How Rampant Costs Are Dragging Capitalism Down

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We republish Michael Kidron’s overview of the long-term tendency to falling growth in global capitalism.

With the pandemic receding, worsening contradictions in the global economy are becoming apparent. All over the world, whole populations are facing spiralling costs, falling wages and stagnant growth.

These problems have both recent and historical causes. In the first part of his 2002 examination, pathbreaking Marxist economist Michael Kidron showed how growth and profitability have been declining since the industrial revolution.

In the second half, he argues that rampant costs are degrading the capacity of capitalism to reproduce itself.

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Shift in costs

In the early days many inputs into production were “free”, or nearly free, in the sense that they were not, or hardly, paid for. Water was there for the taking as energy or raw material, wood likewise. Locations were easily and cheaply available. Finance was most likely to take the form of equity, not loans. Start-up costs in the new manufacturing were almost everywhere a small fraction of what they were in agriculture at the time – one eighth in Britain and Japan (around 1810 and 1905 respectively), one seventh in France and one sixth in Belgium (around 1850), between a half and a third in the US (in the 1890s). Business was organised in relatively small units with little by way of professional management. By and large monetary outlays went to pay for the direct input of labour and materials in production.

Indirect costs were few – machines were made mostly of wood, installed mostly within existing buildings, and their maintenance was normally within the competence of existing artisans. One does not come across the words “wear and tear” or “depreciation” in 18th century industrial accounts, or any evidence of a systematic application of the underlying concept.

There were few overheads. The total (fixed and circulating) capital needed per worker in big industry in England at the turn of the 19th century was about four to five months average male wages. In France a couple of decades later, reflecting higher prices for the more advanced techniques that had become available, it was six to eight months. (150 years later a new entrant would be investing 300-350 months average wages per worker employed.)

Social overheads in particular were not much of a burden. They were sustained for the most part by society outside the market system. Labour was reared and trained in the non-capitalist agrarian sector. Internal order, national security and most of transport and communications were embedded in it. They were available at little or no cost to capital. Some of it came from simple marauding and sale of booty, as in the European slave trade, and some from unrequited exports from the colonies – 1.7 percent of Dutch domestic product from Indonesia (1778–1780), 1.3 percent of British net domestic product from India (1868–1872). Most of it came from the home societies on which the spores of the market system fastened and in which they grew.

By the time the market system moved from its early, enterprise phase to its middle, national economy or state capitalist phase, it was outgrowing the supply of free goods and services. A growing portion of inputs needed to be sourced from within. There were still, naturally, the direct costs of production – labour and materials. But now, typically, plant and machinery were essential. Water which earlier had flowed freely had now to be bought in, as did refuse services. Transport and communications networks had to be built from scratch and maintained. Labour which earlier streamed in and out of the system as needed now had to be conserved within it, turned for the most part from a flow to a stock item, paid for to some extent whether used or not. Indirect costs formed a larger share of the total.

Overhead expenditure increased prodigiously. Fixed capital grew from 11.5 percent of GDP in the US in 1871–1880 to 13.2 percent in 1974–1979, from 4.6 percent in the UK in 1801–1810 to 15.3 percent in 1974–1979, and from 6.3 percent in Japan in 1881–1890 to 21.1 percent in 1974–1979. Fixed capital per worker increased 5.2 times in the US between 1890 and 1987, 7.6 times in Britain, 9 times in Germany and 54 times in Japan. Capital per worker in British coalmining rose 250 percent in constant prices between 1816 and 1913. Business organisation had grown so large and so complex as to require a permanent, professional management cadre to command, control and co-ordinate, and a permanent, professional purchasing and sales organisation. These people were largely unaffected by the cyclical pattern of business activity. In addition business was increasingly required to support the social overheads necessary for its existence – internal order, national security, a stable labour force, education and training, public health, and private welfare.

By the time the market system had reached the limits of its second phase, in the third (and fourth) quarters of the last century, non-direct costs (taxes, enterprise overheads, indirect costs) were absorbing the lion’s share of all production in a typical large enterprise.

The rise in costs has not run its course. As the market system presses against environmental constraints, new items are being identified – the costs of abatement, renewal and recycling. The very concept of cost is undergoing further development. Time honoured accounting assumptions – that entities are defined in space and time and events which do not fall within the defined organisation (externalities) can be ignored; that the only events which need to be recognised are those which can be described in financial terms; that the only real cost of production is, ultimately, the cost of human labour; and that resources in terms of materials and energy, and waste absorption, are inexhaustible and interchangeable – are wearing thin. Increasingly the costs of production are seen to include the costs of environmental depletion and degradation, and production itself seen as a transformation – of capital into income – and not as an infinitely repeatable process.

