Economic growth has arguably been the first and foremost issue of capitalist development from classical political economy to more recent economic studies. Most discussions on development boil down to the nature and characteristics of the ruling class. Given that the ruling class controls the surplus of society, how the surplus is used—whether it is invested, consumed, or simply wasted—is at its discretion. The effective utilization of surplus implies a reasonable rate of capital accumulation and economic development.
In 1957, in the Political Economy of Growth, Paul Baran made a seminal contribution to our understanding of the connection between economic surplus, a concept he introduced into the development discussion, and growth. He argued that even poor countries still retain considerable economic surplus beyond the national essential consumption and that the way ruling classes use that surplus shapes nations’ development trajectories. By eliminating unnecessary upper-class consumption and the inefficiencies of the market economy, among other factors, a better-organized society like socialism would make it possible for all nations to grow and develop.1
To draw on an example from Chinese economic history, according to economist Victor Lippit, the per capita income in China was roughly the same in 1933 as it was in 1953. The saving rate, however, increased from 1.7 percent in 1933 to 20 percent in 1953. This steep increase was achieved with substantially better living standards for ordinary people. The new revolutionary society, Lippit argued, was able to simultaneously eliminate unnecessary elite consumption and waste, and increase popular consumption and investment.2
From a different perspective, Keynes and post-Keynesian economics have also made significant contributions toward our understanding of capitalist investment behavior, particularly with the concept of animal spirits.3 Essentially, animal spirits are the capitalist psychology of surplus utilization: the link between expected profits and planned investment. A rise in animal spirits can promote accumulation and growth at a given rate of profit.
The idea of economic surplus is often overlooked in neoclassical economics. For example, the concept of the poverty trap sees virtually no way out of poverty except through an exogenous shock. In terms of supply, poverty means lack of education and health care, which could lead to lower labor productivity; in terms of demand, poverty means a small market and lack of effective demand. When some neoclassical theories start to recognize the possibility of self-sustained development in poor countries, they jump to the other extreme, relying on ahistorical assumptions about the nature of the capitalist class. One illustration of this is the influential dual-sector model, commonly known as the Lewis model after its creator William Arthur Lewis. When proposed in the 1950s, the model correctly argued that given the low consumption levels and low wages of migrant labor from the underdeveloped countryside, the urban capitalists could receive a higher-than-average return from their investments. Lewis assumed that high profits would lead to continued investment and that the whole economy would grow as a consequence.4 However, in reality there is no guarantee that capitalists will be willing to spend all these profits and superprofits on capital accumulation.
The question of surplus utilization is highly relevant to more developed countries as well. For example, in the last decades in the United States, the decoupling of profit and capital accumulation is evident. While overall after-tax, corporate profit as a share of gross domestic product (GDP) has increased from about 4 percent in the mid–1980s to about 9 percent in last few years, net investment as a share of GDP has declined from about 5–6 percent to about 2 percent during the same time.5 The disconnection between profit and investment has been particularly acute since the 2007–09 economic crisis. Other advanced countries such as the United Kingdom and Japan have also seen similar patterns with downsizing, stock buybacks, and lack of interest in investment, or simply “the capitalists’ investment strike.”6
In recent years, there has been an ongoing discussion about the slowing of economic growth rates among major capitalist economies. Mainstream economists are increasingly recognizing the relevance of stagnation to capitalism. As examples, Robert Gordon explains the decline of U.S. growth through supply side factors like lack of great technological breakthroughs, while Paul Krugman and Lawrence Summers attribute the problem to lack of effective demand.7 However, as pointed out by Hans Despain, few mainstream scholars acknowledge that stagnation is a tendency embedded in the capitalist system.8
Marxian literature has long emphasized the importance of secular stagnation in advanced capitalism. In his famous pamphlet on imperialism a century ago, Vladimir Lenin argued that imperialist economies based on monopoly capital “inevitably engenders a tendency of stagnation and decay.”9 Using the concept of surplus absorption, Baran and Paul Sweezy argued that capitalism required surplus waste, such as through the sales effort and war, as there tended to be a shortage of consumer demand and investment.10 Sweezy maintained that stagnation since the 1930s was only interrupted by the Second World War and the postwar economic expansion.11 The forces that brought the economic boom and a strong incentive to invest created overcapacity and in turn undermined their original contributions. Fred Magdoff and John Bellamy Foster, among others, have contended that financialization, as another major form of waste, simply postponed the stagnation through limited employment and wealth effect while intensifying the contradictions of capitalism.12
The Marxian tradition studies the dynamics of development and stagnation in both developing and developed economies. But one major difficulty is providing a consistent measure of surplus to compare across time and space, particularly to calculate the potential surplus from eliminating irrational and wasteful organization and unemployment in different contexts. To aid in this end, Baran himself provided a number of different concepts of surpluses.
