Some Contradictions of Capitalist Success

...One important factor is borrowing for speculative purposes...

...Congress has repeatedly liberalized depreciation provisions as a backdoor means to cut the corporate income tax...

...These include a safe and clean environment, social and economic infrastructure such as transportation systems, and basic and applied scientific research...

...the pensionfund savings of the many can now perform the task historically filled by the wealth of the few...

...The political challenge we face is to find alternatives to Marxian political strategies to confront some of the social and economic contradictions that Marx anticipated...

...Capitalism is premised on the scarcity of money capital, but dynamic growth has succeeded in dramatically reducing that scarcity...

...An alternative possibility is that government deficits and Federal Reserve policy pushed up U.S...

...The Role of Government In light of ample supplies of domestic savings, the huge federal budget deficits of the 1980s seem basically benign...

...This figure is based on actual flows of money into a variety of financial instruments —bank accounts, stocks, bonds, and pension funds...

...Hence, some portion of total new investment in the economy should be seen as simply replacing that portion of the capital stock that was used up in production...

...It must be remembered that the private market was not willing to provide middle-income people with mortgage loans until the federal government stepped in to create Veterans Administration and Federal Housing Administration loans...

...In a context where the private sector is unable and unwilling to invest in low- and moderate-income housing, the result has been a dramatic shortfall in the production of housing and the rapid increase in homelessness...

...In other words, net investment has been falling as a share of total investment...

...Moreover, democratic debate over corporate direction is likely to produce better decisions than the hunches of a few top-level managers who lack the expert knowledge and hands-on experience that exist further down in the organization...

...And there is absolutely no correlation between the ability to raise billions for a takeover and the managerial skill to motivate employees to perform at high levels...

...An IBM facility in Raleigh, North Carolina, reduced the space needed for production from 51,000 to 9,000 square feet, and a Westinghouse facility in West Mifflin, Pennsylvania, cut its floor space from 125,000 to 52,000 square feet...

...Department of Commerce, Fixed Reproducible Tangible Wealth in the United States, 1925-1985 (Washington, D.C.: USGPO, 1987...

...The result has been lower reported corporate profits and a sharp drop in the yield from the corporate income tax...

...Thus far, this problem has been hidden from view—particularly in the United States—by the dominant economic discourse, but the effects are already visible around us...

...economy...

...Private productive investments in the Third World can absorb only a tiny share of the surplus capital in the developed nations...

...While it might seem wildly irrational to spend $40 million for a Van Gogh painting, it could well be that the same painting will be resold in ten years for $120 million, producing a higher profit than any alternative investment...

...The second is that money capital is the key productive force—the vital fluid that makes the economy work...

...Equally important, flows of credit are mediated through complex institutional arrangements and are also shaped by expectations about future rates of inflation...

...By 1988, informationprocessing equipment—a category that includes computers, office machines, communication equipment, instruments, and photocopying machines—constituted almost a third of all private purchases of capital equipment, but computers and office machines represented only 38.2 percent of this total category...

...These data show that personal savings in the United States were at historically high levels in the 1980s—double the rate indicated by the NIPA data.' Moreover, when differences in national accounting techniques are considered, the gap between United States and Japanese savings rates is minimal.'- The Fed also develops annual estimates of the total net worth (assets minus liabilities) of households, and the annual change in household net worth was more than a trillion dollars in several recent years...

...This means, first of all, producing those public goods that the "free market" cannot provide...

...While people's needs for goods and services are almost unlimited, only some of those needs can be filled by private investments that promise returns higher than the interest on government bonds...

...When banks are "deregulated" so that bankers abandon prudence in favor of making the largest profit, the result is the collapse of the savings and loan industry...

...The purest examples are Japan and Taiwan, where the bidding up of land prices is so extreme that in certain areas it has become impossible to contemplate building a new factory...

...government bonds soaked up large amounts of money that otherwise could have done even more speculative damage...

