Finance & Industrial Capital in the Current Crisis

— Mary Malloy

ROBERT BRENNER, IN "Why Clinton Failed Parts I and II" (ATC 46 and 56), makes a valuable contribution to the left's discussion of the Clinton administration's failure to deliver on its promise to "bring the state back in."

Many on the left believed that Clinton's election would inaugurate a new era of capitalist state intervention in the economy ("industrial policy") that could restore U.S. manufacturing competitiveness, end nearly three decades of economic stagnation, and raise the living standards of the working-class majority of the population. Brenner's essays are an important corrective to the illusion that there is a "painless" solution, beneficial to both capitalists and workers, to the current economic impasse in the United States and globally.

Brenner's analysis, however, suffers from several important deficiencies -- one methodological, and two empirical. Methodologically, Brenner does not present an explanation of the international capitalist crisis of profitability that began in the late 1960s.

Brenner's claim that the global decline in profitability is the underlying cause of the fall of investment, productivity, employment and wages across sectors (financial, manufacturing, transportation, services) and industrialized capitalist societies is correct. However, he does not clarify the cause of the decline in profitability, the relationship of the international crisis to the "relative decline" of U.S. manufacturing competitiveness, or the conditions for either the reversal of the international crisis or revival of manufacturing.

His failure to identify the cause of the crisis makes it difficult to sort out the relative weight of different economic processes in shaping the current political and economic situation in the United States. Brenner's assumption, that problems of competitiveness account for all of the observed decline in the manufacturing sectors share of output and employment over the last twenty-five years, leaves unexplored alternative explanations of this decline, which might shed more light on our current economic impasse.

Put another way, if the decline in U.S. manufacturing competitiveness (which dominates much of Brenner's writing) explains only a small portion of the observed decline in manufacturing, then the causes of and possible solutions to the international crisis assume the central role in understanding the current economic and political impasse.

My starting point is that the contemporary international economic crisis is caused by a fall in average profitability across sectors of the economy and across countries. It is the necessary result of the dynamics of capitalist accumulation -- specifically, the overriding tendency to mechanize (capitalize) the production of goods and services.

From this perspective, average profitability falls, not because fixed capital becomes less productive, but because the productivity of labor rises through replacing workers with machinery. The fall of U.S. profitability of the private domestic non-farm economy begins in the late 1940s, well before foreign competition is even an issue.(1) This theory of the global crisis of profitability helps us to identify the economic, rather than the simply political, barriers to capitalist state policies that promise a "painless" solution.

Is U.S. Manufacturing in Relative Decline?

Central to Brenner's analysis of why Clinton failed to push through his "mild, but unmistakable attempt to reverse the long-term trend toward U.S. industrial decline," is the decline of the manufacturing sector's economic and political position. He notes "that the [manufacturing -- M.C.M] sector as a whole has massively shrunk in size and weight...and the political implications are substantial." (Part II, 29) He attributes this shrinkage to the problems of U.S. manufacturing productivity:

"Over the past half century, U.S. productivity growth in manufacturing has been a third to a half that of its leading rivals, above all Japan and (increasingly) the rising East Asian manufacturing economies. In one after another manufacturing line, U.S. business has been obliged to cede ground or to retire from the field. Indeed, in little more than a quarter century, manufacturing as a proportion of the private business economy has fallen spectacularly, from around 33% to under 20%, both in terms of output and labor force. (Part II, 26)

Brenner contends that the international structure of profitability has led investment away from the manufacturing sector in the United States to sectors either irrelevant or actually counterposed to the needs of manufacturing production in the U.S. This, he believes, accounts for the falling productivity of the manufacturing sector, which produced declining U.S. competitiveness and what Brenner sees as the "evaporation" of manufacturing in the United States.

Although Brenner admits that some high tech lines compete on the basis of their historic leadership in science and technology, the only hope for U.S. manufacturing revival, given the lack of capital investments, is lowered real wages and a continued drastic devaluation of the dollar.

No one can deny that some segments of U.S. manufacturing have experienced competitive pressures since the 1970s. Nor is there any doubt that the living and working conditions of U.S. workers have declined sharply in the last twenty years. In the 1980s alone, U.S. manufacturing employment declined by over one million workers. Production workers, along with most nonsupervisory workers, have also seen their real hourly earnings fall steadily since 1978.(2) Working-class communities have been destroyed and families uprooted and weakened. The critical question is what caused these developments -- the failure to maintain a competitive manufacturing base, or the fall in average profitability rooted in the rising productivity of labor?

