Capitalist Economists Debate ‘Secular Stagnation’ (Pt 5)

Rudi Dornbusch predicts unending capitalist expansion

“The U.S. economy likely will not see a recession for years to come,” economist Rudi Dornbusch (1942-2001) wrote in 1998. “We don’t want one, we don’t need one, and, as we have the tools to keep the current expansion going, we won’t have one. This expansion will run forever.”

In the late 1990s, the Internet was making rapid progress. Fueled by various technologies including the digital computer, the transistor and electronic circuit board—the “computer on a chip”—and the GNU/Linux computer operating system, world communications were, and are, being revolutionized. And this technological revolution was no illusion.

For the first time, home computer users could connect to the Internet, which now featured its own graphical user interface called the World Wide Web. No longer was the Internet confined to text but would soon include audio and video files. With such a great technological revolution under way, many capitalist economists—and this was echoed by some Marxists as well—foresaw an era of never-ending capitalist expansion. The Clinton boom of the late 1990s was to be just the beginning.

During the Clinton administration, stocks soared on Wall Street while the rise in the NASDAQ stock index—which lists “high-tech” stocks—seemed to know no limit. Goldman-Sachs economist and financial analyst Abby Joseph Cohen’s (1952- ) predictions of continuing soaring stock market prices drew skepticism from many seasoned stock market veterans, yet she continued to be proved right. Until March 2000, that is. Then things began to go horribly wrong as the NASDAQ index sagged and then crashed.

“Her reputation was further damaged when she failed to foresee the great crash of 2008,” Wikipedia writes. “In December 2007, she predicted the S&P 500 index would rally to 1,675 in 2008. The S&P 500 traded as low as 741 by November 2008, 56% below her prediction. On March 8, 2008, Goldman Sachs announced that Abby Joseph Cohen was being replaced by David Kostin as the bank’s chief forecaster for the U.S. stock market.” Although Internet technology continued to make great strides and stock markets both crashed and soared, the world capitalist economy entered into a period of slow growth—interrupted by the the turn-of-the-century recession that included the NASDAQ crash that Cohen missed and then the much deeper “Great Recession.”

Indeed, the world economy has, since Dornbusch made his prediction of unending capitalist prosperity, seen the worst growth figures since the 1930s Depression. The situation has gotten so bad that some capitalist economists have revived the term “secular stagnation,” last widely used among economists in the late 1930s. What did Cohen and Dornbusch and so many others miss?

They were right about the technological revolution. They left out only one little thing: the contradictions of the capitalist mode of production. But perhaps we shouldn’t be too hard on them. Though both Dornbusch and Cohen were/are highly trained economists, they didn’t learn about the contradictions of capitalism in their university studies. It wasn’t part of their course work. For that, they would have had to turn to the work of Karl Marx, and that they apparently neglected to do.

Innovation defined

In this final post in this series, I will use Joseph Schumpeter’s definition of “innovation.” According to him, innovation involves not only the invention of new types of use values but their commercialization, or in Marxist terms their production as commodities by industrial capitalists. The material growth of production—the foundation of human progress according to historical materialism—involves not only the expansion of the production of existing use values but the development of new use values, as well as the production of these use values with smaller quantities of human labor.

Under the capitalist mode of production, the rise of industries producing commodities with new use values requires massive investments by industrial capitalists. The level of investment necessary for large-scale innovation cannot be sustained unless these investments yield at least the average—and in new industries a much greater than average—rate of profit if they are to be sustained. And profitability, as we have seen throughout this blog, requires not only the possibility of producing surplus value. It also—and this is all too often forgotten by many Marxists today—requires the realization of surplus value in terms of money material.

As regular readers of this blog know, once capitalism has developed to a certain point the ability of the industrial capitalists to increase production exceeds the ability of the market to grow. As a result, the ability of the industrial and commercial capitalists to make profits at periodic intervals temporarily collapses—not because they can’t produce surplus value but because they cannot realize it. These temporary collapses in the rate and mass of profit should not be confused with a permanent fall in the rate of profit caused by the rise of the organic composition of capital—Marx’s famous tendency of the rate of profit to decline.

If the industrial capitalists did not have the ability to expand production faster than the market can grow, the problems of producing surplus value would come to the fore. In the absence of periodic crises of overproduction and the the post-crisis periods of stagnation that these crises breed, the growth in demand for the commodity labor power would be much stronger than it is. The rate of surplus value would inevitably decline as competition would more and more favor the sellers of labor power over the buyers. The capitalists would respond by introducing new machinery at a far faster rate than they do in the presence of periodic crises of overproduction. Consequently, the organic composition of capital would rise much faster in the absence of the periodic crises, and the rate of profit would fall far faster than it actually does.

Did the death of a Wall Street banker cause the Great Depression?

In contrast with the analysis of crises that I have developed throughout this blog, based on the work of Marx, most bourgeois economists assume that under capitalism limits of production determine the limits of the market. Economic crises in this view are caused by accidents that in principle could be avoided. Milton Friedman wrote volumes and ultimately won a Nobel Prize in economics for “demonstrating” that the Great Depression was caused by the incorrect policies of the Federal Reserve System.

The Nobel Prize laureate then further reduced the cause of the Depression to a single accidental event—the death of the veteran Wall Street banker and Federal Reserve Bank of New York head Benjamin Strong (1872-1928). According to Friedman, Strong would have used his influence within the Federal Reserve System to avoid the mistake his successors made allowing the “money supply” to shrink by one-third. In Friedman’s view, this mistake was the cause of the Great Depression.