...Yet virtually all of the items in this category incorporate microchip technologies that have facilitated product improvements with little cost increase...

...by now, everybody is aware that this year's model has many times the power of a five-year-old model at a fraction of the cost...

...In the persons of Donald Trump and Michael Milken, the rentier was the cultural hero of the 1980s...

...In fact, however, money capital is no longer scarce, and it has ceased to be the key productive force...

...Moreover, when combined with just-in-time systems of inventory control, these new manufacturing technologies dramatically reduce the floor space needed for manufacturing...

...If this sounds a bit like the argument of a certain nineteenth-century Hegelian philosopher who anticipated that capitalist social relations would one day become a fetter on the development of society's productive forces, it is hardly coincidence...

...Government must also find ways to funnel money to productive activities that the private market is not willing to fund...

...In the same way, the price of money—the interest rate—departs from the perfect auctions of economic theory...

...In each year, gross investment consists of depreciation (investment compensating for used-up capital) and net investment (that which is genuinely new...

...import of capital in the form of foreign purchases of U.S...

...Economic efficiency requires markets, but it also requires that those markets be constrained and regulated...

...The more generous the depreciation provisions, the larger share of its capital investments a firm can write off as an expense of doing business...

...The implications of this are obvious...

...The problem is that the Commerce Department's depreciation adjustments also include a calculation of the replacement cost of capital assets...

...stocks and bonds is itself proof that U.S...

...Most glaringly, the Reagan administration slashed public-housing spending...

...Depreciation Parallel methodological problems characterize the longstanding problem of measuring depreciation...

...economy—as a percentage of GNP—was relatively high during the 1980s...

...First, the acceleration of depreciation means that firms are able to finance a very high percentage of investment out of their revenues...

...Although there continue to be serious problems in assuring that those who have contributed to pension funds receive the benefits they deserve, the amount of money that is put away each year in these pension funds and insurance reserves is almost enough to finance all net investment in plant, equipment, and residential housing in the U.S...

...The liberalization of depreciation has been intended as a means to stimulate investment...

...Interest rates WINTER • 1991 • 59 Contradictions of Capitalist Success have fallen significantly since the early 1980s, but interest-rate determination is a far more complex business than textbook models of supply and demand might suggest...

...Similarly, when corporate raiders can make more money by dismantling firms than by expanding output, the results are hardly efficient...

...As long as this process continues, large profits can be made from speculation...

...Yet federal spending was not used to finance the kinds of productive investment that the private economy consistently fails to fund...

...Scholars as diverse as Karl Polanyi and Kenneth Arrow have taught us that the unfettered free market of economic theory results in disaster because of these irrationalities...

...The classic instance of capital savings has been the computer...

...for example, a thirty-year old commercial building that might have cost $1 million is valued at the $10 million it might cost today before its value is divided by its service life to determine this year's depreciation...

...The resulting expansion in governmental responsibilities need not contribute to bureaucratic unresponsiveness or to big, environmentally insensitive government...

...In fact, the now despised Keynesian argument that huge budget deficits saved the U.S...

...To be sure, questions can be raised about the composition of that investment—whether too much money went for stretch limos and vacation condominiums and not enough for new machine tools and improved production technologies...

...Moreover, the NIPA savings figure is biased downward by the accounting techniques used to assess pension fund contributions, depreciation, and the amount of income not reported to the IRS...

...To be sure, during the 1980s firms did increase their borrowing through bonds and bank loans, but these did not play a major role in financing real investment...

...Moreover, the exaggeration of depreciation also means that the net savings rate in the economy has been substantially underestimated...

...The problem is that both of these estimates are subject to a variety of errors, and even small n•n•n...

...In the past twenty years in the United States, economic data show a rapid increase in depreciation as a share of gross investment...

...The reality, however, is that the increase in depreciation is the result of a series of changes in the tax law...

...To be sure, the failure of the Soviet model has shown the futility of attempting to organize an economy that minimizes the role of markets and the scope of the individual's choice...

