The rise of finance

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One way to distinguish between “young” and “mature” capitalist economies is to compare the power of rentiers across societies. And the latter is measured easily enough.

Recall from the previous post that an economy’s long-term average profit rate depends on the relative growth rates of three factors: labour force, productivity and capital stock. Rapid accumulation of fixed capital (buildings, machines, equipment) is compatible with high average profitability, but only when it’s balanced by technical progress and growth in the employed population. In the 1990s and 2000s most advanced economies – among them several European countries – experienced a recovery of profit rates. But note that, while profitability rose from its mid-1980s low point, capital accumulation in many of these countries stayed low. Observe how, in Britain and the Netherlands, investment in the early 1980s failed even to cover depreciation, producing a reduction in the capital stock. Thereafter, investment in plant and equipment was barely above replacement levels. This indicates the decline of manufacturing and the rise of finance – Thatcher’s Big Bang – in both countries.

Compare the accumulation rate – both its trajectory and absolute level – of a younger capitalist country: China since the Deng reforms.

What accounts for this difference? In China, the number of wage workers continues to be swelled by migration from the countryside; and importation of advanced technology means labour productivity is still growing swiftly. On the other hand, in advanced economies that have been through demographic transition, the workforce has stabilised. Birth rates are low and agricultural labour reserves are long depleted. And productivity growth can only be sustained at a maximal 2-3 per cent. In these countries, rapid accumulation is incompatible with high profit rates. Unless accumulation slows down, the rate of return will become depressed, with a greater fraction of firms pushed towards bankruptcy. And with slow population growth, high demand for labour and over-abundance of capital, the bargaining position of the working class would rise.

So there’s some truth to Thatcher’s notorious slogan: if the balance of class forces is to be maintained, there is no alternative to the rentier’s rise. Increasing the relative size of sectors like advertising, finance, law and the military (which consume the social product rather than adding to it) means that less of the surplus is available for productive re-investment. The rise of the rentier interest is apparent, then, when we look at the proportion of profits that go towards capital accumulation. Call this fraction the investment rate. Where the fraction of the surplus that is re-invested is 1.0, the growth rate of the capital stock will equal the profit rate. Throughout the 2000s, about 40% of China’s GDP went towards capital formation (due to lack of reliable wage data, we can’t know what proportion of the surplus product this is; but it suggests an investment rate well above 0.5 – an astonishing figure). Compare this to a “mature” capitalist economy with a strong financial sector.

This is one symptom of the neoliberal counter-revolution: a smaller share of profits retained for productive reinvestment, and a greater fraction going towards interest payments and dividends. The lower the investment rate, the larger the portion of the surplus product going towards unproductive expenditure: bankers’ bonuses, private jets, fighter jets, personal servants.

When China’s productivity “catch up” ends, and its labour reserves are exhausted, we might expect a similar social transformation to happen there. Except, of course, that the political victory of neoliberalism depended crucially on the glut of labour produced by China’s re-entry to the world market. In 2020, where will be China’s China?

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13 Responses to “The rise of finance”

  1. Nick Says:

    I’ve just seen that a similar point has been made by Erdogan Bakir and Al Campbell in the latest (July) issue of Science & Society. Their paper is called “Neoliberalism, the Rate of Profit and the Rate of Accumulation” and is based on US data.

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