To answer this we must sort out the factors that account for what appears to be the shrinkage of the manufacturing sector in the total economy. It is true that since 1950 the rates of growth of manufacturing output per worker in the United States have been consistently below that of other countries. However, the level of U.S. manufacturing productivity remains the highest in the world. In 1990, U.S. total manufacturing productivity exceeded Japan by 17% and Germany by 21%.(3)

Moreover, there is growing evidence that since 1990 the level of productivity has improved considerably relative to its competitors. It is the absolute level of productivity, not the rates of growth, that determines unit costs and thus U.S. competitiveness (assuming, of course, that wage rates and exchange rates are held constant).

There is no question that the productivity levels of foreign competitors in certain lines of manufacturing (auto, steel, machine tools) have exceeded those of U.S. capitalists at various points since the 1970s. Clearly, foreign capitalists in these branches would have lower unit costs and a growing market share in the United States and globally. Brenner does not analyze, however, the exact extent to which the problem of foreign competitiveness and productivity in some lines cause the total shrinkage of the U.S. manufacturing sector.

If successful foreign manufacturing competition accounts for a small portion of the decline of U.S. manufacturing, then Brenner's arguments about the politics of "relative decline" are open to question and the causes of U.S. economic distress must be sought elsewhere.

The decline of the U.S. manufacturing sector's share of output and employment has little to do with the problems of competitiveness per se, but with two other economic processes: the secular trend of manufacturing's rising productivity relative to services and the depressed levels of economic growth (slowdown in accumulation as a direct response to the international crisis of profitability).

First, the rising productivity of manufacturing relative to services accounts for the bulk of the shrinkage of the manufacturing sector. The rising productivity of labor in manufacturing is a secular process going back to the nineteenth century, and operates in both "long waves" of expansion and contraction. In 1879, the percent of total employment (shares) in manufacturing and services were nearly identical, and increased at nearly the same rate from 1879 to 1919.

From 1919 to 1950, however, the share of service employment rose by over 35%, while the share of manufacturing employment increased by only 6%.(4) In other words, while the absolute size of manufacturing's share of employment rose, the growth of its share relative to services fell from the late nineteenth century until 1950.

Beginning in 1950, manufacturing's absolute share of total employment relative to services falls. From 1950 to 1970, during the "long wave" of expansion when foreign competition was not yet a problem for U.S. manufacturers, manufacturing's share of employment fell from 34% to 27.4%. Once the crisis and "long wave" of contraction began, the decline in manufacturing's share accelerated. By 1990, its share of employment had fallen to 17.4%.

The secular decline of manufacturing's share of employment does not, by itself, imply an absolute loss in the number of manufacturing jobs. From 1950 to 1970, the share fell but the number of jobs in manufacturing rose by 27%.(5) The absolute number of manufacturing jobs continued to rise until 1979. Since that time the absolute number of jobs has decreased.

What explains the absolute job loss in manufacturing in the "long wave" of contraction? History has some lessons here. The fall in the absolute number of jobs in manufacturing occurred once before: in the 1920s, when rapid mechanization combined with overall slow economic growth.

A number of economists point to the role of slow economic growth in the decline of manufacturing employment. These studies suggest that the number of manufacturing jobs would have continued to grow, despite a loss of market share to foreign firms, had overall growth remained strong. For the 1970s, the liberal Brookings Institution economists found that stagnant domestic growth rates caused a 1.5% decrease in manufacturing employment, while foreign trade led to a 2.1% increase in manufacturing employment.

In the case of the hard-hit automobile industry, the same study maintains that only 20% of the fall in U.S. auto output can be attributed to the negative net trade balance during this period, the remaining 80% stemming from the overall decline in sales.(6) Similarly, radical economist Arthur MacEwan argues that even with the share of imports in the U.S. market rising from 18% in 1978 to 23% in 1984, U.S. firms could have sold 700,000 more cars in 1984 had total automobile sales remained at their 1978 level.(7)

Besides slow growth in demand, other economists have noted that the overvalued dollar, and not foreign competition, reduced employment in auto and steel by 10% from 1980 to 985.(8) There is additional evidence that foreign competition plays only a minor role in the decline of real wages and manufacturing's output share. The pro-labor Economic Policy Institute estimates that less than 20% of the general wage erosion in the United States since the late 1970s is explained by foreign trade.(9)

