Long Waves of capitalist

Long Waves of Capitalist Development and the Future of Capitalism

[Published in: Political Economy and Contemporary Capitalism: Radical Perspectives on Economic Theory and Policy, edited by Ron Baiman, Heather Boushey, and Dawn Saunders (NY: M. E. Sharpe, 2000): 78-88.]

Judgment on the future of capitalism has almost always been controversial, and the controversy has usually generated two polar views: first, the almost fetishistic view that capitalism is eternal; and second, the deterministic view that capitalism will somehow collapse of its own accord. We will argue in this study that both views are analytically wrong–as well as non-operative for any policy determination–and that the question of the future of capitalism ultimately boils down to the balance of social forces and the outcome of class struggle.

A judgment on the future of capitalism, of course, requires an understanding of how it works. A basic property of capitalist development is that it grows in erratic and contradictory ways: as it expands it also creates conditions for contraction. It is during long periods of contraction that the system becomes vulnerable, and its future uncertain. During such periods, business and government leaders dispel all pretensions of deferring the economic affairs to Adam Smith’s “invisible hand” and rush to the rescue of the system with all kinds of crisis-management, or restructuring, schemes. The future of the capitalist system is integrally intertwined with its ability to manage such crises. An understanding of the theory and experience of the “long waves” of capitalist development is, therefore, crucial to our discussion of the future of capitalism.


1. Theoretical Framework: the Marxian Profit-Rate Theory of the Long Waves

Alternating periods of boom and bust are rather well established in the history of advanced capitalist economies. Economists make a distinction between the “usual” business cycles, ranging from few to several years, and the longer cycles of few or several decades known as long waves or “Kondratieffs.”

While mainstream economists focus primarily on short-term fluctuations, heterodox economists provide a number of theories of the long waves of capitalist development. Three of the most well-known of these theories are: (a) innovation- or technologically-determined theory, associated with the names of Nikolai Kondratieff and Joseph Schumpeter; (b) the “social structure of accumulation” (SSA) theory, expounded by David Gordon and his various co-authors, and (c) the Marxian profit-rate theory, associated largely with the names of Leon Trotsky and Ernest Mandel.

The innovation theory maintains that long waves of expansion result from clusters of innovations in particular industries or sectors. Depressed economic conditions trigger such clusters of major innovations, first, in a new “leading” sector that grows rapidly and, then, through diffusion and linkages drives a general economic upswing. In the early stages of the expansion, there will be high rates of follow-through product and process innovation in the leading sectors, which will result in high rates of profit and accelerated growth. As the process thus set in motion gradually moves toward market saturation in new lines of business and tight labor markets and rising wages, it will also lead to a slow down in new innovations and in the rate of follow-through product and process improvements. This will eventually weaken, if not put in reverse, the innovation multiplier (a’ la Keynes), thereby ushering in a new wave of economic stagnation.

The SSA approach places the primary emphasis on institutions: a set of institutional arrangements that “alternately stimulates and constrains the pace of capital accumulation. If constituent institutions of the SSA are stable, working smoothly and without challenge, capitalists are likely to feel secure about investing in the expansion of productive capacity.” This will then foster a long-wave of upswing. “But if the SSA begins to become shaky, if class conflict or past capitalist accumulation have pressed the institutions to their limits and they begin to lose their legitimacy,” then investment and accumulation will slow down, ushering in a long period of stagnation. Eventually, a new SSA is “constructed” in order to bring about a new expansion, and the process begins again (Gordon et al. 1994, pp. 15-16).

In the Marxian profit-rate theory there is a tight relationship between the movements of the long-term average rate of profit and the general, economy-wide long wave developments. Indeed, “a Marxist long wave theory,” as Mandel points out, “is in the last analysis a theory of long waves in the average rate of profit.” According to this theory, while the turn or transition from periods of expansion to periods of stagnation can be explained by the inner laws of the accumulation of capital (specifically, by the Marxian law of the tendency of the rate of profit to fall), the reverse is not true. That is, the turn from long periods of stagnation to those of expansion cannot be explained by “purely endogenous” factors: “exogenous” or “extraeconomic” factors are required to bring about such upward transitions. These extraeconomic factors include not only domestic policies of restructuring, but also external factors and foreign policy measures that are designed to capture new markets and enhance profitability on a global level. They are, in essence, economic, legal, political, institutional and, at times, military instruments of class struggle that are employed by business and government leaders in pursuit of profitability (Mandel 1980, pp. 20-22 & 51-52).