Little remains of the free ride enjoyed in the market system’s early phase. Raw labour has for the most part ceased to be a flow, and has turned into a stock item. Skills can no longer be assumed to exist, but have to be formed. Materials have to be managed rather than gathered or mined. The environment can no longer be relied on to absorb all wastes. What previously could be grabbed for the price of providing the means of compulsion now has to be produced, and requires investment. More real costs enter the reckoning of incurred expenses, and of profit.

The second major reason for rising costs and for its obverse – declining profits and growth – stems from the ever more intricate division of labour which made the growth possible. As traditional society’s multi-stranded relationships separated out into autonomous threads, connected in principle only by episodic transactions, the costs of social coherence and continuity that were hidden, and relatively modest, in non-market society grew. These are the “overhead costs” of maintaining the physical and organisational integrity of business – and the rapidly increasing cost of maintaining the physical and organisational infrastructures of society as a whole.

Business overheads are increasing far faster than the variable costs of direct labour and materials. Whereas before, in the middle years of the 18th century, the costs of sales were negligible (even Josiah Wedgwood, 1730–1795, notoriously lavish in this respect, spent no more than one seventh of manufacturing expenses on sales), they now frequently top costs of production; in pharmaceuticals, in feature film production, in dot.coms. The costs of general and financial administration, which together currently constitute a large share of total outlays, were too small to merit separate mention in the typical accounts of a business 200 years ago.

Luxuriant as has been the growth in business overheads, it has been overshadowed by the growth of the social variety. Two hundred years ago few if any taxes were levied on business. Now, notwithstanding the most exquisitely crafted loopholes, a significant share of recorded business revenue is paid out in taxes and other government levies. Some of that is recycled into production, either directly by the state itself or indirectly through subsidies, or interest on or refinancing of government debt. Most, however, is spent on maintaining the physical and organisational structures of the market system itself – the arrangements which make ever increasing specialisation possible.

Spending on social overheads has risen relentlessly. The cost of coercion and the threat of coercion has ballooned. Military expenditure – which accounted for 2.8 percent of GDP in Britain in 1840 – now consumes some 3.2 percent of GDP (250 times larger in real terms) in the US, and 3.8 percent of gross world product. Military service, which directly employed 87,000 men in the army in Britain in the 1700s, 2.5 percent of the male population aged 20-44, occupies 2,863,000 people in the US today, 5.7 percent of 20–44 year olds.

Spending on professional law enforcement – the police, judiciary, prisons, etc – has grown even more. It absorbed perhaps 1.9 percent of GDP in mid-19th century Britain, compared with 0.8 percent in the US today. Most of this is state funded, although by no means all – there is a growing private sector comprising security guards, espionage agencies, private armies and mercenary groups. Law enforcement employs 932,780 people full time (and 84,171 people part time) in the US, some 0.7 percent of the employed civilian labour force. In some cases the costs of coercion are phenomenal. In its dying years the white South African regime was spending 37 percent of GDP on it, a large proportion on enforcing apartheid. The (East) German Democratic Republic shelled out equivalent sums on the same operations, and the still abiding Myanmar (Burmese) government is doing the same.

The same is true of general state administration. The number of civil servants in Britain rose by 3,500 percent between 1797 and 1991 (from 16,267 to 594,400), or from 0.2 percent of the economically active labour force to 2.2 percent. Government employees at all levels – federal, state and local – number 20.3 million in the US today, or 29 percent of the civilian labour force. Together with law enforcement, state administration accounted for some 0.9 percent of GDP in 1890 in Britain, and equivalent proportions in other early members of the market system. Now they absorb $1,375 billion in the US – some 13.8 percent of GDP – a huge relative intensification (even allowing for the 250-fold difference in real national income).

These recorded increases for spending and employment in social coercion almost certainly exaggerate the real increases that took place. Market society did not invent the function. All it did was unpick it, in stages, from the multi-stranded relationships – economic, religious and social – which underpinned the social order of the time. It professionalised what had been bundled with other activities, turning it into a special function that had to be paid for.

