Chris Harman; Zombie Capitalism; Review

Capitalism’s death throes? Zombie Capitalism; Chris Harman / Bookmarks / 2009 / £15.99

Chris Harman’s Zombie Capitalism offers an analysis of capitalist crises, argues Graham Balmer which, combines useful background material with a dogmatic refusal to trace the roots of the current crisis back to a period of strong economic growth...writes Graham Balmer

Chris Harman’s Zombie Capitalism is a combination of the many articles he has written over the years and Explaining the Crisis, his previous major economic work, published a quarter of a century ago.

In Zombie Capitalism, Harman, the SWP’s leading economics theoretician, has produced a comprehensive introduction to the SWP’s economic analysis but leaves little space for alternative interpretations by other Marxist and Left economists, a feature of Explaining the Crisis that made it such a fruitful reference.

Nevertheless, any substantial work by Harman is worthy of serious consideration, not least as a result of his pre-eminent status amongst Marxist/leftist economists. Larry Elliott, The Guardian’s left Keynesian economics editor, referred favourably to it recently in predicting the immanent collapse of the Chinese economy.

Harman points out in the introduction that Zombie Capitalism has had a long gestation. The Great Recession of late 2008 intervened during its drafting and Harman’s analysis of the origins of this global economic crisis is perhaps the most interesting part of the book, illustrating both the strengths and weaknesses of his analysis.

Harman traces the growth in finance and debt that presaged the outbreak of the crisis in the summer 2007, to be followed a year later by the collapse of Lehman Brothers and a devastating credit freeze which turned a financial crisis into a broad economic one. The financial/debt bubble could never be sustained but why did the dramatic growth of the unproductive financial sector with its labyrinthine financial instruments, spiralling borrowing and lending, and rising asset prices develop in the first place?

Harman is an orthodox Marxist economist in that he appreciates the centrality of the rate of profit for capitalism; the Great Depression and the end of the long post-war boom in 1973 are both practical demonstrations of Marx’s famous “tendency of the rate of profit to fall” (TRPF), described principally in the third volume of Capital.

Alongside the US academic Robert Brenner, Harman considers the period from the onset of crisis in the early 1970s to the present as one of chronic stagnation. This period includes not only the crisis-torn 1970s and 1980s but continues through the 1990s and 2000s until today. Ironically while Harman rejects the idea of long waves of economic development, this is one long wave that seems to go on forever and always in the same direction . . . down.

This assertion rests critically on the idea that global rates of profit have never recovered from their low points of the early 1980s. From this mistaken premise the logic flows: the recent financial bubble must have been the response of capitalists to a lack of profitable investment opportunities in the productive sector; “world capitalism would not have become dependent on the bubble had profit rates returned to the levels of the long boom” and “financialisation provided a substitute motor, in the form of debt, for the world economy”.

This forms the core of his analysis. Although he is happy to supplement it with a dose of under-consumption – the idea that crises can develop because of a lack of aggregate demand in the economy – the ”debt bubble” was a form of “privatised Keynesianism” which was “central in ensuring [the productive sector] had markets that neither its own investment nor what it paid its workers could provide”.

Given the importance of the rate of profit to his analysis he provides little detail – two charts and a few figures over a couple of pages – to prove his claims for stagnant profitability. A reader unfamiliar with the debate would be forgiven for believing that few dispute Harman’s account of the trend in the rate of profit.

In fact the opposite is the case; all major studies by both capitalist sources, like investment banks, Goldman Sachs, UBS, JP Morgan or Morgan Stanley and a variety of Marxists confirm that profit rates up to 2007 recovered to levels not seen since the mid-1960s.

One of Harman’s charts is from Gerard Dumenil and Dominique Levy’s paper, The Real and Financial Components of Profitability. This is a very technical paper and various methods are used to calculate the rate of profit in the post-war US, but its summary does anything but support Harman’s assertion. They state that:

“. . . the profit rate of the nonfinancial corporate sector displays the now familiar pattern in three phases: (1) the rise into the 1960s bulge; (2) the decline from the mid-1960s to the early 1980s; (3) a recovery to the levels of the 1950s.”

A second chart from Robert Brenner, The Economics of Global Turbulence, shows the profit rate rising from the early 1980s but never returning to the levels of the long boom. Brenner bases this assertion on profit figures for domestic manufacturing in the US, Germany and Japan. Brenner’s figures show low profit rates as he excludes all those sectors of the economy in which profit has grown particularly fast since the rapid advance of globalisation in the 1990s.

He ignores profits from investments abroad which now accounts for a third of US profits, from the parasitic financial sector which now accounts for a fifth of US profits, and from executive remuneration, which has doubled as a proportion of GDP over the last two decades. Finally, both sets of data finish in 2000, before the strongest period of global profit growth in 2003-07.

Harman, reading from a chart by US Marxist Fred Moseley, “Is the US Economy Heading for a Hard Landing?”, writes;

“Moseley shows a bigger recovery of recent profit rates, but his calculations still leave them at a high point (in 2004) as only marginally above their lowest points in the long boom.”

But this is not Moseley’s own interpretation of the data. In the same paper Moseley writes:

“It has taken a long time, but the rate of profit is now approaching the previous peaks achieved in the 1960s . . . The last several years especially, since the recession of 2001, has seen a very strong recovery of profits, as real wages have not increased at all, and productivity has increased very rapidly.”

