The world economy – a critical comment

Issue: 119

Jim Kincaid

Chris Harman has invited comment on his recent writings on the world economy and there is certainly much for Marxists to debate. We are confronted with a global economy, hugely uneven to be sure, but which in 2007 was producing no less than 25 percent more goods and services than just six years earlier. However, many on the left, including Harman, believe that the basic tendency of the system remains inflected towards stagnation in profits and rates of accumulation—as it has been, in their view, since the 1970s. They argue that the recent period of growth since 2001 has been based mainly on the build-up of unsustainable levels of debt, notably, rapid increases in household borrowing in the US based on soaring house prices. It is certainly true that this increase in debt helped finance a series of huge US trade deficits, which in turn boosted fast export-led growth in China and other emerging economies.

At the start of 2008 a wider international downturn is in progress. US house prices have collapsed, recession looms in the US, the dollar has fallen further and a crisis of unpayable debt has repercussed through the international banking system. What is now crucial is whether the new centres of accumulation in China and the rest of the industrialising world are large enough and dynamic enough to limit the recessionary impact of credit crisis. No one can be sure, but what happens over the next two to three years will be a decisive test.

In this article I will argue three main points against Harman’s vision of the world economy, and the theory on which it is based.1

  1. Despite repeated phases of temporary downturn—and massive increases in economic inequality—the basic story of the world economy over the past 25 years has been one of rising profits, and growth in output and levels of capital accumulation. Advances in productivity have not undermined profitability as would be expected according to Harman’s analysis.
  2. Harman uses Marx’s declining rate of profit analysis in rather an abstract way, focusing too much on the average rate and giving insufficient weight to the countertendencies that Marx saw as limiting or reversing the tendency for overall profitability to fall.
  3. He also makes too little use of Marx’s account of the forces that drive accumulation in the capitalist system: its tendency to expand geographically; to increase the mass and rate of profits by opening up new branches of production; to build up the quantities of capital deployed in the world’s productive system and multiply the numbers of workers employed by capital. Harman’s attention is not focused on the astonishing growth in recent decades in the size of the system, and the momentum given to it by enormous rises in the mass of extra profit generated. His analysis is limited rather narrowly to rates of profit. He neglects trends in the rate of formation of new capitals, relying here on an incorrect view that concentration of capital in most strategic sectors of the world economy blocks the entry of new firms into successful competition. He therefore seriously underestimates the role that the current dynamism of China and other large emerging countries can play in limiting the recession now starting and in sustaining a further phase of overall growth.

I do agree, however, with Harman’s broader perspective that political crises, rooted in the economics of the system, will continue and are likely to deepen. We face tightening ecological constraints, intensifying contrasts between extremes of wealth and poverty, and the social destructiveness inflicted by the never-ending competitive restructuring of capital.

Figure 1: World real GDP growth

Source: IMF World Economic Outlook, April 2007

Figure 1

An important measure of the performance of the world economy is the annual percentage rate of growth in production. Figure 1 gives the IMF’s estimate of world GDP growth (in real terms) since 1970. It shows that in about half of the 36 years covered growth was above or close to 4 percent a year. There were five periods of downturn, but in only two years did annual growth fall to less than 2 percent. The last two recessions followed each other quite quickly but were shallower and briefer than the more serious contractions at the start of the 1980s, and that of 1990-1. In the five years ending in 2006 growth averaged over 4 percent, and the same has turned out to be the case in 2007, despite the serious financial crisis which started last August. World population has increased since 1970, but the average rate of economic growth per person has still averaged nearly 3 percent per year.

The distribution of all this extra output has, of course, been extremely unequal. In most countries the upper income groups have secured enormous increases in their wealth and income. About one billion people live on the equivalent of $1 a day or less, which represents a fall since 1980 from 27.9 percent to 21.1 percent of the world’s population. But total world population has grown over this period, which means that there are large numbers of people who have seen a serious degree of improvement in their material situation. In some areas, especially in Africa and the Middle East, there has been a horrifying deterioration in living standards.2 But in China, for example, over the period since 1980, the numbers of people living on less than $1 a day fell from 600 million to below 180 million, a decrease of more than 400 million people just in one generation.3 The bitter knowledge that an even greater rate of poverty reduction might have been attained in China (and elsewhere in the world) should not blind us to the magnitude of this achievement by the toil of working people and advances in productive techniques.