...Such a mechanism need not degenerate into political favoritism or a huge waste of money...

...But Keynes's anticipation of the declining scarcity of money capital was accurate...

...economy from a continuation of the 1981-82 recession is persuasive...

...Both sets of data are provided in U.S...

...3 See Fred Block, Postindustrial Possibilities: A Critique of Economic Discourse (Berkeley: University of California Press, 1990), ch...

...He then recycled the funds to corporate takeover artists who would often enrich themselves by dismantling viable firms...

...For one thing, the last ten years have taught us that although markets are important for economic efficiency, so, too, are limitations on markets and on individual efforts to maximize wealth...

...Moreover, these Fed estimates have been validated by periodic surveys of consumer wealth...

...In fact, it is generally recognized that gross private investment in the U.S...

...In the 1970s banks rushed to lend money to the Third World and Eastern Europe at high interest rates, almost entirely oblivious of the wasteful and irrational ways in which the funds were often used...

...However, the case for free-market capitalism espoused by Margaret Thatcher and Ronald Reagan is shakier than ever...

...In Japan, the same search by idle capital for speculative profit pushed stock and land prices to extremely high levels before recent selloffs...

...It is less widely recognized that the same innovations in microchip technology that have reduced the cost of computers have an impact on a wide variety of other capital goods as well...

...Economists have had some difficulty making sense of this trend, but the conventional wisdom is that firms have shifted their investments away from structures toward equipment that is used up more quickly...

...Many economists have come to recognize that the actual wage that most employees receive differs from the market wage predicted by the law of supply and demand...

...Democratize the Corporations However, the increased role of the government is only one of the reforms needed to make a savings-abundant economy work effectively...

...In the General Theory Keynes anticipated a point in the future when money capital would become progressively less scarce, driving down the prevailing interest rate and eliminating any productive role for those who simply lend out money...

...business as their publicists have claimed, but as recently as 1971-75, new stock issues provided more than 10 percent of the external funds raised by nonfinancial corporations...

...Moreover, the business cycle has not yet been repealed, and the fragility of the financial system could push the economy into a severe recession...

...Similarly, the government must create a mechanism to make capital available to nonprofit groups, employee cooperatives, and a range of other nontraditional firms that have great difficulty raising money on the private market...

...Over the last twenty years, the economic 58 • DISSENT Contradictions of Capitalist Success news has been dominated by these speculative dynamics...

...Moreover, taxes on capital gains should actually be higher in order to discourage purely speculative investments...

...For another, developed capitalism in the United States, Japan, and the richer countries of Western Europe faces new and profound difficulties, largely as a consequence of its success in expanding wealth...

...The voice of those who provide money capital either through equity or debt has to be subordinate in order to assure that the firm adopts a long-term planning horizon...

...The problem is that our current system of corporate governance rests on both of these mistaken assumptions...

...With all of the idle capital sloshing around the world economy, the sale of $100 billion or more a year of U.S...

...The ultimate power in the corporation belongs to the shareholders because they were willing to trade presumably scarce capital for control...

...In the current environment, even extremely experienced high-level managers find it difficult to make good decisions about corporate strategy and the choice of new technologies...

...However, it becomes even trickier because of the poor quality of the price indexes that are used to calculate the replacement cost of older structures and equipment...

...Imagine, for example, how an individual's income tax bill would be reduced if the entire purchase price of a new car could be deducted from gross income...

...Another would be a major effort to transfer real resources to the Third World to facilitate global development...

...While there was much in WINTER • 1991 • 61 Contradictions of Capitalist Success Marx's thinking about the transcendence of the market and the commodity form that was mistaken, his insights into the problems of capitalist success were prophetic...

...To be sure, there were some cases where the money that Milken raised was used to expand productive investments, but those were few...

...In 1987, this replacement-cost adjustment increased NIPA depreciation by $144.6 billion, bringing it closer to the exaggerated depreciation figures reported to the IRS...