Furthermore he adds:

“And these estimates do not include the profits of US companies from their production abroad, but include only profits from domestic US production. If the profits from overseas production of US companies were added in, it would appear that the recovery of the rate of profit is pretty much complete.”

Of course, this only applies to the period up to 2007. Profit rates peaked in late 2006, before marginally declining up to the autumn of 2008. They then fell very rapidly during the financial crisis last winter, although remaining at levels well above their nadir in the 1980s, before recovering from the second quarter of this year.

This journal has previously calculated a post-war US rate of profit that concurs with Moseley. In addition however, it has emphasised that the rise in global profitability has been even more striking in the emerging economies, notably China. Harman acknowledges in the introduction that he removed much of the empirical data to make the book more accessible, but well-presented data can clarify the argument. Given that his entire analysis revolves around the correctness of this point, data is no optional extra in proving his argument. If he is wrong on this, then the whole thing collapses.

Harman notes, more than once, that investment in the major imperialist economies has remained historically low over the last two decades. Harman attributes this to low profitability, claiming that capitalists have failed to invest as a result of low profit rates. In fact there is no direct link between levels of profit and levels of investment. In the 1950s when profit rates were at their highest, investment levels as a proportion of GDP were relatively low.

High productivity meant that machines were cheap. As profit rates fell through the late 1960s and 1970s, investment rose as capitalists sought to offset rising labour costs by replacing workers with machines and as falling productivity caused machines to become relatively more expensive.

Harman views the long boom through rose tinted spectacles at times. He calls recessions of the period “growth recessions”, but it is not the case that there was consistently high non-residential fixed investment throughout the period.

Although Harman accepts a “productive element” to the dotcom bubble of the late 1990s, it was still “based on speculation”. Indeed, the US stock market was marked by “irrational exuberance”, in Alan Greenspan’s words, as telecom and hi tech shares saw their prices vastly exceeded those warranted by company profits.

But the bubble was an outgrowth, an overextension, of an investment boom which vastly raised productivity due to the ICT revolution, the roll out of personal computers and the rapid introduction of the Internet. The technical basis of capitalist manufacturing was revolutionised, reducing the cost of labour and capital and increasing profit rates.

Harman, throughout the book, pays scant attention to the impact of productivity in revolutionising the means of production and raising profit rates. And for good reason; he has never accepted that the cheapening of the elements of constant capital (something Marx explained repeatedly – see Capital Volume 3 Chapter 5 for example) can, through increasing productivity, lower the cost of machinery, factories, offices, raw materials and so forth – and act as a very important countervailing tendency to the tendency for profit rates to fall.

This limits the breadth of his analysis and as a result he stresses just two central countervailing tendencies that can either impede or even reverse the fall in profitability. Firstly, he points to increases in the rate of exploitation – either by increasing hours, cutting wages, etc. or through productivity gains in the consumer goods industries which cheapen the cost of living for workers and leave more profit for the capitalist.

Secondly, through crises which destroy or devalue large chunks of capital, something which, he claims the concentration and centralisation of capital – fewer and bigger companies – has diminished, as the number of companies deemed “too big to fail” has limited the ability of capitalism to rejuvenate itself through this means.

But in his haste to prove the intractability of stagnation, has Harman overlooked other factors that could, sometimes unexpectedly, provide a fillip for capitalism?

Not surprisingly, the collapse of Stalinism in the USSR, China, etc. is a blind spot for Harman. The precise nature of these economies is now an historical question, but the IS/SWP tradition of state capitalism has been a grave impediment in analysing the global economic impact of the restoration of capitalism in the previously centrally planned economies.

The “bankruptcy of whole states – notably the USSR, with a GDP that was at one stage a third or even a half that of the US”, (obviously these entire states were not too big to fail) is a passing comment in a passage on corporate restructuring in the West.

Tony Cliff, in the original version of state capitalism, substituted international military competition for economic competition, but Cliff did not view the USSR within its boundaries as capitalist. On the other hand, Harman did. Hence Harman saw its demise as little more than a shift from one form of capitalism to another – from state to market.

Harman plots the development of China from Mao to the present and acknowledges its tremendous economic growth, but believes that over-investment – in many sectors, not just exports – and low employment growth has exerted a downward pressure on profitability.

He quotes the IMF: “Even compared to Korea and Japan during their boom years, the ratio [of investment to GDP] in China today looks high.” He might have added that China, as part of its fiscal stimulus package, is today embarking on a programme of investment in infrastructure – transport and power – that is one of the greatest in the history of capitalism.

Such rapid investment can often result in an economy “over-heating” – the Chinese government was taking counter-cyclical measures to dampen down property speculation before the sub-prime crisis broke in 2007 – but this is a far cry from the chronic over-investment, excess capacity and an unsustainable rate of accumulation.

Harman downplays the growth of the Chinese working class over the last three decades, but even his quoted figure of a 3.5% annual increase in urban employment means that it has doubled over the last two decades. And he is really not fond of the idea that the entry of China and the other third world nations into the global economy has doubled the size of the labour force that is exploited by capital. Wonder why?

Harman’s figures that indicate profit rates have been falling in China over this period of rapid expansion are on his own admission dubious and contradictory and are at odds with his own argument about the relationship between high profitability and investment. If falling profitability accounts for falling investment in the west. Why does falling profitability account for high investment in the east?