Here, I use Lippit’s approach to focus on a narrower and more straightforward version of surplus—that is, the difference between national output and essential social consumption. To take it further, if labor income is more or less in line with essential consumption, we can approximate economic surplus by property share of income (rent, profit, interest). Of course, this approximation will tend to create an upward bias in developing countries as the labor incomes are often insufficient to meet basic needs. It could also give rise to downward bias in developed countries as labor incomes exceed essential consumption due to high-salary jobs in certain occupations. All the same, the property-share approximation can still give a roughly accurate measure of the historical trend of economic surplus.
Another approach is to approximate surplus using the top income share. If we assume that, in every society, the essential consumption level is around the medium income level, then the share of the top 10 percent of national income could serve as an estimated measure of the difference between national income and essential consumption—the surplus. This approach also comes with potentially skewing tendencies. For example, if income distribution is extremely unequal, then a top 10 percent income share could overstate the surplus. If income distribution tends to be very equal, then a top 10 percent share will underestimate the size of the surplus. Still, top income shares provide useful information and can serve as a cross-check method.
To study the utilization of surplus, or the animal spirits of the ruling class, I compare the size of surplus and gross capital formation in a variety of countries starting from the mid–nineteenth century. To measure it, I use the Baran ratio, defined as the ratio of investment to surplus. For example, relatively high Baran ratios indicate that the ruling class is interested in capital accumulation, while persistently low and/or decreasing Baran ratios imply a gradual transition to slow accumulation and stagnation.
My results provide strong support for the secular stagnation thesis. The Baran ratios for major capitalist economies such as Britain and Germany were low and stable from the mid–nineteenth century to early twentieth century. In the post-Second World War years, the Baran ratios increased historically among both developed and developing countries. While the neoliberal era saw a dramatic decline in the Baran ratios of most economies, there are still considerable variations across the globe. In recent years, the Baran ratios of developed countries have tended to stabilize around pre-Second World War lows, while the ratios of China and India remain relatively high. The empirical evidence shows that slow capital accumulation and growth is an inherent feature of contemporary capitalism.
Measuring Economic Surplus and the Baran Ratio
Ideally, economic surplus could be calculated as the residual of national income deducting social-essential consumption. However, this is often impossible due to lack of data. Alternative methods include utilizing property share of GDP, which equals one minus labor share, and the top income research pioneered by Thomas Piketty. This is particularly helpful when the labor-share data is missing. In this article, I have used the top 10 percent share of the national income as a proxy for surplus. Other top income shares are often not available for most countries in the sample.
As a reliability check, I then examine the difference between the estimates from the essential consumption approach and the two aforementioned alternative approaches. Since there are considerable differences between the developing and developed worlds, data from both China and the United States is used.
For simplicity, I assume that the median personal income in the United States is about the same as the country’s essential consumption level. China is a little more complicated. Taking into account the persistent rural-urban income gap, I assume that urban residents’ essential consumption is the same as median income and the rural residents’ essential consumption is 60 percent that of the urban residents.13 The surplus is then calculated as the share of GDP in both countries after essential consumption is subtracted.
Chart 1 presents the estimates of surplus with essential consumption and the other two methods, which show no persistent distortions, for 1985 to 2014. All three U.S. estimates show very similar patterns (Panel A). In the Chinese case (Panel B), the three estimates differ to varying degrees, but share the same trend over time. The alternative approaches may have underestimated the level of surplus, which would lead to higher Baran ratios, but this potential bias should not affect the ratios’ overall trends. Therefore, both property and top income-share approaches seem to be fairly reliable estimates of the level of economic surplus in a country.
