Posted by John, November 16th, 2009 - under Permanent arms economy.



A voice for the voiceless is an occasional series in which I publish articles by students and young workers. Feel free to send me a contribution. This article is by Luke Mason from Sydney University.

The post-World War II boom (“the long boom”) lasted roughly from the 1940s to the early 1970s.[i] During this period, the world economy went through enormous, unprecedented continuous economic growth.[ii] This went against majority expectations. It was thought that, after the war, the world economy would slide back into recession. Instead, the growth lasted for decades. The boom, however, came to an abrupt end in 1971 and then, after a short boom, ended again much more severely in 1973. Recession swept upon the advanced capitalist countries and a big part of the Third World. No such long boom has occurred since. The history of modern capitalism, from the mid-1800s onwards, has been a history of boom and bust: approximately every ten years or so, recession has hit world the economy (Choonara, 2009, p. 84). The long-boom thus holds particular significance. It begs the question: why was the capitalist system able to escape recession for so long?

Any explanation for why the long-boom ended must necessarily account for the boom itself. This essay will argue that the root of the boom lay in what has come to be known as “the permanent arms economy”, and sees its end in a subsequent widespread decline in the rate of profit.[iii] Other explanations, particularly that of “social structure of accumulation” theorists, will also be explored. The essay will then conclude with the political implications of the end of the long boom.

The SSA approach places primacy on the role of institutions within political economy. It suggests that institutions significantly shape the long-term socioeconomic performance of economies under capitalism. Specifically, that they, as durable structures, condition the capital accumulation process, relationships between and within classes, capital and the state, and nation-states within the state system (O’Hara, 2008, p. 89).[iv] Furthermore, particular sets of institutions (social structures of accumulation) regulate “[l]ong-term investment, demand and growth” depending on their influence on confidence, stability, and conflict resolution (O’Hara, p. 89). The degree to which the SSA stabilises the economy is reflected in both the rate of profitability and its predictability (Kotz et al, 1994a, pp. 56-57). This regulation occurs in an evolutionary fashion as a structure transforms through time with its capacity to produce long-term growth. SSA theory posits, importantly, that this metamorphosis occurs “through long movements (“waves”) of dynamic formation and demise” (O’Hara, p. 90). Clusters of institutions that assist capital accumulation tend to promote long-swings of growth, while those that fail to do so tend towards long-swings of stagnation.

For SSA theorists, the post-World War II long boom – a perceived long-wave of expansion – and its end – a perceived beginning of a long-wave of stagnation – were facilitated by particular social structures of accumulation. Gordon et al in Cherry et al (1987, p. 43) look specifically at the US boom/slump, but have important implications for the SSA approach and the broader, global long boom. They argue that the boom rested on the strength of US capital vis-á-vis potential challengers: through the capital-labour accord, Pax Americana, the capital-citizen accord, and the moderation of inter-capitalist rivalry (Cherry, p. 48). As the boom rested on its strength, the weakness of the US capitalist class both in national and international terms led to a decline in profitability that then led to a supply-side crisis and an end of the boom.[v] This weakness itself is attributed to: labour’s revolt beginning in the 1960s over political and economic demands; the defeat of Vietnam and challenges from the Third World; and increased rivalry between and from both domestic and international capitals such as those from Europe and Japan (Cherry, pp. 48-51).

There are a number of weaknesses to the SSA approach outlined above. Firstly, there is the tendency to ignore how states relate to each other within the state-system.[vi] Just as no capital can exist in isolation from other capitals, so too can no state exist in isolation. This is so even if, like in the case above, an analysis is limited to a national economy. In Gordon et al there is no mention of the fact that together with the US all of the other major countries underwent a virtually simultaneous boom for three decades. It leaves unanswered what the relationship is between the boom in the US and that of other countries. This is a flaw that Kotz et al (1994b, p. 307) note: that capitalism is comprised of a state system “presents a challenge for the social structure of accumulation approach, which has tended to emphasize the relation between institutions and accumulation in particular countries“.

