Capitalism – the Edge of a Vortex
By Fawzi Ibrahim
[Fawzi Ibrahim, Senior lecturer
(retired) and author of several books on electronic engineering, television and
video technology and computers. Email:
When the crisis of 1973-74 was upon us,
Anthony Crosland, the then Labour Secretary of State for the environment, told
local authority representatives ‘the party’s over’. Glossing over the fact that
most people weren’t aware of there being a party, let alone that it was over,
Crosland was right in that the crisis of 1973-74 was an important
watershed. The following two decades
witnessed a ‘reconfiguration of the capitalist system’[1]
culminating in what is variously described as ‘the crisis decades’[2]
‘the age of insecurity’[3],
‘the new economy[4], the
‘long slowdown[5] and ‘the
long downturn’. But what was so special about that crisis? After all, cycles of
boom and bust are normal; so normal, they are dubbed ‘the business cycle’. What
was special about the 70s? Was it the oil crisis, the breakdown of
international monetary system (Bretton Woods), the onset of ‘globalisation’,
the winter of discontent, the ‘crisis of Fordism’, new management techniques,
computerisation or was it the election of Thatcher and Reagan, the impending
collapse of the Soviet Union or the rise of ‘neo-liberalism’? All of these and
other external factors have been sited to explain the peculiarity of the 70s
and the period that followed. But looking at external factors for an
explanation confuses cause and effect.
This article will show that the causes of
the crisis of the 70s were internal to capitalism, inherent within it. Employing new graphical techniques borrowed
from electronic engineering, the article will illustrate how in the early 70s,
as a result of falling rates of profit, capitalism was heading towards a
vortex-like critical zone. The ‘transformation’ that followed was necessary to
prevent capitalism tipping over the edge and into oblivion.
The
dog that didn’t bark
Classical economic orthodoxy has become a dirty
word. Every economist worth his or her
salt, from the Left or the Right has had a pop at this or that classical
theory. Among the theories receiving most attention is the ‘tendency of the
rate of profit to fall’. This theory, though mainly associated with Karl Marx
in fact has its origin with Adam Smith and later with David Ricardo. It is one
of the more enduring and most contested theories[6].
Over the last two or three decades, the
rate of profit in developing economies has to a large extent showed no tendency
to fall. It is this fact that convinced sympathisers and delighted opponents to
declare the theory of the falling rates of profit outdated, having no basis in
fact and with no value whatsoever. Opponents saw this as an opportunity to kill
the theory once and for all. Some sympathisers side stepped it[7],
others made magnificent efforts to show while the theory was ‘right in Marx’s
time’ it is no longer applicable or that the capitalist have managed to find a
way round it[8] and yet
others contend that ‘what Marx meant by the “tendency” of the rate of profit to
fall was not an empirical trend’[9].
But, there is no reason to apologise for, find
a way round the theory or say that it never meant what it said. Rates of profit
would gradually fall until they hit a ‘critical threshold level’, which, if it
is crossed, would make the system collapse in the same way as continuously
reducing the idling speed of a car engine, beyond a certain critical threshold,
the engine would stall. The human heart beats at a normal rate of 60-80 beats
per minute. However, if the heart beat falls to 25 or 30 beats, to its critical
threshold, then any further decrease will result in a catastrophic heart
failure. In the same way as a car engine
cannot be observed running at a speed below its critical threshold or a heart
beating at a lower rate than its threshold of about 30, a rate of profit lower
than the critical threshold cannot be observed.
If such a threshold was to be breached for any length of time, the
system would suffer catastrophic failure.
Empirical evidence would not show a rate of profit continuously falling
beyond this critical threshold in just the same way as the speed of an idling
engine or a heart beat cannot be measured below their critical threshold level.
Once the rate of profit crosses that critical threshold, it has to be urgently
rescued otherwise, like our car engine and our human heart, it would
stall. Since society has to go on and in
the absence of an alternative economic system ready to take over, capitalism
has always managed, by hook or crook to revive itself and lift the rate of
profit and with it profits above the critical level[10]. This has been the history of all highly
developed capitalist economies. From this point of view, capitalism digs its
own grave. The real crisis comes not when the rate of profit falls, an
assumption made by many, but when it stops falling.
