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Competition and Class

A Reply to Foster and McNally

Robert Brenner teaches history at UCLA, where he is director of the Center for Social Theory and Comparative History. He is an editor of Against the CUTTentand author of essays in The Brenner Debate: Agrarian Class Structure and Economic Develop- ment in Pre-Industrial Europe, eds. T.H. Aston and C.H.E. Philpin (Cambridge: 1985); Merchants and Revolution: Commercial Change, Political Conflict, and London’s Overseas Traders (Princeton: 1993); and The Economics oiGlobal Turbulence (Verso: forthcoming in 2000).

The postwar economy is widely understood to have gone through two major phases. During the long boom between the end of the 1940s and the early 1970s, most of the advanced capitalist economies (outside the United States and the United Kingdom) experienced record-breaking rates of investment, output, productivity, and wage growth, along with low unemployment and only brief, mild recessions. But during the long downturn that followed, the growth of investment fell significantly, resulting in much-reduced productivity growth, sharply slowed wage growth (if not absolute decline), depression-level unemployment (outside the United States), and a succession of serious recessions and financial crises. My goal in The Economics of Global Turbulence was to explain why the long boom gave way to a long downturn, to reveal why stagnation has persisted on an international scale for such an exceedingly long period, and finally to demonstrate how the failure to resolve the problems underlying the long downturn opened the way to the world economic crisis of 1997-1998. I therefore saw it as my central task to explain why the rate of profit, especially in manufacturing, not only fell sharply between 1965 and 1973, but also failed for so long to recover, and not just in the U.S. economy, but in the advanced capitalist economies taken in aggregate. For it seemed clear to me that the fall, and failure of recovery, of profitability on an international scale lay behind that extended slowdown of system-wide capital accumulation at the source of the long downturn.

In seeking to explain the fall in the rate of profit, my point of departure is the anarchy of capitalist production and, in particular, the competitive pressure on capitalist enterprises to cut costs as the condition for their very survival. The resulting tendencies toward the accumulation of capital and toward innovation are, of course, at the root of capitalism’s historically unprecedented capacity for developing the productive forces. But, occurring as they do in an unplanned, competitive manner, they are also, I argue, at the source of capitalism’s tendencies to periodic crisis and stagnation. This is because individual capitalists have no interest in, and are in any case incapable of, taking account of the aggregate effect of their actions, specifically the destructive impact of their cost-cutting on already existing capitals and on the ability of those capitals to yield profits. Intractable problems thus tend to arise when capitalists cut costs, because they often render obsolete the fixed capital that their rivals introduced earlier, thereby preventing those owners from realizing the expected, and necessary, rate of profit. Plant and equipment that initially represent the most up-to-date (socially necessary) technique, but which need to be operated for an extended period to recover their cost and provide sufficient returns, are thus rendered insufficiently profitable in the face of the new, lower prices that have resulted from the premature introduction of new, even more productive fixed capital.

More specifically (and combining, for the sake of brevity, the conceptual and historical aspects of my argument), I try to demonstrate that the key to the fall in the rate of profit, and to its long-term failure to recover, was the emergence, and persistence, of overcapacity and overproduction on a system-wide scale, especially in manufacturing, beginning in the mid-1960s. Overcapacity and overproduction, I contend, emerged out of a process of uneven development, marked by the interaction between the fast-growing, later-developing economies of Japan, Europe, and (later) East Asia, and the slow-growing, earlier-developing economies of the United States and the United Kingdom, which I see as a central determinant of both the long boom and the long downturn. The Japanese, West German, and other later-developing industrial economies were thus able to grow rapidly during the boom by virtue of their ability to exploit the advantages of being followers technologically, backward socioeconomically, and hegemonized militarily and financially by the United States. They adopted cheap but advanced U.S. technology in order to catch up. After repressing or containing militant worker uprisings in the years immediately following the Second World War, they took advantage of huge pools of unemployed workers in their still relatively backward rural sectors so as to keep wage growth relatively low compared to productivity growth. They avoided the heavy unproductive military expenditures undertaken by the United States. And they emphasized domestic manufacturing, supported by their banks and governments, rather than the internationalization of their economies via the overseas expansion of their multinational corporations and banks.

During the first part of the postwar epoch, the German and Japanese economies in particular functioned as hubs of great regional economies in Europe and East Asia. They used their much lower labor costs; their advanced economic institutions for regulating intra-manufacturing, finance-manufacturing, and capital-labor relations; their undervalued exchange rates; and their protectionism to thrive at the expense of the high wage, free-trade oriented, and internationally directed U.S. (and U.K.) economies. U.S. authorities freely acquiesced in this pattern of international economic evolution, because it enabled them not only to insure the creation of markets for their initially overwhelmingly dominant domestically-based manufacturers, but also to pave the way for the large-scale penetration of the European economies through the direct investment of their great multinational corporations, while carrying out one of the most intense waves of military-imperial expansion the world had ever seen. In fact, U.S. producers long suffered relatively little damage from intensifying international competition, because they had begun with such an enormous technological lead and were long able to dominate the huge U.S. domestic market, even while ceding huge chunks of their overseas markets to producers abroad. U.S. multinationals were able partially to compensate for declining export shares by using the overvalued dollar to buy up assets on the cheap throughout the world.