Thus the picture is one of a capitalist system that is highly dynamic and growing in terms of overall output, though with huge social unevenness over geographical space, and a marked cyclical pattern over time. But how sustainable are current levels of growth? Will the present financial crisis and associated downturn in the giant US economy be just another brief and shallow recession like the five previous ones? Or are we starting to see the impact of more serious limits in the recent pattern of growth?

To assess the situation more deeply we have to consider levels of capital accumulation and profitability in the system. In an article published last year Chris Harman reviews the literature about trends in profits and comes to the following conclusions:

  1. In the industrial countries high profits in the 1960s were followed by a period of sharp decline which ended in the early 1980s with the profit rate about one third of the level of 20 years before.
  2. “Profit rates did recover from about 1982 onwards, but they only made up about half of the decline that had taken place in the previous period”.4 Harman does not comment on the overwhelming evidence that an enormous rise in profitability in much of the world economy took place in the period between 2001 and 2007. On the global situation, one authoritative source, the Bank for International Settlements, reports that “corporate profits in 2005 appear to have reached historical highs as a proportion of global GDP”.5 Harman’s discussion is confined to Britain, the US and China. He concedes that “for the moment profits in Britain appear to be high…15.6 percent for all non-financial corporations in the fourth quarter of 2006—the highest figure since 1969”.6 On the US Harman gives no figures, but suggests only that the upsurge of financial speculation and private equity takeovers will mean that “corporate profits will be being puffed up until they lose touch with reality”. In actual fact the ratio of share prices to company profits has not been exceptionally high in recent years in the US. Fred Moseley concludes in a recent article:

The rate of profit in the US is now approaching the previous peaks achieved in the 1960s. The last several years especially, since the recession of 2001, have seen a very strong recovery of profits, as real wages have not increased at all, and productivity has increased very rapidly (4-5 percent a year). And these estimates do not include the profits of US companies from their production abroad, but include only profits from domestic US production.7

In the period 2004-6 annual profits in the US continued to rise, from $1,331 billion in 2004 to an estimated $1,653 billion in 2006.8

On profits in China, reliable sources report massive recent increases. For example, Lardy estimates that “from 1998 through to the first half of 2006, profits of industrial enterprises in China soared from 2 percent of GNP to over 10 percent”.9 The World Bank’s Beijing office, in its latest report, says that “profit margins in China’s industry have continued their trend increase, supported by continued rapid growth of efficiency and labour productivity”.10

Of course, overall profit levels in the system vary cyclically and there is no reason to suppose that the recent upsurge in profitability in China and much of the rest of the world economy will not be followed at some point by a downturn. It may well have started in 2008. But what would prevent a further recovery in the near future, as happened after the temporary downturn around 2001? In October 1987 world equity markets crashed by 30 percent in a few days, but interest rate cuts implemented by the US Federal Reserve and other central banks contained the crisis. The effect on jobs and profitability in the industrial sector was very limited. The same was true of the massive downward lurch in US bond markets in February 1994. As Marx noted, because the financial markets are often dominated by speculative pressures they can, for long periods, become relatively autonomous from the productive economy. Thus, he concluded, financial crises, even if severe, need not necessarily have a corresponding impact on commodity production.

There are many problems of measurement and definition of profits, but really no clear evidence of any pattern of long term fall in the rate of profit.11 Profit rates in the industrial countries were high in the late 1950s and early 1960s. They fell sharply in the late 1960s and 1970s, rose again after 1982, hit a short but steep downturn around 2001 and recovered strongly through to 2007.

Harman reads Marx as arguing that the deepest and most persistent tendency in the system is for average profit rates to decline, though the decline can be slowed, or even in some periods reversed, by the operation of countervailing processes. Harman explains:

Marx’s basic line of argument was simple enough. Each individual capitalist can increase his (occasionally her) competitiveness through increasing the productivity of his workers. The way to do this is by using a greater quantity of the “means of production”—tools, machinery and so on—for each worker.12