The
economic footprint of capital
The traditional time series is a useful
analytical tool that has formed the backbone of almost all economic analysis.
But the time series has severe limitations.
While the time series shows how individual items, say profit, prices or
unemployment varies over time, it tells us nothing about a possible relationship
between profit, process and unemployment. If we are to explore the process of
capitalist production, we need to explore the relationship between those items
that lay at the heart of its operation. The operation of capital is defined by
the relationship of three variables: the quantity of capital investment, the
rate of profit[11] and
profit. It is the simultaneous values of these three components that define the
operating point of capital, its status as a profit-making vehicle. To analyse
its operation, we must therefore look at how these three components relate to
each other and interact with each other over time. To do this, we need to develop a new
technique to construct an operational map of capital.
The
operational map
Fig. 1 The operational map of capital defining Capital
A and Capital B with their respective capital investment, I (x-axis) and rate
of profit, RP (y-axis)
To illustrate the relationship between
these three variables, we will first establish the relationship between two of
them, the rate of profit and capital investment using a graph with investment,
i on the x-axis and the rate of profit, RP on y-axis (Figure 1). Capital
operating at any combination of rate of profit and capital investment can be
represented by a point on the graph, such as point A for capital A with RP= 20%
and an investment of £2000, or point B for Capital B with RP =12% and an
investment of £6000. These points are the operating points of Capital A and
Capital B respectively. The operating point of a capital may move as capital
investment I, and the rate of profit RP vary over time.
The third variable, profit, may be drawn on a 3rd axis resulting in a complex 3-D graph. To avoid this, we can provide a measure of the third variable by the use of equal profit, EP curves or contours. Fig. 2 shows three equal profit contours: EP1, EP2 and EP3.
Figure
2. Equal Profit EP contours
Consider point b on the equal profit
contour EP1. The area under the point
represents the profit obtained by capital operating at this point, namely area ABCD
= DA x DC = rate of profit x investment = 20% x £1000 = £200. Similarly for point b1 on the same contour
EP1, profit = area A1B1C1D1= 10% x
£2000 = £200. The same applies to any
other point on that contour. EP1 is a £200-profit contour. In the same way,
points on the other two contours represent other profit levels, namely £300 for
EP2 and £400 for EP3. EP2 is a higher EP contour than EP1 and EP3 is higher
than EP2. If the operating point moves ‘upwards’, from EP1 to EP2 or from Ep2
to EP3, profits will increase and vice versa.
Let us suppose that Capital X is operating
at point b whereby its total investment is £1000 with a rate of profit of 20%
resulting in a profit of £200. If, in the following year, the operating point
of this capital moves to b1 on the same EP contour, then while its
investment has doubled, its profits remain the same. Its rate of profit has of
course dropped by 50%. However, if the
operating point moves to b2 (RP = 16% and i = £1875) on EP2, its
profits will increase to £300 in spite of the fact that the rate of profit has
dropped from 20% to 16%. This is because capital investment has increased by a
higher proportion than the drop in the rate of profit, 87% increase in i
compared with 20% drop in profit. In general, higher profits are made when the
operating point of capital moves upwards from a ‘low’ to a ‘high’ EP contour.
Conversely, profits suffer a decline if the operating point moves downwards to
a lower-profit EP contour.
Now, if we plot the operating points of a
capital, year on year, we can observe its development and derive some
conclusions. By joining the operating points we obtain the operating
characteristic curve, the economic footprint of capital. For the sake of
simplicity, let us consider a straight line characteristic curve with a falling
rate of profit, X-Y in Fig. 3. The straight line is used merely for
illustrative purposes. In the real economy of course, the characteristic curve
would not be a straight line as we shall see later. For a straight line
characteristic curve, the rate of decline of the rate of profit, i.e. the
gradient of X-Y is constant. In Figure 3
points p1, p2, p3 etc. are the operating
points of capital at time intervals (the duration of which need not necessarily
be one year ): p1 (interval one), p2 (interval two) and
so on.