Much the same can be said of the three other broad categories of social overhead expenditure – spending on securing compliance with prevailing social arrangements, spending on physical infrastructure, and spending on the formation and maintenance of a workforce.

Spending on compliance – call it moral coercion, or attitude engineering, comprising spending on welfare, on official and unofficial propaganda, on production and other subsidies – has increased far more than the number of categories it covers, from perhaps 2.2 percent of gross product in the early 1800s to 36.8 percent in the UK (and 7.7 percent in the US) today.

Sometimes the spending is bizarre. Saudi wheat farmers whose costs of production exceed $600 a tonne have been known to sell their crop (to New Zealand) for under $100 a tonne. The US price of $65 a tonne charged to Algeria was coupled with a subsidy of equal amount. European beef has been sold to Brazil at less than one quarter of the official European Union price.

Spending on physical infrastructure – transport and communications – once an incidental expense of existence for all but a microscopic proportion of humanity, has soared in the same fashion, from some 0.1 percent of gross product in 1890 to well over 11 percent in the US today. And the pressure to spend yet more is unrelenting, as traffic jams on land and in the air turn into gelatinous brawn.

Spending on the formation and maintenance of the workforce – the lion’s share of educational outlays and of outlays on health, particularly its public health component – has grown even more remarkably, from possibly 0.6 percent of GDP in Britain in 1890 to 9.4 percent in the US today.

Let it be repeated – expenditure is the baldest indicator of developments. Activities that were enfolded in the normal fabric of social life separated out into specialisms, became public – and paid for. Their visibility outpaced their actual growth, but the growth was substantial all the same.

The increasing weight of overheads within total costs indicates an ominous trend within the market system – the amount of productive activity as a proportion of all organised activity gets ever smaller. This is particularly apparent in the current period when estimating the shift from production to maintenance is less of a Neanderthal exercise.

Take as productive any activity resulting in a product or a service that can be used for further production. It might be a bowl of cereal, a steel ingot, the delivery of a product or of a message about it, education or instruction. In market society not all of this necessary activity takes place inside the market. A part of it, a small and declining part it may be said, is still not fully captured in the web of monetary transactions – childcare for example, or food production for one’s own use. This part, although productive in a social sense, is not productive in terms of the market system.

On the other hand, not everything paid for is productive. The money spent on a battle tank is real, yet it buys nothing that can be used for further production – not even the most flamboyant militiaman will use it to get to the office or to plough a field. The same goes for work that goes into designing, making and servicing it – and for the food and other goods and services consumed by these people, and for the goods and services consumed by their suppliers in infinite regression.

If the military sector is the clearest example of unproductive activity, it is not the only one. Most central government outlay and some local government outlay is devoted to ends other than expanding production, such as the spending on coercion (police, prisons, law) or compliance (state pensions, subsidies, disability allowances), or both (general administration). Much production is generated in, and by, waste industries – economic sectors that act as proxies for personal expenditure by owners and their agents (business entertainment, gifts and travel); that are an expense of profit distribution amongst enterprises (finance, most insurance); or that redistribute existing assets (landed property or rental services other than maintenance and repair construction, sales of art and collectables). Another block of activity is generated in, and by, partially-waste industries, whose output is usable in principle as inputs into further production, although, in practice, a proportion is drained off into unproductive use – financial (as distinct from material) record keeping, planned obsolescence, the building and maintenance of prestige offices in central business districts. Then there is the production activity generated by the personal consumption expenditure of people engaged directly in waste production, of employees in unproductive occupations, and lavish personal consumption expenditure out of profit.

None of these is easy to define, let alone quantify. Living in the maw of a particular social system, particularly a global, all-consuming system, makes it difficult to distinguish the generic from the contingent conditions of social existence, or necessary costs from haphazard ones. Even if the distinction were easy in concept, it would be difficult to make in practice – there are no readily available statistics even in the hub of the system, and few numbers at all at the rim. This said, a crude, pioneering study concluded that only 39 percent of gross output in the US in 1970 was productive. This is a measure of actual output. It excludes output that might have existed were it not for unemployment (4.9 percent of the workforce in that year – say 12.5 percent of the productive workforce). It excludes productive output lost through duplication, excessive seemingly-productive consumption, irrational ideologically-induced methods of work, and so on. It is a measure, cautiously estimated, of the waste that goes on inside the market system. It does not measure the waste of the system. It is a measure capital would take of itself if only it could. Thirty years later real gross output as conventionally measured has increased by 160 percent, but a slightly larger part was unproductive. The productive economy in the US remained static.

