Thursday, March 6, 2014

Is capitalism past its use-by date?

by Michael Roberts

Back in September 2012, I wrote a post on whether capitalism is a mode of production that just suffers a series of crises, booms or slumps, or is instead (or also) a system that will eventually break down and collapse when it passes it ‘use-by’ date.  I think I still hold to my tentative conclusions in that post ( In that post, I referred to a paper by Robert J Gordon, a professor at North-Western University entitled, Is US economic growth over? – see and

In that paper Gordon argued that the rapid technological progress under the capitalist mode of production in the last 250 years is now over.  Growth in real GDP per capita, at least in the US economy, will be slower that in any extended period since the Civil War.   Gordon argued there are six headwinds that will slow future innovation: an ageing population in the mature economies; rising inequality; an increasing lack of competitive advantage for the mature capitalist economies; poorer education because public investment in education is being destroyed; increasing environmental regulations; and excessive debt. Gordon concluded that US real economic growth could fall to just an average 0.2% a year for the foreseeable future compared 2-3% of the past.
Whether those headwinds justify such slower economic growth is open to question.  Gordon suggested that capitalism drove the productive forces (and thus economic growth) upwards from about 1750 to 1950. But since then it has been in a downward spiral that no longer takes the productive forces forward. Capitalism, at least in the mature economies, has had its day.
Well, Gordon’s paper came in for a lot of flack from mainstream economics.  The arguments against Gordon centred round his claim that technological progress had come to an end.  Both arch Keynesian guru, Paul Krugman and arch Chicago neoclassical economist John Cochrane agreed that their “gut feeling” was that Gordon is too pessimistic about the future of technology.  As Gordon put it in a sequel paper to his 2012, just released (Gordon 050314), “A controversy about the future of U.S. economic growth was ignited by my paper released in late summer 2012.1 The debate began with my prediction that over some indefinite period of time into the future, perhaps 25 to 40 years, the growth of real per-capita disposable income of the bottom 99% of the U.S. income distribution would average 0.2% per year, compared to 2.0% per year in the century before 2007. This prediction set off a firestorm of controversy with commentary, blogs, and op-eds around the world.”

Gordon admitted that he was talking about the US and no other economies where the ‘headwinds’ may be less and agreed that “there is plenty of room for “catch-up growthin the emerging markets of the world”.  And he was looking at potential growth not actual real GDP.

Gordon was criticised for underestimating the new technologies that will come into play in driving up productivity growth over the next few decades.  In his sequel paper, he says “the primary role of the headwinds in predicting slow future growth escaped notice in the initial round of controversy about innovation”  He retorts: “there is no need to forecast that innovation in the future will “falter,” because the slowdown in the rate of productivity growth over the past 120 years already occurred more than four decades ago. This sequel paper explains why the pace of innovation declined after 1972. The future forecast assumes that innovations in the next 40 years will be developed at the same pace as the last four decades, but reasons for scepticism are provided for that prediction.”

So Gordon claims that he does not need to predict poor innovation from here still to conclude that US economic growth is set to slow to a trickle over the next few decades.  Gavyn Davies, the Keynesian economist and former chief economist at Goldman Sachs, who now blogs for the Financial Times, agreed that the prospects for increased living standards for the average American household do not look good (The economic future of Americans – some arithmetic,

Gordon predicts the real living standards of all but the top 1% in the income distribution will barely grow at all in the decades ahead and that this experience of the vast bulk of the population has been no better than that since 1973. Over the whole of that period, median real household income has actually risen by only 0.1% per annum.

However, Davies’ successor at Goldman Sachs, Jan Hatzius, is less pessimistic. Hatzius points out that the trend in college attendance continues to expand strongly, so he does not see why the contribution of education to productivity growth should decline.  Hatzius also reckons that the rise in the profits share cannot continue indefinitely, and cites evidence that the share of the top 1% in the wage distribution stopped rising in 1997. He therefore reckons that rising inequality will be much less of a factor in the decades ahead. Even so, as Davies points out, the resulting future growth in median household income is still only 1-1.5%.  This is what US capitalism offers most Americans at best, and that assumes no more major recessions or slumps.