Figure 3 Notional evolution of the economic footprint
of capital
It can be seen that when the characteristic
curve crosses the EP contours upwards, from low to high EP contours (P1
to P2, P2 to P3, P3 to P4,
P4 to P5 and P5 to P6), profits are
increasing. When the operating line
moves from one point on an EP contour to another on the same contour (P6
to P7), profits are unchanged. However, when we move further down
the characteristic curve, P7 to P8, P8 to P9,
P9 to P10, profits begin to tumble as the operating point
begins to move from high to low EP curves. It will also be noticed that
although the gradient of the characteristic curve (i.e. the rate of change in
the rate of profit) is the same throughout, the characteristic curve crosses
the EP contours upwards at low levels of capital accumulation and downwards at
high levels of accumulation. As a
general rule, characteristic curves are more likely to cross the EP contours
upwards when capital accumulation is low than when it is high. This is because
as capital accumulates, an increasingly larger quantity of I is necessary to
compensate for any incremental drop in the rate of profit, if profits are to be
sustained, let alone improved. As capital accumulation continues apace, a
critical point is reached, P8 in the diagram, when capital cannot
accumulate fast enough to compensate for the drop in the rate of profit[12]. Profits begin to fall. This is the critical zone of capital, the
edge of the vortex[13].
Every firm, industry or economy has an operating characteristic curve, an economic footprint. How the characteristic curve crosses the EP contours is determined by among other things, the level of economic development including technical advance, wage levels and capital accumulation. As capitalism develops with high capital accumulation, its economic footprint inexorably moves towards the critical zone.
Figure 4 Typical economic footprint approaching the
critical zone (UK, Private Non-Financial Corporations, 1965-79, Gross)
A
practical footprint – the
The straight line footprint is purely
theoretical. It is used for illustrative
purposes only. In the practical world, the economic footprint of capital will
fluctuate as the economy goes through cycles of upturn/downturn. A typical
footprint that is approaching its critical zone is that of the non-financial
sector of the
Table 1.
Capital investment (col 2), year on year and its corresponding rate of
profit (col. 5) for Private Non-Financial Corporations (PNFC) in the
|
|
|
|
|
Rate of |
|
|
Capital |
Capital |
Capital |
profit |
|
|
£m |
change £m |
%change |
% |
|
1965 |
51184 |
|
|
11.4 |
|
66 |
56406 |
5222 |
10.2% |
10.3 |
|
67 |
58463 |
2057 |
3.6% |
10.4 |
|
68 |
61338 |
2875 |
4.9% |
10.5 |
|
69 |
67080 |
5742 |
9.4% |
10.5 |
|
70 |
74951 |
7871 |
11.7% |
9.7 |
|
71 |
84266 |
9315 |
12.4% |
10.0 |
|
72 |
95239 |
10973 |
13.0% |
10.3 |
|
73 |
112858 |
17619 |
18.5% |
10.2 |
|
74 |
141701 |
28843 |
25.6% |
7.4 |
|
75 |
175992 |
34291 |
24.2% |
6.7 |
|
76 |
210156 |
34164 |
19.4% |
7.0 |
|
77 |
243476 |
33320 |
15.9% |
9.0 |
|
78 |
280634 |
37158 |
15.3% |
9.5 |
|
79 |
363266 |
82632 |
29.4% |
9.2 |
The crises that characterised capitalism
since the 70s are of a different nature to the ‘trade cycle’ of the past and
the stop-go phenomenon of the sixties. Current recessions/crises are of a
different order. They are caused by the fall in the rate of profit to a
critical point, a threshold level where profits begin to fall as well, the
critical zone. Quantity changes to
quality. Capital’s operating point hovers
along the critical threshold, rising above it only to be forced to dip below
it, to be rescued by a ‘crisis’ and its
aftermath and so on.
When an economy crosses the critical zone
threshold, the fall in profits indicated by the characteristic curve moving
from one EP contour to lower EP contour, is an average loss over the whole
economy. Being an average, some parts of
the economy will suffer no losses and may even make a profit while others
suffer very high losses. Such losses invariably result in bankruptcies and
closures. If the economy remains in the critical zone, this trend will continue
and economic activity will gradually come to a standstill as
production-for-profit becomes unsustainable.
