Rate of profit and capitalist crisis

In reviewing Robert Brenner’s theories, Mick Brooks looks at the causes of capitalist crisis and delves into such questions as the tendency for the rate of profit to fall and overproduction. This article is to be considered as a contribution to the debate among Marxists on the causes of capitalist crisis.

The Marxist historian Robert Brenner has written a survey on the world economy since the Second World War which in the process of becoming the most influential left wing economic analysis for more than a decade. His work is in a special issue (no. 229/1998) of New Left Review entitled ‘The economics of global turbulence’. It is updated in a book ‘The boom and the bubble’ published in 2002. In future these two sources will be cited as B1 and B2 in this review article.

Brenner’s survey is seen as important – Perry Anderson in his 1998 introduction ludicrously praises him by declaring that ‘Marx’s enterprise has certainly found its successor’. But the articles will come over to any objective observer as exceptionally well researched and authoritative. His conclusions are challenging. We need to take them seriously.

Against ‘profits squeeze’ theory

Brenner begins well. “Between 1970 and 1990, the manufacturing rate of profit for the G-7 economies taken together” (this refers to the biggest capitalist powers) “was, on average, about 40 per cent lower than between 1950 and 1970.” (B1 p.7) And this fact is seen as central. “?the radical decline in the profit rate has been the basic cause of the parallel, major decline in the rate of growth of investment – along with that of output itself – is, I shall argue, the primary source of the decline in the rate of growth of productivity, as well as a major determinant of the increase of unemployment.” (B1 p.7)

This is surely right. If capitalism is a system based on production for profit, movements in the rate of profit are the heartbeat of that system. And the facts support that interpretation.

Brenner goes on to take a pop at what he calls ‘supply-side explanations’. His terminology is a little confusing. Brenner is actually referring to a trend in academic Marxism that came to the fore in the 1960s and has been influential ever since. They are better described as the ‘profits squeeze’ theorists. These observers noted the decline of the rate of profit throughout the 1950s and 1960s, which led to world crisis in the 1970s. In fact it announced the end of a period (1948-1973) which we now see to have been a golden age for world capitalism. These theorists did not believe this fall in the actual profit rate was caused by Marx’s tendency for the rate of profit to fall, which we discuss later. They saw the profit rate, and the share of profit in the economy which is easier to work out from national income accounts, as being caused by the rising share of wages. We don’t want to misrepresent the advocates of profits squeeze as arguing rising real wages came out of a clear blue sky to cause the crisis of capitalism. Books such as Andrew Glyn’s ‘British capitalism, workers and the profits squeeze’ 1972 put forward a notion of ‘over-accumulation of capital’ as the basic problem. But in the context of relatively full employment in the advanced capitalist countries they believed worker militancy on wage demands could be the trigger that pushed the system over the edge. In this they agreed with the representatives of the capitalist class!

The notion of over-accumulation is borrowed from a few scattered remarks by Marx. “Overproduction of capital, not of individual commodities – although overproduction of capital always includes overproduction of commodities – is therefore simply over-accumulation of capital. To appreciate what this over-accumulation is? one would only assume it to be absolute? There would be absolute overproduction of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e. appropriation of surplus labour, production of surplus value of profit?at a point therefore when the increased capital produced just as much, or even less, surplus value than it did before its increase, there would be absolute overproduction of capital?In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages).” (Capital Vol. 3 p.251, all references are to the Progress Publishers, Moscow edition of Capital) This conjecture by Marx of a crisis triggered by rising wages is in the nature of a ‘thought experiment’. In our view a hundred and forty years later, that is still its status – a theoretical possibility, but not something that has ever happened in the real world.

With the passage of thirty years after their first writings, we are not interested in accusing the profits squeeze Marxists of ‘blaming the workers for the crisis’. We just want to show that this theory does not explain what has happened since. It is a false analysis. Brenner agrees. His critique of the profits squeeze theory is excellent

First he develops the argument of the left Keynesian economist Kalecki that in a boom capitalists make more money. They do so because their factories are working flat out. By using capacity to the full, they reduce costs and increase profits. They do so even as real wages rise. In a boom more is produced, so both capitalists and workers can be better off. Under such conditions militant class struggle is unlikely to develop.

Secondly, Brenner argues, as wages rise capitalists substitute capital for labour to put the lid on their wages bill. Improved living standards for workers are a stimulus to technological innovation on the shop floor that tilts bargaining power back in favour of the bosses.

Finally, faced with a threat, capital can migrate. While capital is leaving, immigrant labour can be drawn in to reduce the bargaining power of the working class as a whole.

Later on Brenner highlights his main points.

‘The universality of the long downturn’

Second the simultaneity of the onset and various phases’. “The advanced capitalist economies experienced the onset of the long downturn at the same moment – between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 1974-75, 1979-82 and from 1990-91.” (B1 p.22) How is it possible, Brenner asks, for the different course of the class struggle in different countries to produce these global trends?

Last, the length of the downturn’. “Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach.”?”it is almost impossible to believe that the assertion of workers’ power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century.” (B1 p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself, who explained that the movement of wages in the boom-slump cycle was ‘the dependent, not the independent variable.’ Marx realized that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

So there is a crisis in profits and it is not caused by ‘greedy’ workers. Brenner goes on to reject our alternative, that the rate of profit is falling for reasons outlined by Marx himself. “Fundamentalist Marxist theory, which sees the economy’s tendency to increase productivity by relying to an ever greater extent on indirect relative to direct labour as leading inexorably to a fall in the rate of profit. Paradoxically, this theory, too?also posits a decline in profitability as resulting from declining productivity.” (B1 p.11)

Now this is just not true. Outlining the tendency for the rate of profit to fall in Capital Vol. 3, (p.212:) Marx explains, “It is likewise just another expression for the progressive development of the social productivity of labour, which is demonstrated precisely that the same number of labourers, in the same time, i.e. with less labour, convert an ever-increasing quantity of raw and auxiliary materials into products, thanks to the growing application of machinery and fixed capital in general.” So for Marx the rate of profit tends to fall not because productivity growth slows but because it doesn’t. This is a simple misunderstanding of Marx’s position. But before we look at more detail at Brenner’s critique, we’ll try to explain Marx’s theory.

Dynamics of capitalism

Marxists believes that capitalism is a system based on profit. Profit is nothing other than the unpaid labour of the working class. Marx looks at the value added by the worker in the production process. He divides this added value in any piece of work, or in any period of time the worker puts in, into two parts. Paid labour is the work done that is returned to the worker in the form of wages. The workers are not paid for the labour they put in, but for their labour-power (literally their ability to work). In other words they are paid for their keep at whatever is established as the norm for workers in the time and place they live. Workers are exploited in the strictly scientific sense that they produce more value than what they are paid in the form of wages. So there’s also unpaid labour going to the employing capitalist, or to other sections of the capitalist class. Rent, interest and profit is the classical formula for the way the surplus produced by the worker is divided up, though there are other hangers on as well.

