships (BEA 2019b, Table 6.1).

Appendix C Estimating the profit rate in Japan, 1955–2017

Japan’s gross domestic product from 1955 to 1959 is from SBJ (2012, Table  3–7). Japan’s gross domestic product from 1960 to 2017 is from World Bank (2019). For the period 1955–1993, total labor income is the sum of compensation of employees and 70 percent of the household sector operating surplus less imputed service from owner-occupied dwellings. Compensation of employees, household sector operating surplus, and imputed service from owneroccupied dwellings from 1955 to 1979 are from SBJ (2012, Table 3–11-d). Compensation of employees, household sector operating surplus, and imputed service from owner-occupied dwellings from 1980 to 1993 are from SBJ (2012, Table 3–29-e). In 1994, the estimated labor component of the household sector operating surplus less imputed service from owneroccupied dwellings equals 58.1 percent of the gross mixed income reported by OECD (2019, “National Accounts,” Simplified Non-Financial Accounts). For the period 1994–2017, total labor income is the sum of compensation of employees and 58.1 percent of the gross mixed income reported by OECD (2019, “National Accounts,” Simplified Non-Financial Accounts). Taxes on capitalists are the sum of taxes on production and imports less subsidies, taxes on corporate income, and household or individual income taxes paid by capitalists. For the period 1955–1969, indirect business taxes less subsidies is from SBJ (2012, Table 3–7). For the period 1980–1993, indirect business taxes less subsidies is from SBJ (2012, Table 3–25). For the period 1994–2017, taxes on production and imports less subsidies is from OECD (2019, “Public Sector, Taxation and Market Regulation,” Details of Tax Revenue). For the period 1955–1964, direct taxes paid by non-financial and financial corporations are from SBJ (2012, Table 3–11-a and 3–11-b). For the period 1965–2017, taxes on corporate income, profits, and capital gains is from OECD (2019, “Public Sector, Taxation, and Market Regulation,” Details of Tax Revenue).

Appendix C: Estimating the profit rate in Japan  139 For the period 1955–1964, direct taxes paid by households is from SBJ (2012, Table 3–11-d). For the period 1965–2017, taxes on individual income, profits, and capital gains is from OECD (2019, “Public Sector, Taxation, and Market Regulation,” Details of Tax Revenue). The proportion of individual income taxes paid by the capitalists is assumed to be the same as the property income share in the personal factor income, which equals gross domestic product less consumption of fixed capital, taxes on production and imports less subsidies, taxes on corporations, and net saving (net disposable income) by financial and non-financial corporations. For the period 1955–1979, net saving by non-financial and financial corporations are from SBJ (2012, Table 3–11a and 3–11b). For the period 1980–1993, net disposable income by non-financial and financial corporations are from SBJ (2012, Table 3–29b and 3–29c). For the period 1994– 2017, net disposable income by non-financial corporations and financial corporations are calculated using gross disposable income less consumption of fixed capital by non-financial corporations and financial corporations reported by OECD (2019, “National Accounts,” Detailed Non-Financial Sector Accounts). Consumption of fixed capital from 1955 to 1979 is from SBJ (2012, Table 3–7). Consumption of fixed capital from 1980 to 1993 is from SBJ (2012, Table 3–25). For the period 1970–1993, consumption of fixed capital is adjusted upwards to account for the difference between the current version of Japan’s gross domestic product reported by World Bank (2019) and the historical version reported by SBJ (2012, Table 3–7 and Table 3–25). Consumption of fixed capital from 1994 to 2017 is from OECD (2019, “National Accounts,” Simplified Non-Financial Accounts). Domestic total profit is gross domestic product less total labor income, taxes on capitalists, and consumption of fixed capital. National total profit is domestic total profit plus net property income from the rest of the world. Net property income from the rest of the world from 1955 to 1979 is from SBJ (2012, Table 3–10). Net property income from the rest of the world from 1980 to 1993 is from SBJ (2012, Table 3–28). Net property income from the rest of the world from 1994 to 2017 is from OECD (2019, “National Accounts,” Detailed Non-Financial Accounts). For the period 1955–1969, Japan’s business sector capital stock is assumed to be 62.3 percent of the total economy net stock of fixed assets less dwellings (SBJ 2012, Table 3–14-a). For the period 1969–1979, Japan’s business sector net stock of fixed assets is the sum of net stock of fixed assets of nonfinancial corporations, financial corporations, households (including private un-incorporated enterprises) less dwellings (SBJ 2012, Table  3–14-b and 3–15). For the period 1980–1994, Japan’s business sector net stock of fixed assets is the sum of net stock of fixed assets of non-financial corporations,

140  Appendix C: Estimating the profit rate in Japan financial corporations, households (including private un-incorporated ­enterprises) less dwellings (SBJ 2012, Table 3–32 and 3–33). For the period 1995–2017, Japan’s business sector capital stock is calculated as 51.5 percent of total fixed assets less dwellings reported by OECD (2019, “National Accounts,” Balance Sheets for Non-Financial Assets).