In fact all serious empirical studies of Chinese profitability (Goldman Sachs, UBS, OECD etc) demonstrate that it surged after the turn of the millennium. It was this surge of profits which funded the US credit sub-prime boom. As he explains himself:

“Along with the similar surpluses made by Japan and the oil states, [China] provided the lending which enabled US consumers and the US government to keep borrowing until the credit crunch of the summer of 2007.”

But how could it have exported its surpluses if there was no surplus to export?

Earlier in the book Harman describes well the critical role of the credit system within capitalism; how it sucks in the mass of profits and redistributes them for investment, with financial institutions mediating between productive capitalists in the process of borrowing and lending. He shows how much financial capital takes the form of paper claims on future profits (Marx’s “fictitious capital”), often only tenuously linked to production, which is the only sector of the economy that creates new value from labour. A precarious “shadow banking” system develops, always ripe for speculation – and implosion.

The problem arises when he attempts to relate the growth in cheap money and financialisation to profitability. He explains that:

“The rate of interest has often been confused in mainstream economic writings with the rate of profit. But in fact the level and direction of movement of the two are quite different.”

And that:

“Since the profits of productive capitalists are the major source of the funds for lending, a high rate of profit will encourage a lower rate of interest. On the other hand, if profits are low, more productive capitalists will themselves want to borrow and this will exert a pressure for interest rates to rise.”

So the interest rate is determined by the supply and demand for loanable funds; if profits are high ample funds will be available and interest rates will be low, if profits are low, then vice versa.

So Harman’s professed on-going stagnation-regime of low profitability implies a high rate of interest. And, indeed, during the 1970s and 1980s when profits were low interest rates were high. But since the advent of globalisation in the early 1990s, global interest rates have been historically low over the last 15 years. It is Harman who is hopelessly confused. His contention that recent bubbles must be the result of economic stagnation and low profitability is refuted by his own theory.

It is blindingly obvious that the vast pool of surplus profits made in China this century (called a “savings glut” by the bourgeois economists) and made available to the financial markets in the G7 caused interest rates to be low (reflecting the excess supply of money).

This in turn allowed for and underpinned the massive extension of credit (and debt) to firms and households hitherto denied access to it (such as low income families seeking their own homes in the USA). This inner connection between boom and bust completely escapes Harman.

Zombie Capitalism has a broad scope, covering several other areas of interest, such as the basics of Marxist economics, theories of imperialism, the state and globalisation, and the environment as a further limit to capital. But none of that is really what it is all about. Harman fails because on his central contention, around which his entire argument revolves, that profit rates fell in the period up to 2007, he is simply wrong.

And as a result the most important and contentious economic arguments contained in it disappoint given the dramatic changes in world capitalism since his last book all those years ago.

Sun 15, November 2009 @ 11:59

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discussion of this article

James said…

“from the parasitic financial sector which now accounts for a fifth of US profits”

How can something be parasitic and at the same time account for 1/5 of US profit?

Mon 16, November 2009 @ 18:26

bill j said…

Simple the financial sector takes profit off the productive sectors. The figures are here if you're interested, table 6.16D

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=239&Freq=Qtr&FirstYear=2007&LastYear=2009

Mon 16, November 2009 @ 19:41

Dimitris said…

These profits of the financial sector could be the product of speculation, claims to future productive profits that will never materialize because they where the results of various bubbles that where triggered by a persistent policy of "easy money", low interest rates. The later is not all the time an indication of high profits. In Japan in the late eighties they had a huge bubble in the real estate sector and in the stock exchange while the economy was heading towards recession and the rate of profit was falling rapidly.

Have you red the article on China in the latest issue of NLR. I think it makes a persuasive case that the Chinese economy is dependent on the exports to the west, that it has not developed a sizable internal market and probably wont do it during the latest crash, as long as the recovery package is oriented towards primarily infrastructure programs. The comparison with Japan, Korea, etc is very revealing... I think there are gaps in your analysis, though I find it more convincing than the one of the catastrophists.

Tue 17, November 2009 @ 02:40

bill j said…

But China is not Japan in the 1980s. Japan in the 1960s maybe. And in any event I don't think you're right, The national income statistics do not include those financial profits which arise from windfalls. Their recent rise and fall reflects this quite well I think.

On China there's a myth around the left that there is a regime of low profitability etc. Its difficult to reconcile this with China's exceptionally strong growth over the last two decades and even during the last crisis. It seems that in the West low profits are associated with low growth and in the East low profits are associated with strong growth. All that really matters is it appears is that there are low profits.

This is a really good paper from UBS Jonathan Anderson on Chinese savings and profits;

http://www.allroadsleadtochina.com/reports/Anderson_November.pdf

He notes that; "Rather, according to the best available estimates based on flow of funds data, the real story is the sudden rise of gross corporate savings, which shot up to more than 26% of gdp by 2007 from about 15% of gdp at the beginning of the decade.

"In national accounts parlance, “gross corporate savings” is nothing more than total corporate earnings, or corporate profits. So over the space of a few years Chinese profits shot up dramatically as a share of the economy and by far more than could be reasonably invested at home."

In other words China's savings and export of capital abroad was not as a result of a dearth of investment opportunities at home, after all its been investing over 40% of GDP for years, but due to a super abundance of profits that had to be put somewhere.

The size of China's internal market of course, depends not only on consumer demand, which btw has been rising very strongly, but also on investment. As Anderson points out it is the super abundance of profits that has caused the "disproportion" in the Chinese economy.