For Marx, commodities are on average sold at prices proportional to their values, in terms of the labour time embodied in their production. We divide the working time into two parts – paid and unpaid labour. But the value of a commodity also consists of the indirect labour involved in its production. In the case of a Kit Kat, for instance, the price is not just some money which goes back to the workers as wages and the surplus value (as Marx calls it) shared out among the different sections of the capitalist class. It also consists of the price of chocolate the capitalist pays for the workers to pour over the biscuit bars. And it consists of the depreciation on the machinery the workers use in their task, and on the building where they work. All these things Marx calls constant capital (c) because they pass their value unchanged to the final product. The element that the capitalist lays out on wages is called variable capital (v), because only by putting workers to work can the bosses make a surplus. Finally there is the surplus value (s). So the value of a commodity can be resolved into constant capital, variable capital and surplus value.

Marx believed the fundamental tendency in capitalism was what he called the accumulation of capital. This means that rather than just guzzling the surplus value produced by workers, capitalists are forced to plough back most of it into production. Why? Capitalists are competing with each other. The best way to sell more than a rival is to sell cheaper. The best way to sell cheaper is to make the goods cheaper, that is in less time. Historically, the progressive task of capitalism has been to raise the productivity of labour through the application of science and machinery to the production process. In Marxist terms, this process is bound up with the extraction of relative surplus value. Let us explain.

In Marx’s view capitalists do not innovate in order to reduce costs (though that may be the result of innovation), contrary to Okishio’s theorem (see below). They innovate in order to raise the rate and/or mass of surplus value. The outcome is not ‘willed’ by anyone but is a result of forces of which individual actors are unaware. The first capitalist who introduces a new technique which raises the productivity of labour may sell the goods at the old price corresponding to the old value – the socially necessary labour time formerly necessary to deliver the product. Alternatively he or she may drop the price a fraction in order to realise the greater mass of goods produced as a result of reaping scale economies in an improved production process. In either case the innovating capitalist sells above the individual value, the new amount of socially necessary labour time to produce with the new technology. And in either case the capitalist makes a super profit. That is probably their intention. So far, so good.

Where does this super profit come from? If we assume, as Marx did at this level of abstraction, then it must represent a redistribution of surplus from other capitalists. The alternative explanation seems to be that it comes out of thin air.

As the innovation becomes generalised the super profit disappears and the commodity is sold at a price corresponding to its new, lower value. The production of relative surplus value is therefore a process of progressively cheapening commodities. That is its result – that is not what anyone wills. This is important to bear in mind when we look at Okishio’s theorem and when we come to Brenner’s own analysis which is based on it.

This accumulation process is associated with increasing the amount of machinery behind the elbow of each worker. This means direct labour (v) being increasingly replaced with indirect labour (c) as a proportion of the values in the product. We are simplifying, but we will deal with Marx’s dialectical method a little later. Accumulation, then, is associated with what Marx called an increase in the organic composition of capital, that is an increase in the proportion of capital devoted to constant as against variable capital.

Constant capital may make the worker more productive, but it passes its value unchanged to the final product. For the capitalist, it is just a cost and, over time, an ever-increasing cost.

So accumulating capital means the boss can exploit the worker more, but it is likely to cost more. That poses the possibility of a tendency for the rate of profit to fall

The tendency for the rate of profit to fall and capitalist crisis

“This is in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and even less consciously articulated.” This is how Marx announced his discovery of the tendency for the rate of profit to fall in the Grundrisse (at p.748). Why is this tendency so important? What does it do to the capitalist system? And what is its relationship to capitalist crisis? One of the great services of Brenner’s analysis is to put the falling rate of profit centre stage in the progress of post war world capitalism. Brenner proves chapter and verse that the crisis of the world economy is essentially a crisis of profitability.


It is often stated that the crisis of capitalism is basically a problem of overproduction. This does not mean that too much is produced in absolute terms; it means that more is produced than can be sold to the working class. And how can this be possible? It is possible only because capitalism is a system of production for profit. The system only exists because it does not pay workers ‘the full fruits of their labour’.

Marx did not deny this. “The conditions of direct exploitation, and those of realizing it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus value on an extended scale” (Capital Vol. 3 p.249). This passage is part of Marx’s discussion of the tendency for the rate of profit to fall. In other words the drive for profit and the same tendencies that produce a tendential fall in profit rates are responsible for the problems confronted by capitalists of how to realise their surplus value (by selling the goods). The difficulties in realising surplus value which has already been produced is what we call overproduction. So is overproduction, which Brenner rightly sees as a fact in the crisis-ridden phase of the post war world economy, unimportant? Not at all. Overproduction is the form of appearance of a profits crisis, as Marx makes clear.

It is also said that capitalism goes into crisis because the workers cannot buy back all the goods they produce. Of course they can’t. Workers can buy as much as their wages allow them to. But they spend the rest of their working time producing surplus value. The bosses have a choice as to what to do with this surplus value. They can consume it by buying ‘luxury’ goods. In doing so they provide a market for capitalists producing Rolls Royces, Rolex watches and caviar. These capitalists never expected to find workers among their customers. They also devote a sizeable proportion of national income on ‘collective luxury spending’, such as arms. These products do not enter into the standard of living of the workers. They are not wage goods.

Or bosses can invest part of their surplus value. The capitalists who produce fork lift trucks, lathes and mainframe computers do not expect to sell them to the working class. The market for capital goods is found from the surplus value capitalised (invested) by other capitalists. Of course, by ploughing back a large part of the surplus value produced by the working class, capitalism makes them still more productive and widens the gap between what workers produce and what they can afford to consume. That is a contradiction of capitalism.

Here is Marx’s view on the subject of ‘underconsumption’: “It is pure tautology to say that crises are provoked by a lack of effective demand or effective consumers?that commodities are unsaleable means only that no effective purchasers have been found for them?But if one were to attempt to give this tautology the semblance of a profounder justification, by the statement that the working class receives too small a portion of its own product?one could only remark that crises are always prepared precisely by a period in which wages rise generally, and the working class actually gets a larger part of the annual product which is destined for consumption.” (Capital Vol. 2 p.414-5)

As to the argument that ‘capitalism restricts the market’, Lenin spent a great deal of his early political career arguing the opposite. His adversaries in the movement against autocracy were the Narodniks, a sort of utopian socialist grouping. They argued that capitalism would not be able to develop in Russia because it restricted the market. Lenin and the other pioneer Marxists argued that capitalism actually creates the market. In a series of works culminating in ‘The development of capitalism in Russia’, Lenin argued that the coming of capitalism destroyed the self-sufficient lifestyle of the peasants, forcing them to buy and sell to make a living. And capitalism separated producers from the means of production, forcing them to work for wages. Hence the Marxists saw the new working class created by these processes as the vanguard fighters against Tsarism.