The asymmetry of up- and down-turns in Mandel’s theory stands in sharp contrast to the SSA theory’s symmetric account of such turns, according to which, long waves of capitalist development are just as able to endogenously move from down- to up-swings as they are from up- to down-swings (Gordon 1978, p. 28,).

How does this SSA view stand in light of experience? Not very strongly. It finds relevance primarily in the social structure of accumulation and the restructuring policies that were developed in response to the Great Depression of the 1930s, and in the subsequent social and economic developments leading up to the late 1970. But this is not quite fortuitous, as the SSA theory seems to have been both prompted by and largely based on those restructuring experiences, the subsequent post-war expansion, and the decline of that expansion in the 1970. Not surprising, then, the SSA approach finds only limited relevance to the restructuring policies of other major economic crises. Both the restructuring policies in response to the crisis of the 1890s as well as those in response to the crisis of the 1970s were crafted and implemented unilaterally by the business and government leaders, rather than being somehow mapped out by a collective or pluralistic social structure of accumulation, as claimed in the SSA theory. To the extent that this theory finds relevance to the depression of the 1930s, it is limited primarily to the US case: it cannot explain why it was the case that, for example, that same depression that in the US led to F.D.R.’s New Deal coalition in Europe and elsewhere led to fascism and war.

Mandel’s theory of exogenous “extraeconomic” factors, by contrast, seems to better explain such unpredictable outcomes of the interplay of social forces in the course of long periods of crises. For, according to this theory, the outcome of crisis-management strategies, of institutional overhauls, and of class struggles are not “pre-determined by the process of capital accumulation and labor organization in the previous period,” that is, by “the previous social structure of accumulation,” as argued by the SSA theorists (Mandel 1980, pp. 52-53). In other words, socio-political and institutional changes in response to long periods of crises, at times, develop in relatively autonomous, random, and uncontrollable ways which could then place the capitalist system at fateful cross-roads, including the road to socialism and the road to war and fascism.

This perspective of long waves will, therefore, serve as the theoretical framework of our study as it integrally ties together the major tendencies of technical change, profit rate, capital accumulation, and class struggle under capitalism.


2. Major Crises of the US Economy and the “Extraeconomic” Measures Adopted to Overcome Them

2.1. The Challenge of the First Great Depression (1873-97)

The long economic hardship that began in the early 1870s and lasted through the late 1890s was bound to create social tension. The resulting protest reactions occurred both among the working class and urban poor as well as the farming population. While labor protests were largely sporadic, they were nonetheless threatening to capitalist interests as they were at times very radical. Militant labor responses included the Knights of Labor movement, miners’ protests against their working conditions in both the northern and southern coal fields, dock workers’ massive strikes in New Orleans, and steel workers’ fight against the Carnegie lockout at Homestead, Pennsylvania. The Pullman strike led to the “dramatic confrontation between Eugene Deb’s American Railway Union and federal troops; roughly fourteen thousand police, militia, and troops were called upon to crush the strike, with hundreds arrested and at least thirty killed.” (Bowles/Gordon/Weisskopf 1990, pp. 20-21).

The farmers’ protest activities developed into a more systematic and well-organized movement as it constituted the backbone of the Populist movement and the People’s party. The National Farmers Alliance grew in membership to hundreds of thousands by the early 1880s. Alliance members focused primarily on agrarian populist demands such as easy money, public control of the banks, and public ownership and control of the railroads and telegraph lines. But while the primary concerns of individual members or chapters were immediate economic demands, the Populists’ overall or national concerns–as reflected in the policies of the People’s party–went beyond their own narrow economic interests; they also “demanded a graduated income tax, restraints on monopoly, education, the direct election of senators, … and the referendum” (McConnell 1959, p. 5).