Tue 17, November 2009 @ 07:56

Dimitris said…

I agree that China experienced an exceptionally strong growth during the last decades with high profits. The point is whether the Chinese economy can play the role of the locomotive that will catapult the global economy to a new period of strong growth. If its economy remains export oriented as it mainly is right now it won't. Hung ho-fungs article in NLR shows exactly that. The comparison with the other East Asian Developed economies is very revealing because it shows that these economies very soon took measures to close the development gap between the cities and the countryside, that helped create a strong internal market and a self sustained growth. China has not done that yet, and it is a political matter, a matter of class struggle if it will eventually...

As for the profits , we must take into account what percentage of these, even in the industrial sector are the result of strictly financial operations like those of General Motors for example.

Tue 17, November 2009 @ 10:01

bill j said…

Its debatable how export oriented China is, not as much as is traditionally thought by the left, who all (apart from PR) expected China to collapse with the decline of export markets in the USA.
The reason for that is that while the total of exports is equivalent to 40% of GDP or so, this measures sales to value added, i.e. its a comparison of apples with oranges. When you adjust the figure for imported parts, re-exports and value added, then exports are probably responsible for about 10% of China's GDP directly, plus a certain amount of infrastructure investment and so on.
That seems to be confirmed by the fact that exports have fallen by around 20% this year, but knocked about 3.8% off GDP.
GM are a good example, before the restructuring they were paying $1bn a quarter in interest on their debt mountain, after the restructuring that is down to around $170mn (from memory). Most financial profits are a deduction off wages or interest from the productive sector, therefore they are real profits. Although clearly there is a relation between them and windfall gains etc.

Tue 17, November 2009 @ 12:30

bill j said…

You can read NLRs article here

http://www.newleftreview.org/?getpdf=NLR29401&pdflang=en

Tue 17, November 2009 @ 13:06

m said…

What about Martin Hart-Landsberg's (+ Paul Burkett) analyses on China? (http://legacy.lclark.edu/~marty/mhlpublications.htm)

According to PA O'Hara, profitability in China has been declining in the last 2 decades, though it's still pretty high. (and he predicted further continuation of high growth, yes: http://pohara.homestead.com/files/ChineseSSA.pdf)

Then, some people are pointing to dubious phenomena in China's official statistics and suggest that they may be cooking the books. eg.: TG Rawski: What’s Happening to China’s GDP Statistics?
http://www.pitt.edu/~tgrawski/papers2001/gdp912f.pdf
I dunno.

"Its debatable how export oriented China is, not as much as is traditionally thought by the left, who all (apart from PR) expected China to collapse with the decline of export markets in the USA."

But don't you think it's a bit early to tell? "Problems" in China's stock/real estate market, upsurge in labour militancy due to unemployment etc. is still very much a possibility...
I don't know enough about what's going on within China's core industries, so I'm not saying this will surely happen, but it's not at all excluded either, as you would have it.

Tue 17, November 2009 @ 16:15

Graham B said…

"According to PA O'Hara, profitability in China has been declining in the last 2 decades, though it's still pretty high."

Harman quotes that too in Zombie Capitalism, but in the references/notes he acknowledges that there are "doubts as to the accuracy of the statistics he bases his calculations on" as the O'Hara paper (p401) also shows the rate of exploitation *declining* from 1978 to 2002. Doubts - not kidding!! And it's pretty 'doubtful' how he calculated the rate of profit in 1978, only two years after Mao died and China was still a centrally planned economy!

Clutching at straws.

Tue 17, November 2009 @ 16:52

bill j said…

I wrote a review of Hart Landsberg and Burkett here;

http://www.permanentrevolution.net/entry/872

It was a few years ago, I actually drafted it before we split from Workers Power, who I might add, agreed with its catastrophistic analysis.Basically it argued that there was a chronic crisis of domestic consumer demand due to falling employment in the manufacturing sector (I'm summarising of course), and that it was very vulnerable to a collapse in exports as its economy was entirely dependent on exports.
What it got wrong - way wrong - was that China's state employment statistics only used to cover state employment. That was fine of course when all employment was state employment, but not when it wasn't. There are 200 million migrant workers alone not included in China's employment stats. Since 1990 the Chinese working class has increased by 300million, yet according to these people in the same period its manufacturing sector has actually shrunk. I mean where do you start?
This error, really a bit of a joke actually, has been repeated down the years by Harman, Workers Power and many others.
On exports, no I don't think its too early to tell. This year China's export sector collapsed. During the winter of 2008 China's exports fell at a -60% annualised rate. If its economy had been dependent on exports then it would have collapsed too. But it didn't because the government was able to stimulate domestic demand through a $590bn relationary package and $1.3 trillion in bank lending. As a result growth this year will approach 10% even with a massively contracted export sector.
As Graham says capitalism was only restored in the early 1990s so figures for the rate of profit before that are really measuring surplus to state investment in means of production. In other words they are comparing a non-capitalist with a capitalist economy.
Pretty important distinction one might think.
As the means of production of the centrally planned state was handed over to the capitalist goverment for free in the early/mid 1990s, you could say the organic composition of capital was nil then, so its more than slightly strange to derive a falling rate of profit from a comparison with non-profit centrally planned economy.
All the surveys from the investment banks, UBS, Goldman Sachs, etc. point to the very strong rise Chinese profits between 2003-2008. Profits slipped during the depths of the crisis over the winter of 2009/9 and have rebounded strongly this year.
There is debate about the accuracy of China's statistics, but for another reason. It is reckoned the central government generally under-estimate growth, to head off demands from the US that they allow their currency to reflate. This is a great series of papers from GS;

http://www2.goldmansachs.com/ideas/brics/BRICs-and-Beyond.html

The specific paper on China that deals with the stats is here;

http://www2.goldmansachs.com/ideas/brics/book/BRICs-Chapter4.pdf

It points out that investment is generally over reported, consumption under reported and that profits have exceeded expectations by a large margin over the last years.