The Narodniks saw, correctly, that capitalism impoverishes the small producers. From this they argued, wrongly, that it shrinks the market. Actually capitalism creates a market, but a very unequal market.

How are we to foresee the movement of capitalism into crisis? It’s no good looking for ‘the reduced consumption of the bulk of society’. That is a permanent condition of capitalism, without which the system could not exist. In fact we know wages tend to rise towards the end of a boom as full employment draws closer. And it’s pointless to go looking for signs of overproduction. All that shows is that the crisis is already underway. To say that capitalist crisis is caused by overproduction has no explanatory power.

But what causes the appearance of overproduction is the decline of the profit rate, and that can be analysed and predicted. “The rate of profit is the motive power of capitalist production. Things are produced only so long as they can be produced with a profit.” (Capital Vol. 3 p.259)

As we have seen, Marx discussed overproduction and over-accumulation (overproduction of capital) in his writings. He did so in the context of the tendency for the rate of profit to fall, in his writings in Capital Vol. III on that subject. Marx saw over-accumulation as a possibility only because the rate of profit is the reason for existence of capitalist production. From the quote from Marx we used earlier we saw that over-accumulation was a possibility only because adding more capital might not increase profits – indeed it might actually reduce them.

Competition between capitalists?

In exactly the same way competition between capitalists is important. But it is important as the executor of the laws of motion of the system. “Competition can permanently depress the rate of profit in all branches of industry, i.e. the average rate of profit, only if and so far as a general and permanent fall of the rate of profit, having the force of law, is conceivable prior to competition and regardless of competition. Competition executes the inner laws of capital; makes them into compulsory laws towards the individual capital, but it does not invent them. To try to explain them simply as results of competition therefore means to concede that one does not understand them.” (Grundrisse p.752)

Countervailing tendencies

Marx deals with the counteracting forces on the tendency for the rate of profit to fall in three chapters in Capital Vol. 3. The first chapter is The law as such.‘ The second is entitled ‘Counteracting influences’. The final chapter is Exposition of the internal contradictions of the law.‘ We can see at once that the ‘law’ does not mean that the rate of profit will always fall. It is not a prediction. The tendency for the rate of profit to fall is a force operating on the capitalist system. This force actually unleashes contradictory forces that may tend to drag the rate of profit up.

Let’s look in more detail at the three main counteracting forces mentioned by Marx. First is increasing intensity of exploitation. If the capitalist can get his work force to produce double the quantity of products in a given time, then each commodity will contain less labour and will tend to cost less. If these commodities are part of the basket of goods the workers take as part of their standard of living (‘wage goods’) then the workers will need to spend less time on producing the elements of their own wage and more time will be ‘freed’ up to produce surplus value. This is the process of the production of relative surplus value mentioned earlier. Obviously if the price of Kit Kats fall you don’t feel materially much better off, but this raising of productivity is assumed to be going on all over. Marx assumes at this stage that workers’ real wages (in terms of purchasing power) will remain unchanged. The end result of raising the productivity of labour is thus to increase the rate of surplus value (rate of exploitation). This is achieved by reducing the number of hours the worker has to spend on reproducing the elements of their labour power and thus increasing the time they can devote to producing surplus value for the boss.

Second Marx assumes that on average commodities are sold at their value for the purposes of his analysis. He was well aware that this is not always the case. In fact, he was by far the finest and most systematic chronicler of his time of the abuses of the capitalist system. He knew that the value of labour power was established by class struggle and had ‘a historical and moral element’. Therefore in practice depression of wages below the value of labour-power is important in practice in raising the rate of profit, not this time by making workers produce more but by paying them less.

Third there is cheapening of elements of constant capital. Just as the elements of variable can be made cheaper through raising the productivity of labour, so can the elements of constant capital. So, though there may be a much greater mass of machinery behind the elbow of each worker, each unit of capital may cost less. Though the labourer is working up more and more raw materials over a given period of time, each piece costs less because it takes less time to produce. “The foregoing (cheapening of elements of constant capital) is bound up with the depreciation of existing capital (that is of its material elements), which occurs with the development of industry. This is another continually operating factor which checks the fall of the rate of profit, although it may under circumstances encroach on the mass of profit by reducing the mass of capital yielding a profit. This again shows that the same influences which tend to make the rate of profit fall, also moderate the effects of this tendency.” (Capital Vol. 3 p.236)

How the tendency works in practice

Marx’s analysis is actually more subtle than Brenner gives it credit for. “There is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time.”? “We have shown how the same causes that bring about a tendency for the rate of profit to fall necessitate an accelerated accumulation of capital and, consequently, an increase in the?total mass of the surplus labour (surplus value, profit) appropriated by it” (Capital Vol. 3 p.224-5). In Volume 3 of Capital, Marx even referred to the law as a “double-edged law of a decrease in the rate of profit and a simultaneous increase in the absolute mass of profit arising from the same causes.” (p.220)

Second “a given quantity of newly added labour materializes in a larger quantity of commodities. Considered abstractly the rate of profit may remain the same, even though the price of the individual commodity may fall as a result of the greater productiveness of labour and a simultaneous increase in the number of this cheaper commodity if, for instance, the increase of the productiveness of labour acts uniformly and simultaneously on all the elements of the commodity, so that its total price in the same proportion in which the productivity of labour increases while, on the other hand, the mutual relations of the different elements of the price of the commodity remain the same.” (Capital Vol. 3 p.230)

So the rate of profit can fall, and usually does fall, while the mass of profit available to the capitalist class rises. In addition the mass of profit is expressed in a greater and greater quantity of use-values (‘wealth’), each of which involves less and less labour time to produce, and so each has less value congealed within itself.

Okishio’s theorem

What’s the matter with Marx’s analysis, according to Brenner? His entire confrontation with Marxist theory is contained in a long footnote on pp.11-12 of B1. “For if, as Marx himself seemed to have taken for granted? capitalists are assumed, in response to competition, to adopt technical changes that raise their own rate of profit by reducing their total cost (labour plus capital, or direct and indirect labour) per commodity, it seems intuitively obvious that the ultimate result of their innovation, when it is generally adopted in their line, can be only to reduce the value of the goods produced in their line and thus, directly or indirectly, to reduce the exchange value of the wage, and thus to raise the average rate of profit ? It certainly cannot be to reduce the rate of profit. Formal proof of this result can be found in N. Okishio?”

That’s all there is! Brenner cites the offsetting effects mentioned by Marx and referred to by us earlier, that raising the productivity of labour will make goods cheaper. This in turn will reduce someone else’s costs, for in the circular flow of national income, one capitalist’s outputs are another’s inputs. Whereas Marx believed there was a tendency for the rate of profit to fall, Brenner seems to believe in a tendency for the rate of profit to rise without limit, this time without any countervailing tendencies. Brenner’s proof? He airily refers us to the formal (mathematical) paper by Okishio.

