Is Under-Consumption Responsible for Persistent Stagnation in the US Manufacturing Sector? Econometric Evidence and Implications for State Policy, 1965–2008

ABSTRACT

The monopoly capital/under-consumption model of crisis posits that under conditions of oligopoly the system's inability to absorb a rising surplus generates reduced growth rates and, in the absence of counteracting mechanisms, stagnation. This paper argues that the theory's explanation for the crisis of manufacturing profitability that erupted in 1965 is not supported by the empirical data pertaining to profit rates, capacity utilization, and state expenditure. Specifically, the paper presents an econometric ARIMAX model which incorporates government expenditure as a control variable in order to test whether state spending serves as a counteracting mechanism to raise capacity and increase the manufacturing profit rate, as predicted by the monopoly capital school. It is argued that the model does not support the contention that system-wide stagnation is related to insufficient aggregate demand. Rather, the evidence suggests that the accumulation process continues to be governed by fierce competition. The implications of this conclusion for state policy and labor organizing are also discussed.

KEYWORDS:

• International competition
• crises
• competition
• financial services
• manufacturing

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Shaukat Ansari is a doctoral candidate in the Department of Political Science at the University of Toronto. His research and teaching fields are comparative politics, international political economy and development studies. His dissertation examines the persistence of market orthodoxy in post-apartheid South Africa as well as the oligopolistic structures in the South African economy and their political and social implications. A portion of this dissertation will be published in African Affairs (2016) and will also inform his post doctoral research project which will examine the link between financialization, oligopoly, and national and global profit rates.

Notes

¹ Throughout this paper the term “under-consumption” refers to the flip side of the process of over-accumulation (see Foster 1981, 46). Under-consumption as a theory of crisis was developed by Paul Sweezy in The Theory of Capitalist Development, in which the author argued that there was a tendency under advanced capitalism for the rate of growth of consumption over the rate of growth of means of production to decline as a ratio (Sweezy 1942, 183). Relating this fact to systemic crisis, Sweezy stated that “Since the tendency to under-consumption is inherent in capitalism and can apparently be overcome only by the partial non-utilization of productive resources, it may be said that stagnation is the norm towards which capitalist production is always tending” (Sweezy 1942, 217). Under conditions of monopoly capital, over-accumulation manifests as waste and excess capacity in industry. Wasteful activities such as finance and marketing serve to transfer income to capitalists, who have a lower propensity to consume, and excess capacity cannot be put to work without lowering the price markup so that the output can be consumed. It is in this sense that the present paper employs the two terms interchangeably.

² Kotz's framework of monopoly power is in fact based on the theory of limit pricing, which posits that oligopolistic firms operate with certain cost advantages, which allow them to set prices at a strategic level during the course of the normal business cycle, thus deterring entry by rival firms since the latter are unable to make the average profit rate at the prevailing market price. The policy therefore serves as an effective barrier to entry. Other theorists, such as Cowling (1982), argue that excess capacity is sufficient to discourage entry into oligopolistic lines, whereas Baran (1957, chapter 7) points to the massive capital often required to reach minimum scale economies as a formidable barrier to new entry. It seems unlikely, however, that such obstacles would pose much difficulty for firms with tight linkages to a developmental state (as in East Asia) or with ready access to global capital markets.

³ One notable exception, however, is Harry Braverman's (1974) classic study, Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century. Braverman points to the advent of Taylorism as a means of controlling the movements of the labor force in order to perfect the extraction of surplus value within the realm of production. Although the author was clearly influenced by Baran and Sweezy's study, it is nonetheless apparent that his argument builds on the framework established by the law of value. The latter refers to the Marxian doctrine that while individual prices of production will deviate from values as a result of the establishment of an average profit rate, due to the migration of capital between sectors, at the macro-level value magnitudes regulate prices of production, while the latter regulate market prices. Moreover, the law of value holds that the labor process, at the point of production, is what determines physical production data as value materialized in use values (see Shaikh 1982, 71). As Harvey (2007, chapter 4) has noted, it is therefore unclear how the law of value can hold in the realm of production without also exerting its influence in the realm of exchange.

⁴ I am indebted to one anonymous reviewer for pointing out that the inability of state expenditure to adequately raise aggregate demand and absorb the surplus over a given period is not necessarily inconsistent with the monopoly capital accumulation model, since the theory posits that such expenditure is just one form of waste with its own contradictions. Nonetheless, I do believe that it is reasonable to assume that, within the accumulation model specified by Baran and Sweezy, and in the context of excess capacity, the MCT should predict that an increase in state expenditure should put unused productive capacity to work and raise the surplus.

⁵ This type of game theory lies at the heart of Cowling and Sudgen's analysis of the transnational corporation and their attempt to reconcile its power and financial leverage with the monopoly capital thesis. However, as Semmler (1981) argues, modern game theory has also been used to expose the inherent instability of monopoly market power and collusive price setting. For instance, consider the scenario in which a certain number of producers agree to restrict output in order to keep prices at a stable level and maximize profits. Since violations by any one member are unlikely to be detected, each producer in the cartel has an incentive to obstruct the arrangement in order to sell additional units at the monopoly price. This is the classic collective action free rider dilemma.

⁶ It must be noted that price decreases caused by international competition would not lead to a general decline in the profit rate, since the reduced output prices for certain sectors form the inputs for other industries. Thus, Brenner further argues that the benefits of technical innovation lead to rising real wages which then cause a general decline in the aggregate profit rate. This argument is not, however, the same as the wage-profit squeeze thesis since the rise in real wages is not predicated on a shift in the balance of class power (Brenner 2002, 37).

⁷ Dumenil and Levy (1995) have raised some serious concerns with some of the assumptions underpinning Dutt's analysis. For example, they argue that Dutt's post-Keynesian investment function, in which capacity utilization rates and output adjust while prices are constant, only makes sense in the context of short-run equilibrium. In the long-term, persistently low capacity utilization rates would trigger a reduction in investment by all capitalists in the line, and if such situation were to continue investment would gradually decrease until it ceased completely. This line of inquiry is beyond the scope of this paper.

⁸ Jacob Morris (1980, 420), building on the work of Gillman, argues that the measurement of the profit rate under US monopoly capitalism should be modified to subtract unproductive expenditures (U) from the numerator. The formula for the profit rate would then be written as follows: (S–U)/C. According to Morris, the deduction of unproductive expenditures from surplus value explains the low rate of capital formation in the era of monopoly capitalism. The author thus rejects supply side explanations for the fall in the rate of profit, arguing in line with the monopoly capital theory that low capital formation caused the fall in the profit rate, and not vice versa. As noted below, this position does not receive much support in the empirical evidence.

⁹ The ACF and PACF for government consumption expenditure display the same pattern as the manufacturing profit rate. For reasons of space I have not included the plots for that series.

¹⁰ An argument made by advocates of the monopoly capital theory such as Magdoff and Sweezy (1974, 9) is that the state intervenes in the economy by supplying cheap credit and through government expenditure in order to counter cyclical downturns which erupt whenever the inherent tendencies of monopoly capital begin to assert themselves. However, since this argument is made in the context of cyclical fluctuations, it is ill equipped to explain the secular stagnation and the long-term crisis of profitability.