In the absence of a different economic system being put in place, action
must be taken by capitalists on the one hand and the government on the other to
pull the economy out of the critical zone.
Precisely how that was achieved following
the 73-74 crisis will be considered later. For the time being, let us look at
the type of action open to capitalists and governments if the economy is to
come out of the critical zone.
Moving
out of the critical zone
Figure 5 showing capital P1 on the edge of
the critical zone. The recovery area
(shaded) is where capital must move to if profits are to continue to increase.
When profits tumble and the economy enters
the critical zone, the trajectory of the characteristic curve is such that
further profit losses are likely unless action is taken to initiate a recovery.
For recovery to take place the movement into the critical zone must first be
halted and the operating point moved out and into the comfort zone (shaded area
in Figure 5). The operating point may be made to move:
·
to the right (capital
injection),
·
to the left (the removal of
unprofitable capital),
·
upwards (Instant increase in
the rate of profit)
In
practice of course, a combination of all three will probably take place.
Figure 6 shows how capital has to grow by an ever
increasing quantity just to keep profit levels constant
Capital
injection
If capital investment is increased by a
sufficiently high quantity, then profits may be maintained or even increased
even though the rate of profit continues to fall. Referring to Fig. 6, suppose the economy is
operating at point A and moving along line X-Y.
If the rate of capital accumulation is not changed, the operating point
will move to point B1 on a lower EP contour. However, if at the same
time, profits are to be maintained, the operating point must move to B2
on the same EP contour as its previous operating point A. This means an
injection of new capital ∆B. If the operating point subsequently slipped
to point C1, capital investment has to increase by ∆C to take
the operating point to C2 if profits are to be maintained. For point D, the necessary additional capital
injection is ∆D and so on. For
each incremental drop in the rate of profit, the additional investment required
to keep the amount of profit constant gets progressively larger. It is like running faster and faster just to
stay still. If profits are to increase, even larger amounts of capital
investments are required. Capitalist have a number of avenues for raising
capital through the financial market, converting assets into capital, etc. When that fails to deliver the required
levels of investment, the government have to intervene which in
·
contracting out,
·
privatisation, which turns
public services into commodities[17],
·
The ‘creation of entry points
for private operators of all kinds to tap into’ publicly funded enterprises
such as the NHS[18],
schools and colleges and council services.
·
Public Finance
Initiative/Public Private Partnership (PFI/PPP) with guaranteed high profits
for private capital.
Removing
unprofitable capital
If capital with a low rate of profit is
removed, then the average rate of profit will increase. This may be the result
of any of the following:
·
Writing off capital made
obsolete as a result of technological advance.
·
Increasing turnover and
effectively reducing total capital
·
Merger by which capital is
reduced as a result of ‘rationalisation’.
·
Writing off large amounts of
capital that normally takes place following any period of stagnation, recession
or crisis.
·
The removal of unprofitable
capital out of production for profit, in other words, nationalisation. Where
certain lines of investment, such as transport and energy that are essential to
the overall running of capitalism and cannot be dispensed with, become
‘unprofitable’, they are taken into public
ownership but kept in operation with public subsidies if necessary[19].
·
Capital export. Exporting ‘unprofitable’ capital to more
profitable parts of the world.
·
Wars. Apart from the destruction caused by war
which brings with it ‘re-construction’, wars increase the demand for weapons
increasing the profits of the armament industry and its subsidiaries.
·
Chasing ever more miniscule
rate of profit differentials through sophisticated mathematically-modelled
speculative business plans and financial products, a risky process which
invariably ends in spectacular failures (sub-prime mortgages is just one
example).
A
lift in the rate of profit
Figure 7 Upward shift of the characteristic curve by
lifting the rate of profit
Consider the characteristic curve X-Y in
Figure 7. If capital is operating on the
threshold of the critical zone, at point A, then any further increase in
capital accumulation will move the operating point to a lower EP contour and
profits will fall. This may be avoided if the rate of profit is given an upward
shift from point A to point A1 on X1-Y1. In
this way, even with the same rate of decline of the rate of profit and the same
level of capital accumulation (lines X-Y and X1-Y1 have
the same gradient) profits will increase. The critical zone is effectively
shifted further down the line.