...Instead, the need for stagnating economies to make massive interest payments has steadily reduced living standards in much of the Third World...

...Hence, the quantity of private savings was more than enough to finance historically strong levels of real investment...

...And the huge cost to the federal government of the savings and loan bailout is reminder enough of what can go wrong in speculative markets...

...That distinction now belongs to the mobilization of human intelligence through scientific and technological advance and through organized problem solving at the point of production, whether it is a hospital, a factory, or a movie studio...

...On the contrary, takeovers tend to disrupt the subtle web of understandings that allow employees to be productive...

...In the aggregate, the firms had so much cash to spare that they increased their ownership of financial assets by an average $100 billion a year during that period...

...While the lenders have generally been successful in avoiding default, very few of those loans proved to be self-liquidating...

...But the misallocation of available resources is a very different problem than claims about inadequate rates of savings...

...The first is the increased vulnerability of entire economies to financially generated panics or crises...

...Moreover, new generations of computer-controlled machine tools are often three or four times more powerful than their predecessors but only slightly higher in price...

...In fact, between 1985 and 1987, internally generated funds—undistributed profits, depreciation, and foreign earnings— actually exceeded total capital expenditures by nonfinancial corporate businesses...

...This declining scarcity has been accelerated in the United States by three factors: the expansion of pension funds, the introduction of capitalsaving technologies, and the rising role of depreciation as a component of investment...

...In the same period, Michael Milken perfected the junk-bond market in which he offered high interest rates as an enticement to soak up excess capital from insurance companies, savings and loans, and money-market funds...

...Declining Capital Scarcity When these three trends are taken together, they force a revision of conventional thinking about the economy...

...Third, the dynamic of capital saving is continually reducing the amount of new investment that is necessary to expand the economy's production of goods and services...

...However, the NIPA calculates personal savings for the whole economy by subtracting one estimated figure from another—personal consumption expenditures are subtracted from after-tax personal income...

...The consequence is that outlays for industrial buildings can be significantly reduced at the same time that production becomes more efficient...

...The fact that large government budget deficits exist along with large imports of capital does not prove that the first causes the second...

...the factory could not possibly earn enough to justify the initial price of the land...

...savings rate is higher than that of Japan...

...In the 1980s savings and loans lent billions to questionable real estate projects that remained unoccupied...

...Similarly, the Reagan administration cut spending for education and training—another area where the private market systematically fails...

...When the pool of available savings is large relative to these investment projects, the result is a desperate search for speculative investment opportunities that promise high returns for idle capital...

...Second, even in "good times," the increased orientation to speculation undermines the economy's capacity to produce...

...But other examples can be found much closer to home: the brilliant young people drawn to megabuck salaries on Wall Street instead of productive careers, the firms that are run into the ground through elaborate financial deals, and all of the productive investments that are forgone because they won't produce as high a rate of return as speculative investments...

...interest rates, thus attracting foreign capital...

...One of the most important components of the Fed's savings data is the total annual increase in the assets of pension funds and life insurance reserves, exclusive of capital gains on their holdings...

...2 One scholar has shown that when Japanese data are recalculated using U.S...

...The consequence was a further deterioration of schools and an expansion of the proportion of the labor force with inadequate skills...

...This means that the U.S...

...That is, firms were able to write off more than threefourths of their total capital expenditures as a cost of doing business...

...This is what he meant by the "euthanasia of the rentier...

...they did not result in investments that produced a continuing flow of revenues that could be used to pay off the interest and principle of the loan...

...It is entirely possible that this demand for credit can rise even more rapidly than the total supply of money capital...

...WINTER • 1991 • 55 Contradictions of Capitalist Success changes in the large numbers have a significant impact on the savings figure...

...4 Older assets are revalued in terms of what they would cost today...

...It is also frequently argued that the U.S...

...Between 1962 and 1989, the service life of commercial warehouses was shortened from 60 years to 31.5, while service lives of equipment used in the chemical industry declined from 11 to 5 years...

