U.S.A: "the declining basic rale of profit in mamulacturing since 1969 8E It has been widely noted that by most usual measures the U.S. economy has experienced a rather sharp decline in the rate of profit since the mid1960s. This decline in what we shall call the "observed rate of profit" has often been immediately associated with an increase in the share of wages relative to profits in national or corporate income. Graphs 1 and II offer a rather typical picture for the period between 1964 and 1973(1) The juxtaposition of these two curves can serve to support two more-or-less opposed sets of conclusions, each of which has an evident apologetic ideological function. One may note that most of these years knew exceptionally high rates of growth in output and investment, and during many of them unemployment rates were exceptionally low by historical standards. Then, the conclusion easily follows that for some reason or other there has been a decline in "liquidity preference" - that an increasingly lower rate of return is needed to encourage capitalists to place a given amount of their accumulated wealth at the disposal of the economy instead of keeping it, as money, in a sock or checking account - so that signals the end The technological revolution» by ROBERT LANGSTON they are increasingly prepared to supply the capital necessary to maintain a high growth, high wage, high employment economy that constantly reduces their own share of national income while constantly increasing the workers' share. From which, in turn, it easily follows that all that is needed to preserve American capitalism as a great prosperity machine for the broad masses is national economic "fine tuning" to keep aggregate demand at a sufficiently high, but noninflationary, level. Or, one may stress some troublesome features of this period, particularly the extraordinary price inflation that market its later years and the unusually severe pressure on capacity in some important industries that was felt toward the end of it. Then one may readily conclude that the short-sighted arrogance and greed of American workers, given muscle by the inordinate power of the unions, has caused both a nearly uncontrollable inflation (as firms desperately attempt to defend the profit margins they need to sustain an acceptable level of growth in the face of exorbitant wage demands and bad work habits) and an acute capital shortage (as they fail in this
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ganic composition begins some two years before the ter 1970 responsible, for the sharp upturn in the orgeneralized price increases of primary products afsince that didn't happen until 1974. Nor were the the world price of crude oil is not at all responsible, carte I's success in imposing a fourfold increase in what does not account for it. Obviously, the OPEC sition of capital? First of all, it is well to note What accounts for this climb in the organic compoitous decline in the basic rate of profit. have accelerated. But added to them is this precipsame time staved off a massive realization crisis ue and of the unproductive sectors - but at the pansion of the share of state revenues in surplus valfor the decline in the observed rate of profit - exvery processes that in the previous period accounted exploitation after 1969 or 1970. Since 1968, the than offsets the rather rapid increase in the rate of ganic composition of capital, a rise that far more diate cause of this decay is an explosion in the orof profitability in the productive sector. The immeWe find a rapid decay in the basic conditions After 1968, the situation changes fundamentally.
process. (2)
fies to the general effectiveness of the off-setting 1966 and 1967 did not precipitate a recession testitime, the fact that the very sharp drop between reolization problem during those years. At the same 1970) bears witness to the increasing severity of the
1969 and, of course, into the recession year of the declining trend of Graph VI between 1964 and hence a longer turnover time of circulating capital, time between purchase and sale of commodities and tion difficulties mean a longer average length of culating capital in one year. Since growing realizamultiplied by the number of turnover periods of cirfion. In other words, it is the basic rate of profit of the capital immediately involved in its producof surplus value produced in one year to the value nual basis (Graph VI). This rate is simply the mass the vicissitudes of the basic rate of profit on an anrate of profit between 1964 and 1969 is offered by 3 ricultins in face of a relatively stable basic Clear evidence of the growing realization difduction would simply cease.) alization crisis of such mognitude that social reprothe economy would undoubtedly experience a retheir absence, but with all other things being equal, cline in the observed rate of profit. (Indeed, in the realization difficulties and thus inhibit the deduced surplus value effect a partial resolution of same time, both of these growing charges on prosurplus value available for private purposes. At the sion of state revenues, which reduces the mass of value must be distributed - and to the rapid expanof capital over which a given volume of surplus
34 sector of the economy - which increases the mass both the rapid expansion of the unproductive trade realization difficulties and on the other hand to of profit is due almost entirely on the one hand to
During this period the decline in the observed rate in the rate of exploitation. (See Graphs IV and V.) of capital were compensated for by modest increases little. Modest increases in the organic composition immediately involved in its production - changed culating capital to the total value of the capital value produced during one furnover period of cirprofit" - defined as the ratio of the mass of surplus tion. Until 1969, what we call the "basic rate of political levels, tending to ameliorate this condiat both the spontaneous economic and the conscious teristic of late capitalism and to capital's reactions, due to the condition of chronic overcapacity characcline in the observed rate of profit was essentially facturing sector) remained quite stable, and the demajor productive sector of the economy (the manu-
1969, the basic conditions of profitability in the observed rate of profit. Specifically, until about 2a distinguished are at work in the decline of the
Quite distinct processes that must be clearly expand productive employment.