Another study found that international trade explains only 14% of the decline in the relative share of manufacturing value added in gross domestic product from 1970 to 1990. The remaining 86% decline is attributed to the 23% fall in the price of manufactured goods relative to the prices of services. This occurred while the physical ratio of goods to services purchased remained constant over this period. In other words, the rising productivity of labor in manufacturing explains most of the shrinkage of this sector's share of value added in the U.S. economy.(10)

The declining share of manufacturing value added also reflects the growing importance of services (product and market research, design, business services, retail and advertising) in the final value of manufactured goods. Today, services represent approximately 40% of the final value of manufactures.(11) These studies suggest that the bulk of the "shrinkage" and "evaporation" of the manufacturing sector is due to the increasing productivity growth of manufacturing relative to services, and not to foreign competition as Brenner asserts.

If Brenner's thesis that successful foreign competition led to the "relative decline" of U.S. manufacturing appears on shaky grounds for the period 1970-1984, its explanatory power appears further reduced when we examine the last decade. Job loss in manufacturing, particularly since the late 1980s, seems to be the result of the combined effects of increased productivity growth (capitalization of production) and the continued slow growth in world-wide demand due to the fall in average profitability.

Put another way, absolute employment in manufacturing is stagnant because the "job destroying" effects of substituting capital for labor (which is improving U.S. competitiveness) are not being offset by the "job creating" effects of increased levels of spending. Firms are increasing the capital intensity of production in existing operations, but not putting new capacity in place.

This tendency is reflected in aggregate investment patterns. While the share of nonresidential gross (total) fixed investment as a percentage of GDP in 1994 was as high as it had been since World War II, projected net investment (the expansion of capacity) was only 2.5% of GDP, a post war low.(12)

The fall in the net investment share is partly explained by businesses (both in manufacturing and services) investing more in equipment with short usable lives, and less in structures with long usable lives. More importantly, capitalists are reequipping and upgrading existing capacity (retro-fitting) to meet both domestic and foreign competition, rather than building new capacity and expanding employment.

This investment boom seems to be having a positive effect on U.S. manufacturing competitiveness. Fom 1986 to 1993 U.S. unit labor costs, measured in "own-currency terms, fell approximately 14% against those of its thirteen main ompetitors."(13) During this period, for example, U.S. total factor productivity in steel production increased at an annual rate of 5%, whereas Japan registered an increase of only one-half percent.(14) Moreover, the same research found that U.S. automotive assemblers are now, on average, equally as productive as most Japanese operations, with the exception of industry leader Toyota.

Furthermore, as shown in the table below, productivity in a number of "at risk" lines of manufacturing have continued to improve since 1990, while employment has increased only minimally or fell.


Output per employee Employment

Automobiles +9.6 +1.5

Machine Tools +4.6 -1.1

Steel +8.3 -3.0

SOURCE: DRI/McGraw Hill, 1995

It is difficult to maintain that these improvements in manufacturing productivity are simply a cyclical phenomena or based on the weak dollar.

The recent "drastic" fall in the dollar may not be as crucial to U.S. export growth as Brenner contends. The dollar's fall, on a trade weighted basis, is not that great. Indeed, when steel productivity is measured without reference to monetary units, the improvement is dramatic. In the early 1980s, labor hours per metric ton of U.S.-produced steel was approximately 30% greater than German and Japanese steel. By 1993, U.S. labor hours were 10% lower.(15)

It appears that U.S. manufacturing, after ten years of wrenching restructuring, may have regained some of its competitive edge. From 1987 to 1992, durable goods exports rose by 97% while imports rose only 34%.(16) According to the table below, U.S. industrial capital has won back some of the export markets it lost in the 1970s.


1981 1985 1993

Japan 9.0 10.7 8.5

Germany 13.7 15.0 10.4

United States 13.8 10.5 13.7

SOURCE: DRI/McGraw Hill, 1994

This restructuring of production, combined with the slow, painful, but real cyclical economic recovery in the United States, has caught the attention of Washington policy makers. Certain aspects of the Japanese and Germany model of "industrial planning" that Clinton and his policy circle (Reich and Tyson) found so appealing just five years ago (which no doubt served those countries well when the world economy was growing) now appear bulky and bureaucratic in a period that demands increased flexibility and painful adjustments to shifting market dictates.