Appendix D Estimating the profit rate in China, 1980–2018

China’s gross domestic product from 1952 to 2018 is from China Data Center (2019, “National Accounts”). China’s total labor income is the sum of rural labor income, labor component of the urban entrepreneurial income, total wages of urban private units employed persons and unclassified workers, “urban units” total wages, and the employers’ contributions to labor insurance and welfare funds. Rural labor income is calculated using rural population multiplied by the sum of the rural households’ disposable wage income and entrepreneurial income per person. Rural population from 1980 to 2018 is from NBS (2019a, “Population”). Rural households’ disposable wage income and entrepreneurial income per person from 1980 to 2018 is from NBS (2019a, “People’s Livelihood”). Labor component of the urban entrepreneurial income is 70 percent of the urban entrepreneurial income. Urban households’ total entrepreneurial income is calculated using urban population multiplied by the urban households’ disposable entrepreneurial income per person. Urban population from 2000 to 2018 is from NBS (2019a, “Population”). Urban households’ disposable entrepreneurial income per person from 1985 to 1996 is from NBS (1992: 282, Table 8–9, 1994: 259, Table 9–6, 1997, Table 9–5). Urban households’ disposable entrepreneurial income per person from 1997 to 2018 is from NBS (2019a, “People’s Livelihood”). I assume that the urban unclassified workers receive the same average wage as the urban private units employed persons. Total wages of urban private units employed persons and unclassified workers is calculated using the total number of urban private units employed persons and unclassified workers multiplied by the average wage of urban private units employed persons. Total urban private units employment from 1990 to 2018 is from NBS (2019a, “Employment and Wages”). Number of urban unclassified workers is calculated as urban total employment less “urban units”

142  Appendix D: Estimating the profit rate in China employment, urban private units employment, and the number of urban self-employed persons. Urban private units average wage from 2009 to 2018 is from NBS (2019a, “Employment and Wages”). For the period 1980–2008, urban collective units average wage is used as the proxy for urban private units average wage. Urban collective units average wage from 1980 to 1984 is from NBS (1989: 146, Table 4–42). Urban collective units average wage from 1985 to 1999 is from NBS (2000, Table 5–24). Urban collective units average wage from 2000 to 2008 is from NBS (2019a, “Employment and Wages”). “Urban units” total wages from 1980 to 1984 is from NBS (1989: 124, Table  4–22). “Urban units” total wages from 1985 to 1999 is from NBS (2000, Table 5–18). “Urban units” total wages from 2000 to 2018 is from NBS (2019a, “Employment and Wages”). In addition to wage payment, the employers’ labor cost includes social insurance contributions and other workers’ benefits paid by the employers. China Statistical Yearbook 1999 provides total insurance and welfare funds paid by “urban units” from 1980 to 1998 (NBS 1999, Table 21–54). For the period 1999–2018, I  assume that the employers’ contributions to labor insurance and welfare funds equal 50 percent of total social insurance receipts and 25 percent of “urban units” total wages. Social insurance receipts from 1999 to 2018 is from NBS (2019a, “Public Administration, Social Insurance, and Other”). Taxes on capitalists is the sum of indirect taxes, business income tax, and individual income taxes paid by capitalists. Total indirect taxes equals total tax revenue less business income tax and individual income tax. China’s total tax revenue from 1980 to 2018 is from China Data Center (2019, “Government Finance and Banking”). Business income tax from 1985 to 2018 and individual income tax from 1999 to 2018 are from NBS (2019a, “Public Finance”). The capitalist share of the individual income tax is assumed to equal the share of urban households’ capital income in the urban households’ total disposable factor income. Urban households’ total disposable factor income equals the sum of disposable wage income, disposable entrepreneurial income, and disposable property income (NBS 2019a, “People’s Livelihood”). Urban households’ capital income equals disposable property income plus 30 percent of the disposable entrepreneurial income. For the period 1980–1992, consumption of fixed capital is calculated as the difference between gross fixed capital formation and the total “accumulation” of fixed assets (including both productive and non-productive accumulation). Gross fixed capital formation is from China Data Center (2019, “National Accounts”). “Accumulation” of fixed assets is from NBS (1994: 41, Table  2–19). For the period 1993–2018, the national consumption of

Appendix D: Estimating the profit rate in China  143 fixed capital is the sum of consumption of fixed capital from each province provided by NBS (2019b, “National Accounts”). Domestic total profit is gross domestic product less the sum of total labor income, taxes on capitalists, and consumption of fixed capital. National total profit is domestic total profit plus net property income from the rest of the world. Property income from the rest of the world and property income payments to the rest of the world from 1982 to 2018 are from NBS (2019a, “National Accounts”). China’s business sector net stock of fixed assets is constructed using the perpetual inventory method: Kn = K0 + Σt=1n(NIt) Kn is the real capital stock in year “n,” K0 is the real capital stock in the initial year, NIt is the real net investment in year “t” (t = 1, 2, 3, . . . n). This formula says that real capital stock in any year is the sum of the initial real capital stock and the cumulative real net investment between the initial year and the end year. China Statistical Yearbook 1985 (NBS 1985: 374) provides net value of fixed assets of state-owned enterprises in the industrial sector, which stood at 10.08 billion Yuan in 1952. In 1952, state-owned industrial enterprises accounted for 41.6 percent of China’s industrial gross output value (NBS 1985: 306). Assuming that the non-state industrial enterprises had the same capital-output ratio as the state industrial enterprises, the industrial sector’s net stock of fixed assets in 1952 is estimated to be 24.25 billion Yuan. In 1952, China’s industrial gross output value was 34.4 percent of China’s total society gross output value (NBS 1985: 20). “Total society gross output value” is a statistical concept used in the former socialist net material product accounting system; it measures the sum of gross output value in agriculture, industry, construction, transportation, and trade. Assuming that other economic sectors had the same capital-output ratio as the industrial sector, China’s total business sector net stock of fixed assets in 1952 would be 70.51 billion Yuan. As the capital stock grows, the capital stock in the initial year becomes an increasingly smaller fraction of the capital stock in the later years. Alternative assumptions on the capital stock in 1952 have little impact on the levels of capital stock after 1980, which mainly depend on the levels of cumulative net investment that have taken place since 1952. China Statistical Yearbook 1993 provides “accumulation” of fixed assets in productive and non-productive sectors from 1952 to 1992 (NBS 1993: 48, Table  2–28). “Accumulation” is the term used for net investment in the net material product accounting system. For the period 1952–1992,