a consequence of the inability of the econemy to productive workers. To a large extent, this rise was most exclusively of the rise in the proportion of unment in the social position of the workers, but alrelative to wages was not the result of any improve1969. (See Graph III.) The falling share of profits decade, and this upward trend was sharpest after facturing industry was upward throughout the whole The trend in the rate of exploitation in U.S. manuital shortage appeared. More precisely expressed: years when the severe inflation and purported captageous after 1969, that is, precisely during the class during this period, and it was most disadvan1. was in fact disedvantageous to the working The immediate economic relationship of forces I. data was hand led.
In the second part, we will outline the way the which can help refute such ideological constructions.
analysis and some interpretations suggested by it, thesis form, the preliminary results of a statistical In the first part of this article we shall present, in
Americans" in the future than in the post.
chine can function even more gloriously "for all back in favor of profits, the great prosperity macan be restrained and income distribution tilted and only if - the greed of the organized workers attempt). From which it easily follows that if -
USA
price level of raw materials begins to rise more rapidly than that of intermediate materials, which are themselves, for the most part, the products of U.S. manufacturing industry. (The wholesale price index of raw materials rose about 6% between 1969 and 1971, while the price index for intermediate materials, parts, and components rose by 7.6% during the same period.) The explanation must rather be sought in long-run, structural changes in the technical conditions of U.S. manufacturing itself. The most likely one runs along the following lines: For the two decades or so following the second world war investment in the third technological revolution - in the sense both of the commitment of surplus value to research and development of fundamentally new production processes and of the accumulation of capital in the hardware that embodies the results of this R & D -had a generally stabilizing effect on the development of the organic composition of capital. Certainly, the very pronounced displacement of living labor by dead labor, of humans by machines, tendentially reduced the mass of variable capital relative to constant. Certainly, the growing magnitude of investment in instruments of production, combined with the shortening of the economic life of those instruments of production (the shortening of the turnover time of fixed capital) tendentially increased the mass of constant capital relative to variable. But this investment also powerfully increased the productivity of labor, specifically in the manufacturing sectors producing intermediate materials. And these productivity increases effected a cheapening of the value of these materials relative to the value of the means of consumption sufficient to offset, in the total value of constant capital, the rising value of the fixed component. Beyond a certain point, however, the rate of investment in the technological revolution begins to de-. cline, because these investments require the commitment of enormous masses of surplus value and are intrinsically quite risky. Two conditions are necessary to justify a continuing expansion of them: a rapidly expanding market for their results and a structure of that market that can assure very large monopoly profits. The first condition was gradually undermined by the inevitable disparity between the rate of growth of the productive forces generated by the third technological revolution itself and the rate of growth of mass consuming power. (In this sense, the realization problem underlies even the rising organic composition of capital. An eternally self-sustaining investment boom, with the surplus value embodied in means of production being endlessly realized by the purchase of those means of production in order to produce more means of production irrespective of the state of demand for means of consumption is as impossible today as it was in the epoch of free competition or the period of "classical" imperialism.) The second condition was undermined by the progressive rise of serious competitors to U.S. capital in West Europe and Japan. But with the decline of investment in the technological revolution, accumulation in fixed capital progressively loses its efficacy in cheapening the material elements of circulating constant capital relative to variable capital. The net effect of rising fixed investment is no longer to stabilize the organic composition of capital but to increase it. Moreover, the process tends to be self-nourishing. The decline in the basic rate of profit occasioned by the rising organic composition of capital particularly discourages investment in qualitatively new technologies because of the magnitude of the capital and the risks involved. So once the point is reached beyond which fixed investment has the net effect of increasing the organic composition, the rate of increase in the organic composition tends to accelerate. The declining basic rate of profit in U.S. manufacturing since 1969 - caused by this explosion in the organic composition of capital - signals the end of the third technological revolution. 