Markets

The Structural Crisis

Before reading this it might be best to review a few articles to put this into context. One of the first posts I ever wrote was about the clout of the financial sector in Has there been a quiet coup?, immediately followed by another one about the explosion of inequality in The rich and the rest. Then we explored the origins of neoliberalism with The 1979 coup and The dominance of finance. Maybe that is too demanding for a reader with little time on her hands so let us quickly review what we understand so far with some key pictures. The Gini coefficient measures inequality so that if John Paulson takes home the entire income in the United States and everyone else makes zero dollars the Gini will be at one. If everyone makes the exact same amount of money, the Gini is at zero. This makes it is easy to see the explosion of inequality since 1980:

Not only has inequality grown at an unprecedented rate overall, it has intensified. The higher up you go in the income ladder the bigger the jump. While the share of the top one per cent has grown from single digits in the late 1970s to around 25 per cent today, the share of the top 0.1 per cent has grown even faster. This is happening because the returns to capital have gone up significantly at the cost of returns to labor; and of course, capital is highly concentrated at the top:

What we are witnessing is the greatest wealth boom in the history of the United States. Most of this great wealth is concentrated in the financial sector. In fact, finance has not just gained in revenue and profits, it has accumulated immense political clout. There has been a massive transformation in the world-economy, putting us unquestionably in a period of financial hegemony. This is not unprecedented. As we learned from Braudel, this is precisely what happened when Genoese capitalism matured in the sixteenth century, with Holland in the eighteenth, and Britain in the late nineteenth. However, the blossoming of financial hegemonies in past centuries is perhaps only of peripheral interest to us. What we really care about is what is happening right now. How did this come to pass??

Duménil and Lévy have put forward a very persuasive case that it was the structural crisis of the 1970s that resulted in a massive mobilization of forces to restore upper class wealth and power. During the stagflation crisis of the 1970s–when profit rates of Western corporations were collapsing–there was a serious decline in the wealth of the upper class. Their share of financial assets halved in the decade after 1965:

Profit rates declined throughout the West (the dotted line is Germany, Britain and France; and the solid line is the United States):

The crisis of profitability created unprecedented unity among Business elites. The atmosphere of intensifying crisis not only led to a major political realignment with the disintegration of the New Deal era ‘system of 1936’ (à la Ferguson)–which gave way to the Reagan revolution and the attack on labor and welfare–the system of 1980. It also throughly transformed the relationship between finance and industry marking the end of managerial capitalism and the autonomy of great corporations at the hands of resurgent capital. In this post, I do not want to look forward but backwards. In particular, I want to explore the genesis of this transformation. Why was there a structural crisis in the first place? Was the post-war order of broad based growth, led by state and corporate planners sitting on a time bomb? Did it collapse under the weight of internal contradictions? Did the system accumulate too many inefficiencies? What the hell happened?? 

Following Duménil and Lévy, I made the following claim. Beginning in the late 1960s there was a secular decline in the profit rate of Western corporations “which came about due to a slowdown in material expansion”. The more I thought about it the less it made sense. The key point is that structural changes like this–the decline in the rate of profit from 1966-82 being a classic example–happen for structural reasons. Now, it is not beyond the realm of possibility that there was a slowdown in technical progress, which is certainly a structural factor. But I did not see any evidence of that, and as it turns out, it just wasn’t the case. As Brenner points out in his book The Boom and the Bubble, “A decline in productivity growth could not have been the source of the fall in profitability for the simple reason that, in the manufacturing sector, where the profitability decline was for the most part located, productivity growth actually rose during the years when profitability fell, increasing at an average annual rate of 3.3 per cent between 1965 and 1973, compared to 2.9 per cent between 1950 and 1965.” 

Mulling over it for a few months a thesis gradually began to dawn on me: it had to be the Japanese explosion. In the early post-war period and accelerating after 1960, Japan was growing at a ferocious rate. Japan’s GDP was $91 billion as late as 1965. By 1980, it had grown to $1,065 billion. This was an export-led growth, most of it going to the huge US market. Japanese manufacturers were exporting less than $2 billion to the US in 1960. In 1988, Japanese exports had crossed the hundred billion dollar watermark. Only the word explosion is appropriate here.