144  Appendix D: Estimating the profit rate in China “accumulation” of fixed assets in productive sectors is used as the proxy for the business sector net investment in fixed assets. For the period 1993–2018, business sector net fixed investment is calculated as the total economy net fixed investment multiplied by a business sector share. Total economy net investment in fixed assets is the difference between China’s gross fixed capital formation and consumption of fixed capital. China’s Flow of Funds Account provides gross fixed capital formation by institutional sectors. The business sector’s share in the total net investment in fixed assets is assumed to be the same as the business sector’s share in the gross fixed capital formation. The business sector gross fixed capital formation is the sum of gross fixed capital formation in the non-financial business sector and gross fixed capital formation of financial institutions. Flow of Funds Accounts from 1993 to 1999 are from NBS (1999, Table C-23, Table C-25, Table C-27, Table C-29, 2000, Table C-21, 2001, Table 3–21, 2002, Table  3–21). Flow of Funds Accounts from 2000 to 2016 are from NBS (2019a, “National Accounts”). For 2017 and 2018, it is assumed that the business sector accounted for 69.1 percent of the total gross fixed capital formation and total net fixed investment (the same share as in 2016). The business sector net fixed investment calculated earlier is in current prices. This is deflated into real net fixed investment in constant 1952 prices using a fixed investment price index. NBS (2019a, “Price Indexes”) provides fixed investment price index from 1990 to 2018. For the period 1953–1989, I use the national fixed investment price index calculated by Zhang, Guiying, and Jipeng (2004) and reported by Jin (2012, Table  1). For the year 1952–1953, I use the Shanghai fixed investment price index reported by Zhang and Zhang (2003, Table 2) as the proxy for the national fixed investment price index. Using the previous data, China’s business sector real net stock of fixed assets from 1952 to 2018 can be calculated. The real capital stock is then re-inflated by having it multiplied by the fixed investment price index. The result is China’s business sector net stock of fixed assets in current prices. This is the capital stock series used for calculating the business capital-GDP ratio and the profit rate.

Bibliography

Armstrong, Philip, Andrew Glyn, and John Harrison. 1991. Capitalism Since 1945. Oxford: Blackwell Publishing. Arrighi, Giovanni. 1994. The Long Twentieth Century: Money, Power, and the Origins of Our Times. London; New York: Verso. Arrighi, Giovanni, Kenneth Barr, and Shuji Hisaeda. 1999. “The Transformation of Business Enterprises,” in Giovanni Arrighi and Beverly J. Silver (eds.), Chaos and Governance in the Modern World System, pp. 97–150. Minneapolis; London: University of Minnesota Press. Arrighi, Giovanni, Po-keung Hui, Ho-fung Hung, and Mark Selden. 2003. “Historical Capitalism, East and West,” in Giovanni Arrighi, Takeshi Hamashita, and Mark Selden (eds.), The Resurgence of East Asia: 50, 150 and 500 Year Perspectives, pp. 259–333. London; New York: Routledge. Arrighi, Giovanni, Po-keung Hui, Krishnendu Ray, and Thomas Ehrlich Reifer. 1999. “Geopolitics and High Finance,” in Giovanni Arrighi and Beverly J. Silver (eds.), Chaos and Governance in the Modern World System, pp. 37–96. Minneapolis; London: University of Minnesota Press. Arrighi, Giovanni, and Beverly J. Silver. 1999. Chaos and Governance in the Modern World System. Minneapolis; London: University of Minnesota Press. BEA. Bureau of Economic Analysis, United States. 2019a. GDP and the National Income and Product Accounts Historical Tables. https://apps.bea.gov/iTable/iTa ble.cfm?reqid=19&step=3&isuri=1&1921=survey&1903 = 316#reqid=19&step= 3&isuri=1&1921=survey&1903 = 316. ———. 2019b. Fixed Assets Accounts Tables. https://apps.bea.gov/iTable/iTable. cfm?ReqID=10&step=2. ———. 2019c. International Data, International Transactions Tables. https:// apps.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=9&is uri=1&6210 = 4. ———. 2019d. Industry Data, GDP by Industry. https://apps.bea.gov/iTable/iTable. cfm?ReqID=51&step=1. ———. 2019e. International Trade and Investment Country Facts. https://apps.bea. gov/international/factsheet/factsheet.cfm. Beckert, Sven. 2015. Empire of Cotton: A Global History. New York: Vintage Books, a Division of Penguin Random House LLC.