Tue 17, November 2009 @ 17:45

m said…

Actually, O'Hara uses a third source, not his own calculations:
Holz,C. A. 2005. China's economic growth 1978-2025: What we know about China’s economic growth tomorrow.

Other studies have pointed in the same direction:
Jesus Felipe, Edith Lavina and Emma Xiaoqin, Fan, “Diverging Patterns of Profitability, Investment and, Growth in China and India during 1980-2003”, World Development 36:5 (2008) http://www.eea-esem.com/files/papers/EEA-ESEM/2006/581/INDIA-CHINA-3.pdf (even stronger decline in profitability)

Zhang Yu and Zhao Feng, "The Rate of Surplus Value, the Composition of Capital, and the Rate of Profit in the Chinese Manufacturing Industry: 1978-2005”
(a strong recovery in the RoP after 1998)

Tue 17, November 2009 @ 17:50

bill j said…

Interesting paper, makes the same mistake as O'Hara though in failing to distinguish between central planning and capitalist economies. There's a World Bank paper here form a couple of years ago that looks at China's profit growth;

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/CHINAEXTN/0,,contentMDK:21095495~menuPK:50003484~pagePK:2865066~piPK:2865079~theSitePK:318950,00.html

"By definition, total profits equal profit margin on sales times sales volume, and rapid economic growth boosted sales volumes in recent years. With both margins and turnover up, profit growth in industry averaged 36 percent in the period 1999-2005. Margins came indeed under pressure in 2005, but growth in sales was large enough to sustain still-respectable profit growth of 23 percent that year. Margins appear to have rebounded in the first half of 2006....
How can profit growth in industry have kept up with rapid increases in raw material prices in recent years? The answer is continued rapid productivity growth. As Mr. Shan also notes, labor productivity in industry grew at almost 20 percent on average since 1998, much faster than wages, which grew on average by about 14 percent. As a result, the share of output going to workers declined from 24 percent in 1998 to 17 percent in 2005. In other words, enterprise profits increased its share of a very rapidly growing pie."

I reviewed an OECD paper from 2006 here, which described the path to capitalist restoration very well;

http://www.permanentrevolution.net/entry/861

http://ideas.repec.org/p/oec/ecoaaa/471-en.html

http://puck.sourceoecd.org/vl=988560/cl=33/nw=1/rpsv/cgi-bin/wppdf?file=5lgh2z33dzxx.pdf

Tue 17, November 2009 @ 18:03

m said…

"because the government was able to stimulate domestic demand through a $590bn relationary package and $1.3 trillion in bank lending."

and are you perfectly sure this is not going to cause any problems? (inflation, asset bubbles, buildup of over-capacities).

"All the surveys from the investment banks, UBS, Goldman Sachs, etc. point to the very strong rise Chinese profits between 2003-2008. Profits slipped during the depths of the crisis over the winter of 2009/9 and have rebounded strongly this year. "

OK, I'll read these, though I think we should be cautious with them, as their function is not just neutral analysis, but cheerleading and enticement for investors. That's not our perspective, is it?
(IIRC you were relying on these investment bank reports a lot in 2006-2007, and predicted confidently even in 2008 that there wouldn't be a recession at all. We know how that one turned out.)

"What it got wrong - way wrong - was that China's state employment statistics only used to cover state employment. That was fine of course when all employment was state employment, but not when it wasn't. There are 200 million migrant workers alone not included in China's employment stats. Since 1990 the Chinese working class has increased by 300million, yet according to these people in the same period its manufacturing sector has actually shrunk. I mean where do you start? "

Well, I'll have to look them up again, but AFAICR there was a lot of discussion about the migrant labour force there. They had some more recent studies in the last 3 years or so, those are my point of reference as I don't have access to their book.

"There is debate about the accuracy of China's statistics, but for another reason. It is reckoned the central government generally under-estimate growth, to head off demands from the US that they allow their currency to reflate. This is a great series of papers from GS; "

Well the study I referred to talks about overestimation of (total GDP) growth, not underestimation. So does the ADB. OK, I should compare them.

Tue 17, November 2009 @ 18:13

bill j said…

Actually I didn't predict confidently there wouldn't be a recession, I thought there well might be a recession, but on balance expected it a year later. That was because I thought that if it followed the previous two decades, 1998 and 1987 when the financial crisis generally proceeded the recession by 18 months, then it may do so this time too. Hey ho.

Of course the lending may well cause problems, that's the nature of capitalism, its a chaotic problem ridden system. Its all about an assessment of those problems and when they're going to occur. That isn't so easy to get right (see above).

Personally I think the investment banks analyses are generally the best. Certainly much better than those of the left. While its true the banks want to sell their financial products, they also want to give themselves credibility by accurate forecasting. The left aren't interested in that. They generally do hardly any empirical research and when they do refer to figures its usually second hand. Want an example? The latest piece in Fifth International - by Luke Cooper - asserts that profits are not measured on an annualised basis, when they are.