But is technology and innovation really going to fail to deliver better growth over the next few decades?  The rise of robots and artificial intelligence is predicted by some to have an exponential effect in what has been called the ‘second machine age’ in Andrew McAfee and Erik Brynjolfsson’s influential book on the march of the robots. I intend to return to this issue in a future post.

But what cannot be denied is the productivity growth in the US and other major capitalist economies has been slowing since the 1970s – neoliberalism has failed to innovate.  US output per hour of work since 1972 has risen by only about 1.3% a year, apart from the brief boom in the late 1990s.  And real output growth per worker has slowed from a mediocre 2.4% a year (as Gordon recorded) in the last 20 years to just 1% a year over the past three years.

Many critics of Gordon’s view argue that this slowdown is temporary and is caused by the effects of the Great Recession and the cyclically weak recovery since.  Once capitalists start to invest more, productivity growth will recover to the previous trend.  The only problem with that argument is that there is still little sign of any significant return to the previous trend in business investment growth.
I did a quick analysis of US business investment growth.  In 2013, real spending on business investment in the US rose 3.8%, little more than half the rate achieved prior to Great Recession.  And what is especially noticeable is that spending on hi-tech innovatory equipment, the previously dynamic high growth sector with an average of 10-20% annual growth, is very weak, now growing at a pace slower than overall real GDP.
US business hi-tech investment
Hi-tech spending on both equipment and software has fallen as a share from 4.7% of US GDP in 2000 to 3.5% in 2013.  It is this area that is key to boosting productivity.  What is the reason for this slowdown in investment in new technology?  Well it appears to be that the cost of new equipment and software is just too high relative to the realised and expected return on those investments – in other words, the rate of profit is not high enough.

Kenneth Rogoff, of Reinhart and Rogoff fame (or infamy, see my post,, pitched in on Gordon’s predictions in a recent article (Malthus, Marx, and Modern Growth).  He agreed that there were obstacles to continuing the ‘previous success’ of capitalism.  There was environmental degradation; growing inequality within countries; aging populations that don’t work; and the risk of financial crashes. Yet he remained optimistic that capitalism can overcome these challenges.  After all, “so far, every prediction in the modern era that mankind’s lot will worsen, from Thomas Malthus to Karl Marx, has turned out to be spectacularly wrong… despite a disconcerting fall in labour’s share of income in recent decades, the long-run picture still defies Marx’s prediction that capitalism would prove immiserating for workers.  Living standards around the world continue to rise.”

Rogoff continues that technological progress has trumped obstacles to economic growth in the past.  “Will each future generation continue to enjoy a better quality of life than its immediate predecessor? In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes. In advanced economies, though the answer should still be yes, the challenges are becoming formidable.”   So the mainstream economists remain broadly optimistic about the future of capitalism, despite Gordon’s prognostications – not surprisingly.

In my post in September 2012, I reckoned that capitalism could get a further kick forward from exploiting the hundreds of millions coming into the labour forces of Asia, South America and the Middle East?  This would be a classic way of compensating for the falling rate of profit in the mature capitalist economies.  I have calculated before that the world rate of profit (not just the rate of profit in the mature G7 economies) stopped rising in the late 1990s and has not recovered to the level of the golden age for capitalism in the 1960s, despite the massive potential global labour force.  It seems that even the countervailing factors of foreign investment in the emerging world, combined with new technology, have not been sufficient to keep pushing up the world rate of profit, so far (see roberts_michael-a_world_rate_of_profit.).
world rate
I’ll be revisiting these measurements of the world rate of profit in a future post in the light of new work done by a young Marxist economist from Argentina.

Yes, crises are endogenous to capitalism because of the main contradiction within the capitalist mode of production, of accumulation for profit and not need.  But also it is possible for capitalism to recover and soldier on ‘endogenously’ when sufficient old capital is destroyed in value (and sometimes physically) to allow for a new period of rising profitability.  Capitalism can only be replaced by a new system of social organisation through conscious action of human beings, in particular by the majority class of people (the working class globally). Without such conscious action, capitalism can stumble on.

Maybe the mainstream economists will be proved right and the new technology in the pipeline will be applied by a resurgent capitalist revival to boost productivity and growth, but Gordon’s evidence suggests otherwise.

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