Nevertheless, uneven development through the growth of the world division of labor did not long remain only favorable in its effects. Between 1965 and 1973, manufacturers based especially in Japan, but also in Germany and in other parts of Western Europe, combined relatively advanced techniques and relatively low wages to reduce relative costs sharply vis à vis those in the United States. On this basis, they dramatically seized increased shares of the world market and imposed on that market their relatively low prices, while succeeding, by virtue of their relatively reduced costs, in maintaining their old rates of profit. Their U.S. competitors found themselves facing slower growing prices for their output, but caught with inflexible costs as a result of their being stuck with fixed capital comprised of suddenly outmoded technology. Those that could no longer make the old, or average, rate of profit even on their circulating capital alone, i.e., on the new investments for labor, raw materials, and intermediate goods that were needed to operate their fixed capital (plant and equipment), had to shed productive capacity. Others, in order to hold on to their markets, had little choice but to accept significantly reduced rates of profit on their fixed capital, since they could not raise prices above costs as much as they had previously.

As a consequence of the unanticipated irruption of lower-priced Japanese and German goods into the market, U.S. manufacturing producers were unable to realize the old, established rate of return on their placements of fixed capital because demand outran supply in their lines. System-wide overcapacity and overproduction, which manifested itself in a declining system-wide rate of return on capital stock in manufacturing, was the result. Between 1965 and 1973, the U.S. manufacturing sector sustained a fall in the rate of profit on its capital stock of over 40 percent. Simultaneously, the profit rates of the leading European and Japanese manufacturing economies taken in aggregate were roughly able to maintain themselves (at least up to about 1969-1970). The upshot was that, in the same years, the profit rate of the manufacturing sectors of the G7 economies taken in aggregate (a surrogate for international manufacturing as a whole) fell by about 25 percent.

The Japanese, German, and other European economies did not remain immune from the aggregate decline in profitability. Enormous U.S. balance of payments deficits (and Japanese and German balance of payments surpluses) emerged as the natural concomitants of declining U.S. competitiveness and profitability in the later 1960s and early 1970s and propelled the world monetary system into crisis. Between 1971 and 1973, the Bretton Woods system of fixed exchange rates had to be jettisoned and the U.S. dollar sharply devalued, while the mark and yen were correspondingly revalued. Japanese and German manufacturers were burdened with sharply rising relative costs compared with those of their U.S. rivals and obliged to shoulder a much greater share of the fall in aggregate profitability that had struck the G7 manufacturing economies. But it was evidence of the degree to which overcapacity and overproduction had by this point gripped world manufacturing that U.S. producers, though benefiting from the dollar’s fall, were unable to come close to restoring their boom-time profit rates.

Still, it is one thing to account in this manner for the initial fall in profitability. It is quite another to explain why there was no recovery for so long. In particular, why didn’t firms suffering from falling profitability in their lines shift means of production into other, higher profit lines in order to alleviate overcapacity and overproduction? I believe that there are basically three answers to this question.

First, the great corporations of the United States, Germany, and Japan that dominated world manufacturing had better prospects for maintaining and improving their profitability by seeking to improve competitiveness in their own industries than by reallocating means of production into other lines. They possessed great amounts of sunk capital, already paid for, that they could use “free of charge.” As a result, at least for a time, they could generally make higher rates of profit on their new investments in circulating capital (labor, raw materials, semi-finished goods) in their own industries than they could on investments in other industries. Though they suffered reduced rates of profit on their total capital, it nonetheless made sense for them to stay put.

Moreover, these corporations maintained long-established relationships with suppliers and customers that could not easily, or without great cost, be duplicated in other lines. Perhaps most importantly, over a long period they had developed hard-won specialized knowledge of production they could apply only to their own industries. During the 1970s and after, U.S., German, and Japanese corporations found it more promising to fight than to switch, and did not generally relinquish their positions unless forced. With help from supportive governments and/or sympathetic bank financiers, they sought to transform and improve production to compete better. As a result, there was insufficient exit.

Secondly, despite the reduced profitability in world manufacturing lines, the process of uneven development continued. Emergent low-cost producers, based especially in East Asia, found it profitable to enter many of those lines, just as their predecessors from Japan had once done in analogous circumstances. There was too much entry, further exacerbating overcapacity and overproduction.