Secondly, in Gordon et al’s account (Cherry et al, 1987) it is argued that the strength of US capital laid the basis for the US boom and with its demise came the slump. An important element of the argument is the strength of the US working class, which is seen to have engaged in successful struggle from the mid-1960s and cut into profits. This simply does not hold up to the facts of the situation (Harman, 1999, pp. 124-125; Dunn, 2009, p. 151). The argument bears much resemblance to the “wage-squeeze” accounts of the crisis and fails just the same.[vii] In reality, from 1955 to 1970 the share of wages fell 5.4 percent (Harman paraphrasing Andrew Glyn, 1999, p. 124). Perhaps even more importantly, while there was significant working class challenges to capital throughout Europe in the late 1960s and early 1970s – there was not in Japan, West Germany and, crucially, the US (Harman, p. 125). Lastly, real wages rose every year throughout the 1950s in all the major capitalist countries and yet the profit rate and investment increased, inflation remained low with near full employment everywhere (Harman, p. 126). This begs the question for SSA and wage-squeeze theorists alike: why did all the major economies go into crisis together in the mid-1970s? Similarly, the same question is raised regarding foreign competition: why only did the affects of competition become truly felt when they did?

At the heart of the PAE approach is its attention to both the rate of profit and the level of arms spending throughout the duration of the long boom. What was unique about the period was that economies had profit rates significantly higher and more sustained than in the pre-World War II decades (Harman, 2009a, p. 165). This provided the impetus for continual investment from capital, but does not of itself explain how the rates were achieved and sustained throughout the period. This look to profit rates is a common feature of both PAE and SSA approaches – why they occurred is where the two depart. Where the SSA approach looks to the historical development of accumulation-conducive institutions, PAE explores the role of military expenditure.

Military expenditure, which was enormous, is important for two key reasons.[viii] First, it provided a market for the output of major industries.[ix] This meant major corporations could undertake long-term planning with the guarantee that they could realise their investment. Second, it constituted unproductive expenditure. It is unproductive insofar as the manufacturing of arms does not go into the production of future surplus value – it is either stockpiled or used directly in war (Choonara, 2009, p. 135). In Marxist economics, capitalists introduce new means of production in order to undercut their competitors with lower prices; the threat of elimination then forces the general adoption of the innovation. An outcome of this increase in the organic composition of capital (the ratio of investment to labour – OCC) is Marx’s tendency for the rate of profit to fall.[x] In this way, the unproductive expenditure is significant because it reduced the level of possible future accumulation and slowed a rise in the OCC – thus halting the falling rate of profit.[xi]

Another dynamic also underpinned the boom. The extent varied from state to state, but during the period states seized ownership and control of capital accumulation (“state capitalism”). In the US, Britain and France the economy was oriented towards military competition; while in Germany and Japan, it was oriented to foreign market competition (Harman, 2009a, p. 171; Brenner, 2006, p. 94). Moreover, the states acted to: reduce the pressures leading to overproduction; directly enforce a high rate of exploitation; intervene to slow down the boom where necessary; and maintain a level of guaranteed demand (Harman, 2009a, p. 178). The overall effect of these states – in the Global South, the West, Japan and the Eastern bloc – was to prevent the overproduction that was common prior to (and after) the long boom. Importantly, these dynamics were not pre-planned; they were a product of inter-imperialist rivalry.[xii]

Why then did the boom end? And why in 1973? PAE again looks at what happened to rate of profit during the period. There is general agreement among economists that profit rates fell from the late 1960s until the early 1980s (Harman, p. 196).[xiii] Crucially, during this period the organic composition of capital increased rapidly. As Harman (2009a, p. 197) explains, citing mainstream study figures, the US OCC in manufacturing rose by over 40 percent between 1957-68 and 1968-1973, while the OCC in the UK rose by 50 percent between 1960 and the mid-1970s. This validates the argument that a rising organic composition of capital can cut into profits,[xiv] but begs the question of why it happened when it did and not earlier.

