Falling Growth And Rising Costs

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

For years, since the beginning of the first lockdown, there has been fevered speculation about the direction of economic policy, and what it would mean for the mass of the population.

The announcements of the Bank of England (3 February) give us the strongest indication yet. The Bank’s governor Andrew Bailey, predicting inflation of 7% this year alongside slowing growth, warned that wages needed to be cut even faster than they already are.

“We do need to see a moderation of pay rises. That’s painful, I don’t want to, in any sense, sugarcoat that message. But we need to see that…”

To repeat, real terms pay is already falling for most workers in the UK. This ‘moderation’ would in fact mean an acceleration in pay decline. The announcements came as it was announced average household fuel bills would increase by £700.

At the same time, Bailey slashed growth predictions (from an already very low level). Rising inflation, slowing growth, and stagnant or falling living standards now seem the level of expectations. This dispensation if fully compatible with a more state-led model of economic development.

Like any turn in capitalism, this new situation has roots both shallow and deep. The failures of the recovery from 2008, and dislocations of the lockdown, require further investigation.

But it should also be remembered that we are witnessing the maturation of long term trends in global capitalism, including rising costs and falling growth.

Below, we reproduce the first part of a 2002 article from Marxist economist Michael Kidron, surveying these long term developments, and their meaning for the future of the system. Further parts to follow.


Profit and National Income

For most of human history the outlay on production – the amount of seed sowed, the amount of thread spun, even the time spent hunting – depended on the intended use of the product. Usually that was fairly well known – producer and consumer were one and the same, or in close contact, and even the greediest, most wasteful or most generous person was limited in the amount of things he or she could consume. With few exceptions needs were finite and known, and a “just price” thought to be attainable.

The direct link between producer and consumer loosened in the 18th century, and goods came to be made for unknown buyers. The market exploded. It became capable, in normal circumstances, of absorbing any amount of goods that any one supplier could provide – and the need to insure against the higher risk of producing for unknown people pressed producers to make as much as they could of the opportunity. Yardsticks of economic activity tied to consumption and sufficiency, or to the achievement of the good life, or to sustainability, however understood, lost their allure. A less evaluative, more objective and more producer-tied measure was required. Profit moved from being the specialist concern of professional merchants to society’s centre stage.

Profit is what remains when all outlays on production and distribution have been met. Some of these outlays are variable. They are linked to the volume of output – either directly, like the wages of those making the article or service sold (the machine operator or opera singer), or the costs of the materials used in producing it (steel or electricity) – or indirectly, as in maintaining the apparatus used repeatedly in production, and the labour which goes into servicing that apparatus (machine repairers, electricians, maintenance workers of all sorts, stage managers). More loosely connected to the volume of production than direct costs, these indirect costs nevertheless rise and fall in sympathy.

There are also outlays that respond feebly, if at all, to changes in output – fixed or overhead costs, to do with the organisation of production and with maintaining the conditions for it: buildings, the information network, the command and control apparatus (management), the security system.

Although the primary source of investment in the means for additional output, not all of profit is invested. Some is diverted to consumption by the owners, in law or in fact, of the productive apparatus. Some of it is siphoned off by the institutions that provide these owners with security – physical in the case of the state, or emotional in that of the church, clubs, therapists and other comforters. But where the producer is less important than the product, and sales by one producer can be substituted for sales by another, there are limits to the unproductive use of profits. In these circumstances it is imperative for each to invest in order to retain or increase market share, to grow in effectiveness and usually in scale, and to increase profit in an endless round.

This compulsion makes profit the finest indicator of the market system’s vitality. A high rate of profit is likely to be strongly associated with growth, a low rate with slow or no growth.

Measuring profit is not an exact science. Despite the image diligently promoted by the profession, and despite the enormous pretensions of the worldwide accountancy firms, accountancy is less a science than an art, and sometimes a highly creative one. Anyone inspecting the published accounts of a typical big firm is hard pressed to tell whether its profits came from continuing business or from windfall gains, how much its assets are worth or what its debts are, and even whether the firm is really profitable. Numbers are attached to all of those by the Arthur Andersens of the world, but what they mean is often unclear.