The shift in the operating point from point
A to A1 may be a result of price rises, wage squeeze or both.
The
edge of a vortex
While the actions listed above may take
capital out of the critical zone, the danger for it slipping back remains a
haunting possibility. This is because
while the characteristic curve may move away from the critical zone, the
tendency of the rate of profit to fall continues, maintaining the downward
pressure on the characteristic curve as capital continues to accumulate. For
this reason, the measures taken to lift the economy out of the critical zone,
not only have to persist but they have to intensify with more drastic measures
taken year on year. Failure to maintain and intensify these measures may take
capital back into the critical zone with all the dangers that that poses.
Capitalism thus skates precariously along the edge of a vortex, permanently in
danger of tripping over. Hence the mantra of ‘living in a changing world’ and
the incessant talk of the need for ‘change’, continuous non-ending change. The
cost of this ‘change’ is lower wages, weaker trade unions, insecurity, loss of
liberty, poverty and war. Here lies the explanation, the economic basis, for
the policies adopted by all governments since the economy crossed the critical
threshold in 1973-74. The rise of neo-liberalism was not an unfortunate
accident.
Events
that shaped the characteristic curve
Figure 8 shows some of the main events in
the
Figure
8 . The political and economic events
that shaped the economic footprint of the
In the sixties and early seventies, the
pursuit of profit was generally frowned upon; profit-making was not a very
respectable business. Then came Thatcher and made profit-making became
respectable again. ‘Greed is good’ was her motto. At that time, privatisation
was the favourite tool. After 1997, with New labour in power, profit-making
became a must. ‘It don’t mean a thing if
it don’t make a mint’ was Blair/Brown motto. With almost nothing else left to privatise,
New Labour turned to Public Private Partnership. Public services were
transformed into commodities, patients into consumers and students into
customers.
In the 80s and 90s we witnessed the biggest
rise in personal debt, a fast growth in inequality, a move away from
manufacturing, a most aggressive privatisation programme, a comprehensive
attack on the welfare state, massive deregulation of the finance system, an
all-encompassing assault on trade unions coupled with changes in the taxation
system that favoured the rich and the wealthy.
‘In the 1980s, a total of £60 billion of state assts were sold at
knock-down prices to the private sector’[21].
Under the stewardship of New Labour, 1997
onwards, a more pernicious form of privatisation was introduced in places where
the previous Tory government dared not go. Introduced by the then Conservative
government in 1992, Private Finance Initiative (PFI) was vitalised and
re-branded as Public Private Partnership (PPP), an umbrella term that includes
PFI. Private Finance Initiative which did not get off the ground under the
conservative government because the then government refused to give away too
many concessions was perused with vigour by the Labour government. ‘In 1997,
the incoming Labour government resuscitated the policy and got PFI projects off
the ground. It removed a number of obstacles and introduced legislation’[22]
to entice bidders and their financial backers.
Up to 1997, a mere 17 PFI contracts were signed to the value of
£2.95bn. From 1997 to 2007, there were
550 PPP contracts signed with a total capital of £51bn.
Conclusion
The repercussions of the above analysis are
far-reaching. The stark question facing
those who pin their hopes on a restrained and regulated capitalism is how can a
system whose very survival depends on breaking out of any restraint and
regulation be restrained and regulated?
For workers and trade unions, the attempt at long-term real improvement
in wages and conditions are futile. For the assorted environmental groups, any
hope that capitalism can reduce greenhouse emission and save the planet are
doomed to failure. An economic system that can’t secure its own creations
(Bearing Bank and Northern Rock come to mind) can hardly be expected to save
God’s creation, the planet itself. For
political economy, gone is the lure of humanitarian Keynesian economics,
capitalism with a human face. Keynesianism lost out to neo-liberalism because
it could not rescue a capitalist system that is heading towards the critical
zone. ‘At the end of the Short Twentieth Century the ‘Swedish Model’ was in
retreat even in its own country’[23].
Humanity faces a stark choice: end capitalism or wither away.