Thirdly, Keynesian policies, which became almost universal in the 1970s, actually contributed to the perpetuation of overcapacity and overproduction, helping to prevent a decisive recovery of profitability and, in turn, of capital accumulation. Increased demand, deficit spending, and easy credit allowed many high-cost, low-profit firms that would otherwise have gone bankrupt to continue in business and maintain positions that might have been occupied by lower cost, higher-profit producers. But, given their low surpluses, such weakened firms could hardly undertake much capital investment or expansion. Instead, in response to an increase in aggregate demand resulting from Keynesian policies, they were able to bring about a smaller increase in supply than in the past, so that the ever-increasing public deficits of the 1970s brought about not so much increases in output as accelerated rises in prices. Keynesianism was thus unquestionably necessary to keep the world economy turning over. But, it increased inflation and, precisely by preventing the harsh medicine of depression that had historically cleared the way for new upturns, it reduced over the long run the potential dynamism of the system.

It was only with the Clinton administration that the world economy was able finally to break decisively with Keynesianism. Volcker, Carter, and Reagan had, of course, introduced a vicious experiment in monetarist austerity at the start of the 1980s. But sharply restricted credit had threatened to precipitate a crash and had to be counterbalanced by military Keynesian deficits. Nevertheless, the government’s accumulation of record debt, in the face of the Federal Reserve’s tight-money regime, brought record-high real interest rates, which offset the gains in profitability that were being secured through the major shakeout of high-cost/low-profit firms taking place over the course of the 1980s and beyond. Faced with a revolt from Wall Street if he sought further deficits, Clinton probably had little choice but to turn to budget balancing. Since Europe had already moved in this direction in preparation for monetary unity, fully-fledged monetary and fiscal austerity finally came to dominate the world economy in the 1990s.

The almost universal macro-economic tightening has brought the accumulated contradictions of the previous two decades to the forefront. It has reduced the growth of domestic demand throughout the world economy, forcing producers everywhere to step up their orientation to exports sharply. A further intensification of international competition has thus been unavoidable, paving the way for a serious exacerbation of already existing international overcapacity and overproduction in manufacturing and for deeper stagnation and heightened instability throughout the decade.

In this context, the U.S. economy managed to expand—though far less dynamically than indicated by propaganda—and to secure a major revival of profitability, especially in the still critically important manufacturing sector. But U.S. manufacturing accomplished its recovery of profitability in large part through a revival of competitiveness, which was itself secured not only by the continuing shake-out of redundant, high-cost means of production in manufacturing lines, but also on the basis of a steep fall of the dollar against the yen and mark and a decade long freeze on real wage growth. The U.S. economy’s increased dynamism was thus accomplished, to an important degree, at the cost of extensive recession, in large parts of the world economy over much of the decade, notably the suddenly much less competitive, export-oriented manufacturing economies of Japan and Germany. In this context, independent money managers sought to increase returns in a world that was short on profitable real investment opportunities but overflowing with liquidity (which had arisen from the Fed’s rescue of the economy’s over-extended corporations and banks during the 1990-1991 recession). They sent masses of short-term money to East Asia, the only center of truly dynamic growth in the 1990s, overheating these economies. This worsened the underlying problem of manufacturing overcapacity and overproduction and set the stage for the international economic crisis of 1997-1998.

Alan Greenspan’s dramatic three-phase lowering of interest rates in autumn 1998 cut short the deepening world crisis by signaling to the equity markets that the U.S. Fed would stand behind the value of their stocks. The major boom (beginning in 1996 or so) that was thus perpetuated has been largely driven by the enormous growth of domestic consumption. This has itself been derived from the “wealth effect,” that has resulted from the record-breaking stock market boom, which has given rise to big capital gains, sharply reduced rates of saving, and the spectacular growth of private debt, both corporate and consumer. The accelerating growth of U.S. consumption has also been behind the record U.S. current account deficits that have kept the world economy turning over. In effect, a new form of artificial demand stimulus through private deficits, made possible by the Fed, has been substituted for the old Keynesian public ones. But, since the underlying problem of system-wide overcapacity and overproduction has not been resolved, it is only the stock market boom, buttressing the consumption boom, that today stands between the international economy and a new recession or something worse.

In the June issue of Monthly Review, both David McNally and John Foster take issue with the emphasis on cost-cutting competition in my account of falling profitability. They regard this as something of a heresy against Marxist orthodoxy, and thus highly problematic. But they do not identify substantive problems in the argument.

McNally’s account is a bit puzzling. He asserts that “Competition-centered theories [like mine]…elide questions of wage-labor, exploitation, fixed capital.” He scolds me for supposedly “failing to build on Marx’s value categories” and proceeding from “a vague and fuzzy concept of competition” (42-43). But he then goes on to present schematically, and, as far as I can see, to endorse fully, my explanatory framework. In so doing, he confines himself to price terms and makes no reference whatsoever to value categories. He offers no indication of how my argument might violate either the theory of value or of surplus value1(I deny that it does.) (44-46). Moreover, he follows up his explication of my thesis by validating it through demonstrating in some detail (although without clearly acknowledging that he is, in the main, simply summarizing my own extended analysis and narrative) how my theory can grasp the onset and successive historical phases of the long downturn, with their characteristic features. I can only be grateful for McNally’s clear and dynamic presentation of my views and his near total vindication of my work.