There's a reason why they don't even bother getting basic empirical information correct, and that's because it doesn't really matter to them. All they have to do is predict a collapse is just around the corner - economics play an ideological rather than empirical function for them. Last year they got lucky, but even then it wasn't the great depression (re-run again) as they all thought.

The ADB talks about both. It depends who you read. IMO the Goldman paper makes a lot of sense.

Tue 17, November 2009 @ 19:11

m said…

do you work at Goldman yourself? :))

Tue 17, November 2009 @ 19:45

bill j said…

No but my nephew did funnily enough - he was the cooling system engineer. He gave it up to get a job in a bike shop. These eco-youth!

Tue 17, November 2009 @ 19:51

Graham B said…

The paper by Felipe et al says, when discussing why their calculations show a declining RoP in China (but a rising one in India), that one reason is that the profit share of GDP (sometimes they call it capital share) has fallen - and hence labour's share has risen (p12 and 13).

Like the O'Hara one with a falling rate of surplus - a strange result.

Tue 17, November 2009 @ 20:24

bill j said…

You can find that Zhang Yu and Zhao Feng paper here

http://www.seruc.com/bgl/paper%202006/Zhao-Zhang.pdf

If you look on page 13 you will see that Harman's description of the trend - this is the third paper he refers to;

"I have come across three studies of profit rates for China. One shows a sharp drop up of more than a third between 1978 and 2000;10 the second shows an even sharper drop of around 40 percent from the 1980s until 2003;11 the third shows a fall for manufacturing until 1999 but considerable rise after that.12

Is barely accurate. This is how the authors describe the trend in profit rates themselves;

"We can divide the trend of rate of profit into three periods. The first period is from 1978 to 1988. In this period, the rate of profit had a very slight trend to decline. In fact it fluctuated between 38% and 31% in those years. The second period is from 1989 to 1998 in which the rate of profit declined relative sharply. It declined from 26% in 1989 to 13% in 1998. The third period is from 1999 to 2004 in which the rate of profit increased steadily. The rate of profit increased from 19% to 31% which near its peak level in 1978."

And we know from UBS, Goldman OECD etc that profit rates grew at their strongest rate after 2004, the date at which the authors end their calculations.

Tue 17, November 2009 @ 20:56

bill j said…

BTW that quote was from the authors powerpoint summary that you can find here

www.networkideas.org/ideasact/Jun07/Beijing_Workshop_07/Zhao_Feng.ppt

Tue 17, November 2009 @ 21:00

m said…

Wait a minute. (I've read the Zhang Yu and Zhao Feng paper too, in its PPT version)

Harman is referring to
1) the O'Hara study
2) the Felipe study
3) the Zhang Yu and Zhao Feng study

I think he described correctly that the first two studies show a continuous decline up until 2002, whereas the third one shows decline until 98 (OK, the paper says it happened in 2 phases, a slower, then a sharper one), and then a strong recovery.

So you claim there was even further recovery in the RoP after 2004. Ok, let's say this is so. All I'm saying is I'm not sure how sustainable all this was. How much of the demand (both internally (state banks), but esp. externally, in the US/EU consumer markets) in the 2002-2007 cycle was debt-financed, for example? This doesn't show up in profit figures.
Yes, China did not collapse in spite of the severe contraction of demand for its exports. You say this is proof that the Chinese economy can go on growing without so much as a bump, no problem.
There is another scenario however, namely, that the enormous stimulus and lending package pumped out by the state was able to compensate for the fall-out in export demand, but won't be able to do so very long.
I don't know enough about China to say which one of these two scenarios are correct, but there are signs in both directions. We'll see.

Tue 17, November 2009 @ 21:34

bill j said…

The paper by Felipe is odd. It says that;

"It is not easy to explain why China's profits rate has declined while that of India has increased...At the most simple level the profit rate can be written as the product of the capital share in output times the productivity of capital...figure 5 shows the capital shares of the two countries. The difference in the evolution of the two series explains (at least partially) why the profit rate has declined in China while it has increased in India. Between 1980 and 2003 capital lost about 7 percentage points in China from about 36% to about 29%. Naturally, this implies that labor's share increased by that much." p13

The profit rates it shows are still pretty high, but there are several problems which the authors are aware of in this assertion, not least, why is investment booming if profit rates are falling?

Of course there is a repetition of the problem of treating pre-1995 China as capitalist, when the OECD paper sited above shows that it was only in the mid-1990s that the majority of the economy was dominated by exchange at market prices, before then it was a centrally planned economy, albeit one in transition to capitalism.

Also their method for working out profit rates maybe needs some closer attention.

But on the data, every other empirical study I can think of has shown that labour's share of GDP has fallen very sharply over the last couple of decades, while living standards have risen due to increasing productivity, while that of profits have gone up in the opposite direction. According to the UBS paper industrial profits as a proportion of GDP rose from 1998 2% to 2008 8%. This is why the domestic economy was able to ride out the export crisis of 2009. UBS say;

"How could aggregate profits go up if individual profit margins did not? The answer is a truly stunning expansion of industrial sales revenue relative to gdp, more than doubling over the past seven years. Equally surprising is that there was no sharp increase in sales coming from traditional export goods such as toys, textiles or information-technology electronics, i.e., the stuff that goes to feed the voracious U.S. consumer. Rather, the action came from heavy industry, and specifically areas such as steel, aluminum, cement and other basic materials, autos and auto parts, machine tools and specialty chemicals—i.e., mostly sectors that support the domestic housing and auto boom."