5. of profit in which a decline in the basic rate The consequences of a declining observed rate of profit is also at work can be expected to be quite different from those of a declining observed rate of profit caused primarily by the chronic tendency toward overproduction. We will consider one important part of this difference. In general, the range of choices confronting the strategists of capital is by no means limited to more (or less) liquidity versus less (or more) return through investment, as the concept of liquidity preference implies. On the contrary, capitalists lock for specific uses of the surplus value they appropriate that promise maximum profits over some time period or other. (In determining the distribution of the surplus value over these alternative uses, relative risk and liquidity requirements of course play a role.) Now a declining observed rate of profit has the effect of increasing the profitability of unproductive investment, precisely because such unproductive investments help to counteract the declining profit rate. Moreover, under conditions of monopoly capitalism, a tendential increase in demand for a certain commodity or of aggregate demand does not automatically lead to a commensurate increase in the output of the commodities for which the demand has risen and thus to market prices rather quickly tending to adjust to the relative values (or prices of production) of output. Rather, the monopolist will ordinarily expect that some mix of price increases above those corresponding to prices of pro-
35
ized in the trade sector is produced in the manufacturing sector. This is actually a rather crude approximation. In the first place, most commodities produced in the productive, agricultural sector enter into trade before they reach their final users, and the productive, transportation sector stands between the manufacturing and trade sectors and between the various establishments in the trade sector itself. Thus, a not insignificant portion of the surplus realized in trade is produced in agriculture and transportation, not manufacturing. Second, the trade sector is not altogether unproductive; particularly, some transportation of commodities takes place within it, and some part of the labor involved in packaging and warehousing must be accounted productive. Finally, some portion of the surplus value produced in manufacturing is undoubtedly realized in nonproductive, service sectors. But the contributions of agriculture and transportafion to national product are relatively small compared to manufacturing, and their relative shares have not changed much over the years we are considering. And while we do not have the data necessary to analyze the various "profit" elements of the very mixed service sector into its various components - surplus value realized in commercial activities carried on in the service sector, surplus value produced there, revenues of professionals - there is no reason to suppose that the proportion of these components has changed a great deal over the decade in question. So this simplification probably does not distort the year to year changes too much. The second step is to regroup the data on various revenues, wages and salaries, profits and so forth - according to their sources in the relations of production - variable capital and surplus value. We procede according to the following criteria: 1. From the standpoint of production relations, all tax payments represent surplus value components. The state is not some "factor of production" standing alongside capital and labor (or capitalists and workers) with a reproduction cost that must be covered. It stands outside the production relations -although it is essential to their reproduction - and can thus be sustained only out of surplus product. So, we estimate the share of income and social security taxes in the "wages and salaries" of workers in the trade and manufacturing sectors and assign it to surplus value. Likewise, we assign corporate income taxes and "indirect business taxes" (mainly sales and social insurance taxes) paid in these sectors to surplus value. And, of course, we allocate profits realized in and net interest paid by these sectors to surplus value produced in manufacturing.