The Role of Finance Capital in Blocking Industrial Policy

In Brenner's account, while "relative decline" weakened the economic and political position of manufacturing capital, it strengthened the position of finance capital, making the latter "the huge and today virtually hegemonic" sector of the economy. (Part I, 21) "[A]bove all, leading representatives of the finance industry succeeded in totally reversing the basic thrust of Clinton's agenda." (Part II, 26)

Brenner's claim that the Clinton administration's new found "free market" policies represent the dominance of finance capital rests on two assumptions. First, the interests of finance capital are completely at odds with those of industrial capital; second, finance capital has the economic weight to force Clinton to abandon his promised interventionist policies.

It is difficult to support the notion that the financial and "real" sector (manufacturing) are so clearly at odds economically and politically. Manufacturing firms still make up a large portion of the customers of the financial sector. Moreover, the last thirty years has witnessed an increased integration of financial and manufacturing concerns through interlocking directorates.(17)

It is true that resources directed to the finance industry have shown a secular rise. However, this trend began in the nineteenth century.(18) Further, Brenner asserts that throughout the post-war period investments either irrelevant to, or actually counterposed to, the needs of manufacturing in the United States have yielded the best returns. However, he fails to support this claim either theoretically or empirically. Theoretically he needs to specify the mechanism by which the financial sector has been able to maintain, over a fifty-year period, returns consistently above those in production. In essence, this would require uncovering the economic and political barriers to the equalization of profit rates between finance and production.

Recent empirical work has found a strong equalizing tendency between the marginal rates of return on stock investments with those in production over the entire postwar period.(19)

It is reasonable to assume that if marginal rates of return equalize, so do average returns. Indeed, over a period of time in which capacity can adjust to above average returns (entry of new firms and investment), there would be a tendency for the equalization of average profit rates between the productive and financial sector, rather than the maintenance of consistently higher returns in finance. In other words, years of losses alternate with years of healthy profits in the financial sector as they do in the "real" sector. The financial sector should experience the same cyclical and structural adjustments -- concentration and centralization of capital, mechanization -- as manufacturing.

During the 1980s "bull market" finance and insurance expanded capacity in response to the rapid rise in the volume of business. From 1980 to 1987, investment in new plant and equipment rose from $22.6 to $54.1 billions. However, this represented an increase in the financial sector's share of total business investment from 7.8% to a mere 13%, which hardly seems hegemonic.

After the stock market crash in 1987, financial capital entered a period of serious cost-cutting and downsizing. From 1988 to 1993, the financial sector's investment in equipment and structures grew by 35%. By 1993, the financial sector's share of total investment stood at only 13.5%, only one-half of one percent higher than its share in 1987.(20) Rather than the financial sector gobbling up productive resources, we are witnessing a rather sharp restructuring of finance to improve its profitability. The U.S. financial services industry has experienced a wave of mergers and acquisitions, downsizing, and cost cutting in response to the low profitability that has swept Wall Street over the last eight years.

Finally, it is not clear that the Federal Reserve's monetary policy over the last four years has attempted merely to advance the narrow interests of financial capital. The Federal Reserve engineered a fall in short-term interest rates from 1991 to early 1994, unquestionably aiding the banking system to reduce the impact of bad loans made in the 1980s. Substantial profits were earned on the difference between the bank's cost of funds and the higher yields on long-term government bonds. But lower short-term rates helped manufacturing capital too. As short-term rates fell so did long-term rates, reducing manufacturing capital's financing costs and contributing to the cyclical "boomlet" in capital spending.

Similarly, the Federal Reserve's repeated tightening of credit in 1994 was not primarily a move against productive investment and economic growth, although this may be an unintended result. Instead it was a successful attempt to stop the speculative frenzy in the bond market set off by the "steep yield curve."

Financial and nonfinancial firms alike, as well as municipal governments (Orange County, California being the most spectacular example), were pocketing the difference between borrowing at low short-term interest rates and investing in long-term, higher-yield government bonds. Once the Federal Reserve put on the brakes in February 1995 and short-term rates started to rise, speculators were paying more to borrow than they were receiving on their investments.