At any given moment the frontiers between costs and profit, or expenditure and income, are in dispute. As recently as August 1999 the Accounting Standards Board in Britain was proposing changes that would force companies to show their liabilities (for tax for example) more clearly, and so bring accounting practice in the UK more in line with the rest of the world. And, to this day, share options which account for three fifths of the pay of chief executives in big US companies are treated as cost when the firms calculate their profit for tax purposes, but not when calculate it for shareholders.

On the larger canvas of national accounts the anomalies and ambiguities are as great, if not greater. It is still true, even after the introduction of an improved System of National Accounts by the World Bank and other international agencies in 1994, that national income falls when a woman marries her driver or a man his housekeeper. More significant (except to the happy couples), it is still true that spending on cleaning the environment raises income, while the increase in value of the environment that results or the original damage that made it necessary are not taken into account. A country that hacks down its trees or exhausts its soil grows richer while the going’s good, but the depletion of natural productive capacity caused by the activity is ignored. Nor does the deterioration of the built environment form part of conventional accounting, although the spending on de-infestation or fumigation that follows (ridding buildings of rats, cockroaches, pharaoh ants or whatever) does. And so too with drug resistant diseases – the treatment that creates the new strains is counted in, while the cost of the resulting non-treatable condition is not. There is still nothing in conventional national accounting to indicate that the real cost of a hamburger might approach $200 or that of a mature forest tree in India might be $50,000 – nothing that might reflect the real cost of replacing or maintaining the assets used up or worn down in the act of production.

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Nor could there be – what is called natural capital is largely unrecorded because there are no property rights in it, and so no market or prices. Even the most shadowy of shadow prices cannot anticipate which aspects of the environment will be considered of value at some future date – practical value, as in some as yet undiscovered medicinal ingredient of a wild plant, or emotional value not related directly to any actual or potential use, as in some geographical feature (‘existence value” in the current jargon). Many parts of nature and nature itself (biodiversity, say, or the hydrological cycle) cannot be appropriated and therefore cannot be valued. Although a topic of heated controversy among economists and statisticians, the depletion effects of production are measurable in principle because the product is sold as timber or ore, for example, but its degeneration effects – the incidental pollution of air, water or land – are not, except in the most far-out academic circles.

And where it does recognise depletion, the system of national accounting treats the conversion of natural resources differently according to whether they are privately owned (in which case depletion is normally charged against the income earned from their sale) or in the public domain (where it is normally not charged). It still excludes from the reckoning some productive services, such as housework or parental care, and includes many unproductive ones, such as those covered by military spending, or much of law enforcement or marketing.

This said, and notwithstanding the imprecision that results, every measurement shows that the rate of profit and the associated rate of economic growth have been in decline since the mass market system’s earliest days.

The rate of profit

Average enterprise profits in the salad days of the industrial revolution were high – between 20 and 35 percent a year in the late 1700s (compared with some 10 percent in the booming 1950s and 1960s, or some 5 percent in the 1970s and 1980s, and less in the 1990s). Robinson of Nottingham, a textile giant of the time, recovered the full value of its investment in mills and machinery in one year, 1784. The Dowlais Iron Company in Wales – then the world’s biggest – was regularly earning over 25 percent per year on its capital in its earliest days (the 1760s), as was the Phoenix Foundry in England. Fine cotton spinners McConnel and Kennedy’s annual profit fell below 26.5 percent on only one occasion between 1799 and 1804, fluctuating between that figure and 30.3 percent in the other five years. In France, Le Blanc, a textile giant in Lille, made over 75 percent per year on average during the Second Empire (1852-1870), and a foundry started in 1825 by the Fourchambault group was regularly returning more than two thirds on capital.

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Compare these figures with those for similar landmark firms today. The stars of new technology – today’s analogues of the textile and iron making giants of 200 years ago – are rattling along on less than these pioneers’ pace: Microsoft, the giant software house, posted profits of 24 percent per year in the 1990s; Intel, the chip-maker, 24 percent; Compaq, the biggest PC manufacturer of the time, 13 percent.

Whole industries show the same trend. Profits in coal production in the UK fell from 13.7 percent in 1890 to 12.4 percent in 1913 (three-year moving averages).