The elections of 1892, which showed considerable support for the People’s party candidates among the farming and laboring population, boded ill for the interests of big business and industrial giants. The pillars of the US capitalism felt threatened:

Business interests rallied as if in a fire emergency. They concluded that agrarian and urban interests must be split….Beginning with the congressional elections of 1894, the wealthy mobilized their support behind the Republican party…. They concentrated on building an electoral alliance with industrial wage earners, seeking to forestall their potential coalition with populist farmers in the West…. The strategy worked. While the Democrats carried the states where the People’s party had scored most substantially in 1892, McKinley [the Republican candidate] won the election on the strength of his margins in the industrial states….The populists lost, soon to disappear from the political arena, and a new and powerful electoral coalition guided by big business had triumphed. (Bowles/Gordon/Weisskopf 1990, 21-2; Hays 1957, 46).

Building on this newly gained political strength, big business moved swiftly on several fronts to implement further political and institutional changes in order to bring about economic recovery. On the labor front, they combined ruse with sheer force: on the one hand, they promised tariffs to protect “American jobs”; on the other, they called out federal troops and private militias to crush unions. Simultaneously, business and government leaders sought to end the so-called “cut-throat” competition of the 19th century by removing political, legal, and institutional barriers from the way of industrial and business combinations and consolidations. This paved the way for the gigantic wave of mergers and takeovers around the turn of the century (Bowles/Gordon/Weisscopf 1990, p. 22).

Another factor that helped end the long wave of economic depression was the new and growing world market for US exports. Rapidly catching up with the European economic and/or colonial powers, US industrial giants began making headway into international markets around the turn of the century. The government actively supported the aims of businesses wishing to establish foreign ventures and compete internationally. Teddy Roosevelt’s blunt statement that “I should welcome almost any war, for I think this country needs one,” succinctly captures the mood of this time and the need of big business in the US for the expansion of foreign markets (Zinn 1980, p. 290).

Extensive economic, political, and institutional restructuring (including suppression of labor and trade union movement, fostering of big business and concentrated industries, and corporate welfare plans), combined with the opening of markets abroad, helped to end the protracted economic crisis that had begun in the early 1870s and to usher in a new long wave of economic expansion that lasted until the late 1920s.


2.2. The Challenge of the Second Great Depression (1929-37)

The economic crash of 1929 and the ensuing long depression resulted from a complex set of factors. A discussion of those factors is beyond the scope and the focus of this study. Whatever its causes, the fact is that the depression made living conditions for the overwhelming majority of people extremely difficult.

Once again, as during the great depression of 1873-97, economic distress precipitated popular unrest. Large numbers of the discontented frequently took to the streets in the early 1930s. Their desire for change swelled the ranks of socialist, communist, and other opposition parties and groups. Left activists gained certain influence among labor ranks, and workers movement for unionization, illegal in many industries until 1935, spread rapidly. “The union literature was like the labor literature of a century ago–looking toward a successor to capitalism….” (Terkel 1970, p. 309).

Labor and other grassroots support for third party candidates in the 1932 presidential election resulted in unprecedented number of votes for those candidates. Third-party votes were even more impressive in congressional and local elections (Piven & Cloward 1977; Terkel 1970).

Business and government leaders clearly understood the gravity of the situation and the need for reform to fend off revolution: “…F.D.R. was very significant in understanding how best to lead this sort of situation….The industrialists who had some understanding recognized this right away. He could not have done what he did without the support of important elements of the wealthy class” (Terkel 1970, pp. 268-69).

The core principle of the ensuing big business-government consensus, known as the New Deal, was that government intervention must be limited to stimulative and distributive measures. While this would provide relief to the economically hard pressed, and thus reduce social tension, it would also stimulate the economy and promise stable growth and rising profitability.