The Federal Reserve's move against those seeking double-digit returns through the use of sophisticated financial strategies such as "yield curve swaps" (at a time when underlying financial instruments were at best yielding single digit returns), produced the bond market's worst year since the 1930s. As a result, profit margins for security firms fell to only 1% in 1994.(21)

While firm after firm in New York is announcing layoffs as a consequence of losses in bonds and derivative products, it appears that Federal Reserve Chairman Greenspan may have extended the cyclical recovery of the "real" sector by eliminating the real possibility of a financial panic.

Similarly, the Federal Reserve's casual attitude about the fall in the dollar is difficult to reconcile with the "financial hegemony" thesis. Instead of rushing to shore up the value of dollar denominated financial investments through higher interest rates, the Federal Reserve is attempting again to extend the expansion by maintaining interest rates and supporting continued export growth through a lower dollar.

If "finance capital" has neither antagonistic interests to manufacturing capital, nor enjoys economic hegemony, how do we explain the Clinton administration's exclusive reliance on monetary policy to the exclusion of fiscal policy to steer the economy?

The "anti-inflation" policy is part of a comprehensive, market-based strategy to advance the competitiveness of U.S. capital both domestically and internationally. This strategy of fiscal constraint, particularly deficit reduction, seeks to eliminate any economic space for firms to servive without cutting costs and increasing productivity, thus enhancing U.S. capitalists' profitability and competitiveness.

This strategy is being pursued in a number of ways. First, public spending like welfare and other income supports are being reduced in hopes that resources will, over time, flow to "productive" hands via business and middle class tax cuts. As deficits shrink so
will interest payments, further relieving the tax burden and redistributing income from government bondholders to "productive" capitalist taxpayers.

Second, reducing direct fiscal stimulation helps dampen U.S. domestic demand for imports during a cyclical recovery (if aggregate demand is rising overseas), thus helping to correct the trade deficit. From 1987 to 1991, the combination of a lower dollar and slack total demand in the United States helped reduce the trade deficit by 86%. Since 1993, as the cyclical economic recovery has picked up steam in the United States, the trade deficit has grown sharply because the recovery in Japan and Europe remains sluggish.

Perhaps most importantly, curtailing the growth of government spending imposes a strict market discipline on all capitalists. The inflationary measures needed to finance job creation and training, infrastructure development, urban renewal or tax cuts benefitting the working and middle class would allow inefficient, "high-cost" capitalists to remain profitable in the short-run by exploiting the gap between rising prices and their costs.

After the merger and acquisition "mania" of the 1980s eliminated some of the least efficient capitalists and forced those remaining to reorganize production and cut costs, a consensus emerged within the capitalist class for real fiscal austerity that would intensify competition and allow only the "survival of the fittest" -- those firms that produce at the least cost.21 With inflation-adjusted total profits (not profit rates) close to an all time high, it appears that the Clinton administration has been seduced, not by "special interests," but by the logic of capitalist competition.

Contradictions of Competitiveness and Efficiency in A Keynesian World

Based on the preceding argument and evidence, Brenner's "relative decline" thesis appears to be of limited use in advancing our understanding the current economic and political situation. Even during the period from 1970-1985, when U.S. manufacturing capital was under the heaviest competitive attack, the evidence suggests that our relative competitiveness accounted for only a small portion of the manufacturing sector's decline in employment or output shares.

Over the last ten years, as the U.S. manufacturing sector has slowly regained its competitive edge, relative decline is even less relevant. "Industrial policy" was rejected not because of political obstacles, as Brenner argues, but because of economic obstacles. In a "long wave" of contraction, "industrial policy" would have been incapable of restructuring production according to the capitalist logic of profitability.

Germany and Japan, countries that used it so well during the "long wave" of expansion, are not rushing into a new round of industrial engineering. The question is why?(22)

In my opinion, there are no insurmountable political obstacles to those economic policies that are economically rational for capitalism. Resolving our competitiveness problems, however, in no way solves the general crisis of average profitability. If history is a guide, a general recovery of profitability, the basis for a "long wave" of expansion in the United States, faces a number of economic obstacles today.

There were two crucial conditions for the rise in profit rates that ended the last two "long waves" of stagnation in the 1890s and 1930s. The first was a sharp rise in total profits through a shift in income from labor to capital. The second was relief from the intense competitive pressure that drives firms to mechanize the production process and raise their capital costs. This "pause that refreshes" allowed capitalists to raise sharply their returns on investment.