Keynesian economists concede that while the general overproduction of commodities is possible—though they generally avoid that nasty term “overproduction”—it is really only a technical problem that can easily be solved by correct monetary and fiscal policies.

In order to explain the prolonged slowdown in economic growth that has occurred since the end of the 1960s, bourgeois economists look for explanations external to the capitalist system. For example, slowing population growth is blamed for slower economic growth, much like it was in the 1930s.

Or economists shift the blame onto the shoulders of science and technology for creating insufficient inventions or the wrong kind of inventions. Examples of the latter are innovations that “save” capital, thus preventing the massive investments necessary for rapid economic growth. An example of the wrong type of innovation would be the GNU/Linux operating system, which can be downloaded free from the Internet, while GNU/Linux powers much of the same Internet. It doesn’t take much capital investment to download GNU/Linux.

The laws of capitalist competition

Capitalism is marked by many forms of competition. For example, there is competition between buyers and sellers, as well as between the sellers and between the buyers. The most important form of competition under the capitalist system is that between the two main classes of capitalist society, the buyers—capitalists—and sellers—workers—of labor power. At its most basic, the trade union movement is an attempt to reduce the competition between the sellers of the commodity labor power in order to improve their position relative to the buyers of that commodity.

There is also competition between the capitalist sellers of the same type of commodity and between producers of different commodities. For example, the producers of houses, automobiles and computers are all chasing the “consumer’s dollar.” If a family buys a house, they might have to hold on to their automobile for another year or more in order to meet their mortgage obligations. However, if they postpone buying a house, they will be able to buy a new automobile this year. Only the very rich are exempt from these kinds of choices.

The intensity of the competition between the buyers of a commodity with a given use value varies inversely with the quantity of the commodity (1). If the supply of the commodity in question expands relative to demand, the competition between the buyers declines. But if the supply of the commodity declines relative to demand, the competition between the buyers increases. Among the sellers of a given commodity, the intensity of competition declines as the demand for the commodity rises relative to its supply, and increases when the demand for the particular commodity declines.

Among the capitalist sellers of commodities, the intensity of competition among them declines when the world market is in an expanding phase, as was the case in the first years of the 20th century and again after World War II. It increases when the world market is expanding much more slowly, which was the case in the period between the world wars and is again the case today.

The same is true of the competition among the various branches of capitalist production. If all the houses the construction industry can build, all the automobiles the automobile industry can churn out, and all the “devices” the computer industry can produce find buyers, there will be little competition between the homebuilding industry and the automobile industry for the consumer dollar. But the greater the shortfall between the supply and demand for housing, cars and computer devices, the greater the competition for the scarce consumer dollar.

The contradictions of fixed capital

Under capitalist production, large-scale production involves the accumulation of large amounts of capital in the form of fixed capital. In contrast to circulating constant capital (2), the elements of fixed constant capital transfer their value to the commodity capital—commodities containing surplus value, or inventories in common language—over more than one cycle of production. While circulating constant capital—raw materials and auxiliary materials—are short-lived, fixed capital can last for many years and even decades before it is fully used up.

The unit of measure of fixed capital

Like all other forms of capital, fixed capital, besides being measured in terms of units appropriate to its particular use value, is also measured in terms of money—weights of money material. Behind this necessary money form of measurement, there lies abstract human labor—value—which is measured in terms of units of time. While this is ultimately the most important measure of fixed capital from the viewpoint of society, it is unknown to the capitalists and thus to our modern economists as well.

The reason is that abstract human labor must take the form of exchange value—monetary value. So it is in terms of money that the capitalists measure value. If everything goes well for the industrial capitalist, the fixed capital gradually transfers its entire value to the commodity capital it helps produce. The process is completed when the piece of fixed capital can no longer physically take part in the process of production. For example, when a lathe is so worn out, it becomes a non-lathe. Repairs partially reverse the process by adding back some of the used-up value into the machine or building and so on, thus extending the life of a particular piece of fixed capital.

If everything goes well, capitalists are always in possession of the value of fixed capital, though its form changes. First, this value takes the form of a definite quantity of money that the industrial capitalist intends to transform into fixed capital. Then it exists in the form of the fixed capital itself—newly bought machines, buildings and so on. After that, it exists in the form of a portion of the value of the commodities that the fixed capital helps to produce—commodity capital.

Then, when these commodities are sold, the value will again exist in the form of money. The industrial capitalist will put the money into a depreciation fund—which will be lent out at interest with the assistance of the capitalist credit system so it is not completely idle—until the value of the fixed capital is completely used up and the money can be withdrawn from the depreciation fund and once again be transformed back into fixed capital.

What can go wrong

However, there are many ways the value of capital can be destroyed as it passes through the form of fixed capital. For example, it can be physically destroyed. If an airliner crashes, the airplane becomes a non-airplane. Its value to the airline company as fixed capital is destroyed and it is written off as a total loss. The Titanic has been a non-ocean-liner since it hit an iceberg and sank to the bottom of the Atlantic Ocean in 1912, where its remains continue to slowly decay. Its value as fixed capital also had to be written off as a total loss by its capitalist owner, the White Star Line.

Fixed capital is regularly destroyed by natural disasters like floods, earthquakes, tornadoes and hurricanes as well as fires. And huge quantities of fixed capital can be destroyed by the most unnatural disaster of war. When Hitler in the final days of the Third Reich ordered factories to be destroyed in Germany as part of a scorched-earth policy, Albert Speer (1905-1981), the Nazi armaments minister who had always faithfully carried out the orders of his Fuhrer up until that time, countermanded Hitler’s orders. Speer’s actions helped save a great deal of the fixed capital of the German capitalists. Speer, when faced between choosing loyalty to his Fuhrer or his class, chose class over Fuhrer.

