Is the era of economic growth over for advanced capitalist countries? If stagnation is what is on offer for the future, what does that portend?
The first question, although limited to the United States, is the subject of an interesting paper by the economist Robert J. Gordon, in which he makes a case that the era of high growth that has persisted for the past two centuries is drawing to a close and that, by the end of the 21st century, the annual growth in gross domestic product per capita may be as low as 0.2 percent — the estimated rate of growth prior to the 18th century.
The paper provides a useful starting point for discussion. A central idea that the paper rests on is that nearly all of the dramatic gains in standards of living, GDP growth and life expectancy that have occurred since the dawn of the Industrial Revolution had already occurred by the 1970s, and that those earlier inventions had vastly more impact than the Internet/computer/dot-com boom that arose in the mid-1990s.
To illustrate this point, Professor Gordon provides a graphic of past, present and projected future growth that assumes the shape of a steep bell curve. British economic growth is represented from 1300 to 1906, estimated by historians for the first four hundred years and by actual figures from 1700 because it was then the leading capitalist power. After 1906, actual United States growth in GDP per capita is used to the present day (because it became the leading capitalist power), followed by the author’s estimates out to 2100. The graph rises sharply starting at around 1870 until about 1950, peaking at 2.5 percent. It’s been downhill since, a trend that is forecast to continue until the growth rate declines to the Medieval rate.
If such a pattern does materialize — and Professor Gordon is far from alone in such pessimistic projections — what would that mean for an economic order, capitalism, that is based on endless growth? That is a question well outside the scope of his paper, and there is no intention here to imply a criticism of a paper for not discussing something beyond its scope. But as this blog attempts to tackle big questions, we are free to ask at a moment when stagnation is already upon us: Can capitalism survive an extended period of essentially no growth?
The Industrial Revolution and continued industrial innovation has brought fantastic changes to humanity, with the most dramatic changes coming in the 20th century. Professor Gordon posits three periods of major inventions: 1750 to 1830, 1870 to 1900 and the recent period of computer innovation. He argues that the first two periods brought a rapid series of inventions that took upwards of a century to be fully realized, fueling long periods of growth that lasted until the mid-20th century. Starting with the steam engine and the cotton gin, products resulting from the inventions of these periods include television, air conditioning and modern expressway systems.
Another example is indoor plumbing, which eliminated much manual labor, Professor Gordon writes:
“Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tonnes of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out.” [pages 4-5]
Motorized vehicles also had a dramatic effect on productivity and standards of living:
“The average horse produced 20 to 50 pounds of manure and a gallon of urine daily, applied without restraint to stables and streets. … The low standard of living reflected not just the small amount that people could purchase but also the amount of effort at the workplace and at home where they had to expend to perform ordinary tasks. … To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That’s an interesting measure of how much efficiency was gained from replacing the horses. Gone was the need for unsanitary and repulsive jobs of people who had to remove horse waste.” [page 5]
After 1970, a slowdown in productivity growth (output per hour) began because the “one-time-only” benefits accruing from the earlier inventions and their spinoffs “had occurred and could not happen again.” The years from 1996 to 2004 brought an uptick in productivity and economic growth, but that had passed even before the economic downturn set in. The rapid development of online commerce lasted only a decade, and the innovations from the widespread adoption of the Internet have already occurred. Moreover, Professor Gordon argues, this most recent period of innovation did not focus on labor-saving measures but rather on entertainment and communication devices rather than replacing human labor with machines.
I would add that the primary economic effect of the Internet has been to shift commerce from one merchant to another, not altogether different from the mania of the past two decades in the U.S. to build new sports stadiums and casinos, which do nothing but shift consumer spending from one entertainment option to another with the additional expense of massive public subsidies. Professor Gordon illustrates his point most effectively when offering a thought experiment: You can keep all the inventions made in 2002 or earlier but none since, or you can have all the products of the past decade but none resulting from the two earlier periods of inventions.
“Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3 am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?
I have posed this imaginary choice to several audiences in speeches, and the usual reaction is a guffaw, a chuckle, because the preference for option A is so obvious. The audience realises that it has been trapped into recognition that just one of the many late 19th century inventions is more important than the portable electronic devices of the past decade on which they have become so dependent.” [page 5]
The author offers six “headwinds” that he believes will reduce the growth of U.S. GDP per capita to a snail’s pace: the mass of retiring baby boomers leaving the workforce will cause output per capita to grow more slowly than productivity; the decline in U.S. educational attainment and growth in higher-education costs; growing inequality; the outsourcing and wage pressure inherent in globalization; environmental damage; and debt and the reduction in growth that results from austerity imposed to reduce debt.
Other than the reference to globalization as one of the six “headwinds” that will increasingly buffet the U.S. economy, the paper too narrowly analyzes the U.S. economy as a closed system, a weakness perhaps unavoidable given its specific focus. It is in no way controversial to note that no country is immune from the problems of the rest of the world given the deeply interconnected state of the world capitalist economy.
The paper is valuable in that it provides a reminder that the era of rapid economic growth since the Industrial Revolution has been a unique period in human history, and that such a time might not continue. Capitalism is a system that requires constant growth, an often overlooked aspect that has asserted itself in dramatic form as the stagnation of recent years has inflicted so much economic misery in advanced capitalist countries, and elsewhere.