Chart 1. Alternative Approaches of Surplus Measurement
The next step in this exercise is to calculate the Baran ratio, or how much surplus is being employed as capital accumulation. Based on the above, we can simply divide the investment share by the level of surplus (also as share in GDP).14 Due to a lack of annual data, only select data points are calculated for pre-1970s series. A higher or lower Baran ratio means more or less efficient use of surplus and capital accumulation. Ratios tend to fall between zero and one, although they can exceed one.
Chart 2 presents three advanced countries that have longer data series. Despite being the first major capitalist country, Britain’s Baran ratio was fairly low throughout the second half of the nineteenth century. This suggests that the British ruling class was not very interested in capital accumulation and spent a huge portion of their surplus on unproductive purposes. Germany tended more toward accumulation and rapidly caught up with Britain during the late nineteenth century, as its Baran ratio was more than double that of the British for most of the time. France, in contrast, ran somewhat in-between Britain and Germany. On the whole, these early capitalist economies spent around 20–40 percent of their surplus on capital accumulation in the pre-Second World War era. Interestingly, under the Nazi regime, the German capitalist class actually was less inclined to accumulate than during the Weimar Republic or the Bismarck era.
Chart 2. Baran Ratios in Britain, Germany, and France
This is obviously very different from the scenarios starting at the end of the Second World War, when capitalist psychology of surplus utilization—the link between expected profits and planned investment—saw a huge boost. Between the mid–1940s and mid–1970s, the three countries’ Baran ratios climbed rapidly. At their high points, Britain spent more than 70 percent, France spent about 80 percent, and (West) Germany spent even more of their surpluses on investment.
Following the Golden Age, the Baran ratios steadily declined throughout the 1980s. From the late 1990s to the present, the Baran ratios seem to have stabilized around values that correspond to their pre-Second World War levels, ranging from 40 to 60 percent.
It is abundantly clear that, except in a short post-Second World War period with active regulation and intervention, capitalist classes, at least in the developed countries, tend to shy away from investment and only spent less than half of the available surplus on capital accumulation. In other words, the currently recognized disconnect between profit and investment is a long business tradition for capitalists.
Notably, in the context of the pre-Second World War world, a Baran ratio of somewhere between 20 and 40 percent may still have been substantially higher than that of a typical developing country. According to Lippit, China in 1933 had no less than 30 percent of national income as surplus, while it only invested 1.7 percent of its net domestic product.15 This implies that the Baran ratio for China was about 6 percent. This dynamic gives insight into why capitalist classes in developed countries were arguably considered more progressive in comparison to the comprador ruling class of the developing countries—they were much more dutifully fulfilling their job of capital accumulation.
Let us now turn to the Baran ratios for other developed and developing countries. First of all, according to chart 3, the more advanced capitalist economies experienced a swift descent in their Baran ratios beginning in the 1980s—a descent that has been slowing since the late 1990s and seems to have more or less stabilized. For the fifteen European Union countries, the Baran ratio dropped from about 90 percent to about 55 percent, while the U.S. figure fell from more than 70 percent to 40 percent.
Chart 3. Baran Ratio: Developed Economies
Other high economies in chart 3 such as Japan, South Korea, and Taiwan used to have some form of industrial policy. When they were quickly growing in the 1970s, these economies had impressive Baran ratios of over 100 percent. Thus, the capitalist classes in these places tended to invest as much surplus as possible, even by a reduction in social essential consumption. This period of high accumulation came to an end in the 1980s and the Baran ratios have declined to around 60–80 percent. Still, on average, this group of countries have higher Baran ratios than U.S. or EU economies.
Among the developing countries, typical Latin American economies such as Brazil suffer from chronic slow growth and accumulation, as can been seen from chart 4. Unlike in the developed countries, there was no clear sign of a decline after the Golden Age. Although, under socialism, Russia undoubtedly had very high Baran ratios (still more than 100 percent in 1989), under neoliberalism, it suffered from lack of investment, evident in its declining Baran ratio approaching 60 percent. The African economies in chart 4 offer a somewhat different story. Both South Africa and Rwanda, which overall have Baran ratios of less than 50 percent, seem to have had a moderate drop in their Baran ratios during the neoliberal age. However, in the last decade or so, Rwanda and Uganda have both experienced noticeable rises in their Baran ratios, reaching over 60 percent.