Technological change destroyer of fixed capital

There is another way that the value of fixed capital can be destroyed—technological change. This can be divided into three sub-forms. One, the same machine or factory building can now be (re)produced with a smaller quantity of human labor than before. Without any physical change in the machine, building and so on, the piece of fixed capital now represents a smaller quantity of abstract human labor—value. It therefore has less value to transfer to the commodity capital it helps to produce. This means that the industrial capitalist who owns the fixed capital produced by more labor has suffered a loss.

In the language of bookkeeping, its industrial capitalist owner will have to “write off” some of the value of the fixed capital. Particularly for long-lived forms of fixed capital, this kind of loss of value is the rule, not the exception. It has the effect of lowering the rate of profit, because the capital value that vanishes has to be subtracted from profit. Though not quite the same as a fall in the rate of profit brought on by growth in the organic composition of capital, it is like the former an expression of the rise in the productivity of labor.

The second form involves the creation of new machines of the same value as the machines they replace but that can produce more units of a given commodity. Commodity capital consists of discreet commodities that are sold individually. If the value that is transferred by a machine during its lifetime is spread over a greater number of commodities, each individual commodity will represent a smaller quantity of value than before.

An older machine that can produce fewer commodities over a given period of time has therefore lost some of its value. Its industrial capitalist owner as a result suffers a loss of capital and will be forced sooner or later to write it off. In this case, like the first, this loss has to be subtracted from profit, which causes the rate of profit to fall. Cases one and two in practice are often combined. Machines become both cheaper in terms of value and more efficient in terms of use value.

The third case involves the use value of commodities that make up the commodity capital. In the course of technological progress and applied inventions—innovation—the use values of the older type of commodities are superseded by quite different commodities that better perform functions previously performed by the older type of commodities. For example, the mechanical typewriter was during the second half of the 20th century replaced by the electric typewriter, and then electric typewriters were replaced by computers.

If an industrial capitalist owned machines and other forms of fixed capital that could only produce electric typewriters, the value of the fixed capital was destroyed as thoroughly as the value of the Titanic was destroyed when it sank to the bottom of the Atlantic ocean. In this case, we don’t have a mere fall in the rate of profit but a total destruction of the value of the fixed capital. This can transform an industrial capitalist into a non-capitalist.

Case three is the most dangerous for industrial capitalists and causes them to think very carefully before tying up the value of their capital in long-lived forms of fixed capital. This is a particular consideration during periods of rapid technological change such as today.

Other dangers of fixed capital for the industrial capitalist

Fixed capital can be very difficult to transform quickly into money capital in a crisis. Commodity capital can often be quickly transformed into money capital by selling it below the price of production or even at a loss if capitalists due to a crisis have to quickly raise cash in order to pay off pressing debts. In this case, our capitalists may lose a portion of the value of their capital but not all of it. The capitalists can often survive as capitalists—though not always—and go back to the accumulation of capital once the crisis has passed.

However, it is far more difficult to sell factory buildings, machinery and so on used to produce commodity capital, let alone sell it quickly under crisis conditions. Though fixed capital can be transferred from the ownership of one capitalist to another, it is not really designed to be “sold” but rather used up over a series of turnover cycles. One of the great perils confronting any industrial business is finding itself with a lot of fixed capital but very little money capital when a crisis hits. In this situation, the owner(s) of industrial capital can very easily lose all their capital, because though they have a great deal of capital, they do not have capital in the form demanded by their creditors—money.

Overproduction of fixed capital

When commodity capital is overproduced, this by definition means that the fixed capital used to produce those commodities was also overproduced. Every generalized crisis of overproduction therefore involves the overproduction—or over-accumulation—of fixed capital. The overproduction of commodity capital can be overcome fairly quickly by reducing or halting production of that particular type of commodity or by selling it at a loss. It is much harder—and takes far longer, often many years—to overcome the overproduction of fixed capital. During this period, little new additional fixed capital will be produced. This is shown by the stages of the industrial cycle.

The history of industrial cycles has shown that the crisis proper rarely lasts more than a year and half. Even the super-crisis of 1929-1933 lasted less than four years in the United States and about three years in most of the other capitalist countries. The end of the crisis phase of the industrial cycle, when industrial production reaches its lowest point and begins to rise once again, corresponds to the overcoming of the overproduction of commodity capital.

However, the period of stagnation or slow growth lasts for several years beyond the actual crisis and sometimes considerably longer. The stagnation or semi-stagnation phase of the cycle corresponds to the period between the overcoming of the overproduction of commodity capital that occurred during the preceding boom and the overcoming of the overproduction of fixed capital that accompanied the boom, or sometimes several preceding booms.

While the crisis proper is marked by “excess inventories” piling up unsold in warehouses, the period of post-crisis stagnation is marked by a high level of excess capacity, with large quantities of factories and machines—fixed capital—lying idle, not able to function as capital.

Only gradually is this excess capacity overcome. (3) It is overcome by being gradually reactivated as demand for commodities rises once again in the wake of the crisis, on one hand, and by being physically destroyed, on the other. Only when excess capacity has fallen to a certain point can a new investment boom occur. As long as excess capacity remains high—the preceding overproduction of fixed capital has not been overcome—no fall in the rate of long-term interest rates can trigger a new investment boom. This is the phase of the industrial cycle that Keynesian economists call a liquidity trap. Such a liquidity trap represents the period between the overcoming of the preceding overproduction of commodity capital and the far longer process of overcoming the overproduction of fixed capital.

