Review of Radical Political Economics 34 (2002) 3544

Competition and protability: a reply to Ajit Zacharias

Robert Brenner
UCLA, ISSR, 4250 Public Policy Bldg, Los Angeles, CA 90095, USA Received 4 April 2001; accepted 8 August 2001

JEL classication: L6; F14 Keywords: Prot rates; Manufacturing

1. Introduction My objective in Economics of Global Turbulence (Brenner, 1998; henceforth EGT) was to provide an interpretation of the long postwar upturn and the long downturn that followed it. My point of departure was the proposition that the long boom was attributable to the achievement and perpetuation of high rates of prot, while the long stagnation was the result, correspondingly, of the fall of protability and its failure to recover. Speaking most generally and schematically, I explain the initial decline in protability, which took place between 1965 and 1973 not only in the United States but also in the G-7 economies in aggregate, in terms of the intensication of competition in the international manufacturing sector, leading to the onset of overcapacity and overproduction on a system-wide scale. I account for the subsequent failure of protability to revive, at least in the rst instance, in terms of a failure of adjustment: insufcient exit out of and too much entry into oversupplied manufacturing lines.

I wish to thank Mark Glick, as well as the RRPE referees, for reading my text and offering valuable comments. Tel.: +1-310-206-5675; fax: +1-310-206-4453. E-mail address: rbrenner@ucla.edu (R. Brenner).

0486-6134/02/$ see front matter 2002 URPE. All rights reserved. PII: S 0 4 8 6 - 6 1 3 4 ( 0 1 ) 0 0 1 1 5 - 2

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2. Theoretical issues 2.1. Falling protability in the manufacturing sector: the nature of technical change My account of the fall in the rate of prot begins, as Zacharias says, with innovators adoption of cost-cutting techniques that improve productivity, the latter dened as increased output from a given sum of labor and capital inputs. But Zacharias is quite wrong to deduce that this amounts to saying that the successful method will have not only lower unit labor costs but also lower unit investment or xed capital (plant and equipment) costs (page 19). By my denition, productivity rises if a given output can be produced with fewer combined labor and capital inputs. Thus, productivity rises when the real outputcapital ratio (capital productivity) stays the same, so long as labor productivity rises, or when the real outputcapital ratio declines, so long as labor productivity rises more than correspondingly. My argument emphatically does not, contra Zacharias, entail a rising real outputcapital ratio (rising capital productivity), and this is a point to which it will be necessary to return (see Section 2.3). If they are not themselves to suffer a fall in the rate of prot, the innovators must be able to put into play a new technique that can cut costs sufciently to allow them to set a price that will force out some incumbents by preventing them from making the average rate of return on their circulating capital. This is necessary for the entrant to reach minimum viable scale and make the average rate of prot. Some incumbents are thus pushed below their shutdown point, while other incumbents, those which are still able to make the average rate of prot on their circulating capital but less efcient than the innovators, remain. As Zacharias says, I assume that the innovators will in fact drive down the rate of prot to the already established level, but at a lower price because their technology is more efcient. In this case, the average rate of prot in the industrial line must fall, since the innovators make the established rate of prot and the incumbents that remain necessarily make less than the established rate of prot on their total capital. Zacharias advances a critique of this formulation to the effect that: (i) it is theoretically possible for innovators to deploy a technique sufciently powerful to allow them to set a price so low as to prevent all incumbents from making the average rate of prot on their circulating capital (or variable costs); (ii) in this case, the rate of prot will rise (pages 1921). The logic of Zachariass argument is impeccable (I myself had made the same qualication in a footnote that was unaccountably left out of my published text). But I do not think it counts against me, as Zacharias thinks. Attempts to theorize a fall in the prot rate routinely stipulate a type of technical change to get their argument off the ground. Shaikhs (1978) argument, for example, which Zacharias embraces later in his text, takes for granted that the new technique will lower the costs of circulating capital (increase the prot margin), while raising the cost of total capital (decrease the prot rate). Analogously, Dobb (1937), as well as Dumnil and Lvy (1993), assume that technical change will cut total costs (increase total productivity), but insufciently to counter the rise of real wages. My assumption about technical change is less restrictive than either of these, indeed far less restrictive than that of Zacharias, as I show below. In any case, it seems to me that there is nothing wrong with making this type of assumption in order to build a theory. The test, of course, is whether it is realistic, in the sense that it enables the theory to comprehend empirical trends. I assume a technology that is powerful