In one line Okishio’s theorem may be stated as ‘willingly introduced techniques must raise the rate of profit’. Here’s how. An innovation will only be introduced by a capitalist if it reduces costs overall. Since profit is the difference between revenue and costs, costs must have gone down while revenue has remained the same. After all, why should it change? So profits must have gone up. If one capitalist’s profits are higher while the others are unchanged, profits overall in the economy must have increased.

The alternative is that the innovating capitalist passes on his or her cost reduction in the form of a fall in prices. Since one firm’s output is another firm’s input, again costs have fallen while revenue is the same. So profits once more must have gone up, according to the theorem. Marx is adamant that cost-cutting is not the motivation. “No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it increases the rate of surplus value, so long as it reduces the rate of profit.” (Capital Vol. 3)

There’s something fishy about Okishio’s theorem. What is a ‘willingly introduced technique’? Under what conditions may techniques be introduced unwillingly? We are not told. Okishio starts with a notion of what capitalists think and what they want, and what they do as a result. (This is called ‘microfoundations’ and is popular with academics who describe themselves as analytical Marxists. It is an application of methodological individualism – the idea that the nature of a society can be derived as the resultant of the wills of the individuals within it. Readers will recognise it as philosophical idealism, the idea that ‘consciousness determines being,’ in another guise)

Marxists start with the nature of capital as self-expanding value and its relationship to the working class. Marx was not much concerned with the psychology of individual capitalists which, indeed, he believed was determined by their conditions of existence. These criticisms can also be applied to Brenner’s hypothesis, as we shall see later. “The way in which the immanent laws of capitalist production are manifested in the movements of individual masses of capital: the way in which they assert themselves as the coercive laws of competition and thus enter the consciousness of the individual capitalists in the form of motives – these matters lie outside the present scope of our enquiry.” (Capital Vol. 1)

The second point is to query the whole purpose of Okishio’s theorem. The logic is that the rate of profit must continually rise. Nobody suggests that is what is actually happening. Nobody has ever run statistical tests. It is as if nobody thinks the theorem is important in the real world. The gloomy conclusion we come to is that Okishio’s theorem was propounded for one reason only – one of the oldest reasons for intellectual endeavour. It was put forward to disprove Marx.

Third – what sort of innovation are we talking about? Economists usually divide the purpose of introducing new techniques in two. Process innovation is usually defined as making old products in new ways. Since these new ways will usually be more cost-efficient, that seems to fit Okishio’s theorem nicely.

But then there is product innovation. This can be defined as producing new goods in old ways. This is not intended to raise the rate of profit. It is meant to pioneer a new market. Its effect on the rate of profit is indeterminate.

Even in the case of process innovation, the results are by no means as clear cut as it may seem to such a ‘theoretical’ economist as Okishio. In the real world innovation is a process of trial and error. In Okishio’s world, there is no uncertainty. Capitalists select the new technique from off the shelf, knowing exactly what it can do for them. In the real world innovation is a matter of learning by doing. It is an old story, going back as least as far as the power loom, that pioneer machines are often slower and more inefficient than the old tried and tested ways. It is only through effort and application that cost cutting is achieved over time. The notion of a thunderclap of inspiration which invests Okishio’s concept of innovation is a far cry from the continual drip of perspiration leading to gradual improvement in firms in the real world.

Fourth, the mathematical models that ‘explain’ Okishio’s theorem completely abstract from fixed capital. Yet it is surely the increase in the mass of machinery behind the elbow of each worker that is the intuitive basis for Marx’s perception (in ‘The law as such’) that the organic composition of capital rises and therefore there is a tendency for the rate of profit to fall. And Okishio abstracts from all that, that is to say he ignores it! “Here we will ignore durable equipment” declares the article in the ‘Palgrave dictionary of economics’ on Okishio’s theorem, written by Okishio himself. It is not surprising under these conditions that he can use maths to ‘prove’ that the rate of profit must continually rise.

Fifth, rising productivity can cheapen the elements of constant capital. This one of the most important counteracting factors to the tendency for the rate of profit to fall. The mass of machinery at the disposal of the worker grows continually, but its value grows much slower. It is obvious that in the real world capital stocks of different vintages enter into the determination of the rate of profit. This is very important when we come to look at Brenner’s own analysis. It is also obvious that this capital is not ‘uniformly and instantaneously’ devalorised by technical progress to use the phrase from Marx we quoted earlier. But this is exactly what Okishio assumes! His mathematical ‘proof’ consists in a set of simultaneous equations. Ex hypothesi, as soon as innovation starts, before it is even generalised, the reduced value of outputs is reflected in the reduced values on the ‘inputs’ side of the equation. In the real world, machinery which may have been bought years before undergoes a ‘moral depreciation’ (its price falls below its individual value, determined in the past) but this is a gradual discovery process on the part of the capitalist, not an instantaneous result.

Sixth, and related to the previous point, innovation takes place in real time. As we explained when we dealt with the extraction of relative surplus value prices do not fall simultaneously with innovation, as a simultaneous equation suggests it must. Okishio inhabits a fantasy world far from the real process of the accumulation of capital.

Finally we underline a point made earlier. If one capitalist makes a super profit, where does it come from? The only materialist explanation, surely, is that it comes from a redistribution of surplus value from other capitalists. The alternative explanation is that it is a gift from the gods.

So what does Brenner think causes profits to fall?

Brenner agrees with Marx that the rate of profit tends to fall over time. He argues that this tendency is central to understanding the post-War world economy. But he disagrees fundamentally with Marx as to why this is happening. He has also ruled out ‘profits squeeze’ from wages as a major factor. So what’s his explanation?

“I start from the premise that, under capitalist social-property relations, the generalization of the individual norm of profitability maximization combined with the pressure of competition on a system-wide scale tends to bring about the growth of the productive forces and overall productivity, with the result that, on the assumption that the real wage remains constant, both the rate and mass of profit rise, assuming there are no problems of realization.” (i.e. getting the surplus value back by selling the goods -MB) “But, given capitalism’s nature, realization problems cannot be assumed away. The same cost-cutting by firms which creates the potential for aggregate profitability to rise creates the potential for aggregate profitability to fall, leading to macroeconomic difficulties.” (B1 p.24)

Let us agree with Brenner that capitalist development inevitably produces overproduction and overcapacity in its wake. What is central to his analysis is the response to this – ‘cost-cutting by firms’. It is competition among capitals that triggers the crisis, according to Brenner.

