Chris Harman: Misreadings and misconceptions – ISJ 119; Review

Stagnation theory

Chris Harman is the most notable advocate on the British left of the notion that capitalism is stagnant, with falling output and investment and stuck in a mire of low profitability. This view, repeated through a series of articles over the last few years, has been subject to increasing criticism – so at odds is it with the recent history of world capitalism.

Harman is nothing if not tenacious, but in the latest issue of the International Socialism Journal he permits one of his critics, Jim Kincaid, to write an extended piece arguing against his position and Fred Moseley to present a shorter series of pointers against his argument.

Kincaid’s article builds on the work that Permanent Revolution have developed over the last two years. Unfortunately, there is no place in the ISJ for recognition of the part PR have played in this debate. While it seems likely that IS editors did not allow our contribution to be mentioned, this is nonetheless a disappointing omission as PR have developed every significant point in Kincaid's critique of Harman either in our journal or on the web long before this went to publication. Nonetheless Kincaid's piece is a a well argued if not entirely rounded rebuttal to Harman’s stagnationist position of the last period.

As is the tradition with these things however, Harman cannot allow an oppositionist, even one from outside the party a free reign, so Kincaid’s piece is accompanied by a typical Harman reply – where he restates his commitment to stagnation theory. 

The growth of world capitalism – or not

Harman opens by saying:

“Let’s start with the facts. Kincaid lays a lot of emphasis on the growth in the output of “goods and services” between 2001 and 2007. No one has denied that growth.” 

Harman claims he mentioned that growth in an article about China written two years ago, but all that article did was recognise that China was growing – something that not even Harman could deny. In fact Harman has repeatedly denied the growth of the world economy. In 2007, in an article called "Snapshots of Capitalism" written after his China piece, he asserts that:

“The first significant thing about the world economy is the way in which global economic growth, averaging out booms and recessions, has not only declined from the golden age of capitalism in the 1950s and 1960s, but also from the levels known in the late 1970s and 1980s.”

Chris Harman: Snapshots of capitalism today and tomorrow: ISJ 113, January 2007

Not only has Harman denied the recent growth of the world economy – he claimed just last year that the stagnation of contemporary capitalism was deeper than during the crisis years of the 1970s and 80s. If he has now changed his mind then fine, but why the cover up?  

“But if you look closely at the IMF graph he provides, it is clear that the growth rate in 2002-06 was no greater than that in 1970-73 (with a much lower peak than in 1973) – that is, in the years that ended in the crisis which spelled the end of the long post-war boom.” 

But of course what is quite different about the growth of the recent period is the direction of the trend. In the period of 1970-73 the trend was downwards, in the period from 2002-07 it is most definitely up, such that even with the current crisis of the US economy, estimates for world growth in 2008 remain above trend. 

And this is without considering effect of the incorporation of the Stalinist ex-centrally planned economies into the world market in the 1990s. The IMF, stuck in neo-classical orthodoxy, measure the transformation of central planning into capitalism – the greatest increase in the size of the world market at any time in its history – as a decline of the market! They confuse the collapse of the central plan with the collapse of the market. Hence the capitalists statistics invert the real picture. In other words even the rising trend demonstrated in Kincaid's graph underestimates the growth of capitalist production with globalisation.

Proving once again that its not always wise to take bourgeois statistics at face value. 

Profit rates

Harman takes issue with Kincaid’s assertion that profit rates have recovered towards their levels of the post-war boom – ironically quoting amongst others Fred Moseley, who in his accompanying piece writes:

“Three decades of stagnant real wages and increasing exploitation have substantially restored the rate of profit, at the expense of workers. This important fact should be acknowledged.” 

No matter that Harman is determined not to acknowledge this fact and casts doubt on the reliability of the US government’s profit figures, pointing out how windfall profits could distort the figures – even though windfall profits are not included in the US government’s figures. We could add that Robert Brenner, the Marxist historian and economist, who's estimates for profit rates Harman favours use the same data as Moseley’s and that Moseley's assessment is shared by the major US financial houses, such as JP Morgan;

"The rise and fall of the corporate profit share
Global corporate profitability maintained its three decade secular trend upward in 2007, interrupted only by a few short-lived setbacks. As measured by the ratio of profits to nominal GDP, the profits share among the major developed economies bottomed in the mid-1970s and slipped in the early 1980s but since then has moved from roughly 6% to over 9% last year. In the US, profit growth has outpaced nominal GDP growth over the past 25 years by a striking margin of 4% per annum."