It is rash, but not ridiculous, to use the US as a template for the market system as a whole. There are signs of convergence in economic activities worldwide – while US spending on the military has dropped from 8.7 to 3.0 percent of GDP, military spending in the rest of the world has risen. Manufacturing employment in the US dropped from 29.1 to 14.8 percent of the total (1980–2000) and rose in the rest of the world. Not too much should be made of this. Structural convergence is slow and of itself proves nothing about the course of productive activity. But it does suggest a diminution in the sources of growth in the market system, particularly when taken together with the general decline in the rate of profit.

As a whole, the market system is still growing. Different parts are growing at different rates. But growth overall is decelerating – at something like 1.1 percent per year between 1980–1990 and 1990–1999. It is declining in productivity – more and more of its resources are devoted to maintaining its structures, and fewer and fewer to production and expansion. Slowly it is slowing down. For a system whose very essence is unbounded material growth, this is alarming.

And there is more to come. As the system presses against its natural limits, which are likely to remain relatively fixed, the real costs of material growth are set to rise and the very notion of growth comes under pressure.

Can the trend be reversed? A review of the structure of costs is instructive in this regard.

Direct costs of production – the costs of the raw materials and the energy, human or otherwise, which goes directly and wholly into the product or service delivered – have fallen precipitously. Ninety seven years ago it cost 13.2 pence to produce one kilo of beef carcass (£3.02 in today’s money). Today the equivalent cost is £1.74 – 58 percent as much in real terms. The cost of services are showing early signs of an equally precipitous decline – the operating costs of British banks dropped 34 percent between 1987 and 1997. No doubt further savings can be made in this area. But how large can they be?

If the art of such cost-cutting lies in increasing labour and environmental efficiency by the application of scientific methods and, in the case of labour, by the application of greater compulsion, direct or not, there are rising barriers to doing so.

In the case of environmental efficiency – improving the productivity of renewable resources (faster growing and higher yielding, possibly GM, crops for example), changes in agricultural techniques (modern irrigation, more careful tree felling), and improving the exploration and exploitation of non-renewables and their recycling – technical boundaries are already being approached in some areas. Decreasing returns are being encountered in modern intensive farming. More generally, there is a natural limit to the photosynthesis which governs plant – and all other – growth. Reserves of non-renewables are being depleted at an accelerated rate.

In the case of labour costs, there are social and human limits to cost reduction – redundancy on the one hand and physical and mental exhaustion on the other.

Even if direct costs could be edged into freefall, their reduction would do little to reverse the decline in productivity and growth – they are already so small a proportion of all costs that no conceivable cut could have much effect. Halving the wage bill of assembly line workers in TV tube production would reduce the running costs of a plant by no more than 2.5 to 5 percent.

Indirect costs, a popular refuge for fugitive direct costs, are more resistant to attack. The inexorable rise in capital intensity implies rising expenditure on maintenance and replacement, an associated rise in technological intensity with the implication of speedier obsolescence, and a rise in the costs of repairing the damage caused to the environment by material production. Not that there are no counter-examples. New materials can reduce the indirect costs of maintenance. But despite the constant efforts made to trim indirect costs (some of which are successful), they avail little against the rise in the relative importance of such costs, occasioned by the increasing complexity of production.

The area of costs most resistant to attack are overheads – not that the attempt to cut them is ever abandoned. The 1990s saw a sustained attack on business overheads, especially in the heartlands of the market system. Mighty behemoths cut swathes through their payrolls, including, to an unprecedented degree, their management cadres. In Europe in the 1990s enthusiastic “de-layering”, “downsizing”, “retrenchment” and “rationalisation” led to the elimination of thousands of jobs in general administration, white collar and headquarters jobs.

In the US tens of thousands of jobs went in the same period, at a time when the workforce was expanding. Even in Japan, citadel of “lifetime employment”, where many of the unemployed are still sheltering in companies that pay wages for no actual work done, managerial unemployment is growing.

Although business retrenchment peaked in the slowdown of the early 1990s, it hardly solved the problem. The ratio of overhead to direct expenditure in business continued its steady rise. The ratio of overhead to production jobs grew. Professional and managerial staff in Europe rose more than a twelfth from 16.9 percent to 18.4 percent of the labour force between 1992 and 1997.