The New Deal stimulus package of government spending was further strengthened by the huge expenditures of World War II. Those expenditures not only served to expand the domestic market, they also paved the way for the US dominance of world markets. A number of other “extraeconomic” factors also contributed to the post-War recovery: bureaucratic, pliant labor leadership and peaceful trade unionism; further penetration into and expansion of world markets by the US transnational corporations; establishment of the Bretton Woods System and restoration of international trade and finance; increased investment in the armaments sector, with state-guaranteed profits; Cold War ideology and the suppression or pacification of any possible dissent; relative decline in the price of oil and other raw materials, especially after 1950; and so on (Mandel 1980, pp. 23-24; Kotz et al. 1994, pp. 68-69).

Thus, a combination of extensive economic and extraeconomc factors, initiated and implemented by the business and government leaders, helped, once again, to turn a long wave of economic depression into a long wave of economic expansion. And while the crisis-resolution tactics of the 1930s were quite different from those of the 1890s, the end result was the same: rescue of the capitalist system and restoration of the political and economic power of the capitalist class.


2.3. The Challenge of the Latest Long Wave of Economic Crisis (1973-82)

In his Long Waves of Capitalist Development (1980), Ernest Mandel argued that the reversal of the protracted economic crisis that had begun in the early 1970s depended on: (a) “shattering defeats for the working class” in key industrialized countries; (b) “radical rather than marginal changes in…some key areas of the so-called third world into large markets for capitalist commodities”; and (c) “the possibility of huge expansion of markets in the postcapitalist [Soviet-bloc] countries.” In short, Mandel arued that such a reversal “depended on the outcome of momentous battles between capital and labor….”(pp. 113-19).

With varying degrees, almost all of these conditions for a long term economic upturn have since been materialized. To begin with, the opening of the Chinese and the formerly Soviet-bloc markets to Western products and capital is offering tremendous opportunities to global business and international capital–the current economic chaos in the so-called emerging markets notwithstanding.

Secondly, the third world of today is much different from that of 20 or even 15 years ago: it is considerably more open to doing business with corporations from the “North” and the “West” than it was in the past. Many of the Third World nationalist leaders who shunned Western capital and advocated policies of import substitution and economic planning have been replaced by conforming pro-market leaders who are eager to import foreign capital.

Thirdly, the corporate offensive against labor since the mid-1970s also proved quite successful in reducing labor costs for businesses. The anti-labor collaboration between the business and government leaders in the United States resulted in (a) a cut in real wages and benefits of about 12-20 percent between the mid-1970s and the mid-1990s; (b) an easier dismissal of union workers and an equally easier hiring of the so-called contingency ones; and (c) a further mobility of capital throughout the world (Schor 1991; Yates 1994).

Additional “restructuring” measures to reverse the economic slowdown of the 1970s included a systematic curtailment of the so-called social “safety net” of unemployment compensation, public education and public health benefits, housing subsidies, food stamps, and the like. Deregulation of business and relaxation of anti-trust laws have also been vigourosly pusued. Most importantly, the tax overhauls since the early 1980s in favor of the wealthy have made income distribution increasingly more lopsided.

The combined business-government efforts to revive corporate profitability seem to have had most of their desired effects: labor costs in real terms fell (on average) by about 16% between 1975 and 1995, and the long declines of the 1970s in productivity, profitability, and investment have all been turned into long expansions. After almost a decade of aggressive policies of economic restructuring, most US corporations regained their international competitive edge by the late 1980s. Evidence shows that manufacturers’ gain in productivity, combined with flat or falling real wages (certainly until 1995-96), has resulted in a considerable rise in total profitability since the early 1990s.

Financed by strong profits, investment spending has also been on the rise since the early 1990s. While in the first few years of expansion most of the investment spending was in the form of increased capital intensity of production in existing operations, in recent years manufacturers have begun to put new capacity in place. Since 1995, overall business spending on new equipment has risen to about 8% of national output annually, a very high rate of capacity building. The rate of increase of business spending in computers and/or information technology during this period has been twice the rate of other capital goods. Capital spending in the fourth quarter of 1998, for example, rose an “astounding” 21%, which lifted the overall capital spending for the year up to the “spectacular” 17.5% increase, way above the 11% average annual growth rate for the 1990s. For high tech industries these rates were 32% in 1998 and 19% annual average since 1991. These high rates of investment since the early 1990s have raised the long-term productivity growth rate to 2% or more which, while not quite as high as those of the mid-1960s, is double the rate in the 1970s and 1980s (Business Week, February 15, 1999, pp. 30-31).

