Wednesday, 3 July 2013

The Rates Of Profit, Interest and Inflation - Part 2

The Rate of Profit (1)

Source: Doug Henwood
Estimates of the Rate of Profit are generally wrong, and those theories that have tried to explain “The Great Recession” as being caused by the Tendency For the Rate of Profit To Fall, analysed by Marx, are, therefore, also wrong, not least because on most estimates, even on their current basis, the rate of profit has been rising rather than falling!

The US Economy Is In Relative Decline

One reason that most estimates of the rate of profit are wrong is that they are based on the data for the US. There are good reasons why that is the case. The US has the most detailed and complete set of data on economic activity of any major economy, and although there are questions over the way some of that data is presented, for example the use of hedonic pricing, perhaps most notably criticised by the neo-Austrian Kurt Richebacher, US data is, on the whole, more trustworthy than most.

China is growing at such a rapid pace that just from its
growth alone it creates the equivalent of an additional
Greek economy every 3 months!!!
But, the problem in trying to understand trends in global capitalism, by extrapolating from the US, is that although the US remains the world's largest economy, it is an economy in significant relative decline. Even its top spot is likely to fall to China within the next five to ten years, and, in fact, compared to the, German dominated, EU economy, the US is already in second place – GDP for each is, EU $17.58 Trillion, US $15.69 Trillion, China $8.23 Trillion. But, the fact that China, whose GDP is only just more than half that of the US, currently, is likely to overtake it within 5-10 years, is itself a measure of the pace of the relative decline of the US economy. The US is growing at around 2% p.a., whilst China is growing, even after a government induced slow down, to prevent overheating, at around 8% p.a.

Given that an economy's rate of growth is essentially an aggregate of the rate of growth of the individual capitals within it, the problem, of using the US as a base metric, for the rate of profit, of capital in general, can be easily seen. The rate of profit tends to set a maximum for the rate of accumulation of capital. An individual capital can, at any one time, raise additional capital, on capital markets, in order to expand its business. It can borrow from the bank, issue bonds, or sell shares. But, its ability to do so, at rates that make it worthwhile, depend upon the availability of capital within the capital-markets, and ultimately, as Marx described, that depends upon the amount of profit that is being created in aggregate.

I have set out in a separate post Money Hoards, Accumulation and Disproportion how Marx analyses the process of capital accumulation, and the role of money hoards within it. But, as it states there, the limiting factor of how rapidly those money hoards can be accumulated is itself a function of the rate of profit. If we take capital in aggregate, then, its ability to accumulate, is limited by the rate of profit.

On that basis, we can see that China is growing at around 4 times the rate of the US. That is either because the rate of profit in China is four times what it is in the US, in which case the US rate of profit is a poor guide to global rates of profit, or else large amounts of profit in the US, are being hoarded, as money-capital, rather than being used for productive investment. The problem with the latter alternative is that between China and the US, it has been China that has been amassing huge money hoards, as well as rapidly expanding its economy, whereas it is the US that has been borrowing large amounts of money from China and elsewhere, frequently, not to finance capital accumulation, but rather to finance continued high levels of consumption. If the case were that the US was making equally high levels of profit as China, but investing a smaller proportion of it, in productive activity, it would make no sense to borrow money from China to finance consumption spending, when that money could have been borrowed from excess money-capital within the US itself.

Jim O'Neill of Goldman Sachs coined the term BRIC economies.
But, they are not the most dynamic, fastest growing only the
biggest, most developed of that group.  He has identified the "Next 11"
and others have pointed to many other economies from Vietnam,
Indonesia, and a range of African economies that are growing and
industrialising fast as the Asian Tigers did 20 years ago.
The argument could be raised that borrowing the money from China was worthwhile, because it could be obtained at lower rates than could be obtained in the US. But, that would still beg the question of why that was. It could only be because there was a greater excess supply of Money-Capital in China than there was in the US. But, if that excess was greater in China, where the demand was high, due to very high levels of capital investment, and accumulation, manifest in its much higher rate of growth, then it could only have a relatively higher level of supply if the rate of profit was much higher. The only logical conclusion is that the rate of profit in China has been much higher than in the US. But, China is not the only country that has had rapid rates of growth and capital accumulation. China is just one of the BRIC economies, but the BRIC economies are not even the most dynamic, the most rapidly growing economies in the world economy. They are just the largest, most developed.