This is not surprising. As businesses become more complex, more specialised, more global and more dependent on each other, the efforts needed, and the costs incurred, to ensure smooth internal coordination between their parts and functions, and to order their increasingly complex relations, become greater. Nothing short of a U-turn in these trends, which are both the expression and the cause of the market’s spread, could reverse the tendency.

The course of expenditure on social overheads mirrors, in magnified form, that of business overheads. They have been subjected to a sustained onslaught since the 1980s.

Yet, essentially, nothing has happened. The rise in social overheads has continued. State expenditure has marched relentlessly onward. In the relatively rich OECD countries it rose from 32.3 percent of combined GDP in 1970 to 41.6 percent in 1989 – by more than a quarter. Add to this increase the contribution of newly privatised firms and newly formed companies dedicated to social overhead activities in the newly deregulated environment – security and prison services in the US, Britain and South Africa, and telecoms, road building and other infrastructural activities in most of the hub countries – and the attack on overheads begins to resemble a mauling by a sheep.

This too should not come as a surprise. Without a constant, accelerating expansion of its infrastructural sinews, the market system could not have grown in depth and scope to the extent it has. Insofar as that growth presses against social and environmental constraints, which elicits curative, preventive and avoidance spending, social overheads are bound to increase.

Attempts to reverse the trend face not only these fundamentals of the market system itself, but also the institutional arrangements within which growth has taken place – namely, the sovereign states which, in aggregate, incur the lion’s share of the spending on social overheads. In the current, fragmented state system, agreement between states on spending priorities is not certain, and in any event is not easily reached. Even if reached, such agreements are not sacrosanct – and certainly not more treasured than the “national interests” which they are deemed to enshrine at the time they are made. And even if they are honoured in principle, the practical application of agreements in the form originally intended cannot be relied on where monitoring and enforcement are dispersed among the parties to the agreement. There is nothing to suggest that social overheads can be trimmed.

As the market system matures and the larger society loses its integrated character in a welter of discrete, specialist, loosely co-ordinated, separately funded functions, its tolerance for overhead expenditure, particularly social overhead expenditure, naturally decreases. At the same time, and for the same reasons, the relative weight of overhead expenditure in the total grows.

It is an acute dilemma for the system. Whichever policy is adopted – the conservative, hands-off, laissez faire prescriptions which leave the provision of overheads to market forces or to ad hoc coalitions of interested parties (Reaganomics or Thatcherism), or the social democratic, mildly interventionist policies which accept the need for systemic provision and provides for it (Clintonomics or Blairism) – society is impaled on one or the other horn of a dilemma. The one assumes that society can still provide the services that were once to be found within whole, self sufficient and fully functioning family and community structures even though these no longer command the resources and attitudes that would make such a policy feasible. The other, just as unrealistic, believes that adequate provision can be made through increases of efficiency and a rational allocation of resources, and assumes that the attitudes conducive to their mobilisation exists.

The dilemma grows sharper as the system grows ever more slowly, employs fewer and fewer productively, and the commitment of those included in it weakens. Global competition and the increasingly rapid changes that result make ever heavier demands on the individual as producer, bruise emotional and moral ties, and weaken the implicit contract – to exchange loyalty for security – between business and its privileged cadres of managerial workers and between the state and its citizens. The cost of maintaining the market system will continue to mount, the effort required to provide the conditions in which it is able to function will grow, the balance between production and control will continue to tilt against the former, the productivity of the market system as such will continue to decline, and the material growth that marks it out from every other society and is its indicator of health will continue to slow down.

It is the rich, hub countries that are most vulnerable to this decline. They are the most centralised, the most dependent on complex and delicate networks of connections, physical and relational, and on public commitment. They exist thanks to efficient delivery of countless goods and services, and the effective functioning of myriads of producers throughout the world. They are impelled to spend most on maintenance, causing slow growth relative to that of the aspiring rim regions, and so compounding their own difficulties and vulnerabilities.

It is possible that market society will go the way of the Doubledays. He, remember, is a senior inspector of taxes, she a tax avoidance accountant. Since between them they have more mutually cancelling work to do than time to enjoy their resulting opulence and, in addition, professional ethics require them to work well apart, they rarely meet. But they did get together long enough 16 years ago to have a son, Buster, who, alienated by his parents’ remoteness, expresses his disaffection by vandalising public property and injecting himself with private poisons.

One family among many might survive in this way, but an entire productive system, particularly one that has destroyed all others or reduced them to shadows of their former selves, will find it difficult.

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