Now, impressive as this investment boom is it does not tell us much about how long the current expansion might continue. In fact, the investment boom signifies a mixed message: at the same time that it enhances productivity and economizes on labor costs it also increases capital-labor ratio, or the organic composition of capital a’ la Marx, which tends to lower the rate of profit. The presence of a number of strong counteracting tendencies, however, indicates that the expansion may not come to an end any time soon. What are such counteracting factors?

To begin with, it is highly likely that, due to the now pervasive use of information technology throughout the economy, the recently heightened productivity will continue for some time. Secondly, because these days economic growth in the US is being driven largely by high tech, information-related technology where prices are falling, capital-labor ratio will not grow as fast as in the days when the driving force of economic growth were steel, railroads, or automobiles. The declining price of the leading technology of growth will serve as a countervailing force in the way of rising organic composition of capital, thereby propping up profits for a longer period of time. Thirdly, the drastically expanded global markets, coupled with the computer technology and the aggressive global economic policies of neoliberalism, means that the US big business now can produce and sell anywhere, as well as source from anywhere. The heightened competitive pressure on an international level means that both prices, especially of primary products, and wages can be kept under control for a longer period than in the past expansions.

Despite the presence of these strong counterbalancing tendencies, vis-à-vis the tendency of the rate of profit to fall, it is not possible to predict how long the current expansion of the US economy will continue. One thing is clear, however: the combined economic and extraeconomic measure that the business and government leaders employed in response to the stagnation of the 1970 have succeeded in turning that long declining cycle into a long expansive one.

3. Lessons and Implications for Social Change

Both in the 1890s and 1980s, the reversal of long economic downturns were brought about as a result of, among other reasons, huge transfers of income from labor to capital. In the 1930s, by contrast, workers and other popular forces achieved employment and income security as a result of a sustained pressure from “below.” The contrast between these two entirely different types of restructuring strategies shows how resourceful the business and government leaders can be in employing all kinds of instruments of class struggle–at times, even diametrically-opposed instruments–in order to restore capitalist profitability, accumulation, and expansion.

What are the implications of this for the future of capitalism? Does it mean that the reign of capitalism has thus become permanent, and that we have reached “the end of history”?

Not necessarily. It simply means that the capitalist system is much more resilient than many of its radical opponents–especially proponents of the so-called theory of “automatic collapse”–imagine; and that the course of the apparently automatic alternation of periods of economic expansion and contraction is dialectically intertwined with that of social developments and class struggle. It signifies capitalism’s ability to restructure the conditions for profitability and reproduction as long as the costly consequences of such restructuring policies in terms of job losses, economic insecurity, and environmental degradation are tolerated. More specifically, as long as the working class keeps producing according the desires and designs of the capitalist system, the reign of capital will continue. No other social class or stratum, no matter how militant or numerous, has the unique or strategic position and capability to bring the capitalist production to a standstill–and the capitalist system to an end. Only the working class can play such a role. When the workers will gain the necessary consciousness and determination to actually appropriate and utilize the existing technology for a better organization and management of the world economy in the interests of the majority of world citizens no one can tell. One things is certain, however: to play such a role, the working class needs entirely new visions and new politics. The new labor politics will need to (a) go beyond trade unionism, (b) go beyond national borders, (c) build independent labor organizations, and (d) operate through coalitions and alliances with non-labor grassroots opposition groups.

Many people would view these ideas and projections as unrealistic. What they probably mean by this is that these proposals cannot be realized under the present socio-economic and political structure. And they are right. But, as this social structure is reorganized, many of the currently “impossible” alternatives will become possible. There is definitely no dearth of material resources for this purpose, certainly not in the US and other industrialized countries. What is lacking is the political will and/or capacity to reorient the society’s priorities and reallocate its resources. The realizability of these proposals (and the fate of capitalism), ultimately, comes down to the relationship of social forces and the balance of class struggle.


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