Declining Profitability Warnings

Marxist economist Michael Roberts recently noticed a startling development within theAmerican economy; “The final estimate of US GDP in the fourth quarter of 2014 came out today. US real GDP growth was left unrevised at 2.2% year-on-year in the final three months of the year, and the figure for the whole of 2014 was unrevised at 2.4%. Mainstream economists were keen to suggest that the current quarter in 2015 ending this week could show a pick-up. But none mentioned the really important development – that corporate profits fell… $30.4 billion in the fourth quarter, in contrast to an increase of $64.5 billion in the third… This [means] that corporate profits are lower by 0.2% from this time last year and are down 0.8% in 2014 compared to 2013”. This is the first decline in year-on-year corporate profits since 2008, and it is a signal of an increasing risk of a slump in investment approximately six months to one year from now, according to Roberts’ predictions. For it is profits that drives investment, and investment that produces real GDP growth in capitalist economies; the result being another recession in approximately a year.

This method of analysis is known as The Law of the Tendency of the Rate of Profit to Fall, and what it seeks to explain is that despite the many, varied, initial triggers of any given economic crisis under capitalism, such as the decline in the housing market that triggered the financial crisis in 2008, the underlying cause of all crises is a lack of profitability. The long-term tendency for the declining rate of profit is a result of an inherent contradiction within the capitalist system. Individual capitalists compete with one another for control of total profits, and profits relative to the capital invested. To achieve these aims the capitalist must develop a means of increasing the productivity of labor, something often achieved through technological development. However, as the capitalist invests in new methods and equipment the accumulated cost of those investments begins to rise, and the accumulated cost of labor declines. The size of the labor force grows, but the cost of the labor force declines, as more and more people lose their jobs to technological innovation, putting them in increased competition with one another for employment, ultimately driving down wages. Increased exploitation of the labor force provides the capitalist with a greater share of value created.

However, only labor creates value, and the surplus value from which profit is derived. Surplus value is the difference between what Labor is paid in wages and the actual value they produce. Simply put, they are not equivalently compensated for the value their labor creates. Inevitably, technological developments initiated by individual capitalists to outcompete one another for control over the total profit expropriated, and the profit relative to capital invested, results in declines in value generated by the investment of the capitalist. As efficiency and output increase for the more developed capitalists they appropriate the share of the surplus value created by the less well developed capitalist, increasing their individual rate of profit, but shrinking the rate of profit of the less well-developed capitalists, and the economy as a whole. If the less well developed begin to modernize in an effort to catch up to his or her more well developed competitors the rate of profit will decline consistently, causing declines in the total profit produced by everyone. As a result the capitalists pull back on investment, causing a crisis. Only through crisis can profitability be restored, through destructive events like unemployment, bankruptcies, banking collapses, etc.

One might now be wondering how this framework accounts for the periods of economic growth experienced over the last few decades. Long-term decline can be overcome in the short term. For example, the tens of trillions of dollars in debt accumulated since the 1980’s by public and private institutions and people like the United States government, consumer debt through credit cards, college loans, mortgages, and corporate debt, can stimulate periods of growth as experienced in the 1980’s, 1990’s and the first decade of the 2000’s. The growth we have seen in corporate profitability since the Great Recession Roberts’ attributes to bankruptcies and large amount of debt written off by the remaining global capitalists. Ultimately, to further try and restore profitability another crisis will be necessary. Since the recovery in the economy began in 2009 we have seen a historic increases in the stock market, with companies being overvalued well beyond their real value. Therefore it seems possible that the trigger of the next crisis will emerge out of the financial sector in the form of a stock market crash.

The political implications of Marx’s law can be seen quite easily over the last forty years or so. In order to restore profitability the neo-liberals began privatizing public services, financialization, targeting unions, driving down wages, and deindustrializing the well developed economies to take advantage of cheap labor in the newly developing economies. The neo-liberal era has been an era of the global capitalist ruling class intensifying their economic warfare on the rest of us by trying to roll back the achievements made by working people in the second half of the 20th Century. They call it Globalization. The period of national capitalist economies protected by domestic governments from the national capitalist economies of other countries has become a global capitalist economy wherein wealth is being redistributed from labor to capital. Domestic governments initiated a race to the bottom wherein any governmental policy that deterred investment, such as labor laws, environmental regulation, and taxation to pay for public services had to be targeted. Hence the rise in for profit colleges, rises in tuition for public universities, cuts to programs fighting poverty, road, bridge, and highway maintenance and reconstruction, cutting taxes on corporations and the rich, etc. Now it is even mainstream in the Republican Party to speak of privatizing parts of Medicare and Social Security. Wealth is distributed from Capital to Labor by re-appropriating the value that capital steals from labor, for only labor is capable of creating, through taxation and policies that increase wages, protect collective bargaining, provide education, housing, health care, safe working conditions, etc.

The effects of these changes can be seen in other ways. Capitalist crisis and class war increase the pressures felt by every sector of the working population. Social cohesion disintegrates and crime escalates, as was seen in the historic rise in violent crime in America from the late 1960’s to the 1990’s. More Americans are imprisoned than ever before, largely for nonviolent crimes. America has more prisoners per capita than any country on Earth. A society needs prisons if it is not longer going to be building not for profit entities such as schools and hospitals. Such as it is we have seen increases in for profit versions of each of these institutions, as well as for profit prisons. In the end there is no way out of this crisis without a reorganization of society, an economy under democratic control by the masses.



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