...The corporate firm needs to be democratized...

...The IRS reported that between 1968 and 1988 depreciation as a percentage of all capital expenditures by nonfinancial corporations rose from 53.8 percent to 77.7 percent...

...Pension Funds The conventional wisdom is that citizens of the United States are profligate and rates of personal savings are at historic lows...

...Yet an enlightened government is also obligated to invest the money it raises in ways that improve economic well-being...

...The obvious question is, why aren't these supplies of surplus capital channeled to those parts of the Third World that desperately need capital for development...

...First, the liberalization of depreciation provisions allows them to reduce their tax burden...

...Moreover, market-type mechanisms could be used in a variety of instances, such as financing for housing and nontraditional firms...

...Fumio Hayashi, "Is Japan's Saving Rate High...

...q Notes This argument is developed at greater length in Fred Block, "Bad Data Drive Out Good: The Decline of Personal Savings Reexamined," Journal of Post Keynesian Economics, forthcoming...

...Equity markets have probably never played as central a role in financing U.S...

...At the cutting edge of manufacturing technology, flexible manufacturing systems use robotics to group together a series of computercontrolled machine tools...

...Interest Rates and U.S...

...economy has become almost self-financing...

...But however it happened, it is an important indicator of the changing relationship between money capital and investment...

...Second, the huge annual flow of money into pension funds and life insurance reserves is almost sufficient to cover the balance of investments that remain...

...This would be a problematic exercise in any event because of the difficulty of comparing the value of different assets over long periods of time...

...This is one of those classic situations in which corporations win both coming and going...

...The price index used for nonresidential construction is particularly inadequate...

...The firm's labor force must be recognized as the major stakeholder that should choose top management and determine overall corporate strategy...

...The problematic nature of the reported depreciation figures means that corporate profits in recent years have been substantially understated...

...Foreign Borrowing It would seem logical that if supplies of capital are so ample in countries such as Japan and the United States, there would be a sharp downward slide in global interest rates...

...The point, however, is not to finance government spending entirely out of taxes because there is also a need for consistent government borrowing on the capital markets...

...This dynamic, along with speculative purchases of stocks and real estate by foreign investors, could explain the coexistence of ample domestic savings and the import of capital from abroad...

...The irrationality of this practice in an era when corporations have been net investors in the stock market seems obvious...

...they put money into the stock market instead of taking it out...

...Domestic economic arrangements are based on two highly problematic assumptions...

...The first is that money capital is scarce so that those who possess it deserve special inducements to invest...

...When banks made huge loans to Third World countries in the 1970s, most of the loans were channeled through governments on the theory that governments were far less likely than private entities to default...

...Second, the data that result from faster depreciation make it look as though corporate profits, net savings, and net investment are anemic, so there is always justification for another round of liberalization to stimulate investment and bolster corporate profits...

...The increased efficiency of these new systems can significantly reduce the total number of machine tools that a firm needs...

...But such an argument confuses accounting conventions with actual economic processes...

...WINTER • 1991 • 57 Contradictions of Capitalist Success These increases in reported depreciation mean that firms have become even more self-financing...

...Yet this change is only vaguely reflected in the official data 56 • DISSENT Contradictions of Capitalist Success because of the inadequacy of the price indexes for plant and equipment...

...In a parallel way, the government must create a financing mechanism that will make possible a dramatic increase in low- and middle-income housing...

...In national income accounting, net investment is assumed to equal net savings, so any increase in net investment will lead to a corresponding increase in net savings...

...This perception is supported by widely reported data on personal savings from the Commerce Department's national Income and Product Accounts (NIPA...

...A balanced budget is to be avoided because that is an indication that the government is failing to draw down the pool of capital available for speculation...

...3 Together, these changes mean that this year's million dollars in capital investment buys equipment that is substantially more effective than the same amount of money purchased five years ago...

...The Commerce Department's national income data are supposed to adjust for these changes in the tax law by using consistent measures of depreciation that are not sensitive to the vagaries of tax law and corporate accounting...