To answer this, the contradictions within the long boom need to be examined.[xv] There were two central contradictions: the first was the differences in arms spending between the major economies; the second was the conflict between economic and military competition. As foreign trade increased throughout the duration of the boom, larger and larger portions of US industry became susceptible to international competition. This became particularly true when the US, in an attempt to cement its hegemony, allowed Germany and Japan access to its markets. This, with their low levels of arms expenditure, allowed the two countries’ productivity and world importance to significantly increase.[xvi] The success of these countries put pressure on high arms spenders – such as the US and Britain – to cut back and invest productively. The pressure of arms spending on its international competitiveness was revealed when it increased by a third during the Vietnam War and inflation skyrocketed and Wall Street turned against the war (Harman, p. 199). In 1971, US imports exceeded exports – forcing Nixon to further cut arms spending and devalue the dollar (thus destroying Bretton Woods). “The dynamic of military competition was relentlessly undercutting the dynamic of military competition” (Harman, p. 200). Although the rising OCC in Germany and Japan had cut average profit rates, it gave them an advantage in export markets and forced other countries to pay. This in turn pressured other economies to increase their own competitiveness through innovation and rising OCCs. The falling profit rates of the 1970s were the result. By 1973 the rates were so low that upsurge in raw material and food prices caused by the boom of the previous two years was sufficient to push the advanced Western economies into recession.

According to Gordon et al, the permanent arms economy (PAE) explanation for the crisis is “incomplete at best” and provides “no further explanatory power” or “much additional empirical insight” beyond the SSA approach articulated (Cherry et al, 1987, p. 53). On the contrary, the PAE overcomes the holes in the SSA approach. While the SSA approach rightly looks at profit rates throughout the boom to explain the crisis, it cannot adequately explain why they drop so suddenly when they do – and indeed why it has a global character. Furthermore, the PAE has far more explanatory power: PAE economists predicted in the early 1960s that the boom would unravel in the early 1970s, and in the late 1970s predicted the subsequent collapse of the USSR (Kidron, 1967; Harman, 1977; Harman, 1976). In terms of empirical insight, the additional measure of the organic composition of capital, which the SSA approach lacks, gives PAE a firm foundation for its falling rate of profit thesis. The same cannot be said of SSA, which relies almost entirely on the correlations between historical developments and profit rates, and faces the problem of cause and effect – each institutional factor seen to be the cause of crisis can each “be seen to be as much the result of a wider crisis as a cause of its intensification” (Harman, 1999, p. 143).

Explanations for the long boom matter. Why was the capitalist system able to escape recession for so long? A lot rests on the answer. If the boom was a product of specific government intervention then it is plausible that a similar boom could occur if only governments again adopted certain policies. And indeed, with the boom, at least in the advanced capitalist countries, rising real wages, near full employment and welfare provision on an unheard of scale (Harman, 2009a, p. 161). If, on the other hand, it was a product of the competition between rival imperialist powers then a similar boom would have a rather high price attached to it.

As Harman (p. 172) aptly puts it:

It was not “social compromise” and the “welfare state” that produced the long boom and the “golden age”. Rather they were all by-products of militarised state capitalism. Prosperity rested on the cone of the H-bomb.

The question is of renewed relevance given the critical state of the world economy and the debate over paths forward. If the Great Depression ended and the long boom began because of the move to total war then prospects for capitalism are quite grim indeed.

Bibliography

Callinicos, Alex (2009) Imperialism and Global Political Economy, Cambridge, Polity.

Choonara, Joseph (2009) Unravelling Capitalism: A Guide to Marxist Political Economy, London, Bookmarks.

Brenner, Robert (2006) The Economics of Global Turbulence, New York, Verso.

Dunn, Bill (2009) Global Political Economy, London, Pluto Press.

Glyn, Andrew, Sutcliffe, Bob (1972) British capitalism, workers and the Profits Squeeze, Harmondsworth, Penguin.

Gordon, David M., Weisskopf, Thomas E., Bowles, Samuel (1987) “Power, Accumulation, and Crisis: The Rise and Demise of the Postwar Social Structure of Accumulation”, in Cherry, Robert, Naples, Michele I., Moseley, Fred, Kurdas, Cigdem, Michl, Tom (eds.) The Imperilled Economy, Book 1: Macroeconomics from a Left Perspective, New York, Union for Radical Political Economics.

Harman, Chris (2009a) Zombie Capitalism: Global Crisis and the Relevance of Marx, London, Bookmarks.

Harman, Chris (2009b)”The slump of the 1930s and the crisis today”, International Socialism, Series 2, No 121, pp. 21-48.

Harman, Chris (2007) “The rate of profit and the world today”, International Socialism, Series 2, No 115, pp. 141-161.

Harman, Chris (1999) Explaining the Crisis, London, Bookmarks.