This flies in the face of Marx’s analysis that ‘it is one thing to share out profits and another to share out losses’. In discussing ‘over-accumulation’ Marx declares, “The rate of profit would not fall under the effect of competition due to overproduction of capital. It would rather be the reverse; it would be the competitive struggle which would begin because the fallen rate of profit and overproduction of capital originated from the same conditions.” (Capital Vol. 3 p.252) Marx’s analysis makes sense; “a fall in the rate of profit calls forth a competitive struggle among capitalists, not vice versa.” (Capital Vol. 3 p.256) Capitalists co-operate with each other in a boom and claw each other’s eyes out in a recession.

Adam Smith and Robert Brenner

We’ve been here before. In Theories of Surplus Value Vol. 2 (p.438) Marx notes, “Thus Adam Smith says; as a result of the growing accumulation of capital, and the growing competition between capitals which accompanies it. Ricardo retorts; competition can level out profits in the different spheres of production?but it cannot lower the general rate of profit.”

Brenner is opposing an important thread in Marxist theory. We do not start with what individual capitalists want, and what therefore they do. We see competition as the executor of the laws of the system. Struggle between individual capitalists is not a gadarene rush of capitalists off a cliff. It is a consequence of a system in crisis.

Constant capital, fixed costs and sunk costs

We are not suggesting that Brenner is simply repeating old errors by Adam Smith. But the roots of his approach lie there. What is new about Brenner’s analysis is that he introduces the notion of sunk costs into Marxist discourse. Let’s pause for breath. Bourgeois economists before and after Marx distinguished between fixed and circulating costs. This is not the most important distinction for Marxists. Fixed costs are investments which depreciate over a period of time – in particular over more than one production period. Fixed costs includes buildings, machinery etc. In Marxist terms, fixed capital passes its value gradually to the finished product through depreciation. We can surmise that a ?1 million machine that makes one million widgets before it is worn out passes ?1 in value to each widget. We don’t have to assume that depreciation goes in a straight line (that is, the machine is worth exactly ?999,999 after producing one widget and thereafter is losing ?1 in value for each widget produced. Anyone who has bought a new car knows it loses ?1,000 off its price when you drive it round the corner. In addition to physical depreciation modern machinery is subject to moral depreciation. Its price drops below its value and has to be scrapped before it is worn out because it can no longer keep up with the competition. But the capitalist does need to get the money back on their investment in fixed capital.

Circulating costs are those that can be recouped in a single production period. Labour power and raw materials are both examples of circulating costs. The capitalist producing Kit Kats has chocolate poured over the bar by a worker for, let us say, ten seconds. The capitalist has to pay the worker for the ten seconds’ work and buy the chocolate up front. But once the consignment is shipped out and sold, the capitalist has ‘realized’ the surplus value locked up in the chocolate bars and the cycle of the production of surplus value can begin again.

Now the reader can see that the distinction between fixed and circulating costs is an important one from the perception of the capitalist, who has money locked up for ages in the form of fixed capital. But while economists were emphasizing this distinction, they were in effect covering up the one that really matters. Both machinery (fixed) and raw materials (circulating costs) are forms of constant capital in Marxist terms, because they pass their value unchanged to the final product. Labour power (also a circulating cost) is variable capital because it can yield a surplus. Marx had a major intellectual struggle against the primacy of these rules of accountancy that concealed the reality of exploitation.

Now to sunk costs. Sunk costs are fixed costs that are unrecoverable upon exit from an industry. For example I may choose to enter the takeaway pizza industry as Mick’s pizzas. Apart from premises and motorbike riders, I need a pizza oven and advertising fliers to put through doors to make people aware of my business. Apparently there is a vigorous second hand market in pizza ovens. I can sell out at any time without losing anything on the oven apart from depreciation as a result of cooking pizzas. I get my money back. But if I quit, I’ve lost my investment in ‘Buy Mick’s pizzas’ fliers forever.

Sunk costs is a concept developed in recent years by bourgeois economists interested in the realities of competition. In the homely example above, I may be inclined to stand my ground and compete rather than close down immediately when the big pizza chains open up near me. I know that my advertising expenditure is a sunk cost, unrecoverable if I run away from the competition.

Let Brenner explain. “Already existing, already paid for – or sunk – fixed capital discouraged further capital accumulation, because it enabled firms to use their existing plant and equipment free of charge, so long as they could make at least the average rate of profit on the expenditures on variable capital (wages, raw materials and intermediate goods) required to put that fixed capital into motion. This enabled them to discourage entry by more technologically advanced potential rivals who could reduce unit costs below incumbents’ total costs but not below their circulating costs per unit.” (B2 p.11)

As the reader may have gathered, sunk costs is not a rubbish concept. It can be quite useful in analyzing when price wars may break out or when capitalists can resolve their differences peacefully. (Of course, this is not why Marxists study economics). But this precious concept is stretched to breaking point when Robert Brenner uses it as the centre piece of his analysis of competition between capitals in the world economy since the Second World War.

The heart of the argument

In ‘outline of an alternative explanation’ (B1 p.24- ), Brenner puts forward his theory. The competitive struggle between capitalists is perceived as a struggle to cut costs (Okishio’s position). Cost-cutting competition leads to overproduction within the industry. How do firms respond? Brenner assumes there are established firms which have not adopted all the latest technology (we will call them laggards) and new entrants who have naturally tooled up with state of the art technology (these we call leaders). Leaders, “rather than merely replacing at the established price the output hitherto but no longer produced by a higher cost firm which has used up some of its means of production – as in the aforementioned case of perfect foresight and perfect adjustment – real world cost-cutting firms, by virtue of their reduced costs, will reduce the price of their output and expand their output and market share at the expense of the higher cost competitors, while still maintaining for themselves the established rate of profit.” (B1 p.25) Fair enough. The leaders have lower costs. The real question is why don’t the leaders blow the laggards out of the water with low prices?

Brenner continues his narrative. “If they possess fixed capital, firms which sustain reduced profitability as a result of the introduction of lower-cost and lower-priced goods by cost-cutters in their line cannot be assumed to respond by more or less immediately leaving the line; this is because it is rational for them to remain in the line so long as the new lower price allows them at least to make the average rate of return on their circulating capital – that is the additional investment in labour power, raw materials and semi-finished goods that is required to put their fixed capital into motion.” (B1 p.26)

Brenner concludes his analysis by asking how low-cost firms make more profit than the average and concludes, “We know that, to the extent that the reduced price in the line leads, as above, to a reduction in profitability in that line, that same reduced price will provide an equivalent increase in income to others in the economy who purchase these goods as their inputs.” (B1 p.29) The question is, who actually secures these gains? And his conclusion is ‘the new prey on the old’. In other words there is a continual transfer of values from the laggard capitalists to their leading competitors.

The concept of sunk costs is critical to Brenner’s analysis. The laggards are actually losing money in the sense that they are selling at prices that will not replace their fixed constant capital. They are only showing a ‘profit’ for this reason. Though our earlier example of a capitalist putting a ? in a piggy bank every time they sell a widget and having exactly enough money to replace the machine when it is knackered is obviously a simplification, the fact is that these capitalists are not putting money aside for reinvestment, even at the old level of productivity. Why are they doing this? Why don’t they just get out? Brenner’s argument is that they know they won’t get the money invested in capital back if they do – they are faced with sunk costs.