What matters here is not physical productivity—a few workers operating a semi-automated production line, or a huge container ship—compared
with how it was done 50 years ago. Productivity is seen as increasing the organic composition of capital, ie a rise in the ratio of machinery to the labour that operates it. Thus the hours of socially necessary labour-time incorporated in the means of production tend to increase, but the number of hours of unpaid labour—the surplus value extracted—does
not rise correspondingly, and may even fall. Thus Harman’s argument is that the increase in productivity, which results from the pressures of competition, must inevitably put “a downward pressure on the ratio of profit to investment—the rate of profit”.13

This is certainly a correct summary of Marx’s argument that productivity advance undermines the rate of profit by raising the organic composition of capital. However, this is stated by Marx as a tendency only, and one which operates at a very high level of abstraction. Marx modifies his abstract argument in a number of crucial ways as he develops, stage by stage, an analysis of how capitalism operates as a concrete historical system. Harman gives insufficient weight to the ways in which Marx qualifies his abstract argument.

For example, Harman writes that “each capitalist has to push for greater productivity in order to stay ahead of the competition. But what seems beneficial to an individual capitalist is disastrous for the capitalist class as a whole”.14 This is a surely gross overstatement. Over the neoliberal epoch since 1980 productivity has been rising persistently throughout most of the world. Yet all the evidence shows that the global capitalist class is doing fine. It has been growing rapidly in numbers, and in the amount and proportion of the world’s wealth which it owns and controls.

Harman emphasises that aggressive price-cutting competition by innovative firms undermines profits and devalues the capital of rivals who are stuck with old technology, and may put them out of business altogether. These losses have to be deducted from the overall rate of profit in each branch of production. But such capital devaluation and lowering of profits are directly damaging only for those companies with outmoded means of production.

As Marx points out, the firms which find new ways of increasing productivity are able, as they cut costs, to secure an above average rate of profit—surplus profit in Marx’s phrase—and the average overall rate of profit in a capitalist economy is raised by such surplus profits. It is true that as their competitors adopt the new methods there is a general fall in prices of the commodities being produced, and rates of profit for all producers in a given branch of production fall towards an average. But Harman says nothing about the effect of the surplus rates of profit secured during the time period before the competition catches up. In his scheme, innovations seem to be adopted virtually instantaneously by all producers. Nor does he discuss the possibility of continuous ongoing waves of innovation which would allow some firms to enjoy surplus profits for much longer periods. Yet repeated advances in productivity have been the pattern in recent years in many industries.15

And, in any case, as Harman does accept, in the longer run phases of devaluation and elimination of less efficient capital clear the way for higher profits among survivors. However, he discusses the law of value and competition only in terms of bankruptcies, conceding that the level of bankruptcy in the 1980s and 1990s had been higher than he expected, because the role of the state in propping up failing firms had been more limited than he had anticipated. But here he underestimates the depth and savagery of the restructuring process in Europe and the US in this period, and he says nothing about the major form which it took. This was the internal restructuring as large firms eliminated their less profitable operations, closed loss-making factories, and imposed huge redundancies.

The current credit crisis

In the previous issue of International Socialism Harman argues that the present credit crisis arose because in recent years the US and European banking system has been awash with cash for which the banks needed to find borrowers. Where did this extra money came from? Harman notes that corporate investment in the industrial countries, which fell during the recession of 2000-1, did not recover to previous levels in the years following. Instead industrial companies fed unused money capital into the banking system. The banks recycled the money to the household sector especially in the form of vast increases in mortgage lending. This pushed up house prices and allowed more borrowing which drove up house prices even more—in a self-feeding bubble, which, while it lasted, sustained consumer demand.

Harman accepts Riccardo Bellofiore’s characterisation of this as “privatised Keynesianism”. The mechanism went into reverse when the subprime crisis imploded in August 2007. The effect will be, Harman argues, that the fundamental long-term forces of low profits and industrial overcapacity will now reassert themselves strongly: “Only the financial bubble stopped recession occurring earlier.” As over-indebted households cut back on their spending the fall in consumer demand will spread recession in the G7 countries. The emergent countries will be hit as their exports to the industrial countries collapse.