Harman, Chris (1996) “The Crisis of Bourgeois Economics”, International Socialism, Series 2, No 71, viewed 1/10/09 <http://pubs.socialistreviewindex.org.uk/isj71/harman.htm>.

Harman, Chris (1977) “Poland: The Crisis of State Capitalism (Part 2)”, International Socialism, Series 1, No 94, viewed 2/10/09 < http://www.marxists.org/history/etol/writers/harman/1977/01/poland2.htm>.

Harman, Chris (1976) “Poland: The Crisis of State Capitalism (Part 1)”, International Socialism, Series 1, No 93, viewed 2/10/09 < http://www.marxists.org/history/etol/writers/harman/1976/11/poland.htm>.

Kidron, Michael (1967) “A Permanent Arms Economy”, International Socialism, Series 1, No 28, viewed 1/10/09 <http://www.anu.edu.au/polsci/marx/contemp/pamsetc/perm/perm.htm>.

Kliman, Andrew (2007) Reclaiming Marx’s Capital: A Refutation of the Myth of Inconsistency, Lanham, Maryland, USA, Lexington Books.

Kotz, David (1994a) “Interpreting the social structure of accumulation theory”, in Kotz, David, McDonough, Terrence, Reich, Michael (eds.) Social structures of accumulation: The political economy of growth and crisis, Melbourne, Cambridge University Press.

Kotz, David, McDonough, Terrence, Reich, Michael (1994b) “Afterword: New International institutions and renewed world economic expansion”, in Kotz, David, McDonough, Terrence, Reich, Michael (eds.) Social structures of accumulation: The political economy of growth and crisis, Melbourne, Cambridge University Press.

O’Hara, Phillip (2008) “A Social Structure Of Accumulation For Long Wave Upswing In Australia?”, Journal of Australian Political Economy, Issue 68, June 2008, pp. 88-111.

[i] This growth was continuous except for a small recession in 1949 in the US.

[ii] While the growth was uneven throughout the world, it included the United States, Japan, Germany, France, Italy, Britain, Russia, much of Latin America, Asia and Africa (Harman, 1999, pp. 75-76). Notably, in places like India, China, and Latin America, while growth occurred, for the vast majority of people life remained much unchanged – or, indeed, it got worse.

[iii] This essay will make heavy use of the work of Chris Harman who is the leading PAE theorist, and particularly his latest book (Harman, 2009) because it contains the most up-to-date data.

[iv] A key strength of O’Hara’s version of SSA is his explicit acknowledgement of the state-system within capitalism and the implications it has both on a national and international scale.

[v] See Cherry et al (1987, p. 45) for graphs of the rate of profit and accumulation.

[vi] For more on the state system, see below and Callinicos (2009).

[vii] As the name suggests, these accounts argued that the long boom ended because of labour militancy which drove up wages and cut into profits. For example, see Glyn and Sutcliffe (1972). For a critique see Harman (1999, pp. 123-126).

[viii] Before the war levels of arms spending in the US were at 1 percent of GNP, after disarmament in 1984 it remained at 4 percent, then increasing to 13 percent in 1950-53 with the Cold War, only to remain at “between 5 and 7 times the level of the interwar years throughout the 1950s and 1960s” (Harman, 2009a, p. 166). Levels were also quite large in Britain and to a lesser extent France.

[ix] Kidron (1967) suggests that in the US for eighteen major industries one-tenth or more had their “final demand stemmed from government procurement”.

[x] Hereafter the theory will be called ‘the falling rate of profit’.

[xi] See Harman (2009a, p. 168, footnotes 28 and 29; and pp. 195-197) for a survey of economists’ empirical charting of the composition and its influence in reducing profit rates.

[xii] See Callinicos (2009, pp. 165-188) for a history of the period and on the imperial competition between the US’s “open door” ambition and the USSR’s “closed bloc”.

[xiii] See Harman (2009a, p. 196) for graphs of US, German and Japanese profit rates.

[xiv] As Harman (2009a, p. 197) notes, this is an empirical refutation of Okishio’s critique of Marx’s theory. For formal refutations of Okishio’s theorem, see Kliman (2007) and Harman (2007).

[xv] The argument articulated here as to why profits declined sharply is based heavily on Harman (2009).

[xvi] See Harman (2009a, p. 198) for West Germany and Japan’s capital and share of world GNP growth contrasted to the US.