The OECD paper covering the period from 1999-2003 shows that profit plus interest as a proportion of value added for state controlled firms rose from 1999 23% to 2003 35% and for private firms 1999 22% to 2003 26%. p18

Tue 17, November 2009 @ 21:38

bill j said…

How sustainable is anything? It depends what we mean by sustainable? China did have a bump last winter, but not a very big one its sharply rising profit rates on a rapidly upward trend since the mid 1990s meant it had the reserves to replace foreign with domestic demand. This is particularly apparent in the Goldman paper, see page 7.

http://www.permanentrevolution.net/files/gs%20savings%20glut%20may%2009.pdf

Choonara elsewhere objects to Goldman's distinction between yield and return on capital - in the case of China they both rocket, rising from 1998 2% to 2007 26%+.
Obviously a lot of the external demand was debt financed, the relationship between the US balance of payments deficit and Mortgage Equity Withdrawal is well established. The point is that through re-orienting its economy internally, China has been able to sustain profit growth since then. That's the point of the UBS piece. They point out that those sectors that have grown most strongly over the last decade are oriented to the domestic internal market.
How long can they keep up the stimulus? How long do they need to. By next year, most likely, export markets will have begun to recover. All that it has involved so far is lifting restriction on bank lending, the state budget deficit has hardly risen and they haven't touched their foreign exchange reserves which have continued to grow.
Can that continue forever? Obviously not. But can it continue for the next few years, I don't see why not. BTW if you take the Pettis scenario of rampant bad debts in Chinese lending, then on examination, he really hasn't got any evidence of it, but merely surmises that when the next crash comes no doubt a lot of bad debts will be revealed. Well no doubt they will be. Just like in every crash.

Tue 17, November 2009 @ 21:48

m said…

you must be working for the Chinese then :))

-

More seriously, your scenario (on China) does seem to be more likely, though the other is not to be excluded either (at least on the basis of my (limited) knowledge on the country), especially with the sometimes weird data that comes out from the Chinese.
Of course, in a political sense, this whole question really doesn't count for us that much. We're against capitalism, even if it is (still and again) able to grow and accumulate...aren't we? I mean when Marxists want to kill each other because they disagree on recent trends in profitability, it's a bit absurd sometimes...

Tue 17, November 2009 @ 22:23

bill j said…

Well absolutely. Its a pressure cooker which will absolutely blow for sure. Russia was growing pretty fast up to 1914 now wasn't it?

Tue 17, November 2009 @ 22:34

Graham B said…

Harman refers to only three studies (ok, they reference others):
1) the O'Hara study
2) the Felipe study
3) the Zhang Yu and Zhao Feng study

I haven't looked at the last one, but on a brief look at the first two there are clearly two problems that must cast suspicion on the method of calculating the RoP in both cases - 1) that China cannot be considered a market economy until the early 90s and 2) their results of falling exploitation or profit share of GDP contradicts the established account by Marxists and bourgeois economists as far as I know.

And Harman himself agrees with 2) for the first study. He spends just half a page out of 350 in Zombie Capitalism on (falling) profitability in China and makes no attempt to refer to any of the counter evidence that is out there. Come on.

We can debate the future of China - plenty unknowns and nothing lasts forever - but lets start by accepting the past.

Tue 17, November 2009 @ 22:47

SteveH said…

"economics play an ideological rather than empirical function for them."

Unlike bourgeois economics of course!

Wed 18, November 2009 @ 16:12

m said…

The Zhang Yu and Zhao Feng study reaches opposite conclusions (rising OCC counteracted by the huge rise in the rate of SV (~profit share), that is a fall in the labour share) than the other two.

This makes more sense to me than the Felipe/O'Hara theory - though I'm not sure where they have screwed up, ending up with a falling profit share...

Wed 18, November 2009 @ 21:16

bill j said…

Agreed Zhang Yu and Zhao Feng study follows a pretty similar trajectory to the Goldman Sachs paper. Showing a falling "rate of profit" up to 1998 and then a very strong growth in it after then. Obviously it only goes up to 2004, when the strongest growth came even after that during the last boom.
I'd have to go through the others in detail to work out where they're wrong, I'm not sure its worth it given that they're so out of kilter with every other study there is.
The key mistake with Zhang Yu and Zhao Feng is that, as the OECD and Burkett and Hart Landsberg show, China was a centrally planned non-capitalist economy before the restoration of capitalism in the mid-1990s. Hence any rate of profit before 1990, is not a rate of profit of a capitalist economy, but a measure of surplus relative to investment in means of production i.e. use values, in a centrally planned one. The OECD stats on the rise in exchanges at market rate capture the growth of the capitalist economy very well I think.
Why this matters in terms of Harman, the stagnation theorists and so on, is precisely around the theory of "state capitalism" or rather the various contradictory and mutually exclusive theories all going by that name, which together form the "theory" of state capitalism. If one recognises that these states were non-capitalist - their exact designation is not so important at this point - before 1990 then one can appreciate how the growth of the world market with their addition to it transforms the prospects of capitalism, enables it to escape stagnation (not crises of course) and enter a new period of general upswing.
If you have a theory of "state capitalism" which asserts that these states were already capitalist and capitalist restoration did not really change anything but rather was a move "sideways" then you have no explanation for the rise of profit rates in the new period of globalisation. Hence the insistence of the state caps that profit rates are stagnant.
(I know that the Trotskyists in the UK at least also insist that, but that's for a different reason, they're catastrophists in the Healy mold.)