Innovation and the rise of new industrial capitalists

Innovation can involve the production of commodities with new use values for final consumers, cheaper methods of producing existing products for final consumers, or a combination of both. Many innovations are what the business world calls “disruptive.” These are the innovations that enable some capitalists to vastly enrich themselves while destroying a large portion of the existing fixed capital of fellow capitalists.

Once industrial capitalists of a particular sector have accumulated large amounts of fixed capital they live in fear of “disruptive innovations” that will destroy the existing value of their fixed capital. If “free competition” prevails, by definition the individual industrial capitalists will not be able to stop new capitalists from setting up businesses taking full advantage of the fixed capital-destroying disruptive innovations. But to the extent industrial capitalists have monopoly power, they will be able to resist or slow down the disruptive innovation for a more or less prolonged period. Such an ability of monopolies to resist fixed capital-destroying innovation is sometimes called “barriers to entry.”

Barriers to entry

One barrier involves the quantity of capital—measured in terms of money—that is required to enter the business. The larger the scale of production the greater the barrier to entry. In resisting the rise of new competitors, industrial capitalists find allies among the bankers. If a bank or other financial institution has major investments in industrial corporations using an existing method of production, or producing commodities of a specific use value, the financial institutions have a lot to lose if the disruptive innovations take hold and the value of large amounts of fixed capital is destroyed before it has reached the “natural” end of its life. This is why industrial and financial monopoly tend to go hand and hand.

Another possibility is that the existing industrial capitalists can make use of the patent system. A patent is a monopoly that is granted to a person or corporation—a corporation is considered a person according to the U.S. Supreme Court—to produce a new type of commodity for a certain period of time. Patents can be bought and sold like a commodity.

For example, an inventor might not have the capital or personal inclination to create his or her own industrial business. Indeed, it is rare for both the talent of invention and great entrepreneurial ability to be combined in a single person. If the inventor obtains a patent, the patent can be sold to an industrial capitalist. Or the inventor might be paid royalties out of the super-profits the industrial capitalist appropriates as a result of having a monopoly on the new type of commodity.

The justification of the patent system in this situation is that it enables inventors to earn an income by performing the labor of invention. By providing the inventor an income, the pro-patent argument goes, inventions that form the raw material for innovations are produced and human society advances. (4)

A second case is that the inventors themselves are salaried workers working for a particular industrial capitalist—generally a very large corporation. Large industrial capitalists spend some of their money capital on research and development with the expectation of generating new types of products that can then be turned into super-profit-making innovations.

The company then goes to the patent office and obtains from the government a monopoly to produce the new type of commodity for a certain period. If a rival capitalist violates the government-granted monopoly, state power is used to shut down the patent-violating capitalist. The salaried research and development workers—the actual inventors—are paid out of super-profits from the state-granted monopoly. While this violates the spirit of capitalist free competition, it is justified by the supporters of the patent system because it enables the development of new types of commodities by salaried employees of an industrial corporation.

How the patent system can be used to suppress innovation

If industrial capitalists buy up the patents on inventions that threaten the value of their existing fixed capital, they can sit on them, because they can use the state-enforced monopoly not only to produce a given type of commodity but also not to produce it. The patent granted by the state power, enables our industrial capitalists to avoid transforming the invention into an innovation for the lifetime of the patent. And, of course, our industrial capitalists and their financial allies use their considerable political power to have the patent prolonged until their fixed capital is completely used up.

It must be remembered that these state-enforced monopolies ultimately rest not on “free competition” but on force. When the United States was industrializing in the 19th century, the U.S. ignored British patents. If Britain had been successful in putting down the “rebels” of 1776, the North American industrial capitalists would never have gotten away with ignoring British patents and copyrights. If they had tried, their businesses would have been forcibly shut down by the government.

But since she had lost the war of independence waged by the colonists, Britain was powerless to enforce her patents. Over time, the inability of Britain to enforce patents against U.S. industrial capitalists led to the massive destruction of much of the fixed capital accumulated over many decades by Britain’s industrial capitalists.

Monopoly and stagnation

Monopoly, whether it rests on monopoly economic power or on state power as is the case with the patent system, works to slow down the rate of technological change and thus preserve the value of existing fixed capital. Monopoly tends to slow down capitalist expanded reproduction by postponing massive new investments until the existing fixed capital is completely used up.

To the extent, however, that free competition prevails—and monopoly capitalism combines elements of monopoly with free competition (5)—new upstart industrial capitalists who have not yet accumulated much fixed capital are free to introduce new innovations. These new capitalists are interested only in “growing their businesses,” even if it means destroying the value of fixed capital of their rivals. Under these conditions, Schumpeter’s “creative destruction” reigns supreme—creative in the sense that new forms of wealth are introduced, and destructive because whole established industries collapse putting their workers at the mercy of the labor market.

Monopoly capitalism can be seen as an attempt to hold “creative destruction” at bay. To the extent it succeeds, it works in the direction of stagnation, in terms of both innovation and expanded capitalist reproduction.

Growth and stagnation

What Schumpeter did not understand is that the growth of the capitalist economy is not limited by the ability of the capitalists to expand production and increase new types of commodities. Rather, it is curbed by the far more limited ability of the market to grow.