146  Bibliography Bowles, Samuel, Richard Edwards, and Frank Roosevelt. 2005. Understanding Capitalism: Competition, Command, and Change. New York; Oxford: Oxford University Press. BP. 2019. Statistical Review of World Energy 2019. www.bp.com/en/global/ corporate/energy-economics/statistical-review-of-world-energy.html. Burkett, P., and M. Hart-Landsberg. 2005. China and Socialism: Market Reforms and Class Struggle. New York: Monthly Review Press. Carter, Susan B., Scott Sigmund Gartner, Michael R. Haines, Alan L. Olmstead, Richard Sutch, and Gavin Wright (eds.). 2006. Historical Statistics of the United States: Earliest Times to the Present. New York: Cambridge University Press. Chang, Chung-Li. 1962. The Income of the Chinese Gentry. Seattle: University of Washington Press. China Data Center, University of Michigan. 2019. China Data Online. National Statistics. http://chinadataonline.org/. Devine, James N. 1987. “An Introduction to Radical Theories of Economic Crises,” in Robert D. Cherry, et al. (eds.), The Imperiled Economy: Macroeconomics from A Left Perspective, Book 1, pp. 19–32. New York: Monthly Review Press. Dumenil, Gerard, and Dominique Levy. 1993. The Economics of the Profit Rate: Competition, Crises and Historical Tendencies in Capitalism. Brookfield, VT: Edward Elgar. ———. 2007. Capital Resurgent: Roots of the Neoliberal Revolution. Cambridge, MA: Harvard University Press. ERP. Economic Report of the President, the United States. 2019. Economic Report of the President, Together with the Annual Report of the Council of Economic Advisors, March. www.govinfo.gov/app/collection/erp/2019. Federal Reserve, United States. 2019. Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts. Fourth Quarter 2018, Released on March  7, 2019. www.federalreserve.gov/releases/ z1/20190307/z1.pdf. FRED. Federal Reserve Bank of St. Louis, Economic Research. 2019a. “Consol (Long-Term Bond) Yields in the United Kingdom.” Federal Reserve Economic Data. https://fred.stlouisfed.org/series/LTCYUK#0. ———. 2019b. “Long-Term Government Bond Yields: 10-Year.” Federal Reserve Economic Data. https://fred.stlouisfed.org/series/IRLTLT01GBM156N#0. GAC. General Administration of Customs, People’s Republic of China. 2019. Tongji Yuebao (Monthly Statistics). www.customs.gov.cn/customs/302249/302274/ 302277/index.html. Gani, Aisha. 2015. “Clause IV: A Brief History.” The Guardian, August 9. www. theguardian.com/politics/2015/aug/09/clause-iv-of-labour-party-constitutionwhat-is-all-the-fuss-about-reinstating-it. Gillman, Joseph M. 1956. The Falling Rate of Profit: Marx’s Law and Its Significance to Twentieth-Century Capitalism. London: Dennis Dobson. Giovannoni, Olivier. 2014. “What Do We Know About the Labor Share and the Profit Share? Part III: Measures and Structural Factors.” Working Paper No. 805, Levy Economics Institute of Bard College, May. www.levyinstitute.org/pubs/ wp_805.pdf.

Bibliography  147 Goldsmith, Raymond W. 1956. A Study of Saving in the United States, Volume III. Princeton, NJ: Princeton University Press. Gordon, David, Thomas E. Weisskopf, and Samuel Bowles. 1987. “Power, Accumulation, and Crisis: The Rise and Demise of the Postwar Social Structure of Accumulation,” in Robert D. Cherry, et al. (eds.), The Imperiled Economy: Macroeconomics from a Left Perspective, Book 1, pp.  43–58. New York: Monthly Review Press. Gregory, James N. 2019. “IWW Strikes 1905–1920.” Mapping American Social Movements Through the 20th Century. http://depts.washington.edu/iww/strikes. shtml. Gross, Daniel. 2014. “Henry Ford Understood That Raising Wages Would Bring Him More Profit.” The Daily Beast, January  6. www.thedailybeast.com/henry-fordunderstood-that-raising-wages-would-bring-him-more-profit. Hansen, James, Makiko Sato, Paul Hearty, Reto Ruedy, et al. 2016. “Ice Melt, Sea Level Rise and Superstorms: Evidence from Paleoclimate Data, Climate Modeling, and Modern Observations That 2°C Global Warming Could Be Dangerous.” Atmospheric Chemistry and Physics 16: 3761–3812. doi:10.5194/acp-16-37612016. www.atmos-chem-phys.net/16/3761/2016/. Heinberg, Richard. 2013. Shale Oil: How Fracking’s False Promise of Plenty Imperils Our Future. Santa Rosa, CA: Post Carbon Institute. Hughes, J. David. 2018. Shale Reality Check: Drilling into the U.S. Government’s Rosy Projections for Shale Gas & Tight Oil Production Through 2050. Post Carbon Institute (Winter). www.postcarbon.org/publications/shale-reality-check/. IPCC. United Nations Intergovernmental Panel on Climate Change. 2013. Climate Change 2013: The Physical Science Basis: Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Summary for Policy Makers. www.ipcc.ch/pdf/assessment-report/ar5/wg1/ WG1AR5_SPM_FINAL.pdf. Jin, Ge. 2012. Zhongguo Jichu Sheshi Ziben Cunliang Gusuan (Estimating China’s Infrastructure Capital Stock). Jingji Yanjiu (Economic Research) (4): 4–14. Keynes, John Maynard. 1964[1936]. The General Theory of Employment, Interest, and Money. San Diego; New York; London: A Harvest Book, Harcourt Brace & Company. Kitson, Michael, and Jonathan Michie. 2014. “The Deindustrial Revolution: The Rise and Fall of UK Manufacturing, 1870–2010.” Centre for Business Research, University of Cambridge, Working Paper No. 459, June. www.cbr.cam.ac.uk/ fileadmin/user_upload/centre-for-business-research/downloads/working-papers/ wp459.pdf. Kotz, David M. 2015. The Rise and Fall of Neoliberal Capitalism. Cambridge, MA: Harvard University Press. Kraemer, Kenneth L., Greg Linden, and Jason Dedrick. 2011. Capturing Value in Global Networks: Apple’s iPad and iPhone. Irvine; Berkeley: University of California; Syracuse University, July. http://pcic.merage.uci.edu/papers/2011/Value_ iPad_iPhone.pdf. Li, Minqi. 2009. The Rise of China and the Demise of the Capitalist WorldEconomy. London: Pluto Press.