The core of Foster’s critique seems to be that the powerful tendencies to concentration and centralization within modern capitalism contradict my argument based on destructive intercapitalist competition.2 “[H]ow,” asks Foster, “does [Brenner’s] theory of crisis based on horizontal competition relate to the concentration and centralization of capital?” (31-32)

But it is difficult to grasp the critical point of this rhetorical question or to understand how it affects my argument, since concentration and centralization of capital are so obviously straightforward manifestations of intercapitalist rivalry, both effects of competition and means of fighting the competitive war. Large firms are, of course, generally aided by their size and financial wherewithal in securing those economies of scale and other technical advantages over their rivals that make possible temporary technological monopolies, which can be realized in either higher rates of profit or increased market share.3 They therefore tend to win out in competition against small firms.4 But the upshot is not, as a rule, the end of competition but the continued prevalence of competition, pursued by the relatively small numbers of large firms that dominate each industry, surrounded by not insignificant numbers of smaller, weaker ones. These great firms are not, for the most part, price takers, as were, for example, the myriad small producers that used to constitute the world’s markets in agricultural goods. They engage in strategic rivalry, product differentiation, research and development, and so on, as well as competition involving price and output. But, since their competition is not any less brutal, it is difficult to see why Foster sees the concentration, centralization, and predominance of huge firms as undermining my argument.

The bottom line for Foster seems to be that the concentration, centralization, and prevalence of large firms are incompatible with my thesis because they lead to monopoly, and, for that reason, a tendency for the surplus, and for the rate of profit, to rise, which goes against my argument that cost-cutting competition brings about a tendency for the rate of profit to fall as a consequence of its impact on already-existing fixed capital. As an adherent of the Monthly Review school, Foster finds the roots of the long downturn in a problem of insufficient demand that results from the aggregate inability to realize the tendentially rising surplus, especially due to monopoly firms’ interest in keeping down output to secure higher prices and holding back investment to protect already existing capital. Monopolies have the potential to restrict output and investment, of course, because they are freed from the competitive constraint. Insufficient demand manifests itself, in turn, in falling capacity utilization and slowed capital accumulation. Nevertheless, I am doubtful that this argument can get off the ground, because the initial leap from concentration, centralization, and large firms to monopoly and a rising rate of surplus is so difficult to justify, either conceptually or empirically.

The existence of widespread monopoly as the foundation for a tendency for surplus to rise, and for the freeing of firms from pressure to invest imposed by competition, entails, in the first place, that firms, in industry after industry, possess sufficient market power to set, or “administer,” prices so as to yield profit rates above the average on a long-run basis. Concentration and centralization are thought to lead to monopoly because they are believed to create firms of such size and financial power in each industry that entry by newcomers is all but ruled out. Potential entrants are kept out because they cannot secure sufficient finance to achieve the scale and the technological level required to compete. In this situation, incumbent firms are able to collaborate, formally (e.g., through directly colluding) or informally (e.g., via “price leadership”), and to set prices and divide markets so as to secure a rate of profit significantly above the average. The upshot, according to the theory of monopoly capital on which Foster claims to base his arguments, is that surplus, and more generally the rate of profit, have a tendency to rise in the aggregate economy. This is because oligopolistic firms are not only able to raise prices beyond money wage increases but are also obliged to innovate to cut costs and protect themselves against oligopolistic collaborators who could, conceivably, become competitors.5

The basic problem with this scenario—in which concentration, centralization, and large size give rise to monopoly power and monopoly power makes for a tendency for the surplus to rise—is that it is ultimately premised on the effectiveness of barriers to entry that are more than temporary. But, if there is any trend that is as marked in contemporary capitalism as that toward concentration, centralization, and large size, it is that toward the increased mobility and mobilizability of capital on an international scale. Banks most obviously, but other financial bodies as well, tend to have immediately at hand, or to be able to bring together, whatever amount of capital is necessary to enter any field that is displaying an unusually high profit rate. In places like Japan, Germany, and the East Asian Newly Industrializing Countries (NICs), firms can resort to bank finance with particular ease, given the tight connections that exist between manufacturers and banks. In addition, states in such places can apply and routinely have applied truly massive financial resources to aid industries to the same end. The upshot is that more than temporary monopolies are difficult to maintain, without direct political action by governmental authorities to sustain them by controlling entry (and, of course, the tendency over the last couple of decades has been in the opposite direction, toward deregulation).6 In this context, it is more than a bit difficult to credit either of Foster’s core premises: 1) that oligopolistic firms have sufficient market power not merely to transfer part of the surplus from competitive firms, but, by raising prices faster than nominal wages, to increase the total surplus available to capital at the expense of the working class, thereby making for a tendency for the surplus to rise; 2) that oligopolistic firms maintain sufficient insulation from competitive pressures to allow them to hold back on investing, which contributes to stagnation.