A good bit of evidence for our thesis would be that a major chunk of the decline of the rate of profit of US corporations could be accounted for by the sectors penetrated by the Japanese. So, I went hunting for data. Japanese export numbers are easy to locate online, but profit rates are impossible to find. An old friend who is now an economic historian pointed me to the aforementioned Brenner’s book. Not only were the data sources right there in the appendix (it turned out that you can download the data with a click on the BEA website, if you know how to calculate rates and manipulate excel sheets the rest is easy); the book turned out to be one of the most impressive of any on the economic history of the post-war period.

A digression on Brenner’s thesis

Brenner’s framework is actually pretty tight. He considers only the three poles of the world-economy in his analysis: US, Germany, and Japan. The key macro economic indicators whose trajectory is carefully mapped are interest rates and exchange rates between the dollar and the mark (later euro), and the yen. Moreover, he puts a laser like focus of manufacturing profitability, seeing it as a key indicator of underlying economic strength when it rises, and weakness when it falls. His central thesis is a version of ‘inter-capitalist rivalry’, but one with rigorous attention to detail and an impressive marshalling of evidence. So he follows the path of manufacturing productivity and profitability in these three economies and the interplay between them from the post-war boom to the crash of the tech bubble at the turn of the century. Even though his focus is primarily on the 1980s and 1990s, he pays significant attention to the structural crisis that preceded it. In fact, he sees the entire period since the onset of the crisis as one of sustained stagnation. 

In his framework, the principal driver of the dynamics of US economy (and hence the world-economy) is the rate of profit of the manufacturing sector.

“Beginning in the mid-1960s, manufacturers based in the later-developing economic blocs–most notably Japan, but also in Germany and in other parts of western Europe–were able to combine relatively low wages to sharply reduce relative costs vis-à-vis those required to produce the same goods in the earlier developing US. On this basis, they not only succeeded in imposing their relatively low prices on the world market so as to dramatically swell their shares of that market, but also were able precisely by virtue of their relatively reduced costs, to maintain their old rates of profit at the same time.” 

         

Now, his thesis requires a much fuller treatment that I can muster in a digression and I will take it up in a whole new post soon. It impinges more on the bubble driven economy of the current era and it would do grave injustice to his brillant work to tackle it parenthetically. He writes in 2003: “A lasting decline in the rate of profit in the international manufacturing sector, caused by the persistence of over-capacity and over-production, has been, and continues to be, fundamentally responsible for reduced profitability and slow growth on a system-wide scale over the long term.”

Back to Japan

Let us turn back to my suspicion. When I found this book in the library and stared at figure 1.1 above, I knew I was close. One can almost see the impact of Japanese competition on German and US manufacturers. But I needed solid evidence. I found that Japanese exports were overwhelmingly concentrated. Just six sectors accounted for 90 per cent of all Japanese exports. Decomposing US manufacturing into two sectors–those facing significant Japanese competition and the rest–one can immediately see the dynamic at play:  

[All data is from the BEA website. The six sectors that account for 90 per cent of Japanese exports are metal products, textiles, auto, machinery, electronics, and transport equipment. I have taken the rate of profit to be the ratio of corporate profit before tax, (Table 6.17B) and net stock of private fixed assets (Table3.1ES). This is a pretty gross measure and unlike profits after taxes and after depreciation (which is routinely manipulated to reduce the tax burden), this measure captures the underlying profitability of US manufacturers, despite overstating the surplus available to these corporations.]

The rate of profit of US manufacturers was rising sharply in the great early 1960s boom, reaching an all time high of 25 per cent in 1965. This was especially so in the advanced tradable sectors which Japan would later come to dominate. Here the high was an astounding 45 per cent. The average rate of profit of manufacturers not facing Japanese competition declined from an average of 21.4 per cent in the early sixties boom (1960-65) to a still respectable 16.8 per cent in the depth of the crisis (1976-80), a decline of 21.6 per cent. Comparing US manufacturers facing the Japanese onslaught in the same period, we find that they declined from 36.0 per cent to 18.4 per cent, declining by an astounding 48.9 per cent.