148  Bibliography ———. 2015. China and the Twenty-first Century Crisis. London: Pluto Press. ———. 2017. “Profit, Accumulation, and Crisis: Long-Term Movement of the Profit Rate in China, Japan, and the United States.” The Chinese Economy 50(6): 381–404. ———. 2018. “Global Carbon Dioxide Emissions and Climate Change 2018–2100.” Peak Oil Barrel, November  20. http://peakoilbarrel.com/ world-energy-2018-2050-world-energy-annual-report-part-5/. Liu, Ta-Chung, and Kung-Chia Yeh. 1965. The Economy of the Chinese Mainland: National Income and Economic Development, 1933–1959. Princeton, NJ: Princeton University Press. Maddison, Angus. 2010. Statistics on World Population, GDP, and Per Capita GDP, 1–2008 AD. www.ggdc.net/MADDISON/oriindex.htm. Marx, Karl. 1967[1867]. Capital: A Critique of Political Economy, Volume 1. New York: International Publishers. ———. 1967[1894]. Capital: A Critique of Political Economy, Volume 3. New York: International Publishers. Meisner, Maurice. 1999. Mao’s China and After: A History of the People’s Republic. New York: The Free Press. MHRSS. Ministry of Human Resources and Social Security, People’s Republic of China. 2009. China Labor Statistical Yearbook 2009. Beijing: China Statistics Press. ———. 2010. China Labor Statistical Yearbook 2010. Beijing: China Statistics Press. ———. 2011. China Labor Statistical Yearbook 2011. Beijing: China Statistics Press. ———. 2012. China Labor Statistical Yearbook 2012. Beijing: China Statistics Press. ———. 2013. China Labor Statistical Yearbook 2013. Beijing: China Statistics Press. ———. 2014. China Labor Statistical Yearbook 2014. Beijing: China Statistics Press. ———. 2015. China Labor Statistical Yearbook 2015. Beijing: China Statistics Press. ———. 2016. China Labor Statistical Yearbook 2016. Beijing: China Statistics Press. ———. 2017. China Labor Statistical Yearbook 2017. Beijing: China Statistics Press. Minsky, Hyman. 1993. “Finance and Stability: The Limits of Capitalism.” Levy Economics Institute Working Paper No. 93, May. www.levyinstitute.org/pubs/ wp93.pdf. ———. 2008. Stabilizing an Unstable Economy. New York: McGraw-Hill. Mitchell, Brian R. 1988. British Historical Statistics. New York: Cambridge University Press. Miyazaki, Tomomi, and Kazuki Onji. 2017. “The Sustainability of Japan’s Government Debt: A Review.” Theoretical Economics Letters 7: 1632–1645. https://doi. org/10.4236/tel.2017.76110. Moseley, Fred. 1991. The Falling Rate of Profit in the Postwar United States Economy. New York: St. Martin’s Press. Mukherjee, Aditya. 2010. “Empire: How Colonial India Made Modern Britain.” Economic and Political Weekly XLV(50) (December 11): 73–82. NBS. National Bureau of Statistics, People’s Republic of China. 1985. China Statistical Yearbook 1985. Beijing: China Statistics Press. ———. 1989. China Statistical Yearbook 1989. Beijing: China Statistics Press.