Certainly Harman is quite correct to stress that in the four-year period up to 2005 industrial investment lagged behind profits in the G7 countries and that this was one source of the housing-based bubble in bank lending. The IMF reports that in the G7 countries “on average over 2002-4 the excess saving of the corporate sector—defined as the difference between undistributed profits and capital spending—was at a historical high of 2.5 percent of GDP”.16 Harman sees this lag in corporate investment as decisive evidence of a basic stagnation since the 1970s in profits and rates of accumulation in the industrial countries. Here there are two objections to be made. First, the IMF report emphasises that “one factor behind the increase in corporate saving has been the strong rise in profitability that has underpinned higher corporate saving despite an increase in dividends paid”.17 Thus the lag in investment was not due to a lack of profitability, as Harman’s basic line of argument tends to suggest.

Second, there is evidence that industrial investment in G7 has recovered considerably since 2004. For example, the latest OECD report on the question shows that net saving by the corporate sector was down to only 1 percent of GDP by 2006.18 However, even if based on high profits, this is still a sizeable surplus of savings over investment. Nevertheless, before invoking the lack of demand which Keynes saw as underlying the slump of the early 1930s, we have to consider how far the present very high rate of investment and consumption in the emergent world will plug the gap left by a diminished rate of growth in consumer demand in the industrial countries. I will return to this, but first it is essential to consider the recent investment lag in a Marxist framework, rather than rest content with a Keynesian underconsumptionist perspective.

Productivity and the organic composition of capital

If the rate of productivity growth in department one of the economy, which produces means of production, is faster than in department two, which produces wage goods, then the effect will be a fall in the ration of constant capital to labour. There is strong evidence that this has recently been the case. A carefully researched report by the Bank for International Settlements concludes:

Record profits, high cash levels [in companies] and low interest rates have not prompted record corporate investment… Indeed corporate investment as a share of GDP remained low in the G3 economies by past standards… That nominal investment/GDP ratios are still low in most advanced economies remains a puzzle. Part of the explanation could be the fall in the relative price of business fixed investment. For instance, in Japan and the US the price of capital goods has declined by between 25 and 40 percent since 1980.19

The IMF notes that the lag in investment levels in 2002-4 was temporary and in part due to “a short-term reaction to the high corporate debt levels of the early 2000s”. But the IMF adds that “there has also been a longer-term downward trend in the relative price of capital goods” and this explains “about one half of the decline in the nominal investment ratio”. Looking to the future, the IMF suggests that “technological progress will likely continue to lower the prices of capital goods, especially in information technology”.20

This is the process that Marx calls the cheapening of the elements of constant capital. Because productivity has soared in the sectors of the economy which make means of production, industrial companies have been able to meet production targets with relatively limited investment in money terms. The result—in combination with rapidly rising profits—has been to leave many companies with ample cash reserves and debt-to-profits gearing ratios at unprecedented low levels. If the recession that has now started in the US does turn out to be limited in its effect on production and jobs in the world economy, a major reason will be the current financial robustness of the industrial sector.

Profitability and the cheapening of constant capital

The cheapening of the elements of constant capital has contradictory effects on the underlying profitability of the system. It slows down, or maybe even reverses, the build-up in the organic composition of capital—which, as I noted earlier, is central in Harman’s “declining rate of profit” reading of Marx. But, as Marx noted in a little studied section of Capital, lower prices for means of production have the effect of releasing capital from the circuits of productive capital.21 It is this loss of demand that allows Harman to argue that a lower rate of growth in investment in money terms could spread recession. But to clarify which of these conflicting tendencies predominates in the global economy today requires attention to some crucial and often overlooked elements in Marx’s analysis of accumulation and profitability.

Some other countertendencies

Chris Harman’s attention tends to be focused on only one form of
accumulation—the intensive accumulation of mechanisation and rising productivity. But in Marx we also find discussion of a second sort—extensive accumulation in which investment takes place in new branches of production and in geographically new centres of production, and in which extra workers are drawn into capitalist production. The extra workers come from two main sources. They are either workers whose jobs have vanished because of the increase in productivity or workers new to capitalism, for example, those drawn from the peasant sectors of the economy.