Chart 4. Baran Ratio: Developing Economies
Chart 5 presents the data about China and India, two of the largest developing countries in the world. China’s Baran ratio was very high during the Maoist era and close to 100 percent in the early 1980s. Afterward, the ratio decreased mildly until it started to climb up again following the most recent global economic crisis. India shared the typical pattern of growing Baran ratios in the 1960s and ’70s, and, following the reforms of the 1990s, its Baran ratio began to fall. In the 2000s, however, India’s Baran ratio was on the rise despite starting to decline again in recent years. Throughout the neoliberal age, both China and India were able to maintain a remarkably high ratio.
Chart 5. Baran Ratio: China and India
These simple statistics shed some light on the character of the international capitalist class. In developing and developed countries strongly influenced by neoliberalism, the average capitalists spend about 40 percent of their surplus on accumulation. In places with a legacy of industrial policy like Japan and South Korea, typical capitalists reinvest 60 percent or more of the surplus. In countries with still-active state regulation and intervention such as China and India, the capitalist classes could easily spend more than 70 or 80 percent of the surplus on capital accumulation.
The Historical Determinants of the Baran Ratio
In a context of competition between capitalism and socialism, the period between the 1960s and the early 1980s was indeed a golden age for capitalist economies: the ruling class became unprecedentedly productive. This was made possible by strong government intervention and regulation. For instance, as we have seen, the nationalist party-led ruling class in mainland China was once clearly unproductive. But, after being defeated by Communist revolution in the mainland and fleeing to Taiwan, it became highly productive.
As we can see from the data on the Soviet Union (Russia) and China, the Baran ratio of socialist countries was also remarkably high in the postwar period. In fact, the efficient utilization of surplus through economic planning was one of the key advantages of socialist economies.
This age of productive capitalism ended in the 1980s as most economies saw declining Baran ratios. It was no longer a mandate that capitalists reinvest a significant portion of their surplus. The waning threat of the socialist camp, the rise of neoliberalism, and the following deregulation in finance and other sectors all contributed to the change in behavior of the capitalist class. After the decline, the Baran ratios of major economies stabilized around a much lower level—a pattern that remained relatively unchanged by the economic crisis of 2007–09. It seems that global capitalism, on the whole, has moved to a new stage featuring low accumulation, or long-term stagnation.
Nevertheless, there are considerable regional differences. Latin American economies have always had lower-than-average Baran ratios and did not experience a clear golden age. The major East Asian economies still maintained relatively high Baran ratios despite decline in the neoliberal age. And, in fact, these differences were not so much due to government policies. Japan and South Korea had a tradition of industrial policy and Latin America of industrially oriented import substitution. Their historical conditions, however, differ significantly. In Japan, South Korea, and Taiwan, the threat of Communist revolution was real and, after the Second World War, the old ruling classes were dramatically restructured by domestic and U.S. forces. Land reform, among other social changes, also weakened the power of the nonproductive landlord class, laying the basis for better appropriation and utilization of surplus. Latin America, by contrast, was not as threatened by revolutions or ruling-class restructuring. Lack of any meaningful land reform in Latin America also prevented progressive industrial policy from having substantial impact.
Swimming against the current, both China and India have had very high Baran ratios in the last decade. According to the data, China has maintained a high Baran ratio since the early 1980s, and it is reasonable to assume that it enjoyed similarly high ratios in the 1960s and ’70s. Such stability mainly arises from direct state ownership or control of the major sectors, both during the planned-economy era and the market-economy era. Even with privatization and deregulation, among other typical neoliberal policies, the Chinese government still managed to maintain firm control over the use of economic surplus, as can be seen from its rising Baran ratio following the most recent global economic crisis. India, however, did not have a centrally planned economy, although it learned from the experience of socialist economies. To this day, India still implements five-year plans and emphasizes the role of public investment. Following the rise of neoliberalism, India experienced a decline in its Baran ratio, but in the 2000s reversed the trend. In fact, the World Bank recognizes that India’s public-infrastructure investment has been a major driver of its growth in recent years.16
Does this imply that a history of socialism or industrial policy is a prerequisite for a better application of surplus in today’s world? To answer this question, it is illustrative to look at African countries such as Uganda and Rwanda. These economies do not have a strong legacy of socialism or industrial policy, but have demonstrated remarkable surplus utilization with skyrocketing Baran ratios since the beginning of this century. Rwanda’s Baran ratio has nearly doubled since 2000 and Uganda’s has been among the highest in the world in recent years.