Foster berates me for asserting, as I did, that the vision of monopoly control, collaborative price setting, and tendentially rising profitability presented in Monopoly Capital was at best a “reification of quite temporary and specific aspects of the economy of the U.S. in the 1950s.” He goes on to argue, moreover, that “capital’s tendency toward concentration and centralization extending beyond mere national bounds,” especially as it is exemplified in the rise of multinational corporations and “mega-mergers on a global scale,” calls into question my premise of intense “global competition and price [cost] cutting” (31). But it seems to me that my case is borne out by even the most cursory glance at postwar capitalist evolution. It may perhaps be true that, for a brief period after the Second World War, groups of U.S. firms in industries such as auto, steel, or rubber, commanding the most modern technologies and facing overseas rivals enfeebled or in ruins, could cooperate directly or indirectly to administer prices. But soon they were obliged to confront intense struggle for markets from increasingly powerful competitors from abroad, most notably in Germany and Japan. These competitors were able to enter ever more technically sophisticated lines of production with advanced techniques, by drawing on the resources of enormous banks with whom they were closely connected, powerful groups of firms with whom they were aligned, and the backing of their governments.

It is difficult to see how monopolistic power could have sustained itself across wide sections of U.S. industry in the face of the increasing capacity of industrial corporations to enter into the world market, both in the United States and internationally. So, it is difficult to see how the long downturn might have found its origins in Foster’s “overexploitation,” i.e., “the tendency of the surplus to rise,” leading to the insufficient growth of demand. In any case, if a tendentially rising surplus leading to investment stagnation was at the source of the long downturn, why was it that the economy was actually, as I argue, driven into stagnation and crisis by a sharp fall in the rate of profit from the middle of the 1960s, which was rooted in the inability of the firms in its highly concentrated and centralized manufacturing industries to sufficiently mark up over their rising costs? In what sense did “monopoly” prevail, when, in these years, in such industries as transportation, metals, chemicals, and electrical machinery, not to mention textiles and apparel, firms suffered sharply reduced profitability because world-market-imposed prices prevented them from maintaining their old rates of return? Finally, if a problem of effective demand was at the origin of the long downturn, why was it that the manufacturing rate of profit fell so sharply between 1965 and 1973, even holding capacity utilization constant, and that the growth of demand began to fall only after, and as a result of, the profound fall in the rate of profit, rather than vice versa?

Although Foster ignores this, I do offer straightforward evidence to prove my thesis that downward pressure on prices, resulting from overcapacity and overproduction in the international manufacturing sector, was behind the profound fall, and failure of recovery, of manufacturing profitability that lay behind the long downturn. During the decisive years between 1965 and 1973, when the rate of profit initially fell in the United States and on a world scale, the average annual growth of unit labor costs in the U.S. nonmanufacturing sector (the private business economy minus manufacturing), at 4.7 percent, was more than 50 percent faster than that in the manufacturing sector, at 3.05 percent, because nonmanufacturing productivity grew significantly slower than that of manufacturing, while nonmanufacturing wages grew somewhat faster. Nonetheless, in nonmanufacturing, the rate of profit fell by a mere 13 percent in these years, hardly enough to cause serious problems. In contrast, profitability in the manufacturing sector fell by a major 40 percent, to set off the long downturn. What lay behind this divergence is clear. Because they were immune from the international overcapacity and overproduction that at this time gripped manufacturing, nonmanufacturers were able to raise their output prices during these years at the average annual rate of 4.4 percent to maintain their rates of profit. Because manufacturers were, in contrast, subject to the overcapacity and overproduction that resulted from the intensification of cost-cutting competition on an international scale, they could raise their prices at an average annual rate of only 2.1 percent—less than half as fast as nonmanufacturers and were therefore unable to mark up over costs sufficiently to prevent a huge decline in their profit rates.