The scale of extensive accumulation in the Global South in the recent period has been extraordinary, much of it based on local accumulations of capital derived from surplus extraction from peasants, rather than capital exported from the industrialised North. Chinese wages, for example, are 1/20th of US wages, so rates of exploitation can be very high, though limited of course by the intensity of competition in the markets for commodities produced. Richard Freeman estimates that the labour force available to global capital, either for direct employment or as a reserve army of labour, tripled from just under one billion workers in 1980 to over three billion in 2000. He calculates that 1.5 billion workers were added to the actual or potential capitalist labour force by its incorporation of China, India and the former Soviet bloc. The other half billion workers came from population growth in countries that were already part of the capitalist system in 1980, especially in Africa and Latin America. Freeman also notes the sizeable effect of extensive accumulation in cutting what Marxists call the organic composition of capital: “The entry of China, India and the former Soviet bloc into the global economy cut the global capital/output ratio by 55 percent, to just 60 percent of what it otherwise would have been”.22 As I noted earlier, Marx argued that this fall in the average organic composition of capital will tend to boost rates of profit.

China as a driver of world accumulation

I have already shown that profits in China have soared in recent years. Harman argues that the Chinese economy is still far from being large enough to act as locomotive in pulling the advanced countries out of the impending recession. He notes that, at dollar exchange rates, China produces only 6 percent of world GDP. But this takes no account of the large undervaluation of the renminbi against the dollar. In any case the capacity of China, a driver of the world economy, is much greater than GDP figures would suggest. GDP in China has been expanding at the rate of 10 percent a year, and nearly half of this is reinvested. The increase in investment in China accounts for a large part, maybe 20 percent, of the annual increase in world capital formation in recent years. Profits from production in China are not just retained domestically, or transformed into the vast Chinese holding of US financial assets, but are widely shared among the foreign capitals that invest in China, thus helping to offset the damage done to profits elsewhere in the world by Chinese competitive success.

Foreign capital, American and Japanese especially, is sharing lavishly in the profitability of the “Chinese” economy. For example, the US government reported that “in the first six months of 2006, US corporate profits in China passed $2 billion, up more than 50 percent from the first half of last year. US companies were on pace to earn more in China in 2006 than they earned there during the entire 1990s”.23 Demand from China for raw materials and other imports is fuelling growth throughout much of East Asia, Latin America and the Middle East. Nor is the Chinese productive system as dependent on exports to the US as is claimed by many, Harman included. The World Bank reports that only one quarter of growth in 2006-7 was accounted for by an increase in exports.24

In a useful recent article the Economist points out two developments that will limit the global impact of recession in the US and Europe, and act to offset the G7 investment lag that Harman stresses. First, half of China’s exports now go to other emerging economies. Indeed, Chinese exports to Brazil, India and Russia were up by 60 percent in 2007, and to oil exporters by 45 percent. Exports to the US account for only 8 percent of Chinese GDP, 4 percent of India’s, 3 percent of Brazil’s and 1 percent of Russia’s. Second, in 2007 consumer spending in the emergent countries rose almost three times as fast as in the developed world:

Investment seems to be holding up even better: according to HSBC real capital spending rose by a staggering 17 percent in emerging economies last year compared with only 1.2 percent in rich countries.25

Exports from the US and Europe to the emerging world are rising rapidly, especially in the capital goods sector. It is certainly not possible to predict how severe and extensive the crisis unfolding in 2008 will turn out to be. But so far it does not look like a classic Marx-Minsky type of crisis of corporate indebtedness. In general industrial companies in most major countries have responded to the high profitability since 2001 by running down debt, buying back shares and building up cash reserves—all of which will help them ride out a downturn. In addition it is important to register that in recent years China has been only the most dramatic example of a more general pattern of more rapid growth in the industrialising than in the industrial economies. In 2006 GDP in India increased by 9.2 percent, in Russia by 6.7 percent, in Latin America by 5.5 percent. In the emerging and developing world as a whole it grew by 7.9 percent, compared to 3.2 percent for the advanced economies. This growth is deeply uneven between different regions and social classes. Moreover, such figures do not measure what is essential for a Marxist analysis, namely rates of accumulation. But they unmistakeably indicate that very high levels of capital accumulation are taking place.

My fundamental difference with Harman is that his discussion of the rate of profit fails crucially to register the political and economic consequences of the sheer momentum of current accumulation. He is preoccupied with average rates of profit, but what drives the system is the quest for surplus profit. We often use Trotsky’s phrase “combined and uneven development”, but in practice discussion focuses mainly on the unevenness of capitalist development. My plea is for much more attention to current patterns of combined development. Large numbers of new workers each year are entering direct capitalist employment. Many of them move into jobs in technically advanced factories and offices at high levels of productivity, and are thus subject to high rates of exploitation. In the present period what we urgently need to be thinking and debating about are the economic and political consequences for the system—and for our
politics—when accumulation is both rapid and global, and when extensive and intensive accumulation are closely combined.