But Brenner’s analysis is contradictory. The laggards are selling at prices that do not cover the replacement of fixed constant capital, just wages and materials. (They have to pay these otherwise production will cease.) In effect they have written their capital off. But if it has been written off, it can’t be a sunk cost!

How does Brenner get himself into this pickle? It is because he treats capital as a thing, when in fact it is a social relation. Marx dealt with the three circuits of capital. From one point of view capital starts as a sum of money. This is then spent on means of production ( c ) and labour power (v). These are brought together in the production process. The produced goods are realised and capital once more appears as a sum of money – a bigger sum of money. This is the circuit of money capital. Then there is the circuit of productive capital with capital starting and finishing in the production process. From yet another, equally valid, point of view we have a circuit of commodity capital. The point is, these are all different forms of appearance of capital. In effect Brenner is just looking on capital as machinery.

Isn’t it possible for the process described by Brenner to happen in the real world? Certainly individual capitalists find their capital devalorised. Its original value, in terms of the socially necessary time to produce it at the time it was constructed, is destroyed by the entry of shiny new capitals with higher productivity. To get any money back at all the laggards have to sell at a loss. As a result they do not recoup the cost of their investment in fixed capital. We agree with Brenner that all this can happen and does happen. But classical Marxists would argue that this contradiction is resolved by the destruction of the laggard capitals through bankruptcy. Just as Brenner finds incredible the argument of the ‘profits squeeze’ theorists that wage militancy should plunge the entire capitalist world into a prolonged crisis for three decades, so we find it difficult to believe him when he argues that laggard capitals can linger on in a half life for thirty years of stagnation.

Even bourgeois economists understand that capital goes through various phases. They use a ‘putty-clay’ analogy which points to the different time scales involved in the life of capital. In the long run capital is money. It is putty. It can be turned into a fleet of passenger aircraft, part of a car plant, or a shop in Oxford Street. Once it is transformed into a productive use (productive of surplus value) it is clay – fixed in that form for the time being. Over time the capital asset will depreciate but the continual sale of commodities at a profit should provide money for its replacement. In the long term the owner of an unsuccessful budget airline can opt to become the owner of a chain of shops. Capital in money form allows the capitalist to invade any sector with a higher rate of profit. That is how the rate of profit is equalised between different industries.

In Brenner’s analysis, fixed capital can only be a sunk cost in the short term. In the longer term, laggard firms will either disappear or migrate to more profitable sectors of production.

Do Marxists accept the ‘putty-clay’ analogy? Not entirely. It is useful in pointing to the difference between capital in the long and short term. The problem is, the concept of a long term and a short term itself is simplistic. Bourgeois economics basically treats productive capital as ‘stuff’. This understates the richness and complexity of actual capital equipment. Most capitalists may own such items as buildings, fork lift trucks, PCs, a fleet of delivery vans, lathes, tills and a whole host of other pieces of capital equipment, all of different vintages and all depreciating over different time scales.

So what? We believe that capitalists have to recover the cost of their fixed capital. And we agree that they often don’t, because of the devalorisation of capital. But we would argue that this non-stop destruction of capital, which is an inevitable feature of capitalist ‘progress’, takes the form of the destruction of the failing firms. And because productive capital consists of different items of equipment which all have to be replaced at different times, the laggard capitalists cannot just discount their entire capital stock.

That is the principal difference between Marx’s position and the analysis by Brenner. Capitalists cannot survive forever on antiquated technology, as Brenner believes. In fact there was a massive destruction of capital in the 1970s and 1980s – as anyone who was politically active at the time will recall. Great swathes of British capitalism disappeared, never to return.

So for Marx overcapacity is a moment of capitalist crisis, not a permanent condition of its existence. Excess capacity is destroyed in a slump, preparing for a recovery – till the system falls again at the next fence. In fact Brenner’s analysis indicates the problem is one of chronic stagnation, not of boom and bust. Now it is quite true that since the definitive end of the ‘golden age’ of the post-war boom capitalism has been characterised by slower growth,. But there have also been crises in 1979-82, 1990-91 and at the present. These have to be explained. They can only be explained with the help of Marxist economics.

The nature of capitalism

Robert Brenner ‘privileges’ manufacturing in his analysis of post-war capitalism. We agree it has an importance beyond the proportion of the working class that works in this sector. All the dramatic improvements in productivity have taken place in manufacturing. In the ‘service’ sector (not a Marxist expression, but one we have to deal with because of its importance in national income accounting) in many cases productivity has not increased at all. Consider the case of cleaners, bar staff, shop workers, lorry drivers, actors and waiters. In many other cases (such as nursing) the whole notion of productivity measurable against an outcome is frankly ludicrous. We deal with Brenner’s account of the interaction between rising productivity and lower costs in manufacturing and the non-manufacturing sector at a later stage.

For the present, we want to criticise what we regard as a simplistic depiction of competition among capitalists in the manufacturing sector. It is perceived as a relentless drive to cut costs and sell cheaper. This might be a realistic depiction of the world steel market. Brenner does not mention individual industries in any detail. The case of steel actually is a very bad example for his thesis. Inefficient producers in the advanced capitalist countries have not been able to survive by wallowing in obsolescent technology and selling at a low price at the cost of consuming their capital. They have been threatened by new entrants to the world market such as Korea armed with state of the art technology. Many have gone under. Those who have survived have done so by retooling in order to compete with the market leaders.

But steel is an exception. It is an exception because it is a homogenous good. Nobody can tell where steel of a given grade was produced. Most goods, certainly most consumer goods, are differentiated from one another. Cars differ by nature. And car manufacturers deliberately accentuate these differences. They spend enormous amounts of money trying to persuade people how different their product is from everyone else’s even when, and especially when, it’s not really much different.

Brenner spends a lot of time discussing under what conditions capitalists may collude and under what conditions destructive price wars may break out. But the normal course of modern oligopoly capitalism is neither collusion nor competition on price, though these have their place, but never-ending non-price competition, the never-ending search for a new market or market niche for new products. This entire dimension of capitalist ‘competition’ is missed out in his analysis.

Equalisation of profit rates

Since capitalism is production for profit, each capitalist seeks a higher rate of profit. The resultant of this search however is a tendency for a uniform rate of profit to be established throughout the system. This equalisation of the profit rate is a tendency, not an accomplished fact. It comes about precisely through the constant striving of capitalists for higher profits than their fellows.