There are two factors that could have contributed to Rwanda’s and Uganda’s growing Baran ratios. First, given the countries’ poverty, their governments and ruling classes prioritize economic development in policy making. This means that they are more inclined to adopt strong industrial policies and focus on investment. Second, both countries were ravaged by civil wars in the 1990s, weakening part of the old ruling class. These dynamics could make a restructuring of proaccumulation ruling classes comparatively easier, not unlike the cases of East Asian economies.
In sum, Baran ratios of capitalist economies have always generally been low. Of course, however, there are exceptions. Revolutionary movements can force ruling classes to waste less and invest more, as in the Golden Age. Postwar economies with weaker, old ruling classes can implement more regulation and proaccumulation policies with less resistance, as in the Golden Age and some contemporary African economies. And ruling classes in countries with socialist and/or industrial legacies tend to be more investment inclined, such as Japan, China, and India. In short, the spirit of the capitalist class is a product of class struggles and overall historical conditions.
Growth, Stagnation, and Legitimacy
Economic growth depends both on how much surplus the ruling class can appropriate, as well as how much of that surplus will be spent on accumulation. Thus, a higher Baran ratio should more or less correspond to a higher growth rate.
Chart 6 presents the relationship between GDP growth rate and Baran ratios between 1990 and 2015, based on selected countries. It clearly suggests that, during the last twenty-five years, countries with higher Baran ratios have indeed tended to have higher growth rates. Countries with low Baran ratios (below 60.0 percent) grew, on average, by 2.4 percent per year, while countries with high Baran ratios grew by 5.4 percent per year.
To contextualize these numbers, from 1870 to 2008, the average annual world GDP growth rate was about 2.8 percent.17 This is approximately in line with the growth rate of countries with low Baran ratios. In other words, a nonproductive capitalist class is a long-standing feature of capitalism. During the postwar Golden Age (1950–75), the world GDP grew about 4.7 percent per year.18 This is close to the growth rate of economies with high Baran ratios.
Capitalism has historically been a dynamic mode of production, especially compared to precapitalist societies. The humble growth of major economies before the Second World War might be considered significant when contrasted to the growth of previous centuries. However, because of the history of the Golden Age and the experiences of fast-growing socialist economies, the prewar norm has now become a sign of stagnation. Thus, the current stagnation could be considered a return to the original standard of the late mid–twentieth century, which, in turn, developed out of the end of the postwar era’s unprecedented historical conditions. Although relevant, so-called external factors like technology or effective demand are unlikely to be the main elements behind stagnation. The key is the changed characteristics of the capitalist classes, which result from class struggles and other historical factors.
As chart 6 suggests, a period of rapid growth like the Golden Age requires an average Baran ratio of about 60 percent—that is, a 10 to 20 percent point increase for the major capitalist economies like the United States and Western Europe. A change of this magnitude breaks the capitalist norm and generally calls for a revolutionary and/or postwar context. But even if such change occurs, there is no guarantee it will remain contained within capitalism.
Chart 6. Baran Ratio and Growth 1990–2015
After all, the legitimacy of capitalism ultimately depends on how effectively the ruling class employs surplus. Despite inequality and oppression, capitalism has been considered a progressive mode of production insofar as capitalists keep reinvesting larger portions of surplus value compared to other modes of production, such as feudalism. In the heyday of the Cold War, capitalists managed to use surplus at a level comparable to socialist economies, showing the system’s resilience and flexibility.