2. The portion of "compensation of employees" constituted by payments to private pension and health and unemployment insurance funds we assign to surplus value. The workers do not receive it as current income; they receive merely a conditional claim on some fragment of the surplus value to be received in the future. 3. The incomes of the decision-makers, managers, and executives in the trade and manufacturing sectors we assign to surplus value. We identify the sum of these incomes with the difference between "wages and salaries" in the national income accounts and payments to those carried as "payroll or nonsupervisory" employees in Bureau of Labor Statistics data. The incomes of those in the manufacturing sector carried as "production workers" we regard as revenues of productive workers and assign to exchanges of labor power with variable capital. We are then left with the difference between wage payments to production workers and wage payments to payroll workers in manufacturing. Here, we arbitrarily, but not implausibly, assign half these payments to exchanges of labor power with variable capital and half to exchanges with constant capital. The former corresponds above all to that growing army of engineers and technicians who, while they have little immediate contact with the physical process of production are technically necessary to its maintenance. The latter answers to the unproductive workers, whose increasing number reflects the penetration of the "sales effort" into the manufacturing sector itself. The final step in the analysis is to estimate the magnitude of the various stock concepts we need from the money flows for which data is available. We begin from one stock for which we have data -manufacturers' inventories. The average value of these inventories in the course of a year approximates the average value of the capital that manufacturing firms must keep "tied up" in the materials on which the productive workers, using means of production, work. It is, in other words, the value of the material portion of the constant, circulating capital. Next, we determine the turnover time of this circulating capital. To do this, we estimate annual expenditures of manufacturers on materials by subtracting the gross product of the manufacturing sector from its total annual sales. But annual expenditures on materials divided by the average value of inventories gives us an estimate of the average length of time, as a fraction of a year, from the purchase of those materials to the realization by sale of their value and the value added to them. But this is precisely the turnover time of the material component of the circulating constant capital.
37
USA duction with an extension of output (and hence of productive investment) will maximize his profits over some time period. But under conditions of a declining basic rate of profit, that mix will shift in favor of price increases and to the detriment of the expansion of output and thus of productive investment. For the basic rate of profit measures precisely the efficacy of a unit of surplus value, when accumulated as productive capital, in producing new surplus value. In other words, under conditions of a declining basic rate of profit, a bigger portion of every successive dollar added to effective demand is translated into price increases and unproductive investment, and a smaller portion into increases in output, employment, and productive investment. This in turn tendentially worsens the realization difficulties and encourages the shift from productive to unproductive investment. Graph VI bears witness to U.S. capital's very thorough triumph over its realization problems during the boom following the recession of 1970. In the face of the quickly falling basic rate of profit, that rate on an annual basis went through a sustained increase unlike anything in the boom years of the 1960s. Yet, after the initial spurt between 1970 and 1971, the observed rate resumed its downward course - sure testimony to the increased shift from productive to unproductive investment. At the same time, despite the temporary disappearance of the realization problem, before the onset of the current recession capacity ufilization overall (in the face of serious shortages in some industries) remained lower than in any previous post-second-world-war cyclical upswing, and unemployment rates did not even begin to fall as low as the levels of the late 1960s. Nevertheless, the country experienced a price inflation unlike any seen since the war. Since monopolists were assured of government Fiscal and monetary policies that would permit them to do so, it had become proportionally more profitable for them to raise the prices than to expand output and employment. This began to build inflationary expectations into the economy, which, combined with rising masses of surplus value that could no longer be productively accumulated, conferred the strong speculative aspect on the boom. In particular, the capacity shortages in some materials-producing industries were almost surely the result of stockpiling of those materials by users far in excess of any anticipated needs for production. There was no shortage of capital, but rather a growing disproportion in the distribution of capital, to a considerable extent due to the decline in the basic rate of profit. 36