Nor is this process instantaneous. It is accomplished within industries and across industries throughout the system. Within a branch of industry we believe it is achieved through the innovation process outlined by Marx. “No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it increases the rate of surplus value, so long as it reduces the rate of profit. Yet every such new method of production cheapens the commodities, hence the capitalist sells them originally above their prices of production, or perhaps above their value. He pockets the difference between their costs of production and the market prices of the same commodities produced at higher costs of production. He can do this because the average labour time required socially for the production of these latter commodities is higher than the labour time required for the new methods of production. His method of production stands above the social average. But competition makes it general and subject to the general law. There follows a fall in the rate of profit – perhaps first in this sphere of production, and eventually it achieves a balance with the rest – which is therefore wholly independent of the will of the capitalist.” (Capital Vol. 3 p.264-5)

So within an industry establishing a uniform rate of profit is achieved by wiping out the laggards through technical progress. A standard level of expected productivity is set down in each industry through competition.

But capitalists producing steel or suites of furniture are not directly competing with those making chocolate bars. How is the rate of profit equalised between industries? It is done through the movement of capital between industries, as we outlined earlier. Capital in its money form will migrate in search of higher profits. It is true that capital locked up in a productive form, such as a car plant, is not usually able to switch uses at short notice. But the very destruction of old industries, from the manufacture of ships with wooden hulls and canvass sails down to modern times, shows that capital is not stuck forever in the productive form it adopts for a time.

Manufacturing and non-manufacturing capital

Robert Brenner spends most of his detailed country by country analysis in looking at the problems of manufacturing capital. We agree that manufacturing has been the heartland of surplus value production since the Second World War. We have also indicated that Marxists find the division of national income into primary (farming, fishing and extraction), secondary (industry) and tertiary (everything else – all non-material production) unhelpful. Surplus value is generated in all three sectors. However, having drawn his conclusions on the basis of manufacturing capital, Brenner then has to consider the implications of what happens there on the rest of the economy.

He uncritically applies the conclusions of Okishio’s theorem to the workings of the world economy. Or rather he does so till he comes to discuss the relations between manufacturing and non-manufacturing capital. The logic of Okishio’s theorem is that cost savings in one sector pop up as lower input prices and higher profits elsewhere in the economy. Cost-cutting in manufacturing should reduce the price of inputs for the rest of the economy, improving profits all over. We should expect the whole economy to have a higher and higher rate of profit as productivity continues to go up by leaps and bounds.

But Brenner knows that the rate of profit has gone down in the economy as a whole. Yet what he knows is inconsistent with his espousal of Okishio’s theorem. He has also offered an explanation for falling profit rates, though we believe it is flawed.

How does a decline in manufacturing profits impact on the rest of the economy? As we have indicated in our discussion of the equalisation of profit rates between industries, the fall of profits in manufacturing produced a drift towards non-manufacturing. Eventually this movement of capital would be expected to produce a tendency towards equal (lower) rates of profit in manufacturing and non-manufacturing.

Brenner chronicles this movement of capital in his work. We would expect a drift in employment towards non-manufacturing in any case. If productivity in manufacturing doubles while it remains unchanged in the rest of the economy, and if the structure of demand stays the same, it would only take half as many workers to produce the manufactured goods we want.

What Brenner does not discuss is the possibility of conflicts of interest between different fractions of the capitalist class. He tends to lump the whole non-manufacturing sector together and treat it as a passive add-on to developments in manufacturing.

Occasionally he gives hints as to differences between capitalists that may lurk below the surface. He notes the rise of FIRE (Finance, Insurance and Real Estate) within the service sector. This of course is the cloven hoof of finance capital. He makes a passing reference to the preference of bankers to non-inflationary solutions. But this is important. If he is suggesting that bankers impose their own interests on the rest of the ruling class and at their expense, he should spell it out. And he quite wrongly, in our view, refers to the 1979-82 downturn as ‘Volcker’s recession’ – as if America’s central banker single-handedly precipitated a world crisis.

Most of the time Brenner has little to offer about finance capital in his analysis. It is treated as part of the service sector (which it is in national income accounting terms). But Brenner’s tendency to use this concept uncritically means that he rolls millions of working class people in the service sector (such as nurses, shop workers, home care assistants, lorry and bus drivers) in with the speculators.

World Economy?

Brenner’s detailed analysis of events since 1945 is undertaken by looking at three crucial national economies – the USA, Germany and Japan. There is no doubt these are the most important national economies over the period. But there are 191 countries affiliated to the United Nations! While the USA is certainly more important than Cambodia or Mali to the development of the world economy, it is equally an error in method to analyse any national economy in isolation. Though the USA may have a significant impact on the workings of the world economy (unlike Mali) it remains the case that the world economy will have a greater impact on the United States.

As Brenner pointed out against the ‘profits squeeze’ theorists, we experience world crises of capitalism, though of course such crises always break out first in one country or region, and each national economy is victim to its own history in the course of the crisis. Rather than breaking down crisis to its specific impact on national economies, however, Brenner seems to be trying to add up the individual crises within national economies to gauge the effects on the world as a whole.

There is a further point to be made about Brenner’s spatial economics. For Brenner there is the world and then there are national economies. But the countries he has chosen are the central hubs, if not the economic hegemons, in the three main economic regions. Japan has taken Korea, the ‘tigers’ (or perhaps ‘former tigers’) and the whole of East Asia into its slipstream. The USA has long regarded Latin America as its backyard. And, with Germany in the lead, the European Union has been making increasing headway into the former Stalinist economies of Eastern Europe. Many economists see these regions as more significant economic areas than nations, though they will not make the nation-state obsolescent. Belgium, for instance (an ‘open’ economy with trade figures greater than national income), might be looked at more fruitfully as a part of a western European economy with its own history and traditions, rather than as an economically sovereign state.

Now the point of Brenner’s world economy/nation state dichotomy is that our view of the interaction between the two is necessarily limited. We have trade – movement of goods and services. We have capital movements. And we have migration, though movement of people between the three named countries has not been significant. All these transactions have one thing in common. They are all consummated through the exchange of money. So the exchange rate is critical.

Exchange rate movements

This helps to explain the quite extraordinary importance given to exchange rate movements in Brenner’s analysis. He has failed to investigate so many other possible causal factors. He ends up like the drunk looking for his dropped keys beneath the street light ‘because if they were anywhere else he couldn’t find them anyway.’

The economic decline and revival of the great powers relative to one another over the period is largely explained by Brenner in terms of exchange rate fluctuations. And these exchange rate movements are largely seen as willed by nation states.

This does not correspond to the British experience. After the Second World War sterling stood at ten Deutschmarks. By the time the German currency was subsumed into the Euro, the exchange rate was just three to one. Germany was seen as a post-War ‘miracle’ economy, while Britain was in relative decline over this period. German productivity went ahead by leaps and bounds, so their goods destroyed British markets at home and abroad, despite the competitive advantage Britain gained by the progressive depreciation of sterling. Real factors, the gain in productivity through higher investment, is more important to a country in the long run than exchange rate manipulations.