Let’s assume the ability of the global market to grow across the industrial cycle is 3 percent a year. That means on average industrial and commercial capitalists can in terms of money increase their capital by 3 percent a year. Within the industrial cycle, some years will see growth well in excess of 3 percent, and other years will have far less growth or even negative growth. But the 3 percent figure across the industrial cycle is only an average. This means that about half of the world’s individual firms, individual sectors of industry, and individual countries will grow more than 3 percent—a few much more—while half will grow less than 3 percent. And a few will even shrink.

A basic law of capitalist production is that the organic composition rises over time. This means that the rate of growth will be higher in Department I, which produces the means of production, than in Department II, which produces means of consumption. So if the average rate of growth of the capitalist economy across the industrial cycle is 3 percent, it will be somewhat faster than this on average in the industries that are part of Department I and somewhat slower in the Department II industries. For example, the average rate of growth of the industries that make up Department I might be 3.1 percent, while the industries that make up Department II might be growing at 2.9 percent.

However, the rate of growth of individual branches of industry within the two departments of production, not to speak of individual firms, can dramatically deviate much more radically from the 3 percent average than Department I and Department II as a whole can. The smaller a firm, new industry or country is relative to the world capitalist economy, the longer it can grow relative to the average before its rate of growth begins to decline towards the average.

As we have seen throughout this blog, the laws of capitalism do not allow a rate of growth for the global capitalist economy to equal the one which would be physically possible—or what would be possible in a socialist economy. Instead, they dictate a far lower rate of growth.

The laws of mathematics dictate that a firm, new sector of industry, or country where capitalism is growing at a rate beyond the global average level, must constitute a growing percentage of the total capitalist economy. Therefore, the more the rate of growth far exceeds the average rate of growth, the sooner the rate of growth must fall towards the average or even below the average.

It seems that Chinese capitalism, which has experienced such remarkable growth since Deng Xiaoping’s reforms were launched in 1978, is now running into the barriers that the economic and mathematical laws governing the capitalist system impose. This is the inevitable fate that sooner or later awaits any firm, new industry, or country that develops capitalist production in excess of the rate of growth of the capitalist economy as a whole.

Throughout capitalist history, there have been a few new branches of industry that have for a period of time experienced a rate of growth far in excess of the general rate of growth of the economy. Examples would be the railroad industry in the 19th century, the automobile industry in the early 20th century, the radio industry in the 1920s and 1930s, the TV manufacturing industry in the 1950s, the personal computer industry from the 1970s until recently, and at present the smart-phone industry, though the most recent reports indicate the rate of growth of this industry is slowing and may have passed its peak.

These repeated phenomena in the history of capitalism give rise to the illusion in the minds of economists like Schumpeter that it is the birth of new innovative industries that is the cause of economic growth—or in more formal Marxist terms, expanded capitalist reproduction. The more new innovative industries there are in this view, the faster the rate of growth of the capitalist economy as a whole will be. In this view, if there were no new industries, economic growth would halt. Bourgeois economists who emphasize innovations as the driving force of economic growth blame economic stagnation on an insufficient quantity of such innovations, or on “capital saving innovations” such as computer software whose price is falling toward zero.

These economists observe that the rise of new industries is marked by large capital investments and the rapid formation of new fixed capital. These investments stir up demand for both the new type of commodities and many old type commodities through what Keynesian economists call the accelerator effect. For example, in order to manufacture smart-phones, new factories must be built that provide business for the very traditional construction industry. The workers necessary to manufacture smart-phones also have to purchase the very traditional commodities of food, housing and other consumer commodities that are necessary for the reproduction of their labor power.

Capitalist expanded reproduction in terms of use values involves both the expanded (re)production of old use values—like food, clothing, shelter—as well as new types of use values—railroads, automobiles, telegraphs, telephones, radios, TVs, personal computers, smart-phones, and now smart-watches. Yesterday’s new types of commodities are today’s traditional commodities, if they avoid the fate of electric typewriters or go the way of the horse and buggy, sometimes within a few years of their introduction.

Money capital and innovation

One of the preconditions for a high level of capital investment is the presence of large reserves of idle money. If the quantity of such idle potential money capital is insufficient, investments in new industries will squeeze out old industry. Or if the quantity of idle money is extremely low, the growth of new industries can come to a screeching halt until sufficient reserves of money are accumulated. A classic example of this is provided by the history of the automobile industry and the progress of what Baran and Sweezy called “automobilization” in their influential book “Monopoly Capital.”

As Baran and Sweezy correctly observed, “automobilization” involved not only the automobile proper but the auto parts industry, the infrastructure of highways, gasoline stations, and other industries stimulated by the rise of the auto. For example, suburbanization was made possible by the automobile, which created in turn the need for countless numbers of new commodities of both existing and new types of use values. Just as is the case with high tech today, automobilization therefore involved clusters of industries, both established and new.

When the process of automobilization was still in its early stages in the U.S., and had hardly begun in Europe, the super-crisis and its associated Depression brought it to a screeching halt. World War II then shut down the automobile industry completely as auto plants the world over were shifted over to produce tanks and airplanes. But the 15-year halt in the process of expanded capitalist reproduction meant that there was by 1945 an extraordinary quantity of idle money in the hands of the capitalists that could now be transformed into capital. Therefore, after 1945 the process of automobilization started up where it had left off in 1929.

The lesson is that under the capitalist mode of production, the development of new types of use values can indeed create new productive forces and revolutionize life in many ways. But it can only do so if economic conditions are favorable for expanded capitalist reproduction, both in terms of the production and realization of surplus value. When the conditions for profit-making are not favorable, even the most revolutionary new innovative industry like the automobile industry can be brought to a screeching halt.