Bibliography  149 ———. 1990. China Statistical Yearbook 1990. Beijing: China Statistics Press. ———. 1992. China Statistical Yearbook 1992. Beijing: China Statistics Press. ———. 1993. China Statistical Yearbook 1993. Beijing: China Statistics Press. ———. 1994. China Statistical Yearbook 1994. Beijing: China Statistics Press. ———. 1997. China Statistical Yearbook 1994. Beijing: China Statistics Press. ———. 1999. China Statistical Yearbook 1999. Beijing: China Statistics Press. ———. 2000. China Statistical Yearbook 2000. Beijing: China Statistics Press. ———. 2001. China Statistical Yearbook 2001. Beijing: China Statistics Press. ———. 2002. China Statistical Yearbook 2002. Beijing: China Statistics Press. ———. 2003. China Statistical Yearbook 2003. Beijing: China Statistics Press. ———. 2005. China Statistical Yearbook 2005. Beijing: China Statistics Press. ———. 2008. China Statistical Yearbook 2008. Beijing: China Statistics Press. ———. 2017. China Statistical Yearbook 2017. Beijing: China Statistics Press. ———. 2018. China Statistical Yearbook 2018. Beijing: China Statistics Press. ———. 2019a. National Data. Annual Data. http://data.stats.gov.cn/english/ easyquery.htm?cn=C01. ———. 2019b. National Data. Regional Data, Annual Data by Province. http://data. stats.gov.cn/english/easyquery.htm?cn=E0103. ———. 2019c. “2018 Nian Guomin Jingji he Shehui Fazhan Tongji Gongbao (2018 National Economy and Social Development Statistical Communique),” February 28. www.stats.gov.cn/tjsj/zxfb/201902/t20190228_1651265.html. NSTC. National Science and Technology Committee, People’s Republic of China. 1995. China Statistical Yearbook on Science and Technology 1995. Beijing: China Statistics Press. OECD. Organisation for Economic Co-operation and Development. 2019. OECD. Stat. https://stats.oecd.org/. ONS. Office of National Statistics, United Kingdom. 2019a. UK National Accounts, The Blue Book: 2019. Supplementary Tables. www.ons.gov.uk/economy/gross domesticproductgdp/compendium/unitedkingdomnationalaccountsthebluebook/ 2019/supplementarytables. ———. 2019b. “Consumer Price Inflation Time Series.” Inflation and Price Indices. www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceindices. ———. 2019c. UK Balance of Payments, The Pink Book Time Series Dataset. www. ons.gov.uk/economy/nationalaccounts/balanceofpayments/datasets/pinkbook. ———. 2019d. “Employment by Industry.” Employment and Labour Market, Employment and Employee Types, www.ons.gov.uk/employmentandlabourmarket/ peopleinwork/employmentandemployeetypes. Peters, Glen P., Robbie M. Andrew, Susan Solomon, and Pierre Friedlingstein. 2015. “Measuring a Fair and Ambitious Climate Agreement Using Cumulative Emissions.” Environmental Research Letters 10(10): 105004–105012. doi:10.1088/1748-9326/10/10/105004. Pham, Peter. 2017. “When Will Japan’s Debt Crisis Implode.” Forbes, December 11. www.forbes.com/sites/peterpham/2017/12/11/when-will-japans-debt-crisisimplode/#62f069bb4c6d. Piketty, Thomas. 2014. Capital in the Twenty-First Century. Cambridge, MA; London: The Belknap Press of Harvard University Press.

150  Bibliography Piketty, Thomas, and Gabriel Zucman. 2014. Piketty-Zucman Wealth-Income Data Set. United Kingdom, 1700–2010. http://gabriel-zucman.eu/files/capitalisback/UK.xlsx. Qi, Zhongfeng. 2006. “Zhuanxingqi Xunzu Guimo de Jingji Gusuan (An Economic Estimate of the Size of Rent-Seeking During the [Market] Transition).” Shangye Shidai (Commercial Times) 21: 46–47. Rawski, Thomas G. 1989. Economic Growth in Prewar China. Berkeley: University of California Press. Riskin, Carl. 1975. “Surplus and Stagnation in Modern China,” in Dwight H. Perkins (ed.), China’s Modern Economy in Historical Perspective, pp. 49–84. Stanford: Stanford University Press. Roach, Stephen. 2004. “How Global Labor Arbitrage Will Shape the World Economy.” Global Agenda Magazine of the World Economic Forum Annual Meeting, January. http://ecocritique.free.fr/roachglo.pdf. SBJ. Statistics Bureau of Japan. 2012. Historical Statistics of Japan, Chapter  3 (National Accounts). www.stat.go.jp/english/data/chouki/03.html. ———. 2019. Japan Statistical Yearbook 2019. Tokyo: Statistics Bureau, Ministry of Internal Affairs and Communications. www.stat.go.jp/english/data/ nenkan/68nenkan/index.html. Shaikh, Anwar, and E. Ahmet Tonak. 1994. Measuring the Wealth of Nations: The Political Economy of National Accounts. Cambridge, UK; New York: Cambridge University Press. Shen, Xuefeng. 2002. “Qingdai Caizheng Shouru Guimo yu Jiegou Bianhua Shulun (A Review and Discussion of the Scale and Structural Change of the Qing Dynasty Fiscal Revenue).” Beijing Shehui Kexue (Beijing Social Sciences) (1): 75–90. Silver, Beverly J., and Eric Slater. 1999. “The Social Origins of World Hegemonies,” in Giovanni Arrighi and Beverly J. Silver (eds.), Chaos and Governance in the Modern World System, pp. 151–216. Minneapolis; London: University of Minnesota Press. Stavrianos, Leften S. 1981. Global Rift: The Third World Comes of Age. New York: William Morrow and Company, Inc. Taagepera, Rein. 1997. “Expansion and Contraction Patterns of Large Polities: Context for Russia.” International Studies Quarterly 41(3): 492–502. United Nations. 2019. World Population Prospects 2019. The United Nations Population Division. https://population.un.org/wpp/. Wallerstein, Immanuel. 1979. The Capitalist World Economy: Essays by Immanuel Wallerstein. Cambridge: Cambridge University Press. ———. 2000. “Peace, Stability, and Legitimacy: 1990–2025/2050,” in Immanuel Wallerstein (ed.), Essential Wallerstein, pp. 435–453. New York: The New Press. ———. 2003. “Globalization: A  Long-Term Trajectory of the World-System,” in Immanuel Wallerstein (ed.), The Decline of American Power, pp.  45–68. New York; London: The New Press. ———. 2007. World-Systems Analysis: An Introduction. Durham, NC: Duke University Press.