1: For a re-education in critical Marxism during a period as one of the editors of Historical Materialism I am grateful to Sebastian Budgen and his cosmopolitan array of colleagues. My thanks also to Pete Green for discussion and productive disagreement, and to Sally Kincaid for computer assistance.

2: See Bush, 2007, for a valuable recent account.

3: World Bank, 2006, p9; “Somewhere Over The Rainbow”, Economist, 24 January 2008,

4: Harman, 2007a, p150.

5: Bank for International Settlements, 2006, p24.

6: Harman, 2007a, p158.

7: Moseley, 2007. The New York Times, 4 August 2007, reported, “In the 1960s, about 7 percent of US corporate profits came from overseas. By the first quarter of 2007, that share was up to 29 percent…government figures also indicate that the profits of American companies from their overseas operations have been growing at a much faster pace of 13.7 percent in the current decade, nearly twice the 7 percent rate of growth of profits in the domestic US economy.”

8: “Economic Report of the President”, 2008, table B 90, p331,

9: Lardy, 2007, p14.

10: World Bank, 2007, p7.

11: Harman 2007a, p150, reprints Brenner’s data showing a fall in the rate of profit of manufacturing capital in the US, Germany and Japan from 1970 to 2000. See also Harman, 2008, p33. Neither Brenner nor Harman take account of the shift in manufacturing to the Global South, the massive rise of a labour intensive service sector in the advanced economies, and the post-2000 rise in profit rates in G3 manufacturing (even in Japan).

12: Harman, 2007a, p142.

13: Harman, 2007a, p142. For an account of value as the monetary expression of socially necessary labour-time, see Marx, 1981, chapters 13-15. Harman’s account of the organic composition of capital, and its presumed effect on profit rates, is similar to that presented in Fine and Saad-Filho, 2004. For a detailed critique of this approach, see Kincaid, 2007. Ben Fine and Alfredo Saad-Filho have responded with a detailed defence of their position. This will be published by Historical Materialism in 2008, together with a critical reply by myself which also proposes an alternative reading of Marx’s account of profits and value theory.

14: Harman, 2007a, p142.

15: Harman considers that computers have increased productivity in only limited sectors of the economy. “The US has experienced high levels of productivity due to computerisation, but they have mainly been centred in the computer industry itself and in the retail trade”—Harman, 2007b, p13. This is a very questionable statement. The effects of computerisation, and associated internet technology in the US and in the rest of the world have been enormous and they have been experienced right across the spectrum of commodity production, including cultural products as well as goods and services.

16: IMF, 2006, p136.

17: IMF, 2006, p140.

18: OECD, 2007, chapter 3. Such data, based on national accounts, underestimate the levels of investment by G7 companies in emergent countries such as China.

19: Bank for International Settlements, 2006, p24. Incidentally Japan shows investment at 14 percent of GDP, ie higher than the US at about 9 percent and Europe at 10 percent. Lack of growth in Japanese GDP has not precluded a fairly high rate of profitability and investment in Japan.

20: IMF, 2006, pp141-142, 145. Harman, 1984, pp20-23, discusses capital-saving investment. He argues that “we can expect that there will always be more innovations calling for increased capital than those calling for less”. I remain unconvinced. Why should capital_saving investment be less prevalent than investment to economise on labour?

21: Marx comments on what he calls the release of capital which can result from productivity advance in either the means of production or wage goods sectors. Marx, 1981, pp206-209.

22: Freeman, 2005, p1. Marx also discusses the boost to the average rate of profit provided by the opening up of new branches of production, especially for what he calls luxury consumption-often the production of services which combine a low organic composition of capital with low wages and thus a high rate of profit-”both the rate and mass of surplus value in these branches of production are unusually high”-Marx, 1981, p344. Enormous numbers of such new branches of production have been opened up in the modern capitalist economies.

23: USA Today, 25 October 2006.

24: The World Bank, 2007, p2, says that in China net external trade contributed 3 percent of total GDP growth of 12 percent in 2006-7. See also Lardy, 2007, p4.

25: “Decoupling Debate”, Economist, 6 March 2008,


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