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enough to allow the innovator to secure a place for itself, to secure market share by forcing out some incumbents, but not so powerful as to force out all incumbents. I think that this is realistic, for it seems to me empirically fairly evident that few technologies have cut costs sufciently to enable the innovator to force out all incumbents and take over the whole market for itself. That this is so is not surprising, since the condition required for the innovator to take the whole market is that its total costs per unit be lower than the circulating costs per unit of all incumbents. 2.2. Falling protability in the aggregate economy Zacharias goes to some length to show that, even if technical change takes place and the rate of prot falls in an industrial line (manufacturing) in the way I propose, the rate of prot in the whole economy will not necessarily fall. He clinches his case by rehearsing Okishios theory, which proves that if the innovators technique reduces total unit costs, as in my argument, the aggregate rate of prot must rise. But he need not have bothered. As Zacharias notes in passing, his (and Okishios) conclusion relies on the assumption that capitalists appropriate all the benets from technical progress, in other words, that real wages remain constant (page 21n4). But my argument for a fall in the rate of prot in the economy as a whole is built explicitly on the premise that capitalists are unable to appropriate all of the benets of technical progress. As I put it, if labor is able to get any of the gains from the decrease in prices (in the industrial line where the cost-cutting and consequent fall in protability took place), then the aforementioned processes. . . will indeed result in a fall in protability for the economy as a whole (EGT, 29). Simply put, I assume that real wages in the economy as a whole will rise, as workers enjoy the reduced price of their consumption good(s). I should point out, in passing, that this is not a wage-prot squeeze argument, as normally understood. The rise in real wages that brings down aggregate protability does not, in my argument, follow from, or necessitate, any increase in the power of labor, any change in the balance of class forces. It simply requires capitals inability to prevent labor from enjoying some of the benets from the reduction in price in the line(s) where the fall in protability has taken place. The larger and more widespread the price/protability decline(s), the more unlikely that capital will claw back all the gains. This is all the more the case in view of the fact that capitalists outside the line where protability has fallen are in no way hurt by the increased real wages that workers derive from the reduction in price that accompanies that fall of protability, so are not driven to try to push those wages back down. 2.3. The classical theory of the fall in the rate of prot Zacharias correctly attributes to me the view that the classical theory of the fall in the rate of prot is Malthusian, in the sense that its operation implies the decline in the productive forces. But, contra Zacharias, I in no way at any point suggest that Marxs argument is Malthusian because he failed to recognize that the development of productive forces under capitalism will bring about an increasing productivity of capital, just as Malthus failed to recognize that the same process will lead to an increasing productivity of land (page 19). This proposition is entirely Zachariass creation, apparently inspired by his illogical deduction