Deraising the rate of exploitation. The reserve The recession of 1970 succeeded admirably in army of the unemployed was essentially reconstituted, thanks to the domination of the trade-union movement by a leadership that neither know how nor was much inclined to struggle against unemployment. That recession did not touch the rising organic composition of capital. The present, much more severe recession, will probably only very slightly dampen it. For even a temporary respite would probably require such a massive devaluation of capital - through a wave of business collapses - that even the strongest monopolists would be hurt seriously for a long time, and it would be associated with a level of unemployment that would provoke a disastrous social disorganization if not necessarily a victorious socialist revolution. The bourgeois state can and will act to prevent that, but by so acting it will undermine one important hygienic function of depressions, namely the reduction of the organic composition of capital. The declining efficacy of the now-traditional fiscal and monetary methods of dealing with slump conditions will become increasingly evident. More inflafion and less expansion per dollar, especially in a world of floating exchange rates in which the "export" of domestic inflation is no longer as easy as it was in the days before 1971 when the prosperity of the entire capitalist world depended on the U.S. balance of payments deficits, will lead the ruling class to seck more fundamental solutions. Given the virtual impossibility of a significant, even shortrun reduction in the organic composition of capital, these solutions will be along the lines of measures to effect a really massive increase in the rate of exploitation. The prospect is for a very concentrated attack on the living standards of the American workers and on the trade unions in the not very distant future. Much will depend on the development of a leadership that can defeat that attack and take the counteroffensive on a program of transitional demands that can end the domination of capital once and for all. II. The derivation of the quantities shown in graphs 3-6 begins with the distinction between the productive and unproductive sectors of the economy. We leave aside the catch-all classification "nonfinancial corporation" and direct our attention to the sector in which the production of surplus value is concentrated: manufacturing. But a very substantial portion of the surplus value produced in manufacturing is realized not there but in the trade sector. As a useful simplification, we assume that all the surplus value real-
USA We then relate all the other rates to this turnover time. We define the magnitude of the fixed component of constant capital as annual depreciation multiplied by the turnover time of circulating capital; the magnitude of variable capital is defined as the wages of productive workers (minus the surplus-value components contained in them), taking account of the turnover time. We then calculate the organic composition of capital as the ratio of constant to variable capital and the rate of exploitation as the ratio of surplus-value produced (estimated by the surplus value realized in the manufacturing and trade sectors together) in one turnover period of circulating constant capital to variable capital. The basic rate of profit we then calculate by the usual formula: the rate of exploitation divided by the quantity one plus the organic composition of capital; the basic rate of profit on an annual basis is just the basic rate divided by the turnover time of circulating capital. FOOTNOTES: 1. Graph 1 plots the ratio of after-tax profits to an estimate of total fixed investment in U.S. nonfinancial corporations. Graph Il shows the ratio of aftertax profit to compensation of employees of these same corporations. "Compensation of employees" in U.S. national income accounts refers to wage and salary payments to everyone from the president of the company down to the cleaning woman who graph I 110100
90
1964 66 68 70 72
Rate of Exploitation 38 sweeps his office, together with firms' contributions to private health and unemployment insurance funds and private pension plans. All graphs are drawn on an index number basis with 1964 equal to 100; that is, they show each year's value as a percentage of the 1964 value. All data used to derive the estimates presented in the graphs are drawn from U.S. gavernment sources, particularly the national income tobles that appear in each year's July issue of the Survey of Current Business (Bureau of Economic Analysis, U.S. Department of Commerce, Washington, D.C.). William Nordhaus has offered an important statistical analysis of the observed rate of profit and relative shares in "The Falling Share of Profits, " Brookings Papers on Economic Activity, No.1, 1974 (The Brookings Institution, Washington, D.C.). Unfortunately, Professor Nordhaus is innocent of any notions like "organic composition of capital, " "rate of exploitation, "and the distinction between the sphere of production and the sphere of circulation. His explanation of the decline in the observed rate of profit is of the liquidity preference type mentioned below. 2. The specific measure that prevented a realization crisis was certainly the 1968 budget decision of the Johnson administration to run a very large deficit to finance the Vietnam war. At the same time, an income tax surcharge was imposed, which in our graphs is reflected in the fact that statistically it is an increase in the share of taxes in productive workers' wages that accounts for the rise in the rate of exploitation between 1967 and 1968.
graph IV 130120_ 110 -100
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Organic Composition of Capital
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Observed rate of profit graph V
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Basic Rate of Profit
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"Relative shares"
graph VI
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Basic Rate of Profit on Annual Basis
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THE