Other economies such as those in Indonesia, or Turkey, and more recently economies in Africa have had much higher rates of growth than the BRIC economies, and although many of these economies have had high rates of growth based on the supply of primary materials and foodstuffs, which are likely to be hit hard, in the next phase of the Long Wave, many of them too have learned the lessons of past development, and have tried to utilise these revenues to also build up value added production to the materials they sell, and to industrialise. There is a good reason for that.

When Britain, France and other European countries established colonies across the globe in the 17th, 18th, and 19th centuries they did so as mercantilist powers. That is, they were economies where the ruling class was still the landed aristocracy, but it increasingly shared power in a symbiotic relationship with a rising merchant class. The trailblazers of those merchants were pirates like Sir Francis Drake, and their successors were the heads of private armies employed by the great merchant companies like The East India Company. They followed the merchant code of buy low and sell high. They had no interest in developing industrial production in the colonies, only of obtaining cheap resources from them, and selling manufactures to them.

The task of industrialising the colonies fell much later to industrial capitalism, to Imperialism itself, in the 20th Century, and particularly after WWII. In other words, to the period of Imperialism proper. But, China like the US has never existed as a colonial power. Its expansion from the beginning has been as an industrial power. It has at least as much interest in extracting relative and absolute surplus value, by establishing or supporting the establishment of value added, and industrial enterprises in those lesser developed economies with which it is building economic relations, as it does in extracting profits by unequal exchange.

In fact, in assisting in the development of those industries, which in turn pay taxes and help the development of a local capitalist state, it shifts some of the costs of those state functions off its own shoulders. The more capitalist state apparatuses are developed by local capitals, the more those states carry out state functions for the benefit of all capitals within their remit.

Paul Mason has theorised
much recent unrest in
terms similar to those
of the Revolutions of 1848.
Rapid economic development
and the creation of large urban
middle and working classes.
In fact, there is good reason to believe that much of the reason for the eruption of the “Arab Spring”, of current events in Turkey, Brazil, Bulgaria etc. have their roots in the rapid economic growth that has occurred in these economies over the last 20 years, and the concomitant development of a sizeable, educated middle class, as Paul Mason has described over the last couple of years – Paul Mason. It is a similar development, as both Paul Mason and I have commented, to the material conditions that led to the Revolutions of 1848.

In the first decade of this century, global GDP doubled, and fixed capital formation also doubled. That is a compound annual growth rate of around 7%, closer to the current rate of growth of China, though significantly less than its own average growth rate during that period of 10-12%, than it is to the average rate of growth of the US. If we take the rate of profit as the maximum barrier to the rate of growth, then in considering the average rate of profit of capital globally, we should then consider it to be as much as three times the US rate.

Of course, that is to consider things in aggregate, which hides a multitude of sins, but also understates the rate of profit of some US companies too. As the world's largest and most advanced economy, the US may be in relative decline, but that does not mean that, within it, it does not have some very dynamic, very profitable companies also. In fact, it probably has some of the most dynamic, and profitable companies in the global economy. Businesses, like Apple, and Microsoft, and Google are companies that have only developed, mostly from nothing, in the last 30 years, whilst others such as IBM, that are much older, have recreated themselves. But, it was a US company that first decoded the human genome, and the US has many of the world's top biotechnology, genetic technology and nanotechnology companies. It continues to dominate the global entertainment industry both from Hollywood, and from a range of TV production companies, that continually churn out programming sold across the globe. The US dominates the market for space technology, though other large economies like China and the EU, and Russia are developing as alternatives.

So, it is not surprising that whilst old, globally uncompetitive companies like GM and Ford, used their huge balance sheets from the 1980's onwards to remain in business, whilst year in year out they produced losses, these newer, high value, high profit companies, were able to accumulate profits and grow rapidly, whilst at the same time accumulating their own huge money-hoards on their balance sheets. Some time ago, Microsoft was reported to have over $40 billion of cash, whilst Apple is reported to have over $140 billion of cash.

In fact, the build up of money-hoards by these companies, as with the build up of cash of whole economies like China, is an indication not of some crisis of capitalism, not of some overproduction, or falling rate of profit. It is an indication of the exact opposite, of the magnitude of the increase in the rate of profit, and of the volume of profit that has resulted from it!

Back To Part 1

Forward To Part 3

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