...Decision-making authority on infrastructure projects could remain at the state or local level even when extensive federal financing is provided...

...Capital Saving This change has been facilitated by the widespread introduction of capital-saving technologies— innovations that reduce the real cost of productive investments...

...The idea of depreciation is deceptively simple—in the process of production, some fraction of capital plant and equipment is used up...

...These shifts in the use of savings are reflected in the changing role of the stock market in the economy...

...Moreover, the firm's ability to make money and provide useful goods and services rests on the skills and capacities of its labor force...

...62 • DISSENT...

...The service lives of capital assets—the period that a structure or piece of equipment is presumed to last—have been dramatically shortened...

...But the intensified search for speculative investments by holders of money capital in the developed countries has a number of obvious dangers...

...So long as the economy continually produces new pools of wealth that need to be invested, it is a safe bet that the prices of assets such as real estate and stocks will continually be bid upward...

...Estimates are that computing power has been declining in price by 20 percent a year...

...Above all, the most impor60 • DISSENT Contradictions of Capitalist Success tant public investment is for the creation of an educated and enlightened citizenry...

...It is this same psychology that lies behind the rapid rise in prices for such collectibles as paintings by Old Masters...

...domestic savings are inadequate...

...When ample supplies of savings lead to bidding up the price of real assets such as stocks, real estate, and works of art, then fortunes can be made by buying such assets on margin, and these margin purchases push up the demand for credit...

...The consequence of this procedure is that government statisticians exaggerate the value of the total capital stock and therefore overstate the amount of depreciation in any given year...

...The systematic qualitative changes in capital goods that result from continuous advances in microchip technology present economists with extremely serious methodological problems in generating consistent data, and they have not yet met this challenge...

...At one level, Keynes was clearly wrong—the rentier has not disappeared but has become a larger-than-life figure dictating the fate of millions...

...In 1988, this figure was $224.4 billion—enough to finance 94.8 percent of all net private domestic investment in the United States...

...This change in the stock market's role is an indicator of an economy in which the availability of funds exceeds the productive private investment opportunities that promise a reasonable return...

...But in the 1980s, nonfinancial corporations were net purchasers of corporate equities...

...If, for example, a new model of machine tool is twice as expensive as the old one but four times more effective, the government data will treat the price increase as resulting entirely from inflation...

...Writing off capital expenses in this way artificially reduces the firm's profits and its resulting tax liability...

...Federal Reserve Bank of Minneapolis Quarterly Review (Spring 1989), pp...

...These examples begin to suggest the outlines of what an enlightened government policy would be in an economy with ample savings...

...The problem quite simply is that these economies, even with ample supplies of cheap labor, cannot guarantee the rates of return that investors expect...

...Because the private economy is unable to find enough productive ways to use capital, the government is obligated to reduce speculative activity by absorbing a larger share of idle capital...

...The 1987 stock market crash provided ample warning of the fragility of a financial system where stock prices are far more dependent on investor psychology than on actual returns...

...Instead of borrowing to finance new investments, firms have gained increased freedom to finance new investment out of revenues...

...Increased spending on research can be organized through a decentralized granting procedure...

...This remarkable reversal occurred through leveraged buyouts, corporate takeovers, repurchases of shares, and straight investments...

...This can be done through increased income taxes on highincome families—a measure that could easily be coupled with tax relief for low- and moderate-income families...

...It is this rule that makes it possible for any Bozo willing to offer a few dollars more a share to take over a major corporation...

...depreciation techniques, there are some years in which the U.S...

...5. Without this adjustment for replacement cost, the increasing rates of depreciation relative to gross investment largely disappear...

...In 1987, corporate profits would have been 22.7 percent higher if the replacement cost depreciation adjustment had been dropped...

...There is, however, an alternative estimate of personal savings developed by the Federal Reserve Board...

...it is not difficult to imagine its working more efficiently than the junk-bond market...