The same pattern, highlighted by the profound divergence in profitability between the manufacturing and nonmanufacturing sectors, also prevailed in the international economy as a whole (the G7 manufacturing economies taken in aggregate) in the period when profitability initially fell, as well as during the subsequent period between 1973 and 1979 when manufacturing profitability fell further, while the non-manufacturing rate of profit held its own.7

For reasons that I cannot fathom, Foster believes that I have somehow confused the study of shifting competitive advantage among nations (mere parts of the system), which has preoccupied business analysts like Lester Thurow and Michael Porter, with the central problem of the profitability of firms in the system as a whole, in relation to system-wide downturn and crisis(33). I make no apology for attempting to bring out the ways in which nationally specific conditions (including labor markets and movements, exchange rates, financial institutions, forms of government intervention, trade protection, and the like) influenced competitiveness. But, I don’t know how I could have made it more obvious that I did so because I wanted to grasp the forces affecting the costs and profitability of firms. My object was to substantiate a thesis that self-evidently begins with the profit-seeking of individual firms under certain constraints, in order to explain the trajectory of system-wide profitability. For the firms, the struggle to cut costs, so as to increase market shares and raise profit rates, has been fundamental and explains why they have had little choice but to concern themselves obsessively with means to improve competitiveness (often in nationally-specific ways). But, the unintended consequences of their actions have been, first, the reduction of aggregate international profitability as a result of redundant capacity and production in manufacturing system-wide, and then the reproduction of reduced profitability through insufficient exit, too much entry, and the rise of (especially government) debt. It is therefore one of my central claims, again ignored by Foster, that, precisely because of the persistence of overcapacity and overproduction (and as a prominent manifestation of its continuation), international competition has, over the course of the long downturn, proved a zero-sum game, with nationally-based capitals tending to improve their profit rates only at the expense of their rivals, so that the system-wide profit rate long failed to rise.

At the root of the misgivings of both McNally and Foster seems to be a concern that I am displacing the “vertical” capital-labor relationship from the center of the analysis of capitalist development in favor of the “horizontal” capital-capital relationship. However, my denial that the deep roots of economic downturn in general, or of the current long stagnation in particular, should be sought in class struggle—in either capital or labor being “too strong”—in no way implies that I doubt that the source of capitalist profits are to be found solely in the exploitation of workers. Nor, Foster notwithstanding, do I place “the question of capital versus labor in the background” (32); on the contrary, as any reasonably careful reader will attest, I analyze the class struggle and its often significant impact on profitability in each of the successive phases of the postwar epoch. But, although exploitation constitutes the only source of surplus value, and although class struggle is significant for the distribution of income, there is no reason to take it as a matter of dogma that the mechanism driving economic crisis and stagnation should be sought directly in the capital-labor relation. Indeed, the thesis Foster himself favors, of a rising rate of surplus leading to problems of realization, depends on the capacity of firms in concentrated/centralized industries to raise prices over money wages, which itself derives from these firms’ horizontal oligopolistic relationships with one another, and explicitly not from the class struggle.8 In the same way, McNally strongly endorses the point of departure and basic structure, if not the concrete results, of the traditional version of the Marxist thesis of the falling rate of profit. Yet this theory derives the falling rate of profit, as he says, from firms’ attempts to cut costs so as to respond to horizontal competition by bringing in new techniques that raise the organic composition (capital-labor ratio) “in order to raise productivity and win the battle for market share“ (44, emphasis added). Class struggle plays no part in it.

In the one place where he does specify a theoretical disagreement with my argument, McNally asserts (not, perhaps, entirely consistently) that the actual source of the expansion of fixed capital that occupies such a prominent place in my analysis is to be found in the exigencies of capital’s class struggle against labor and not, as I would have it, in capitals’ struggle for survival against other capitals (43). McNally’s contention is that capitalists increase their reliance on fixed capital to reduce their reliance on a labor force that will tend to resist the extraction of surplus value. His argument is of a piece with other Marxists’ assertion that employers mechanize primarily to de-skill, so as to reduce their dependence on craft labor.

Now, I obviously have no reason to deny that the resistance of workers, not least skilled workers, at the point of production, plays an essential part in shaping capitalists’ methods of extracting surplus value and making a profit. McNally is surely right to contend that, all else being equal, capitalists will seek to impose mechanized techniques that leave them less rather than more dependent on workers, especially skilled ones. But, when McNally accuses me of failing to “derive the growth of fixed capital from the capital-labor relation in general and labor’s resistance to work in particular” (43, emphasis added), I can only plead guilty. For it seems to me all but self-evident that the growth of fixed capital cannot be derived from the capital-labor relation at all, unless the latter is considered in connection with the pressures of competition. The main reason that capitalists have to worry about worker resistance to the intensification of labor is that, unless they take hold of the labor process, they are under competitive threat from rival producers who have done so. In the absence of the competitive threat, capitalists have no compulsion to intensify the labor process at all; indeed, how much they try to do this would then depend only on each capitalist’s thirst for greater consumption. Why would capitalists be concerned with most effectively fighting the class struggle, if they did not have to worry about maximizing profits in order to compete and survive? The systematic drive to intensify work and secure control of the labor process is generated only by the rigors of competition.9