Let us stick to the 1960-65 vs 1976-80 comparison. Total nominal profits of US manufacturers not facing the Japanese grew from $100 billion to $303 billion, while those facing the Japanese onslaught saw their profits grow from $76 billion to $168 billion. Meanwhile, inflation had averaged 5 per cent a year in the interim period, wiping out half the value of the dollar between 1960 and 1976. Whence, in real terms (in 1960 dollars) profits in the lucky sector grew from $97 billion to $146 billion, while US manufacturers in what was now essentially hand-to-hand combat with Japanese manufacturers saw their total real profits grow from $73 billion to only $82 billion even as real fixed investment (in 1960 dollars) ballooned from $450 billion in 1960-65 to $861 billion in 1976-80. This, despite $1,097 billion (in 1960 dollars) poured into fixed assets (again by US manufacturers facing Japanese competition alone) in the intervening period (1966-75). Therefore, even as the share of US manufacturers facing the Japanese grew in terms of real capital deployed from 46 per cent to 54 per cent of US manufacturers as a whole, their share of total profits declined from 75 per cent to 57 per cent. I can keep going on but let me not belabor the point: the principal driver of the collapse of the profit rates of US manufacturers and hence of the structural crisis was Japanese competition.  

Let me emphasize something at this point. I think it is pretty obvious that Brenner is not ignoring the role of the Japanese. His emphasis is on the systemic problem of excess capacity and over production in the advanced industrial economies, which is a pretty solid framework of analysis as he amply demonstrates. However, I do think something significant is being missed by the tightness of the framework.

The missing link

Why did Japan suddenly become such a powerhouse? How did it come about that Japan summarily outcompeted the big boys in the most advanced sectors of the day?? I don’t think it was just that Japan had a laggard’s low-cost advantage. I suspect it was the container revolution of the 1960s that drove down transport costs and brought Japan effectively closer to the United States by a magnitude. It was this underlying technological transformation of the world-economy that made Japanese manufacturers increasingly competitive vis-à-vis their American and German rivals. It’s hard to find historical figures but a number thrown around in the industry is that the intermodel transport revolution has reduced real costs to 3 per cent of what they were in the 1950s when the first of the containers were deployed. It was this underlying technological transformation of the world-economy that made Japanese manufacturing so competitive. The dominance of Japan (and now East Asia) in this network is hard to miss. Here is a map of container traffic by site of origin. [A TEU is a standard twenty foot unit.]

The other key reason is simply that the Japanese pioneered many advanced techniques which made them better than American corporations. For instance, they were the first to outsource and exploit their semi-periphery. Japanese firms were nimble and pioneered the ‘flying-geese model’: Japan led a sting of vibrant export-led economies (the Asian tigers), who outsourced low cost, low value-added processes to cheap south-East Asian economies in a complex network of subcontracting relationships. Indeed, a huge amount of Japanese FDI went to develop these feeder sectors in the highly productive and low-cost periphery of the Japanese-led system. And when Western corporations finally caught up, it was precisely by adapting Japanese techniques: outsourcing, subcontracting, off-shoring, ‘Just in time inventory management’, trimming down firms to make them more nimble, refocus on ‘core competencies’, and so on and so forth. Of course, let us not forget the role of MITI which managed this explosion with careful planning and deployment of financial resources with a financial sector subservient to the needs of the dominant export-oriented manufacturers.

When the Japanese onslaught finally slowed down, Japan went through a massive asset bubble in the late 1980s. Even as the underlying profitability of Japanese manufacturers went into long term decline, the Japanese economy saw a supermassive bubble in real estate and asset prices. Real-estate prices rose by a factor of ten during the 80s. By mid-decade, American manufacturing had emerged leaner and meaner, by shedding jobs and cutting wages and increasing productivity.

By 1990, Japan was finally reconquered by the United States.         

           

 

Advertisements
Standard

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s