The centralization of capital and the rise of new industries

At the dawn of a new industry there are usually a few small pioneer firms. The big established companies don’t want to risk their capital on new types of commodities that may or may not find buyers. In addition, the new types of commodities can be a threat to established companies. This was the situation with the carriage-building industry relative to the automobile industry at the turn of the 20th century, and the typewriter industry in the 1970s relative to the emerging micro-computer industry. Large established industrial capitalists in possession of large accumulations of fixed capital have a lot to lose. Therefore, it is generally small capitalists—or would-be capitalists—who become the pioneers of new industries. Examples of such capitalist industrial pioneers are John D. Rockefeller in the 1860s, Henry Ford in the first decade of the 20th century, and Steve Jobs in the 1970s.

If a new industry is destined for success, the demand for the new type of commodity will grow for a period of time at a rate that is considerably faster than the rest of the economy, yielding vast super-profits. This creates the illusion in the minds of economists that the new industry is saving the capitalist economy from what would otherwise be almost complete stagnation.

Capital invested in the new industry will yield a rate of profit well above the average rate of profit. This will encourage many industrial capitalist to “try their luck,” including some established big capitalists. An example of this was IBM’s decision to enter the personal computer market in 1981. A more recent example is the decision of Apple, now the world largest corporation in terms of the value of its stock, to enter the smart-phone and now the smart-watch (6) business. During this initial stage, capital actually becomes decentralized as a rate of profit far above the average attracts ever greater amounts of capital from both the industrial and commercial capitalists.

Eventually, however, the market for a new type of commodity reaches the limit set by the fact that there are only so many potential buyers of that type of commodity with the ability to pay. However much the potential buyers may desire a new commodity, their ability to purchase it is not only limited by their overall income but also by the fact that they can’t spend their entire income on the new type of commodity. For example, however many people may desire to buy the new Apple Watch, most still need to spend the major part of their incomes on food, clothes, shelter and transportation.

Therefore, at some point after growing much faster than supply for a period of time, the rate of growth of demand for the new type of commodity must decline drastically. A series of crises of overproduction will hit the new industry as production not only catches up with the growth of demand but exceeds it. Market prices for the new type of commodity will then fall below the prices of production and competition will heat up among the industrial capitalist engaged in the production of the new commodity. Many of these capitalists will then find themselves in an industry that is no longer yielding super-profits. For example, IBM has now abandoned the personal computer industry that it entered in 1981.

When this inevitable stage is reached, capital becomes increasingly centralized in what was the new industry. Or, as the business press puts it, there is a “shakeout” and “consolidation” as the new industry “matures.” The rate of profit on capital invested in the new industry falls to more or less the average rate of profit. An example of a new mature industry is the personal computer manufacturing industry, where sales are in decline and the rate of profit is below the average rate of profit or even negative. (7) It has only taken a few years for the tablet computer industry to also reach this point.

Innovation and the renewal of the members of the capitalist class

The rise of new innovative industries also opens the way for entrepreneurs from the “lower classes” to rise into the capitalist class, since unlike the established industry, great amounts of capital are not necessary at the dawn of a new industry. These “Horatio Alger” stories are then heavily publicized in the capitalist media.

The hope is to prevent young people, especially from the working class, turning towards the workers and socialist movement in order to struggle for a better world. Instead, young people are told that if they are willing to work hard and are “innovative,” they can change the world and as a side effect rise above their class into the ranks of the billionaires. In reality, and especially as the capitalist system ages, innovative entrepreneurs are increasingly recruited from the ranks of the capitalist class. In this case, it is a matter of rising from the ranks of mere millionaires to the lofty heights of billionaires.

This is the pattern we have seen in the high-tech industry. For example, Microsoft boss Bill Gates was born into an already wealthy family. Bill Gates makes a poor Horatio Alger story. This is generally the case with Silicon Valley entrepreneurs, who largely come from already wealthy families who can afford to send their children to universities like California’s Stanford that specialize in training its students to be the next generation of innovative entrepreneurs.

One exception to this rule was the late Steve Jobs (1955-2011), the co-founder of Apple Computer. The other co-founder, engineering genius Steve Wozniak‘s father was also an engineer. It was Wozniak, assisted by another engineering genius, Rod Holt, and not Jobs, who actually designed the Apple II, considered from both a technical as well as aesthetic point of view to be perhaps the best of the early personal computers.

However, unlike Wozniak’s father, Jobs’ stepfather worked at times as a machinist. At other times, the senior Jobs, who had little formal education, worked as a repo man, and owned a used-car dealership. He was basically a classic “petty bourgeois” who though periodically engaged in manual labor tried throughout his life to rise into the ranks of the capitalist class.

His stepson learned from his stepfather not only the value of making things but, if his biographers are to be believed, from boyhood on the values of hustling and selling in an attempt to make large amounts of money. Yet with a stretch, as we saw above, the Jobs family can be presented as “working class.”

Jobs was therefore an ideal “Horatio Alger” for the late 20th century. He wore his hair long at times, avoided suits and ties, liked the Beatles and Bob Dylan, was involved in the drug culture, and in religion was attracted to Buddhism as opposed to the more traditional Christianity or Judaism. Jobs, therefore, appeared to share many of the values of the 1960s youth rebellion but “changed the world” by starting his own company and ended up a billionaire. The message here is that capitalism can be “cool.” This is exactly what the “establishment” was eager to convey in the wake of the 1960s youth rebellion with its anti-capitalist overtones.