Today, the first condition for recovery is slowly being put in place, and surely will accelerate in the coming years in the absence of substantial working class and popular resistance. Firms have lowered real wages and benefits and increased the use of contingent workers, while simultaneously increasing productivity through intensifying the work day and automating production. State policies restricting unemployment and welfare benefits have aided firms in keeping real wages depressed, by increasing competition among workers.

Capital has reduced health care costs without government "managed competition." The restructuring of the health care industry (in particular the increased number of Health Maintenance Organizations which ration health care) is delivering the savings capitalists require, without raising popular expectations with costly universal access and coverage.

Clearly the employers' offensive and state austerity are having their desired effect -- productivity is rising, real wages are stagnant or falling, and total profits are soaring. In the current cyclical recovery, capital is doing very well.

The second condition, however -- a cessation of capitalist competition that would reduce the need to invest in cost-efficient equipment -- is not on the agenda. Firms are retro-fitting existing capacity at very high levels of capital intensity. Efforts to save on capital investment (replacing assembly lines with cell formations) are not generalizable throughout production. Even as total profits rise sharply due to productivity gains and depressed wages, the aggregate rate of profit adjusted for short, medium and long-term fluctuations in capacity utilization is not rising.(23)

While cost-cutting has not raised the basic rate of profit sufficiently above the interest rate to spur a "long wave" of expansion, it has prevented it from falling further. The drive to continually lower costs through mechanization and slashing real wages can only intensify in the coming years as Japan and Germany streamline their economies in response to the new efficiencies in the United States.

Short of a world-wide financial crisis that would "stop the music" for a few years, competitive pressures will grind on. In the case of a global economic collapse, the central banks and capitalist governments would probably patch together a plan to keep effective demand and markets mechanisms moving at some acceptable level. Despite capital's embrace of "anti-state" policies over the last twenty years, capitalist governments have not completely abandoned Keynesian policies that prevent the collapse of effective demand and a resulting depression. Yet this ability of capitalist governments to avert economic catastrophe (and the political threat of massive unemployment) postpones the "pause that refreshes" that could produce a sharp rise in the general rate of profit.

The Democratic administration's failure to adopt industrial policy is part of the global crisis of reformism. Like European social democracy over the last twenty years, the Clinton regime has fallen victim to the ever narrowing space for policies that simultaneously benefit both capital and labor. Working people have turned away from Clinton, as they have from the European social democracies, because they were promised things that could not be delivered in the current economic situation. It is very likely the same will happen to the Republicans as well.

If the failures of liberalism and reformism (or even mainstream conservatism) are not to lead to a further shift to the far right (Perot or worse), then the U.S. left needs to build a movement of working and oppressed people that challenges capitalist profitability.

Brenner rightly identifies two major political obstacles to the development of a social movement: the decline of organized labor and the shift to the right among sectors of the working class. However, if these political obstacles were overcome, we would still confront the crisis of falling average profitability in our struggle for concrete reforms.

Confronting this economic barrier requires three things. First, working people must realize that they can not depend upon "progressive" politicians to insure their living and working conditions. If they do, they will surely be disappointed. The state and capitalist firms are instituting austerity, not because they are greedy, irrational or evil (although, as individuals, they may well be), but because preserving profitability requires these measures.

Second, a new "anti-capitalist" left should promote the militancy, solidarity and political independence of all struggles against the employers' offensive and the state austerity drive because only massive struggles can defend past gains, win new ones, and promote radical consciousness and organization. This means that defending our living standard will require developing our potential to halt business as usual, since our gains are capital's losses.

Finally, we must recognize that while "transitional demands" to redistribute income to working people, redirect investment to depressed communities and tax capitalists (both financial and industrial) are winnable, they will be subject to immediate capitalist attack. The left needs to convince other activists that these measures can only be short-term solutions in a world where capital is free to flow where profits are highest.

Consequently, U.S. socialists and activists need to promote international networks of worker and popular militants to prevent capital flight and minimize competition among workers worldwide. Ultimately, no reform, no improvement in the lives of working and oppressed people can be guaranteed until the rule of capital (both productive and financial) and its overriding logic of profitability is replaced by the democratic
rule of working people.