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reiterated on multiple occasions throughout his paper (pages 19, 26, 29, 30)that, because I believe innovators adopt cost-cutting techniques that raise overall productivity, I must believe that the real output capital ratio (capital productivity) must rise (see above, 1). What I actually argued was something completely different. It was that if, as is posited in the classical theory, rms adoption of a new more mechanized technique does bring about a fall in the rate of prot, despite the real wage remaining constant, then it follows as a point of logic that productivity, taking into account both labor and capital inputs, has fallen. Put slightly more fully, the reason that the rate of prot falls in the classical theory is that the rise in the organic composition of capital (capitallabor ratio) brings about an increase in the outputlabor ratio (labor productivity) that is more than counteracted by a fall in the outputcapital ratio (capital productivity). But, to say this is simply to say that, following the technical change, for any given output, it now takes more combined capital and labor inputs than before. Still again: once you stipulate that all of the benets of a change in technique/change in productivity accrue to capital (constant real wage), the prot rate can only fall if inputs have increased compared to the output (productivity has fallen). Obviously, the new technique is less productive than the old, so the productive forces have, by denition, declined, bringing down the prot rate (EGT, 11 and n1). It is because the decline in the productive forces is, in the classical theory, the source of the fall in the rate of prot that I call it Malthusian. Zachariass own version of the classical theory of fall in the rate of prot clearly demonstrates that a decline in the productive forces is the unavoidable implication of the theorys premises, even though his diagram and the accompanying explanation go far to obscure this fact. In the process that he lays out, rms adopt a new technique that: (a) increases the capitallabor ratio; (b) raises the outputlabor ratio (labor productivity); (c) reduces the prot rate. What he fails to make clear, however, is that what is logically implied by his demonstration is that the technique adopted is worse than the existing one. The prot rate can thus be expressed as the product of the prot share and the outputcapital ratio R = (P /Y )(Y /K). Since, moreover, P /Y = 1 wL/Y , it follows that R = (1 wL/Y )(Y/K). If, as Zacharias stipulates, the real wage remains constant, then the prot share will increase to the extent that, and only to the extent that, labor productivity rises. But, since, for Zacharias, the rate of prot falls as a result of the introduction of the new technique, it is logically implied that the outputcapital ratio has fallen to a greater extent than the outputlabor ratio (labor productivity) has risen. Clearly, again, as a result of the introduction of the new technique, it requires greater capital plus labor inputs than before to produce a given output; thus the productive forces have declined. In his diagrammatic presentation of his argument, Zachariass assumption that the new technique that is adopted brings about a decline in the productive forces is hidden by his depiction of the old and new technologies on a graph whose axes are prices and the rate of prot. Instead, below, I redraw Zachariass technologies using the traditional wage-prot frontier. The foundations of the wage-prot frontier were provided by Sraffa and are uncontroversial (Fig. 1).1

I wish to express my gratitude to Mark Glick for providing me with this demonstration.

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Fig. 1. Line graph wage-prot frontier.

At a given real wage (which Zacharias assumes is constant) the only way that the rate of prot can decline is if the technology represented by the wage-prot frontier moves toward the origin. This implies that the technology is inferior because it yields lower total surplus (wages plus prots) than the old technology at that wage. Again, a Malthusian process, embodying a decline in the productive forces, is clearly behind the fall in the rate of prot.

3. Empirical issues 3.1. When did the manufacturing prot rate fall? The trend of manufacturing protability in the postwar period: To frame his empirical critique of my argument that the intensication of international competition leading to overcapacity and over-production was behind the fall in the manufacturing rate of prot between 1965 and 1973, Zacharias makes the claim that the prot rate began to fall well before the alleged onslaught of foreign competition began (page 24). But, as far as I can see, there is no empirical basis for this claim. The manufacturing prot rate, as I presented it, equals, standardly, gross product minus the sum of compensation, capital consumption, and indirect business taxes. (It is necessary to distribute proprietors income between prots and compensation, and I have done so, as is routine, by calculating proprietors (self-employed) compensation as the product of average compensation per employee and the number of proprietors, and adding it to employees compensation.) In the half decade before protability began to fall in 1965, protability