Thu 19, November 2009 @ 10:23

James said…

Why are you so focussed on the rate of profit and not wages? As revolutionary socialists should you not be making the case to workers that at least in the west real wages have stagnated? What in your opinion has happened to real wages in the last 50 years and how did the opening up of the Chinese and Soviet economies affect these real wages?

Don’t we need a nation by nation, industry by industry analysis to give us the real story of capitalist development?

Thu 19, November 2009 @ 17:42

bill j said…

Hopefully a revolutionary socialist can be interested in profits as well as wages. After all the working class creates both. Wages have as you point out stagnated in the West over the last two decades, in fact as a proportion of national income they have been steadily falling since around 1982. In the East the picture is a bit more complicated in China they have been rising very fast, but because productivity has risen even faster then as a proportion of national income they have been falling. In the ex-USSR they slumped during the 1990s and have recovered a part of that fall since then, but in general living standards remain below that of the ex-planned economies.
And why can't we have both a national and an international look at trends? It is after all a world economy.

Thu 19, November 2009 @ 19:42

James said…

I was actually asking for a focus on both because for the worker capitalism has become stagnant in the West despite the fact that production is located in more favourable locations for profit rates. Workers need to be told why profit rates are rising but wages are stagnant, after all workers only get the wages part of the value they create. It is my view that any debate about profit rates should always touch upon wages.

On the national and international issue, China has a lot of cheap labour to exploit but what is happening to profit rates in Japan or high tech industries etc. How much capital is being invested in research and development, how is that part of the surplus collected by governments being spent. I don’t think the story of capitalism should be told as a single narrative. You should firstly look at the story behind the empirical data, build up the story from the base and then comment on the overall position. Looking at profit rates for the last 100 years or whatever and then simply saying capitalism is stagnant or dynamic surely tells a superficial story.

I don’t pretend to have your knowledge of economics but I would question your methods.

Fri 20, November 2009 @ 09:39

m said…

IMO: there are surely other factors to be considered too.
however in a capitalist, that is a profit-making economy the average profit rate is a key variable, and there is a tight connection between profitability and investment (accumulation) and hence aggregate growth. No coincidence that the post-war boom (in the US) started off with a RoP so high that was historically unprecedented (http://mpra.ub.uni-muenchen.de/14147/) and went into a crisis in the seventies as the RoP declined. Of course, if we want to write an economic history of the period we should look at other things too (wages, transfer payments, the state budget, trade patterns, industrial and technological development, the financial sector, union activity).

Fri 20, November 2009 @ 10:56

bill j said…

Well we have written lots of other stuff about the world economy. This article wasn't supposed to cover all of that, it was a review of Chris Harman's particular take. We think using empirical data is important too. But wouldn't claim to have covered absolutely everything. What we take issue with particularly, is the consensus view propagated by Harman, Brenner et al that capitalism has been stagnant for getting on four decades. In our view, the restoration of capitalism in the former Stalinist centrally planned economies enabled it to escape the stagnation that had pervaded the system between 1973-1990.

I'll have to spend a little longer to go through Alan Freeman's article in detail, but I should point out his graph on page 5 does not show that profit rates are falling, or support his contention outlined in the opening of his piece that capitalism remains in the period of stagnation that began in the late 1960s.
According to Alan Freeman's graph in the period between 1982 and 1997 (where his graph ends because 2000 was the last year that the government collected figures for capital stock) profit rates recover to their highest level since the mid 1960s, the peak of the post war long boom.
We also know that fixed capital investment slowed after 2003 and profit rates soared, as his profits rates basically measure this relationship its likely that his profit rate will have increased greatly since then. During this recession btw the rate of depreciation has been so large that total capital stock has declined for the first time since WWII, while profit rates have fallen far less than is "normal" for a recession.
BTW investment is not accumulation and there is no direct relationship between the general level of profitability and the level of investment. Investment as a proportion of GDP reached its highest post war level in 1981 in the midst of the deepest recession since WWII and when profit rates were at their lowest point. Accumulation is the accumulation of value, not just fixed capital investment. The level of that investment also depends on the price of fixed capital, productivity, the export of capital, the opening and out sourcing of production abroad etc.

Fri 20, November 2009 @ 15:21

m said…

I only referred to Freeman's article to substantiate my claim that directly after the war the RoP was very high. it was in response to James' question, why the RoP is so important. that's all.

yes, investment and accumulation is not quite the same, I was imprecise, youre right, and the relation (between the RoP and investment) is not always direct, but theres no question that theres still an important connection (which is more complex, eg. "coerced investment", prices etc.) at least in the longer term.

actually I think this is one of the blind spots of Marxian economics. we argue a lot over how to measure the RoP, but argue far less over how investment decisions are actually determined. clearly, they're not a linear function of profitability, though of course the two variables can neither move in the opposite direction for a long time. Marx himself didn't really address this question, he did not provide us with an "investment function" of course.

for example the rate of reinvestment (of acquired profits) in the 2002-2007 (in the US) declined, why profits soared.

Fri 20, November 2009 @ 16:03

m said…

(while profits soared)

Fri 20, November 2009 @ 16:03

Chris Harman; Zombie Capitalism; Review

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discussion of this article

James said…

bill j said…

Dimitris said…

bill j said…

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