  1. See Anwar Shaikh, The Current Crisis: Causes and Implications (Detroit: ATC, 1989) for a detailed explanation of the falling rate of profit and its applicability to U.S. economy. It is important to note that while the fall in average profitability arises from the increasing capitalization of production, which increases productivity, over time the fall in productivity produces a slowdown in productivity growth through its effects on investment. This productivity slowdown, combined with the weakness of working-class organizations, explains the bulk of real wage stagnation, rather than foreign competition.
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  2. One of Brenner's central contentions is that U.S. firms have been unable to compete on the work market except through imposing an absolute decline of hourly wages of 15-20% over the period. (Part I, 21) However, he des not cite any data to support this claim. Calculations done by the Economic Policy Institute in The State of Working America: 1994-95 show that real hourly wages for production and nonsupervisory workers began falling not in 1970 as Brenner claims, but in 1978. From 1978 to 1993 the fall was approximately 11%. The decline in real hourly wages for manufacturing workers during this period, however, was even less. From 1978 to 1993 my calculations (using Bureau of Labor Statistics data) show a 7% decline. This essay will argue that U.S. manufacturing firms have been competing not simply on the basis of lower real wages, but perhaps more importantly, by raising the capital intensity of production and reorganizing the work process since the early 1980s.
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  3. Manufacturing Productivity, McKinsey Global Institute, (Washington, D.C., 1993).
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  4. John Kendrick, Productivity Trends in the United States, National Bureau of Economic Research, 1961.
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  5. Historical Statistics of the United States, Part I, 137, U.S. Department of Commerce, Bureau of the Census 1975.
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  6. Robert Lawrence, Can America Compete? Washington, DC: Brookings Institution, 1984.
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  7. Arthur MacEwan, "Protection Without Protectionism," Dollars and Sense, 1986.
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  8. Barry Eichengreen, "International Competition in the Products of U.S. Basic Industries," National Bureau of Economic Research, 1987.
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  9. Lawrence Mishel and Jared Bernstein, The State of Working America, 1994-95 Economic Policy Institute, 1994.
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  10. P. Krugman and R. Lawrence, Trade, Jobs and Wages, Scientific American, April, 1994.
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  11. Krugman and Lawrence, Ibid.
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  12. U.S. Commerce Department, Bureau of Economic Analysis, 1994.
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  13. "Comparative Manufacturing Productivity and Unit Labor Costs," Monthly Labor Review, February, 1995. In "own-currency" terms, unit labor costs are expressed in each countries' own currency, not the US dollar. Expressing unit labor costs in U.S. dollars would overstate the fall of U.S. costs if the value of the dollar falls.
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  14. McKinsey, 15.
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  15. "American Economy Back on Top," New York Times, February 27, 1994.
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  16. U.S. Commerce Department, Survey of Current Business, December 1993.
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  17. See the work of Michael Useem, The Inner Circle, 1984 and Beth Mintz and Michael Schwartz, The Power Structure of American Business, 1985.
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  18. Kendrick, 308.
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  19. I would like to thank Anwar Shaikh for making his results available to me. They will soon appear in a Working Paper published by the Jerome Levy Economic Institute.
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  20. U.S. Bureau of the Census, Plant & Equipment Expenditures, 1980-93.
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  21. Many observers note that certain segments of manufacturing capital opposed the anti-inflation policies of the Federal Reserve. This opposition is understandable since inflation would relieve pressure on their profit margins. Unfortunately, relieving pressure on margins would decrease their resolve to become more efficient. Similarly, the major investment banks (who are the main players purportedly engineering the current anti-inflation policies) did not like the Federal Reserve's moves this year either, which produced their greatest losses in the bond market in seventy years. This measure no doubt will encourage them to earn their profits less through speculation and more through

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  22. further cost savings.

  23. It will be important to follow the economic effects of the infrastructure spending on the Japanese macroeconomy. Clinton's original proposal pales in comparison.
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  24. Katherine Kazanas, "The Productivity Slowdown: A Theoretical and Empirical Analysis of the U.S. Postwar Experience" (Unpublished Ph.D. Dissertation, New School for Social Research, 1994). Adjusting the rate of profit for fluctuations in demand is critical

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  25. for sorting out the causes of the current economic crisis. If the lack of demand was the underlying cause of the fall in profitability, then the adjusted measure would not display a downward trend, which it does. This strongly suggests that the fall of domestic demand is an effect, not the cause, of the fall in the average rate of profit.

ATC 57, July-August 1995

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