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actually rose sharply from 20.8 to 30.3 percent. As to the longer run, the average rate of prot for the three business cycles that run from the November 1948 peak to the April 1960 peak (about 11 years) was 25.0 percent; that from the April 1960 peak to the December 1969 peak (about 10 years) was 24.6 percent.2 There is therefore no trend toward a falling rate of prot in manufacturing in the two decades after 1948. Such a downward trend denitively asserted itself only with the business cycles that ran between December 1969 and November 1973 and between November 1973 and January 1980, when the average rate of prot fell to 16.6 and 14.0 percent, respectively.3 (Fig. 2). The trend of the real outputcapital ratio: Although it is beside the point of my discussion with Zacharias, since I make no assertion as to the long-term trend of the real outputcapital ratio (what I refer to as capital productivity in EGT), I am somewhat mystied as to how Zacharias can argue that it followed a downward trend between 1950 and 1973. In fact, the trend of the manufacturing real outputcapital ratio can be seen to be pretty at between 1950 and 1973: there is an average annual rate of increase of 0.54 percent during that interval and the level is about 8 percent higher in 1973 than in 1950. 3.2. Short-term developments and secular trends As Zacharias notes, I account for the short-term, or cyclical, fall in the prot rate that took place during the mid-late years of the 1950s partly in terms of pressure from labor. Zacharias thinks this contradicts my repudiation of the wage-prot squeeze argument, both in theory and with respect to its ability to explain the long downturn (pages 2526). But, there is no such contradiction. It seems to me self-evident that an increase in the power of labor can bring down the prot rate, and has done so on various occasions during the history of capitalism. What I argued is not that labor can never squeeze capital, but that an increase in the power of labor is incapable of accounting for an extended period of stagnation resulting from an extended period of low protability, such as characterized the long downturn from the end of the 1960s to the 1990s (at least). The reason for this, speaking very schematically, is that when workers succeed in squeezing prots in a particular location, they set off two sorts of responses that undermine their ability to continue to do so. First, capitalists reduce investment, leading to rising unemployment. Second, capital investment increases at other locations that have become
2 My source is the same as Zachariass, although I use the most recent Bureau of Economic Analysis data, which bring all series up through 1999. It should be noted that Zachariass manufacturing prot rate is property-type income minus capital consumption over net capital stock. This introduces a potential distortion, because the prots of capital are bloated by the inclusion in property-type income of all of the income of the self-employed. As a result, to the extent that the number of self-employed in the manufacturing sector falls (as it did historically) protability is articially pulled down. Proprietors income also adds to the prots of capital such extraneous items as the rental income of persons, as well as the current surplus of government enterprises less subsidies. Still, using proprietors income for prots does not alter the trend in manufacturing protability. With proprietors income minus capital consumption, instead of net prots, in the numerator, the average rate of prot for the 194860 business cycles is 27.1 percent, that for the 196069 business cycle is 26.1 percent. 3 I see protability as sustaining a steady decline from 1965 and show that an intensication of international competition is behind it (Section 3.3). But my analysis holds just as well if it is presented in terms of successive business cycles. For a demonstration, see Brenner (1999, 124126).

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more attractive to business precisely as a result of the prot squeeze that has taken place, again reducing workers leverage. Indeed, as I made clear in my text (EGT, 5561), the prot squeeze of the mid-late 1950s to which Zacharias refers exemplies my argument. At the end of the 1950s, falling protability issued in a major slowdown of domestic investment, the acceleration of investment overseas, several years of recession, and sharply increased unemployment. As a result, labor was very much weakened, the investment climatepotential protability improved, and capital embarked on a new and powerful short-term boom during the rst half of the 1960s.4 It was because I sought to understand the postwar economic history of the U.S., short-run episodes as well as long-run trends, that I invoked different variables at different points in my account. Zacharias is unhappy with my switch from one explanatory variable to another (page 25). But since he himself must admit that the evolution of the actual prot rate is subject to a variety of forces which act with varying degrees of power at any given instant (pages 2526), I do not see what other alternative he thinks I had. Nor does concerning oneself with forces that determined short-term developments prevent one, as Zacharias implies, from attempting simultaneously to discover forces behind long-term trends. This is what I attempted to do in Economics of Global Turbulence (EGT). I offered general accounts of the long boom and long downturn, respectively, in terms of forces that acted secularly to bring about, respectively, rst, an extended period of high protability and, then, an extended period of low protability. Within that broader two-phase framework, I invoked forces that operated only in the short-term, or cyclicallylike shifts in the balance of class forcesto explain temporally restricted developments. 3.3. Did intensied competition bring about falling protability, 196573? Zacharias attempts to undercut my argument that the fall in manufacturing protability that took place between 1965 and 1973 can be attributed mainly to intensied international competition. To do so, he points out that the manufacturing trade balance went negative in only one year (1972) before 1983, but was more or less constantly negative after that. But this demonstration mainly misses the point. It should be noted rst, in passing, that the trends of the manufacturing trade balance adduced by Zacharias actually t my argument rather well, as they follow, in a rough and ready way, the course of manufacturing protability. Thus, as Zachariass graph shows, the manufacturing trade balance remained roughly at between 1950 and 1965, uctuating between 3.5 and 5 percent of GDP, while manufacturing protability generally stayed high. Between 1965 and 1973, however, at just the time that the manufacturing prot rate fell sharply, the manufacturing trade balance as a percentage of manufacturing GDP also plummeted, falling below zero in 1972. Between 1971 and 1978, there was a major reversal of the trend. The dollar fell a great deal, contributing to the improvement of U.S. competitiveness and of the manufacturing trade balance as a percentage of manufacturing GDP, and there occurred a certain stabilization of the manufacturing prot rate. From 1978 to 1985, there was another sharp change of direction.