  JPMorgan Research J.P. Morgan Securities Ltd. London April 21, 2008

And Goldman Sachs;

“The past five years have seen a spectacular boom in global profits . . . As of late 2007, profit margins in Europe and the US were about 4.2 and 5.2 percentage points respectively above their 20 year average . . . Even in Japan, profit margins have moved well above their historical trend . . . The biggest surge in profits over the past five years has been in emerging markets.”

Goldman Sachs; The End of The Global Profit Boom? (p2) Global Economics Weekly Issue No: 08/02 January 16, 2008

Gobal savings and investment

Another key argument of Harman’s is that the decline in global saving and investment over the last three decades is proof of capitalist stagnation. Quoting figures from the IMF’s World Economic Outlook, April 2005, Harman says:

“Global saving and investment (as a percent of GDP) fell sharply in the decade following the first oil price shock in the early 1970s, but were then relatively stable until the late 1990s. More recently, however, they again declined, hitting historic lows in 2002 before modestly recovering over the past two years.” 

But Harman's graph, which only begins in 1970, doesn't actually describe this path. Savings and investment remains high albeit fluctuating in the 1970s, falling in the 1980s and again in the 1990s, before undergoing a mild recovery from the turn of the millennium. If Harman had taken the graph back to include the entire post-war boom, he would have seen that savings and investment was also low in the 1950s, before rising in the mid 1960s to its 1970s levels.

A moment’s reflection ought to raise doubts in Harman’s mind.

The 1970s/80s were a period of stagnation – there is no question about that. Every side in this current debate agrees, Harman even says so in his book “Explaining the Crisis”. Yet in this period of stagnation, investment and savings were high. At the peak of the post-war boom in the 1950s and early 1960s savings and investment were low, before increasing as the long boom came to an end in the 1970s/80s. So clearly, high saving and investment are not indicators of capitalist advance and expansion.

What trends of savings and investment actually show is the price of investment – in other words its efficiency. In periods of rapid capitalist advance (to put it schematically) productivity is increasing rapidly so investment is cheap – you get a lot of bridges, railways or airports for your money. When capitalism is slowing investment is expensive – so the same quantity of investment costs more. So when Harman claims that:

“In other words, far from global accumulation showing a rising long term trend, as Kincaid contends, it has been falling.” 

He is confusing the cost of investment with its amount. As the Economist demonstrated in June 2008:

“THE biggest investment boom in history is under way. Over half of the world's infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies.”

(Source: The Economist print edition, 5 June 2008 Economics focus; Building BRICs of growth; Record spending on infrastructure will help to sustain rapid growth in emerging economies)

Harman’s claim inverts reality – and this is why he is unable to explain the relationship between increasing productivity and the recovery in profit rates. As JP Morgan explain;

"Profit margins, proxied by the share of profits in GDP, have risen steadily to record highs during the past 25 years across most developed economies, boosted by a secular fall in the relative price of capital, the cost to financing the acquisition of capital, and the taxation of capital. The relative price of capital goods has fallen due to technological progress, as well as, increased capital mobility, competition and offshoring."
 

JPMorgan Research J.P. Morgan Securities Ltd. London April 21, 2008
 

The decline in savings and investment through the period of the 1990s onwards (albeit with a recovery since 2002), reflects two things:

First, as Kincaid proves, and as PR have already explained in a series of articles over the last two years, through the ICT revolution, the collapse of the Soviet Bloc and opening of the world to trade, the reduction in circulation times, the opening of new lines of production, the movement of manufacturing to the emerging markets and transition economies, productivity has exploded and the price of fixed capital has fallen very fast over the last two decades. As a result the price of investment has declined. The fall in savings and investment shows, not the sclerotic and stagnant nature of capitalist production, but its dynamism. The high levels of investment in the 1970s/80s show its high price – not the physical quantity of output.