To the foregoing, it seems to me that one need only add the crucial, if hardly controversial, point that capitalists have, historically, been driven to expand fixed capital so as to cut costs not only by the exigencies of controlling the labor process, but, even more, by the demands of technology and (increasingly) science, i.e., the need to bring in ever more powerful productive forces. Of course, this process of mechanization has itself been powerfully shaped by the capital-labor relation and the class struggle. It is no accident that investments in improving technique are, under capitalism, “biased” to such a great extent toward investment in machines as opposed to investment in human beings. Capitalists are anxious to avoid, if at all possible, increasing the bargaining power and autonomy of their workers by endowing them with increased skill, and, by the same token, surely pursue de-skilling to the extent feasible. Given, moreover, the freedom of the labor market, capitalists are obviously afraid that workers in whose skills they invest will move to another firm. The fact remains that capitalists are sometimes obliged to invest in their workers’ skill and education, because this is the most effective way to cut costs, so as to increase profitability and survive in competition. In any case, however they cut costs (by improving their control over the labor process or by improving technique, by de-skilling or by re-skilling), the exigency to which they are responding is the need to remain competitive.

The foregoing point can be put more generally.10 On the one hand, it is impossible to derive the law of capital accumulation merely from the existence of wage labor alone. On the other hand, the tendency to invest surpluses and innovate is inherent in economies structured by social-property relations in which the direct producers have been rendereddependent upon the market by their separation from the means of subsistence, even if they have yet to be proletarianized by their separation from the means of production.

It should be emphasized that non-capitalist economies with substantial amounts of wage labor are not uncommon in world history (European feudalism being a good example). The point is that, in such economies, the employers (e.g., feudal lords and sometimes large peasants) who exploit wage labor are shielded from competition by their possession of the means to provide their own subsistence directly. Since they are not therefore dependent on the market for their inputs, they do not have to sell their outputs competitively to survive. As a result, they do not, as a rule, compulsively seek to maximize profits through cutting costs in production, so cannot be expected systematically to accumulate or innovate. On the contrary, they adopt other “rules for reproduction” that either better maximize their surpluses (e.g., in the case of lords, by investing in the means to fight wars or exploit peasants) or that allow them to maintain themselves as they think best (e.g., in the case of peasants, by producing for subsistence in response to the uncertainty of harvests, subdividing plots, choosing leisure instead of work). The upshot is that capitalist tendencies of development fail to materialize.

In contrast, in economies where they are free from the extraction of their surpluses by extra-economic coercion, but do not possess their full means of subsistence (especially the land), direct owner-operator producers have no choice but to seek to sell competitively by maximizing their price-cost ratio via specializing, accumulating their surpluses, and innovating to the extent they can. This is because (in contrast, most notably, with peasant possessors of the full means of subsistence) they have been rendered dependent upon the market for their inputs, thus subject to competition to survive, and this remains the case whether or not they hire wage labor. 11

To put the point succinctly: in economies where the social-property relations have failed to render the direct producers subject to competition, the law of capital accumulation will not hold, even if wage labor is common; in economies where the social-property relations have rendered the direct producers subject to competition, the law of capital accumulation will prevail, even if wage labor is absent.


