Over the past twenty-five years, UCLA economic historian Robert Brenner, a longtime contributor to the New Left Review, has developed an increasingly influential theory of what he calls “the long downturn” — the global economic slowdown that began in 1973 with the passing of the postwar boom.
In Brenner’s account, for a half century the world economy has stagnated under the weight of a long crisis of profitability caused by chronic overcapacity in global manufacturing — a problem that first made itself felt with the postwar reentry of German and Japanese firms into already-saturated export markets, but which has only gotten worse with time.
For Brenner, chronic overcapacity is the symptom of a flaw in the economic mechanism of capitalism, arising from the unplanned anarchy of market production: firms in overcrowded industries, saddled with sunk costs in the form of fixed capital, lack the incentive to withdraw from unprofitable lines of business, resulting in intractable pileups of excess capacity that breed cutthroat competition, sinking profit rates, and, ultimately, stagnation.
The politics of the Brenner thesis might not be obvious to the naked eye, but we got a glimpse of it earlier this year via a commentary by the Berkeley sociologist Dylan Riley, a sometime coauthor of Brenner’s, criticizing certain socialists for what Riley thought were their overly indulgent evaluations of the Biden administration’s industrial policies.
Whatever the merits of his case, what was notable about Riley’s article was the use he was able to make of Brenner’s economic framework in service of a political argument: Bidenomics, he believes, will result in “a massive exacerbation of the problems of overcapacity on a world scale,” and this fact, in his judgment, exposes “neo- Kautskyite” socialists as lacking a “credible answer to the structural logic of capital.”
Crisis in Theory
Some readers might still be puzzled about what the connection is, exactly. Why should the prospect of, say, overcapacity in the global solar panel industry exert any influence one way or the other on how socialists judge something like the Inflation Reduction Act? As Eric Levitz of New York Magazine pointed out, a “global glut of low-carbon technology” is hard to see as a nightmare scenario, to put it mildly.
But what might seem like a non sequitur becomes less mysterious once you’ve grasped the political subtext underlying Brenner’s theory of the long downturn.
A few years before he debuted his thesis in a 1998 issue of the New Left Review, Brenner delivered a talk to fellow members of the socialist group Solidarity on the problem of how revolutionaries should relate to social democrats. (The talk was published under the title “The Problem of Reformism.”)
The question was pressing because reformism, as he explained it, was “our main political competitor,” and “the inescapable fact is that, if we want to attract people to a revolutionary-socialist banner and away from reformism, it will not generally be through outbidding reformists in terms of program. It will be through our theory — our understanding of the world.”
What distinguishes reformism from revolutionary socialism is not its support for reforms; revolutionaries seek reforms, too. In fact, “as socialists, we see the fight for reforms as our main business.” The real basis of the division lies instead in the reformists’ personal material interests, as well as their theory of capitalism.
The social basis of reformism, Brenner explained, lay in the ranks of the trade union bureaucracies and social democratic party apparatuses. Since their organizational interests were unavoidably threatened by outbreaks of unabashed class struggle, reformists always opposed militant movements from below. They urged workers to confine their actions to voting for social democrats on election day and backing official trade union actions on the job. Reformists, in other words, want workers to place their fate in the hands of reformists.
That was why they were always claiming that “state intervention can enable capitalism to achieve long-term stability and growth”; that the working class can “use” the state to pursue those objectives “in its own interests.” Reformists have to maintain these positions because without promises like these, given their opposition to class struggle, reformism and its organizations would have nothing to offer the working class at all.
By the same token, the praxis of revolutionaries must stay closely connected to their theory of economic crisis. Revolutionary socialists must always emphasize that “crises arise from capitalism’s inherently anarchic nature,” and that because of the system’s “unplanned” character, “governments cannot prevent crises.” Only then could they make the case to workers that reformism cannot and will not work, regardless of the alleged good intentions of the reformers.
This, according to Brenner, was why, “for revolutionaries, so much is riding on their contention that extended periods of crisis are built into capitalism.”
Brenner was hardly the first to elevate crisis theory to so central a role in socialist political practice. The connection has been a staple of Marxism ever since the outbreak of the great revisionist controversy in the 1890s. When Eduard Bernstein, the protégé-turned-apostate of Marx and Engels, called on social democracy to embrace a reformist route to socialism, he put the issue of capitalist crisis at the heart of his case: crises were becoming less frequent and, above all, less apocalyptic as capitalism matured, Bernstein argued. With the scenario of total breakdown seeming increasingly remote, the revolutionary option was robbed of both its plausibility and its justification.