Bibliography  151 Wolf, Martin. 2018. “China’s Debt Threat: Time to Rein in the Lending Boom.” Financial Times, July 25. World Bank. 2013. China 2030: Building a Modern, Harmonious, and Creative Society. The World Bank and the Development Research Center of the State Council, People’s Republic of China. http://documents.worldbank.org/curated/ en/781101468239669951/pdf/762990PUB0china0Box374372B00PUBLIC0. pdf. ———. 2019. World Development Indicators. https://databank.worldbank.org/data/ source/world-development-indicators. Wright, Erik Olin. 1997. Class Counts: Comparative Studies on Class Analysis. Cambridge: Cambridge University Press. Zhang, Jun, Wu Guiying, and Zhang Jipeng. 2004. Zhongguo Shengji Wuzhi Ziben Cunliang Gusuan, 1952–2000 (Estimating China’s Provincial Stock of Physical Capital, 1952–2000). Jingji Yanjiu (Economic Research) (10): 35–44. Zhang, Jun, and Zhang Yuan. 2003. Dui Zhongguo Ziben Cunliang K de Zai Guji (A re-appraisal of China’s capital stock – K). Jingji Yanjiu (Economic Research) (7): 35–43. Zhang, Lianhong. 1997. “Lun Nanjing Guomin Zhengfu zai Xiandaihua Jincheng Zhong de Juese, yi Caizheng wei Zhongxin (On the Role of the Nanjing National Government in the Process of Modernization, with a Focus on Public Finance).” Jiang Hai Xuekan (Jiang Hai Academic Journal) (4): 140–145. Zhang, Yuzhi, and Zhongfu Jiang. 2010. “The Domestic Governance Countermeasure in Order to Enhance Soft Power of China Communist Party.” International Journal of Business and Management 5(7): 170–174.

Index

Note: Numbers in bold indicate a table. Numbers in italics indicate a figure. Africa 24, 26, 33 America see United States Apple iPhone 107 – 108 arbitrage, global labor (China) 90 – 102, 113; and Japan, trade with 102 – 107; see also Apple iPhone Arrighi, Giovanni 23 Asia 26, 33, 59; and Britain 73; East 60 – 61, 76; and the United States 50, 58 Britain: capitalism 19, 21, 25, 30, 32 – 36; Conservative Party 31; economic growth rate 11 – 12, 12; economy, struggles of 87; financial expansion 23 – 25; gross domestic capital formation 20; gross domestic product 21, 25, 36; hegemony 20 – 23, 26 – 30; labor income 36 – 37; Labour Party 26, 31; material expansion 23 – 25; national income, 1855 – 2018 36 – 37; Thatcherism 30 – 35; see also Industrial Revolution; United Kingdom Capital (Marx) 1, 3 – 4, 109 capital consumption 113 – 118 capitalism: definition of 1; European 26; industrial 26; “New Deal” 45 – 48; “second fundamental law of” 18; secular trends 15 – 16; “small government” 42; socialism to 75 – 77; see also Marx, Karl; Wallerstein, Immanuel

capitalist accumulation 1 – 3, 8, 13 – 16, 19, 54; in Britain 29, 31 – 32, 34, 35; in China 71, 74, 82, 84; contradictions of 89; foundations of 109; in Japan 57 – 58, 62, 64 – 68; in the United States 38 capitalists, taxes on 25, 25, 30, 40, 42 – 43, 46, 47; in China 84 – 85, 85, 142 – 143; in Japan 62 – 63, 65, 67, 138; in the United Kingdom 131 – 132; in the United States 135 – 137; see also taxation costs China: accumulation, state-sector 87; business net fixed investment 11, 123; capital output ratio 5, 6; capitalism and capitalists in 75 – 77; class structure 77 – 82, 78, 81; early modern 72 – 75; economic crisis 82 – 87; economic growth rate 12, 122; global economic growth, contribution to 72; and global trade 90; gross domestic product (GDP) 58, 59, 84, 85, 113 – 118, 114, 115, 117, 121; gross world product, share of 2; Japan, trade with 102 – 107; labor income 85, labor income 113 – 118, 114; labor productivity 120 – 121, 121; manufacturing 97, 98; profit rate 109 – 111, 110, 126 – 127, 126, 140 – 144; profit share 111 – 113, 112; rise of 3; social financing, total 87 – 89; socialism 75 – 77; and the United Kingdom, trade with 98 – 102; and United States, trade with 90 – 98; urban proletariat 81, 82 – 83; “urban