The rate of growth

A more direct gauge of the system’s dynamics is via “national income’ – the value of monetary transactions taking place within it. There are many difficulties in taking the measure. Monetary values are often wrongly assigned to output or services consumed outside the market, such as household services or agricultural goods for home consumption. On the other hand, and equally misguidedly, they are not fully imputed to transactions that take place unrecorded, as in the black economy, or when they are not mediated by money, as in barter deals between individuals, firms and even countries. The many currencies in use within the system need to be reduced to a common standard, which is difficult. The system itself is constantly reaching into places and economic sectors innocent of recording and statistical techniques. Until recently there were no agencies concerned with monitoring the system as a whole. Even today, international bodies such as the World Bank, which could be expected to take a system-wide view, avoid doing so, and confine themselves to aggregating separate national accounts.

The relative novelty of measuring national accounts – they were fashioned into an effective tool only in the 1950s – makes them untrustworthy when applied to earlier economic data collected without them in mind. The result is to suppress evidence of the market system’s initially explosive growth by embedding it in the lethargic performance of the prevailing non-market economy of the time.

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In Britain, industry and commerce, themselves containing pre-capitalist ways of doing things, were bumbling along at a growth rate of something like 0.8 percent per year in the first four decades of the 18th century. Output took off in the middle decades, more than doubling to 1.7 percent per year (1740–1745), and almost quadrupling to 3.1 percent per year in the following decade (1750–1760). After some deceleration in the 1760s and 1770s, the real rate of growth of output in industry and commerce achieved levels fully equal to those of the East Asian Tigers of today – 8.8 percent per year cumulative in the 1780s and over 10 percent per year in the 1790s. Reconstructions of the national accounts show little of this remarkable growth. They reveal a sympathetic but greatly suppressed movement – a growth of 0.4 percent a year on average in the period 1695–1715 to 1725–1745 rising to 1.1 percent from 1725–1745 to 1745–1765 and after falling back to 0.8 percent a year in 1745–1765 to 1765–1785, rising strongly again to 2.1 percent a year in the period 1765–1785 to 1785&ndah;1801.

If modern Britain, with current economic growth – some 2.2 percent per year at the turn of the millennium – not far from what it is presumed to have been 200 years ago, seems to be doing not badly by comparison, it is because two very different beasts are being compared – one still half-buried in a consumption-oriented world, the other a mature, more or less pure market economy committed to growth. The relevant comparison is the one between Britain’s current economic growth and the expansion of industry and commerce in Britain two centuries ago. That shows a consistent, long term decline in the system’s, not the country’s, rate of growth.

Recent years confirm the trend. After a period of lusty economic expansion in the third quarter of the last century, fuelled by a vast monetisation of mass consumption as millions of peasants poured into the world’s big cities, and by the single-shot reduction in social overheads as these new town dwellers were made to make do without matching expenditure on housing, roads, public administration and so on – fuelled also by a rapid increase in the international division of labour (globalisation), by a conscious attempt on the part of governments to keep their countries’ production as close to capacity as possible, and by a host of attendant technological advances both precipitated by these developments and which made them possible – the rate of economic growth resumed its downward course, by a fifth on average between the 1960s and the 1970s.

The deceleration has been unevenly spread. Since the Second World War, and particularly in the 1980s and the first half of the 1990s, growth was spectacular in some areas, particularly in the Tiger economies of East Asia: Hong Kong and South Korea clocked up an average growth of over 9 percent per year for 20 years until 1997; the Chinese super-dragon raced ahead at 10.1 percent per year (if we are to believe the inflated official figures); Thailand, Indonesia and the Philippines performed as well and sometimes better in short spurts, but the picture for the system as a whole has not changed in its essentials.

For the rich countries – Western Europe, the US, Canada, Australia, New Zealand and Japan – responsible for some 55 percent of world output as conventionally measured – average growth rates fell from 6.04 percent per year in the 1950s and 1960s to 2.69 percent per year in the 1970s, 1980s and 1990s. In the world as a whole the annual average rate of growth – 4.91 percent between 1950 and 1973 – fell to 3.01 percent between 1973 and 1998.