Secondly, and unfortunately, Kincaid’s state capitalism means he leaves this critical point out; the transformation of the former Stalinist centrally planned economies into capitalist ones meant that the capitalists inherited a mass of means of production for free. There was no need to build a railway system in Russia, the second largest in the world, as the former plan had already done so. This meant there was a period of what Goldman Sachs described as “investment free growth” in these economies, as the capitalists took advantage of the existing means of production, to limit their investments and so increase their profits.

Productivity and the organic composition of capital

Harman is hidebound by a theory of productivity which fails to see how revolutions in productive technique can lower the organic composition of capital and therefore increase profits. Marx explained  that:

“… the development of the productive power of labour in any one line of production, e.g., the production of iron, coal, machinery, in architecture, etc., which may again be partly connected with progress in the field of intellectual production, notably natural science and its practical application, appears to be the premise for a reduction of the value, and consequently of the cost, of means of production in other lines of industry, e.g., the textile industry, or agriculture. This is self-evident, since a commodity which is the product of a certain branch of industry enters another as a means of production. Its greater or lesser price depends on the productivity of labour in the line of production from which it issues as a product, and is at the same time a factor that not only cheapens the commodities into whose production it goes as a means of production, but also reduces the value of the constant capital whose element it here becomes, and thereby one that increases the rate of profit.”

Marx Capital Vol. III Part I Economy in the Employment of Constant Capital The Conversion of Surplus-Value into Profit and of the Rate of Surplus-Value into the Rate of Profit 

So Marx is explicit. Revolutions in technology in one line of production, particularly of means of production, cheapen the cost of constant capital and therefore increase the rate of profit. Yet according to Harman:

“Now, it is true that the first capitalists to innovate get excess profits. But as the innovation is generalised across a sector, profit rates fall.” 

This is the diametric opposite of what Marx says as it precisely ignores the impact of productivity. Marx is not discussing an innovation which may confer a temporary advantage on a capitalist, say by enabling them to produce a particularly unique or desirable item – like an iPod – which makes no difference to productivity, but which provides them with short term profits until another capitalists invents something better than an iPod. He is talking about a revolution of technique, particularly in the production of means of production. Increasing productivity by reducing the price of constant capital increases the profit of the capitalist class as a whole, who can now buy the cheaper machine. Paradoxically Harman’s figures for saving and investment – which he takes as proof of stagnation and decline – demonstrate exactly this point.

China

Another key aspect of the stagnation theory propounded by Harman is the assertion that nothing has fundamentally changed about world capitalism with the advent of globalisation. Hence, he needs to down play the significance of the rise of new capitalist powers like Russia, Brazil and India, but most critically China. Harman says that:

“Accumulation in China, and to a lesser extent in India, has been rising. But the Chinese economy today is not big enough to be a locomotive that can pull the rest of the world economy behind it.” 

“At current exchange rates the IMF gave its GDP in 2006 as $2,600 billion – just behind Germany …” 

But why use figures from 2006 when the figures for 2007 or even mid-2008 are available? This is after all the age of the internet! By the end of 2007 the Chinese economy stood at $3,291 billion, By the end of 2008 it will have surpassed $4,000 billion. 

And the growth of emerging markets does not only refer to China. According to a May report from Morgan Stanley:

“Asian domestic demand, based on thirteen volume indicators, is now larger than the US. Asia current dollar GDP is 59% of the US size, but its true size is masked by cheap currencies and labour costs.”

Morgan StanleyAsia Pacific Strategy Asia #1; China The Engine! May 1st 2008

Growth of the world working class

“… justifies his claim by referring to a much hyped article by Richard Freeman, which claims:

'The labour force available to global capital tripled from just over one billion workers in 1980s to over three billion in 2000 – either for direct employment or as reserve army of labour … 1.5 billon workers were added to the actual or potential labour force by its importation of China, India and the former Soviet bloc. According to Freeman this has supposedly “cut the global capital/labour ratio by just 55 to 60 percent of what it otherwise would have been.'”

“The claim is astonishing in its disregard for facts.”  

Harman points out that India was always a part of the world system and says that:

“I would also argue that Russia and China were part of the world system, and in looking at its dynamics you have to take into account their fairly high rates of growth and accumulation 30 or 40 years ago.” 