In previous posts on this blog, I have written that the Keynesian policies that fueled the long post-World War II boom in the U.S. economy rested on a pair of one-time occurrences that can’t be repeated because it depended on a strong industrial base and market expansion. A repeat of history isn’t possible because the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which to expand. Moreover, capitalists who are saved by Keynesian spending programs amass enough power to later impose their preferred neoliberal policies.
Those neoliberal polices are in the interests of the capitalists who impose them, but are not simply a “choice.” The competitive pressures of capitalism lead to globalization and austerity. Irresistible competitive pressures were foreseen by Karl Marx, who encapsulated some of these problems in his theory of the tendency of the rate of profit to fall. In order to maintain profitability and compete successfully, a capitalist must reduce the costs of production. (This can be more or less stressed at different times; for instance, during the 1990s, there was a Wall Street mania in which industrial companies regularly made public pronouncements proclaiming their intent to become the “lowest-cost producer” in their industry in an attempt to curry favor with speculators.)
Corporate globalization is a natural consequence of the pressure to reduce costs; moving production to countries with far lower wages and few enforceable labor laws is an obvious response under the logic of capitalism. Mechanization is another response — machines make labor more efficient and require fewer workers be employed. But, Marx argued, more advanced methods of production are more capital-intensive, and thus higher efficiency is offset by diminishing returns on capital. The Marxist economist Anwar Shaikh summarized this concept this way:
“[T]he … pattern implies that the more advanced methods tend to achieve a lower unit production cost at the expense of a lower rate of profit. Competition, nonetheless, forces capitalists to adopt these methods, because the capitalist with the lower unit costs can lower his prices and expand at the expense of his competitors — thus offsetting his lower rate of profit by means of a larger share of the market.”*
One way of visualizing this phenomenon is to think of a construction company. Where many workers are necessary when equipped with shovels, far fewer are needed for the same job when the company buys a truck in which one driver can excavate many times the amount of dirt as a worker with a shovel. The company can buy newer and bigger trucks, but the amount of gained efficiency will never be nearly as dramatic as the purchase of the first truck. If we’d like to carry this example further, we might imagine that some of the displaced workers, after turning in their shovels, go to work on the assembly line building the trucks. But competitive pressures eventually cause the truck manufacturer to move the assembly line overseas.
Countervailing factors can frequently reverse this tendency; cuts to wages, work speedups, layoffs, downturns in the prices of natural resources and shuttering of facilities can each buoy profit margins. Nonetheless, some economists argue that it is precisely a falling rate of profit that has caused the ongoing global economic slump. Marxist economist Andrew Kliman perhaps is the most forceful in arguing that the rate of profit has been falling since the 1970s, leading to sluggish investment and economic growth and mounting debt problems despite the adoption of “free-market” policies.
He is not alone in arguing that, unless there is a transcending of capitalism, the only way within capitalism to restore profitability is through a full-scale destruction of the value of existing capital assets — a process not nearly complete despite the harsh austerity imposed around the world since 2008. (Such a destruction happened in the closures of the Great Depression and the physical damage of World War II.)
The various theories discussed here are not necessarily incompatible; capitalism is undergoing a deep structural crisis — not one of its recurring cyclical downturns. This crisis is the culmination of multiple factors that affect one another, and complex analyses are necessary to understand it. Professor Kliman directly declares that stagnation and a crisis-prone economy is the “new normal” while Professor Gordon describes his paper as “intentionally provocative.” But, coming from different perspectives, they envision stagnation as the capitalist future (although the latter discusses only U.S. prospects), as do other perspectives.
What does it mean for a capitalist economy that no longer can grow? The route out of past crises has been expansion to new areas, but infinite expansion on a finite planet is impossible. U.S. capitalists tolerated high wages for a time after World War II because they could expand into overseas markets and thereby increase profits. Once intensified competition from rebuilt Europe and Japan, and the relative maturity of markets, put pressure on profits, the rise of neoliberalism ensued.
In the absence of new markets, the only way to increase or even maintain profits is to reduce costs, and ultimately that means cutting wages and benefits. Doing so, however, leads to a new set of problems — consumer spending in advanced capitalist countries tends to account for 60 to 70 percent of economic activity. When working people don’t have enough money to spend, consumer spending declines and depresses the economy, further squeezing profits. More austerity simply means more economic contraction, as many Europeans are experiencing first-hand.
Capitalist businesses must grow or die, and capitalism functions only if it is expanding. When it doesn’t, or can’t, crisis is the result. If so much money is concentrated into so few hands, those wealthy hands can’t possibly buy enough to offset the deprivation of everyone else, nor should that be a desirable way to run an economy.
If stagnation is the “new normal” of capitalism, then deprivation, pain and worsening inequality is all that it can offer, save for the occasional temporary uptick — a never-ending race to the bottom. Is such a system really the best humanity can do?
* “Falling rate of profit” entry in A Dictionary of Marxist Thought (Tom Bottomore, editor) [Harvard University Press, Cambridge, Massachusetts, 1983], page 159