Jobs, therefore, symbolizes the transition from the idealism of the 1960s to the “me decade” of the 1980s. In corporate-driven culture, Jobs represents the possibility of realizing the American dream of becoming a billionaire while enjoying the Beatles and Bob Dylan and getting high on illegal drugs, while providing the masses with “great innovative products” just like Henry Ford provided an earlier generation with affordable automobiles. (8)

The nation state and capitalist competition

Capitalist competition is based on the struggle by each individual capitalist firm and capitalist nation to control the world market. The world market has not always existed. It had its origins in the gold and silver discoveries of the 16th century. Without the world market, large-scale capitalism could not exist. But the world market is divided into the national markets of the individual bourgeois nation states. The nation of the capitalist epoch, in contrast to its pre-history ancestor as a federation of tribes not tied to any particular territory, or the city state-centered nations of antiquity, is based on a large fixed geographical area with definite borders.

Within the geographical area of the bourgeois nation, a common language is used that facilitates business. Along with a common language, there are common measures of weights and units and a common currency. The bourgeois nation—assuming it has independence from other nation states or empires—can use tariffs and other foreign trade restrictions, exchange controls, subsidies, state enterprises and the manipulation of the value of the currency to keep money within the nation state.

There is one other important weapon that capitalist states use to attract money into their country. This weapon is patents, which can be used to defend either the state-granted monopoly of its national companies to produce certain types of commodities or defend its companies’ right to disregard the patents granted by other bourgeois nation states. By keeping money within a nation through so-called mercantilist policies, demand is kept high within the home market at the expense of shrinking the national markets of other bourgeois national states. This is true because at a given point in time, there is only so much real—metallic—money in the world. Therefore, contrary to the theory of comparative advantage taught in college level economic textbooks, the interests of each individual nation state conflicts with other nation states.

The wars that have occurred between bourgeois nation states throughout the history of capitalism, therefore, are not the result of misunderstandings and prejudices but arise from real conflicting economic interests. The conflicting interests between nation states then give rise to various forms of racism and chauvinism in the sphere of ideology. The capitalist mode of production not only creates the modern bourgeois nation state but also pits nation against nation.

Just like individual industrial capitalists resist the rise of new industrial capitalists that threaten to take markets from the established capitalists, bourgeois nation states resist the rise of new nation states. First, a new bourgeois nation state has to defend state power through tariffs and other means to conquer its home market at the expense of foreign capitalists. If it is successful, its industries then move to conquer foreign markets—the home markets of other capitalist nation states. It is often easier for new innovations to take hold in rising nation states than in older declining nation states. The reason is that the capitalists in the new nations begin with little or no existing fixed capital based on older technology.

These conflicting interests lead inevitably to political conflicts that sooner or later lead to war. These wars can involve existing nation states attempting to use force to divide and re-divide the world market in their favor such as was the case with the two world wars of the 20th century. Or they can involve, as is the case today, wars to prevent the rise of new nation states that have the potential to become new centers of capitalist industrial production.

When the emergence of new nation states leads to the rapid development of capitalist industry, huge amounts of fixed capital in the existing nation states are destroyed. Militarism, which is the inevitable result of competition among capitalist states, then devours huge amounts of capital, even in “peacetime” not to speak of wartime. But militarism also plays a crucial role in innovations that later play a crucial role in the civilian economy.

Today’s wars involve the attempts by the U.S. world empire to prevent the rise of new states—for example, a state that would unite the Arab nation that stretches from the Iraq-Iran border in the east to North Africa’s Atlantic coast in the west—that threaten the value of the fixed capital of the “free world.” Even worse, if a united Arab state were to emerge uniting the vast Arab nation, its industries would not only compete with the industries of the established capitalist countries for the Arab home market and later the world market, it would compete for the vast oil and other hydrocarbon resources of the Arab world as well.

During the first half the 20th century, the struggle between two capitalist nation states, the United States and Germany, for both raw materials and above all markets played a central role in world politics. This struggle between what were the two most dynamic capitalist states of first half of the 20th century ended exactly 70 years ago this year with the rise of the U.S. world empire. To understand present-day imperialism with its wars and political and economic crises, including the current crisis in Greece, it is absolutely necessary to understand the relationship between the United States and Germany.

Germany is presented in a dual way in the U.S. media and popular culture. On one hand, movies about the Third Reich and the Nazis continue to be churned out as though World War II never ended. On both large screens of movie theaters and small screens of today’s “devices,” the Fuhrer and his evil crew of Goering, Goebbels, Himmler, Hess, Streicher and so forth ride again, backed by a huge herd of bestial “Heil Hitlering” Germans.

Indeed, alternate history movies are made where Germany won World War II and the Swastika flag flies over the White House. Heroic U.S. resisters, however, are fighting the Germans in the streets of U.S. cities and will inevitably liberate America from the rule of the evil German Reich.

The message is that only the heroism of America’s “Greatest Generation”—with a little assistance from Britain and its great democratic leader Winston Churchill—the role of the “Russians” (9) is barely mentioned—saved us, maybe only temporarily, from an America ruled by “the Reich.” To avoid any misunderstanding, Hitler, Goering, Goebbels, Himmler, Hess, Streicher et al. were as evil as they come. But the real question is how such a crew of brutal misfits could gain the state power that enabled them to commit their crimes on the scale they did.

On the other hand, today’s Germany is presented as a country devoted to democracy sharing the same values of the U.S. It seems as though the Germans underwent a magical transformation in 1945. Or maybe not. Perhaps the Germans have not really changed at all. Maybe they remain evil Nazis ready to shed their “democratic masks” as soon as we let our guard down. If we don’t watch out, a resurgent German Reich might still come to our shores and the portrait of George Washington will be replaced by that of Adolf Hitler on the one-dollar bill.