Well sure they were part of the world system – they were part of the world – but were they part of the world capitalist economy? Not even Cliff and Harman’s state capitalist theory claims that. State capitalist theory always asserted that the competition of these states with capitalism was based on their military not their economic ambitions. Harman continues:

“Perhaps more importantly, the figures for worldwide employment are fanciful. In 2001 the non-agricultural workforce of the developing and transition economies was 1,135 million.20 Self-employment accounted for a high proportion of these: 32 percent in Asia, 44 percent in Latin America and 48 percent in Africa.21 Those proportions have grown everywhere with urbanisation. That reduces Freeman and Kincaid’s 1.5 billion potential new workers to about 700 million.” 

Well possibly so, but might not the addition of 700 million new workers to world capitalism have some impact? Further we might add that another key effect of the collapse of the Stalinist bloc was the opening up of relatively independent semi-colonies like Brazil and India to unfettered exploitation by the imperialist financiers. Globalisation removed any protection these economies may have had. Hence in the truest sense their working classes were open to naked exploitation to a degree unheard of during the cold war. 

“Industrial employment in China actually fell from 78 million in 1997 to 54.4 million in 2001. The fall was due to large-scale redundancies in the old industrial sectors, which was not compensated for by increased employment in newer sectors, despite the massive investment taking place there.” 

But this is getting silly. Since 1990 the urban population of China has increased by 190 million, of whom 100 million have moved there from the countryside since 2001. What does Harman think those people do?

“After joining the WTO in 2001 about 150 million Chinese joined the global workforce. Ninety-seven million Chinese, two-thirds of the US labour force, have moved to urban areas since 2001. Manufacturing and services have gained 88 million workers at the expense of agriculture, which lost 47 million people.”

Merrill Lynch, May 2008

But Harman’s complete misreading of the statistics has an important repercussion, because he claims that the size of the Chinese working class is falling, when in fact it is increasing by around 10-15 million a year. Bizarrely, he quotes Marx:

“The additional capital formed in the course of accumulation attracts fewer and fewer labourers in proportion to its magnitude. The old capital … repels more and more of the labourers formerly employed by it.”

Its difficult to think of a less appropriate use of Marx’s work. Certainly the growing capital attracts fewer workers relative to its magnitude, but its magnitude is growing at such an explosive rate that, notwithstanding this proportionate reduction, it is still able to absorb 10-15 million new workers a year! This speaks against Harman, not for him. Harman claims that:

“The ‘organic composition of capital’ has been rising at a rapid rate in China.”

But if the organic composition of capital were rising in China this would be manifested in falling rate of profit. And indeed this is exactly what Harman claims:

 “The rate of profit has been undergoing a long-term fall.”

Odd then that China’s 30 year growth at over 10% per annum should be caused by a long-term fall in the rate of profit? Perhaps this too explains the health of the capitalist economies in the west! 

Harman claims that recent studies, made in 2000 and 2003 (so not that recent then), claim that the Chinese rate of profit has been falling. He says:

“In any case, profit margins and profit share are not the same as profitability. Recent studies of profitability in China show it as falling.” 

This is very true, profit margins are not the same thing as profitability. Paradoxically, profit margins have stagnated over the last five years, while profitability has surged. So what's going on? UBS addressed exactly this point in a report published in March 2008.

“How can we argue that rising corporate earnings are behind the increase in China’s overall saving rate when we saw that heavy industrial margins actually fell after 2003? The answer is that there’s a very big difference between profit margins and total profits, and that difference holds the key to understanding just how China could have developed such serious external imbalances over the past half-decade … margins rose from the end of the 1990s through the early part of this decade but have been flat or even falling since 2003. Now … [consider] the ratio of total industrial profits to GDP – again, a very different story indeed, with the profit ratio exploding upward over the last five years.”

UBS 20 Asian Economic Perspectives, 26 March 2008 

The explosion of the profit rate is a result of surging production, output, sales and turnover, such that, while profit margins have stagnated, profits as a share of GDP have dramatically accelerated over the last five years – the period not included in Harman’s recent reports!

Heaven forbid the idea that Harman is disregarding the facts.

Conclusion

Sat 05, July 2008 @ 21:52