However, as shown in the data, the capitalist classes in major economies, such as the United States and the United Kingdom, have gradually ceased to be productive. Since this trend remained unchanged even after the most recent crisis, it is clear that this is not simply a return to the long-run average. This suggests that any potential for progress and flexibility in the system may have been exhausted in these mature capitalist economies. There are countries where the (young) capitalist classes are still more productive, but these are primarily developing countries with severe problems of their own.
This does not, of course, mean that a fast-growing economy is free from its own contradictions. Endless growth is fundamentally incompatible with our ecological system. But the move to stop global warming and build environmentally friendly infrastructure still requires tremendous effort, which means that a significant part of the world surplus must be invested in the project. This will not be possible without optimal utilization of the surplus or a high Baran ratio.
The Baran ratio provides a way to examine the use of surplus under different economic systems. The results of international Baran-ratio calculations clearly support the notion of secular stagnation in capitalism. For major capitalist economies such as Britain and Germany, Baran ratios were, on the whole, stable and low from the mid–nineteenth century to the early twentieth century. In the post-Second World War years, Baran ratios rose to historic levels among both developed and developing countries. However, the neoliberal era saw a sharp decline in the Baran ratios of most economies.
There is, of course, considerable variation across the globe. The Baran ratios of developed countries have tended to stabilize around a low, pre-Second World War level in recent years, while the ratios of China and India remain relatively high. Calculations show that slow capital accumulation and growth is an inherent feature of unregulated capitalism, both before the Second World War and during the neoliberal era.
Neoliberal logic often attributes lack of investment and slow growth to high labor costs. This justification clearly contradicts the fact that, globally, labor share in GDP has fallen throughout the neoliberal era. The responsibility for stagnation, as well as capitalism’s crisis of legitimacy, lays squarely with the capitalist class.
- ↩Paul A. Baran, The Political Economy of Growth (New York: Monthly Review Press, 1957).
- ↩Victor D. Lippit, “The Concept of the Surplus in Economic Development,” Review of Radical Political Economics 17, no. 1–2 (1985): 1–19.
- ↩John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1973), 161–62.
- ↩William Arthur Lewis, “Economic Development with Unlimited Supplies of Labor,” Manchester School 22, no. 2 (1954): 139–91.
- ↩Calculated based on Federal Reserve Economic Data—Federal Reserve Bank of St. Louis, available at http://fred.stlouisfed.org.
- ↩John Smith, Imperialism in the Twenty-First Century (New York: Monthly Review Press, 2016), 290–93.
- ↩Robert J. Gordon, The Rise and Fall of American Growth (Princeton: Princeton University Press, 2016); Paul Krugman, “Secular Stagnation, Coalmines, Bubbles, and Larry Summers,” New York Times, November 16, 2013; Lawrence Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound,” Business Economics 49, no. 2 (2014): 65–73.
- ↩Hans Despain, “Secular Stagnation: Mainstream Versus Marxian Traditions,” Monthly Review 67, no. 4 (September 2015): 39–55.
- ↩Vladimir Lenin, Collected Works, vol. 22 (Moscow: Progress Publishers, 1977), 276.
- ↩Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966).
- ↩Paul M. Sweezy, “Why Stagnation?” Monthly Review 64, no. 2 (June 2012): 53–60.
- ↩Fred Magdoff and John Bellamy Foster, “Stagnation and Financialization: The Nature of the Contradiction,” Monthly Review 66, no. 1 (2014), 1.
- ↩If we assume the rural essential consumption is higher than 60 percent of its urban counterpart, then the resulting surplus will be lower, but will not change the basic pattern.
- ↩For data from 1850 to 1970, the calculations of investment share of GDP are based on B. R. Mitchell, ed., European Historical Statistics, 1750–1970 (London: Macmillan, 1975). The post-1970 data series is available from the World Bank database. Where available, GDP has been used; for all other instances, GNP has been used instead.
- ↩Lippit, “The Concept of the Surplus in Economic Development.”
- ↩Frederico Gil Sander, Saurabh Shome, Smriti Seth, and Jaba Misra, India Development Update: Fiscal Policy for Equitable Growth (New Delhi: World Bank, 2015).
- ↩Data is from the Maddison Project Database, version 2013, Groningen Growth and Development Centre, University of Groningen, available at http://rug.nl/ggdc.
- ↩Maddison Project Database, version 2013.