This view of reality presented on the “History Channel”—sometimes called the Hitler Channel—and other corporate-dominated media is of course a caricature of reality, as is all U.S. corporate propaganda. But it does raise the question, what is the real relationship between the U.S. and its German “ally,” where did this relationship come from, and where is it going? How is the U.S.-German relationship evolving against never-ending “secular economic stagnation,” occasionally punctuated by “ordinary” recessions and extraordinary “Great Recessions.” The recent Greek crisis has focused attention on the role of today’s “democratic” Germany in today’s Europe.

In the U.S. media, Germany is usually pictured as “the bad guy”—and the corporate media never fails to forget how really bad the Germans get—while the U.S. desires a better deal for the Greeks but what could it do when faced with those Germans? Is Germany once again reaching out to dominate Europe and challenge the U.S for world domination, or does it remain a satellite of the U.S.? This will be the subject of coming posts beginning next month.


1 This law holds in various non-capitalist forms for competition. For example, if prey species are relatively scarce, the competition among carnivores for prey will be more intense than in periods of plentiful quantities of prey species. The result of intense competition for meat-eating animals will be a decline in the number of carnivorous animals. Their decline in number is analogous to the decline in the number of independent capitalists—centralization of capital—during a crisis of overproduction.

Among the prey species, a decline in plants that serve as their foodstuffs increases competition among them for food, which causes a decline in their number. In contrast, when plant food is abundant, competition among these animals declines and their number increases, which then causes a decline in the intensity of competition for prey among carnivores, causing their numbers to rise. This is analogous to an increase in the number of capitalists that occurs when markets expand rapidly. (back)

2 Circulating constant capital consists of raw material plus auxiliary materials like fuel and electricity. Variable capital under the capitalist system is also a form of circulating capital. In contrast, under a system of commodity slavery that existed legally in the U.S. South before the Civil War, or exists illegally on the margins of capitalism today, variable capital is a form of fixed capital. Under commodity slavery, the slave functions as a fixed capital whose value has to be replaced out of the necessary labor the slave performs—the labor that replaces the value of food and upkeep of the slave—over many turnover cycles during the slave’s lifetime. In addition, as is the case under capitalism proper, the slave has to perform additional surplus labor, which when realized on the market in money form represents the slave owner’s profit. (back)

3 How rapidly the overproduction of fixed capital is overcome varies from cycle to cycle. If the world market is in an expansionary phase reflecting a high level of the production of money material relative to the real economy, idle fixed capital is absorbed rapidly. If, however, the world market is growing slowly due to a relatively low level of the production of money material, its takes far longer for the existing idle fixed capital to again be absorbed into production.

The crisis of 1857-1858, which was observed by Marx and Engels, was the first general crisis of overproduction that occurred after the massive gold discoveries of 1848-1851 that raised the production of money material dramatically. This crisis was initially very severe, but within just a few months of the “crash,” business began to pick up and full prosperity was restored within a year.

In total contrast, though the recession that began in 1929 at first seemed like an ordinary cyclical downturn, gold production was below the pre-war levels because of the aftereffects of the “Great War.” Consequently, the long-term rate of growth of the market was extremely low. Even a decade later, huge amounts of idle fixed capital—or more properly productive forces unable to function as capital—prevented a return to prosperity and “full employment” in the United States and many other capitalist countries. (back)

4 The U.S. Constitution specifically authorizes Congress to pass laws to issue patents if it advances the “useful arts.” If the Constitution were interpreted literally by the U.S. courts, much of the present patent and copyright law that the U.S. has forced on the rest of the world through the World Trade Organization and various “free-trade” agreements would have to be declared unconstitutional and therefore void in the U.S. I will examine this more closely in coming posts. (back)

5 Commodity production means free competition, and capitalism is the highest stage of commodity production where labor power becomes a commodity. The combination of elements of monopoly and free competitions means that monopoly capitalism is a transitional phase between capitalism—the highest stage of commodity production—and socialism, the abolition of commodity production. (back)

6 A smart-watch is actually a small computer worn on the wrist and works with smart-phones, which themselves are pocket-size computers. (back)

7 The personal computer industry falls victim to the most dangerous form of the destruction of the value of fixed capital of all—the development of new types of commodities that can perform the function better than the commodity it replaces. For example, the laptop computers of 2005 could do virtually everything that a desktop computer could and were in addition portable. Now smart-phones—which are really computers that can be carried around in a pocket and can serve as phones and cameras as well—do many things that were done previously by laptop computers plus some things laptops can’t do very conveniently like serve as phones and cameras. (back)

8 There is a difference between the business strategies of Steve Jobs and Henry Ford that should be noted. Ford produced the first cheap car for the “masses.” Jobs, on the other hand, always aimed for the high end of the market. Apple products are generally more pleasing to the eye than the competition but are quite pricey. In this sense, Jobs’ strategy of aiming at the high end of the market is the opposite of the strategy followed by Henry Ford, who produced the cheap Model T priced “for the common people.” (back)

9 The Soviet Union was actually a multi-national state that included not only Russia but many other nations as well. It was the Soviet nations fighting together under the leadership of the Soviet Communist Party that defeated the Nazis and chased them all the way to Hitler’s bunker in Berlin. The Soviet Union, therefore, should not be referred to as “Russia.” (back)

One Response to “Capitalist Economists Debate ‘Secular Stagnation’ (Pt 5)”

  1. Stavros Hadjiyiannis Says:

    Excellent article.

    As always.

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