Even during its “Goldilocks” business cycle of the 1990s, the US posted annual average growth rates in real gross domestic product (GDP) of 2.2 percent compared with the 1950s and 1960s, when growth averaged 3.5 percent and 4.5 percent per year respectively, and compared with an average of 3.5 percent per year since the civil war – and with 1.2 percent in 2001.

The declines in growth as measured by conventional national income accounting become precipitous when their social and environmental effects are considered.

Much of the “growth” in conventional national income accounting comes from shifting existing economic activity from the non-monetary social economy of households and communities to the money economy (leading to the loss of social capital); from depleting stocks of natural assets (forests, topsoil, fisheries, oil and mineral resources, stratospheric ozone) beyond their rates of renewal, and counting their decreases as income; and from treating as income the costs of repairing the damage caused by growth – waste disposal, clean-up of toxic dumps and oil spills, healthcare as a consequence of environmental diseases, rebuilding after floods caused by deforestation, and financing and installing pollution-control devices.

A reconstruction of national income accounts for the US from 1960 to 1986, counting only those increases in output that fed into improved well-being, and adjusting for the depletion of social and environmental resources – an index of economic welfare rather than output – suggested that individual welfare peaked in 1969, held steady in the 1970s, and then fell. Studies in Holland put the damage caused by pollution (air, water and noise) in 1986 at 0.5-0.9 percent of gross national product (GNP). Similar studies estimated that pollution damage in Germany was costing 6 percent of GNP. An earlier, more limited study for the US put the costs of pollution damage at 1.28 percent of GNP in 1978. A study of Costa Rica between 1970 and 1989 concluded that the average annual growth rate would have been more than a quarter less than recorded if the depreciation of forests, soils and fisheries had been taken into account – in 1989 alone deforestation cost the country 7.7 percent of GNP. The first, limited, green accounts in Britain, published in 1996, estimated the costs of oil and gas depletion at a quarter of the income of these industries (0.5 percent of GDP), and estimated that spending on pollution abatement by industry as a whole amounted to £2.3 billion in 1994 (1.5 percent of value added in industry). A study by the World Resources Institute in Washington DC concluded that Indonesia’s economic performance between 1971 and 1984 was not the 7 percent per year generally accepted, but 4 percent once the depletion of oil, forests and topsoil were included in the calculations.

Even disregarding environmental reckoning, the recent slowdown in the market system’s rate of expansion is without precedent. To be sure, there have been long declines in the past. The Great Depression in the last quarter of the 19th century took wholesale prices in Britain steadily downwards from 1873 to 1887, and then again between 1891 and 1896. But it scarcely interrupted real economic growth – the average annual growth of 2.2 percent registered between 1856 and 1873 dropped mildly to 2.1 percent between 1882 and 1899, and then regained its former rate. Net domestic capital formation, measured as a proportion of GDP, was not very different from what it had been before and after the depression years 1873–1896. In the system as a whole, with the US and Germany outpacing Britain, growth was even more robust. The workings of the international gold standard ensured that prices throughout the world fell in step with those in Britain, but production expanded strongly too – by 2.5 percent per year on average (1.4 percent per head) in the period. If there was a single cause of the Great Depression, it was the shortage of money. The supply of monetary gold on which the quantity of banknotes and deposits ultimately depended was tight until the end of the 1880s, while the demand for it rose mightily as new countries rushed to adopt the international gold standard after 1870.

The slump of the 1930s also had a lot to do with the inadequacy of finance. True, real output fell dramatically. World trade fell even more precipitously – by 83 percent between January 1929 and March 1933 (from $3 billion to $0.5 billion at constant prices). But the collapse of the banking system was even greater.

The current slowdown, however, is independent of crises in banking and finance. True, these exist in plenty – the “Third World” debt crisis in the 1980s, the Savings and Loan turmoil in the US, the worldwide property market collapse, the “derivatives debacle” in the mid-1990s, and the Asian “contagion” of the late 1990s. Except for the last these had little effect on the real economy.

The roots of the current slowdown seem to go deeper.

This article is republished from Marxist Internet Archive.

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