  1. Except in one respect , for which, see below, pp. 41-42.
  2. The burden of Foster’s criticism is not all that clear, in part because he badly misrepresents my argument in the process of objecting to it. He insists that “the secret of the present crisis is said [by me] to lie in the globalization of competition…which knows no bounds and is undermining all fixed positions, resulting in a kind of free fall,” so that “what is projected is a downward spiral induced by competition…with no seeming end to the process“ (30, 28, 31, my emphasis). But, this is plainly a caricature. I never use the term “globalization of competition.” The idea, moreover, of a crisis “which knows no bounds” and “with no seeming end” is foreign to my argument. I list three mechanisms to account for the failure of profitability to recover immediately and thus for the extension of the downturn. These mechanisms are presented as counter-tendencies working against the inherent tendencies to restore profitability built into the drive by employers to reduce wage growth and, most especially, the pressure to reallocate and to shake out high-cost, low-profit means of production from over-supplied, low profit lines. Foster makes it easier for himself to characterize my argument as he does by attributing to me the absurd view that, in bringing in its innovation, the cost-cutter will, as a rule, secure market share by reducing its own rate of profit. Foster writes, “The result [of cost-cutting], since the cost-cutting innovating firm is not able to force the high-cost firms from the market, is ‘reduced profitability in the line for all, including the cost-and price-cutter itself’” (31, my emphasis). But my argument is, of course, the direct opposite, i.e., that the cost-cutter can find it makes sense to introduce its innovation only if it can sufficiently cut costs to increase its share by forcing some incumbents from the field while at the same time maintaining its own rate of profit. Foster can assert the opposite because he has entirely torn from context the above italicized quotation from my book, which is actually stating a counter-factual outcome, i.e., specifying what would happen if a cost-cutting firm sought, against its own interests, to enter a line where it could not force out some of the incumbents. For the full argument, see Economics of Global Turbulence, pp. 26-28 and ff.
  3. Astoundingly, Foster contends that “Brenner explicitly denies that temporary monopoly profits are possible, or that low cost competitors—often the giant firms with their economies of scale—can seize control over large shares of the market at the expense of their smaller competitors” (33). He also asserts that “It would not be too much to say that Brenner’s entire model depends on the inability of the low-cost innovator to obtain short-term monopoly profits” (vol. 37, no. 4). But, he offers no reference from my work to back up, explicitly or implicitly, these unfounded claims…nor could he, since my whole standpoint, in agreement with common sense and the view of economists of almost every stripe, is premised on the assertion of the proposition he says I deny.
  4. That said, it should not be overlooked that much innovation is achieved by new, small firms, which in some instances evolve into large ones.
  5. For this, and the preceding paragraph, see, of course, P. Baran and P. Sweezy, Monopoly Capital (New York: 1966 and 1969), pp. 53-78; also P. Sweezy, “Competition and Monopoly” (1981), in J. B. Foster and H. Szlajfer, eds., The Faltering Economy (New York: 1984), pp. 32-39.
  6. See, especially, M. Glick, “Competition versus Monopoly: Profit Rate Dispersion in US Manufacturing Industries,” Ph.D. dissertation, New School for Social Research, 1985; and S. Zeluck, “The Theory of the Monopoly Stage of Capitalism,” Against the Current, vol. I, no. 1 (1980). Cf. J. A. Clifton, “Competition and the Evolution of the Capitalist Mode of Production,” Cambridge Journal of Economics, vol. I (1977); and W. Semmler, Competition, Monopoly, and Differential Profit Rates (New York: 1984). Foster elsewhere expresses disdain for the idea that the increased difficulty of maintaining barriers to entry (due especially to the increasing capacity of financial institutions in general, and of foreign corporations in particular, to mobilize sufficient capital to make possible access to unusually profitable industries) has made the maintenance of monopoly profits difficult. But, it is hard to see on what basis he does so. J. B. Foster, “Is Monopoly Capitalism an Illusion?” Monthly Review, vol. 33, no. 4 (1981), p. 43.
  7. Foster seems to think that the facts that falling prices have been uncommon in the postwar epoch and that, for a significant part of the postwar epoch, inflation was the order of the day, somehow go against my argument that the rate of profit fell because firms found their profits squeezed by downward pressure on prices resulting from overcapacity and overproduction (mainly) in manufacturing lines (32). But general, absolute price trends are obviously beside the point of my argument, which concerns only the relative trends of costs and prices. Manufacturing firms saw their profits squeezed because, as a consequence of overcapacity and overproduction in manufacturing (resulting from the introduction into the market of lower-priced goods by lower cost producers), they were unable to mark up their prices sufficiently to counteract their rising costs, as they had previously been able to do, and as nonmanufacturers continued to be able to do.
  8. “Unions certainly do play an important role in the determination of money wages…This does not mean, however, that the working class as a whole is in a position to encroach on surplus or even capture increments of surplus which, if realized, would benefit the capitalist class relative to the working class. The reason is that under monopoly capitalism employers can and do pass on higher labor costs in the form of higher prices.” Baran and Sweezy, Monopoly Capital, p. 77.
  9. I wish to thank Vivek Chibber for his help with the formulations in this paragraph.
  10. The following section presents, in desperately abbreviated form, ideas from my work on economic development and the transition from feudalism to capitalism. For recent statements of my viewpoint, see my “Property Relations and the Growth of Agricultural Productivity in Late Medieval and Early Modern Europe,” in A. Bhaduri and R. Skarstein, eds., Economic Development and Agricultural Productivity (Cheltenham, UK: 1997) and “The Low Countries in the Transition to Capitalism,” in J.-L. Van Zanden and P. Hoppenbrouwers, eds., From Peasants to Farmers? The Transformation of the Rural Economy and Society in the Low Countries in Light of the Brenner Debate, forthcoming , as well as “The Rises and Declines of Serfdom in Medieval and Early Modern Europe,” in M. L. Bush, ed., Serfdom and Slavery. Studies in Legal Bondage (London and New York: 1996). See also the analogous, closely related analyses presented by E.M. Wood, “The Politics of Capitalism,” Monthly Review, vol. 51, no. 4 (September 1999), which dovetail with the arguments presented here, and with which I am in full agreement.
  11. I do not contend that such economies ever existed in pure form, though rough approximations can be found in seventeenth-century England and seventeenth-century northern Netherlands. But, it is useful to posit the model to see more clearly the social-property relations that underpin the tendency to accumulate capital, as well as to understand the tendency to act like capitalists of the owner-operators who constitute often significant segments of capitalist societies, notably farmers.

1999, Volume 51, Issue 07 (December)
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