In any case, how far can exchange rates be influenced by government action? Now there have been well accredited instances of coordinated interventions by the imperialist powers on the foreign exchange markets. And it is certainly true that antagonisms between major capitalist countries have been fought out through the medium of the exchange rate. But these ‘political’ interventions onto world markets are surely the exception. Certainly British readers will recall the Major government’s determination to stay in the Exchange Rate Mechanism being washed away by a wall of speculative money in 1992.

One set of well-documented coordinated interventions on the foreign exchanges took place after the Plaza Accord in 1985. The early years of the Reagan administration in the USA after 1980 saw a series of policy mistakes that lead to a rise in the $ against all other currencies. This ‘super dollar’ made American exports impossibly expensive and destroyed large swathes of US industry. Reagan’s advisers got the other major capitalist powers in a room and basically threatened them with all-out trade war unless they played ball. After that day central bankers successfully drove the $ down to more realistic levels. Brenner is quite right to describe this as a successful intervention, but he does not emphasise its exceptional nature. Marxists are quite happy to perceive exchange rates as at a ‘wrong’ level (the ? is definitely too high at the time of writing – February 2003). But we do not accept there is a ‘right’ level, in the sense that exchange rate policy can solve a country’s economic problems. Brenner does not go that far, but he definitely ascribes too much importance to the gyrations of the exchange in the relative success and failure of the US economy in relation to its rivals. Likewise Marxists know that policy mistake can be important in the development of a national economy. But, at risk of repeating an elementary truism, in a market economy, long term outcomes are the result of market forces, not government intentions.

In B2 Brenner discusses the effect of what he calls the ‘Reverse Plaza Accord’. By this he means the reversal in policy towards a strong dollar in the early years of the Clinton administration. Significantly, this did not get much mention in B1. But his short chapter on the ‘Reverse Plaza Accord’ is actually crucial to his second book. The Plaza Accord was widely reported and discussed in the financial press in 1985. Perhaps that gave it some of its credibility. The reversal of policy in 1995 did not get the same coverage. It was actually a deal stitched up with the finance ministers of Germany and Japan. Nor does Brenner present much evidence of coordinated intervention afterwards. In any case the dollar did appreciate against other currencies. For the strengthening of the $ had major implications on the boom and the bubble of the 1990s.

The 1990s

Brenner is measured and restrained in his analysis of the American boom of the decade. Not for him saucer-eyed predictions of a new economy where slump has been banished! No boasting about the final triumph of Anglo-Saxon capitalism, red in tooth and claw, over its effete rival European variants for him! As usual, his factual material is excellent.

For Brenner, the bubble began to blow up after 1995. “The fact remains that by the end of 1995, even after increasing rapidly for the better part of a dozen years, share prices had not outdistanced the growth of corporate profits. It could indeed be said without exaggeration that the dramatic increase of the stock market up to that point basically reflected the dramatic recovery of profitability in the US economy from its depressed state in the recession at the start of the 1980s.” (B2 p.138)

What is distinctive about his analysis is the link he draws between the strong dollar and the speculative bubble. For if the dollar is continually appreciating against the domestic currency, speculators who ‘invest’ in American pieces of paper will make a capital gain when they change their dollars back to local money on top of anything it ‘earned’ in the States. And the inflow of foreign currency helped drive the dollar up further. So foreign money helped to fuel the speculative bubble of the late 1990s.

Because of the strong dollar, “In 1995, the rest of the world bought US government securities worth $197.2 billion, two and a half times the average for the previous four years, and followed up with purchases of $312 billion in 1996 and $189.6 billion in 1997, a total sum of $0.7 trillion.” He goes on “Such enormous purchases could not but dramatically loosen the chain on US money markets, chasing down interest rates and freeing a cascade of liquidity to purchase US equities.”(B2 p.141)

So, “During the first quarter of 2000, the total value of US non-financial corporate equities, their market capitalization, reached $15.6 trillion, up from $4.8 trillion in 1994.” (B2 p.182) The bubble was about to burst.

Brenner and the rate of profit

It is one of the great merits of Brenner’s work that he sees movements in the rate of profit as central to developments in the world economy since the Second World War. Actually the statistical detail in his work on this topic is outstanding.

We have seen that Brenner disagrees fundamentally with the classical Marxist position as to why the rate of profit tends to fall over time. We believe we have shown his alternative explanation is unsatisfactory. So how does Marx’s theory help illuminate the facts presented by Brenner.

First we look at the global position. In all countries surveyed, the rate of profit was declining (from a high point just after the War) throughout the period we now call the ‘golden age’ of post-War capitalism. This fall, at first gentle, became manifest after 1965 and grew into a full-blown crisis in 1974-75. The whole course of the class struggle since that time has been triggered by a desperate effort by the ruling class to restore the rate of profit. As Brenner shows, though workers have been beaten back in one country after another through the neo-liberal offensive that began with Thatcher and Reagan in the 1980s, golden age profit levels have not been restored.

What he missed

For Marx, ‘the real crisis can only be deduced from the real movement of capitalist production, competition and credit.’ (Theories of surplus value Vol. 2 p.512) All downturns are unique. They are a product of the accumulated history of the world economy. At the same time they all have features in common. They are all instances of the working out of the basic laws of capitalism. In this context the tendency for the rate of profit to fall can only appear in the background.

Brenner’s analysis misses this richness. Any theorist has to abstract from the incidental to start with, and to cut straight to the underlying tendencies. The task, of course, is to return to these apparently incidental features on the surface of events, and explain from first principles how they got there and how they came to assume their importance.

Brenner starts with a critique of the ‘profits squeeze’ theorists. In forcefully refuting the notion that wage demands can trigger crisis, Brenner then fails to discuss the importance of class struggle. While we completely agree with his critique, class struggle between workers and capitalists in general cannot be abstracted from in a realistic analysis of modern capitalism.

Secondly, Brenner’s analysis misses out serious discussion of conflicts between different fractions of the capitalist class. In particular finance capital is all but ignored. National capital blocs are thus seen as cohesive units with a uniform set of objectives. Actually capitalists, as Marx explained, are warring brothers. Potential conflicts of interest between capitalists within a national economy cannot be ignored. Effectively that means ignoring competition, the ‘executor’ of the laws of the system.

Third, it is simplistic to divide the capitalist world into a series of homogenous units called nation states. Capitalism needs the nation, and it undermines it. Capitalists see themselves as individuals against the world, as joint participants in a national capitalist enterprise, and they see their world as their oyster. Nation states, for their part, are likely to perceive themselves as in a regional alliance against the other regions as well as having their own interests.

Brenner’s project is hugely ambitious. He has pointed us all in the right direction. But his work, as it stands, does not offer a fully fleshed out account of the world economy since the Second World War.

April 2003.

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. “?none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune.” (B1 p.22)