Index  153 units” 78, 79, 80, 82, 83, 141; wages 83, 106 – 107 Chinese Revolution 61, 75 climate stabilization and limits to growth 127 Cultural Revolution 76 Deng Xiaoping 76 East India Company 20, 73 emissions: carbon dioxide 128 – 129; greenhouse gas 13 European Union 71, 72 First World War see World War I fossil fuels 13 Germany 24, 26 global emissions see emissions Great Depression 5, 7, 29, 40, 50, 86, 111, 125; and the “New Deal” 112; and small government capitalism 41 – 45 Great Recession 52 – 56 Great War see World War I Greece 68 – 69 gross domestic product (GDP) 5, 6, 10, 12, 17; see also [individual countries by name] growth theory 8; neoclassical 118 – 119 Hong Kong 77, 79, 91, 92 imperialism: British 61; expansion (Japanese) 58, 60; rivalry 24, 26 income: capitalist property 3, 16; personal factor 136 – 137; property 21 – 22; proprietors’ 17; see also [individual countries by name] inequality 76; economic 54; income 18; social 50; wealth 10 India 71 – 73, 72; exports 20; imports 21; national independence 30; wages 90 Industrial Revolution 20, 22; Second 38 Intergovernmental Panel on Climate Change’s Fifth Assessment Report 128 Japan 68, 57; business capital-GDP ratio 125; business net fixed investment 11, 123; capitalism before 1945 58 – 61; capital

output ratio 5 – 7, 6; child labor 59; China, trade with 102 – 107, 103 – 105; debt 68 – 70; economic growth rate 12, 12, 122 – 123, 122; economic miracle 61 – 64, 111; economy, struggles of 87, 89; government debt 68 – 70; gross domestic product (GDP) 58, 59, 63, 65, 67, 106, 113 – 118, 114, 115, 117, 121; gross fixed investment, business sector 124; gross world product 2; imperialist expansion 58, 60; labor income 90, 113 – 118, 114; labor force growth 13; labor productivity 120 – 121, 121; manufacturing 97, 98, 106; military occupation of 58; net fixed investment 10; profit and accumulation 62, 63, 66; profit rate 64 – 68, 109 – 111, 110, 126 – 127, 126, 138 – 140; profit share 111 – 113, 112; ruling class 58; WWII 73; taxation costs 57 – 58; tax revenue 59, 69 – 70; and the United States 45, 48, 58, 64 Keynes, John Maynard 14, 31, 42, 49, 89 Kondratieff, Nikolai 15 Korean War 61 labor income 113 – 118, 114; see also [individual countries by name] Liu Shaoqi 76 Liu, Ta-Chung 74 Long Depression 23 Macau 79, 91, 92 macroeconomics 33, 45, 89 Mao Zedong 73 – 74, 76 Marx, Karl 1, 14; “organic composition of capital” 10, 18, 109, 116; on tendency for the rate of profit to fall 3 – 5, 127 Marxian, Marxist 8, 15, 89; economics 13; political parties 26 Meiji Restoration 59 Minsky, Hyman 42 Mitchell 130 – 133

154 Index National Labor Relations Act of 1935 45 neoliberal, neoliberalism: era 10, 53, 89, 90, 107, 111 – 113, 126; in Britain 37; restructuring 29; rise of 48 – 52 Opium Wars 73 Pearl Harbor 61 Peters, Glen P. 128 Philippines 61 Piketty, Thomas 18 profit rate: and crisis 13 – 15; definition of 16; measuring 16 – 17 Qing Dynasty 72 – 74, 75 Riskin, Carl 74 Roach, Stephen 90, 107 Russian Revolution 26 Russo-Japanese War 60 Second World War see World War II shale oil 55 – 56 Sino-Japanese War 60 socialism see China South Korea 61 Taiwan 61, 77, 79, 91, 92 taxation costs 2, 15 – 16, 113 – 118; definition of 115; “material expansion” phase 23; see also [individual countries by name] tax cuts 50, 85 taxes 139; business 138; East India Company, imposed by 20; income 17, 39, 52, 87, 131, 133, 135 – 137, 142; Wallerstein on 18, 109 tax revenue 16 Thatcher, Margaret 33 Tukugawa Shogun 58 – 59 United Kingdom: accumulation, rate of 27; business capital-GDP ratio 125; business net fixed investment 11, 123;

capital output ratio 5, 6; China, import of goods from 99, 99; economic growth rate 12, 122; global economic growth, contribution to 71; gross domestic product (GDP) 27, 30, 31, 58, 59, 113 – 118, 114, 115, 117, 120, 130 – 134; gross fixed investment, business sector 124; gross world product 2; labor income 26 – 27, 30, 31, 90, 113 – 118, 114; manufacturing 97, 98; profit rate 27, 109 – 111, 110, 126 – 127, 126, 130 – 134; profit share 111 – 113, 112; taxation costs 32, 36; taxes on corporate incomes 133 United Nations 121 United States: business capitalGDP ratio 125; business net fixed investment 11, 123; capitalism 38 – 42, 45 – 48, 54; capital output ratio 5, 6; economic growth rate 11 – 12, 12, 122; economy, struggles of 87; gross domestic product (GDP) 39 – 42, 46 – 47, 47, 58, 59, 113 – 118, 114, 115, 117, 120; gross fixed investment, business sector 124; gross world product 2, 38; and Japan 45, 48; labor income 47, 90, 113 – 118, 114; manufacturing 97, 98; “New Deal” 45 – 48; profit rate 109 – 111, 110, 126 – 127, 126, 134 – 137; profit share 111 – 113, 112; taxation costs 39; tax reductions 54; see also Great Recession Vietnam War 64 Wallerstein, Immanuel 2 – 3, 15, 18, 36, 109 World War I 25 – 26, 29, 33, 36 – 37, 40, 42, 110 World War II 5, 30, 33, 45, 47, 52, 58, 64 Yeh, Kung-Chia 74