For a fuller development of these points, see Brenner (1999, 121122).

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The dollar skyrocketed, and the resulting collapse of competitiveness drove the manufacturing trade balance down to its lowest levels of the postwar epoch; in parallel manner, partly as a consequence, manufacturing protability fell to its lowest points during the postwar epoch. Finally, from 1985 through 1995, there was still a further turnaround. The dollar plummeted again, making for a major improvement in manufacturing competitiveness, which led to a major improvement in the manufacturing trade balance, which was accompanied by a marked increase in manufacturing protability. Prima facie, the trends in U.S. international competitiveness between 1950 and 1995, as reected in trends in the manufacturing trade balance, thus correlate pretty closely with, and appear to lay in part behind, trends in the manufacturing prot rate. Nevertheless, I did not, and would not, rest my argument concerning the impact of international competition on the prot rate on trends in the manufacturing trade balance. The reason is that the trade balance, like the import share, is often an unreliable indicator of competitiveness. This is, in part, because it is so heavily affected by trends in demand that have little to do with competitiveness. It is also, in part, because it cannot take account of underlying trends in protability. If an economy is growing faster than its trading partners, or its population has a higher propensity to consume, its aggregate demand will grow relatively faster and its imports will grow relatively faster, with a depressing effect on the trade balance. By the same token, if an economys manufacturers tend to trade off market share to maintain protability (price) more than their trading partners do, that economy will tend to have lower exports and a correspondingly weaker trade balance, and vice versa. Thus, my main demonstration that an intensication of international competition lay behind falling manufacturing protability between 1965 and 1973 did not depend upon the trajectory of the manufacturing trade balance. What I pointed out was that the U.S. manufacturing sector, heavily exposed to international competition, experienced a very large fall in its prot rate in these years, whereas the non-farm non-manufacturing sector, for the most part untouched by international competition, sustained only a mild decline. Thus, between 1965 and 1973, the manufacturing rate of prot fell by 43.8 percent (43.0 percent if indirect business taxes are left in), but the non-farm non-manufacturing rate of prot fell by only 13.9 percent (just 9.0 percent if indirect business taxes are left in). This was the case, moreover, despite the fact that, in the same period, unit labor and capital costs increased substantially more rapidly in the non-farm non-manufacturing sector than in the manufacturing sector. What accounts for the far greater fall of the prot rate in manufacturing than in non-manufacturing, despite the greater increase in costs in non-manufacturing than in manufacturing, is the much greater ability of non-manufacturers than manufacturers to raise product prices. Between 1965 and 1973 non-manufacturers were, in fact, able to raise their product prices at an average annual rate almost twice that of manufacturers, 4.25 percent compared to 2.3 percent (EGT, 102108). This evidence, it seems to me, constitutes a strong case that intensied international competition was at the root of the big fall in the rate of prot in manufacturing. But Zacharias entirely ignores it.5

For the empirical material referred to in this paragraph, see The trajectory of the manufacturing prot rate: a reply to Dum nil and L vy (accompanying below), p. 50, specically the line graph on U.S. manufacturing e e and non-farm non-manufacturing net prot rates, 194999 and the table on The growth of costs, prices, and protability in the U.S., 196573.

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References
Brenner, R. (1998). The economics of global turbulence. New Left Review, 229. Brenner, R. (1999). Turbulence in the world economy: reply to James Crotty. Challenge, 42. Dobb, M. (1937). Political economy and capitalism. London: Routledge. Dumnil, G., & Lvy, D. (1993). The economics of the prot rate: competition, crises, and historical tendencies in capitalism. Brookeld, VT: Edward Elgar. Shaikh, A. (1978). Political economy and capitalism: notes on Dobbs theory of crisis. Cambridge Journal of Economics, 2.