Bernstein’s salvo forced the defenders of Marxist orthodoxy, in its various shades, to sharpen their own theoretical arguments, and by the 1920s there were two identifiable poles of analysis in Marxist crisis theory: Rosa Luxemburg’s “underconsumptionist” view, which stressed the inadequacy of working-class purchasing power as the main source of the system’s crisis tendencies; and the German social democrat Rudolf Hilferding’s “disproportionality” theory, which traced the root of crises to the recurrence of accidental mismatches between the outputs of the different branches of industry — a hazard arising from the “blind,” unplanned nature of capitalist investment.
When looking back at these debates, what comes into view is the perennial reflex, among Marxists of a certain mindset, to judge theories of crisis according to a criterion of nonreformability: the source of crisis must be something that can be plausibly depicted as ineradicable without some unspecified revolutionary supersession of the existing mode of production.
Now, there are sensible reasons to expect economic crises under capitalism to arise from forces that reflect the vested interests of capitalists themselves in one way or another — in which case, attacking the roots of crisis requires attacking capitalist interests. But actual nonreformability turns out to be a maddeningly mobile target.
Take, as an example, Hilferding’s crisis theory, which attributed economic turbulence to “disproportions” in the pattern of capitalist investment, arising from the system’s “anarchic” and “unplanned” development.
Like Brenner today, Hilferding — the leading economic expert of the interwar German Social Democratic Party — held that only planning could solve the problem of disproportions. He pointed to the growth of private industry cartels since the late nineteenth century: these were proof that capitalists themselves had been forced to accept the logic of planning to stabilize increasingly chaotic markets.
However, cartels were ineffective in the final analysis: as long as they remained purely private, voluntary initiatives, they were unable to bring order to their industries because they could not effectively discipline their members. To stabilize the economy in a lasting way, comprehensive planning would have to be undertaken by the state.
From today’s vantage point, Hilferding’s crisis mechanism might seem soundly reform-proof: after all, the planning of prices and production is nowadays assumed to be too strong a medicine for capitalism to swallow.
But in the 1930s, Hilferding was roundly attacked by socialists to his left for what they saw as the reformist implications of his theory. For in the ’30s, “planning” was seen by many on the Left as the ruling class’s preferred path to economic stabilization, the route to recovery that posed the smallest threat to the status quo.
Recall the history of the Roosevelt years: the “First New Deal” of 1933–35, centered on the National Industrial Recovery Act — with its compulsory cartelization of the private economy and imposition of mandatory price floors and output quotas — was the “conservative” phase. The “Second New Deal” that began in 1935 — with its welfare state measures, jobs programs, and union-friendly labor laws — was the “radical” phase.
The same pattern held throughout Europe, where the right wing of the socialist and labor movements embraced the New Deal-ish “planisme” advocated by the Belgian Labor Party and its theorist Hendrik De Man. Left-wing socialists and communists denounced the allegedly fascist undertones of planism and espoused neo-Luxemburgist doctrines of underconsumption. For them, taming the anarchy of production seemed potentially achievable under capitalism. What seemed unthinkable was a drastic redistribution of wealth.
But just a few years later the wheel would turn once again, as a combination of war and pressures from below forced the capitalist world to accept redistributionism on a scale that had once seemed inconceivable. The consequences were, so to speak, revolutionary. In Britain, the share of national income going to the bottom 50 percent, which had been less than half the share of the top 1 percent in 1910, ballooned to more than double its level by 1950.
So it was only a matter of time before underconsumptionism, once regarded as the radical doctrine of Red Rosa, came to be seen as the ruling-class palliative of John Maynard Keynes — sending crisis theorists off once again in search of browner pastures.
The Rise of the Falling Profit Rate
In the 1970s, a very different kind of crisis descended on the capitalist world. This time, there was no question of attributing the problem to a shortage of mass purchasing power: the late 1960s and early 1970s had witnessed a “wage explosion” throughout the industrialized countries amid full employment, tight labor markets, and a wave of heightened working-class militancy.
Accordingly, a so-called profit-squeeze account of the crisis — whose locus classicus was Andrew Glyn and Bob Sutcliffe’s massively influential British Capitalism, Workers and the Profits Squeeze — immediately gained adherents among Marxist and Marx-adjacent scholars in the English-speaking world. (The profit-squeeze theory is sometimes called the “wage-squeeze” theory; the idea, in either case, is that profits were being squeezed by wages.)
The profit-squeeze theory painted the turmoil of the 1970s as a sort of mirror image of the 1930s Depression: just as the earlier calamity had been exacerbated by wages that were too low, sapping aggregate demand, now working-class militancy had pushed wages up too high, eroding the profit rate and bringing investment to a halt.
Initially this account held attractions across the Marxist spectrum. All sides could agree that profit rates had, in fact, declined as wages had surged. And for a fair number of radicals, the theory could be seen as vindication for the kind of militant “transitional” strategy long espoused by Trotskyists: demanding “reforms” calculated to be impossible for capitalism to deliver. Revolutionaries in the trade unions, the thinking went, had helped spur the working class to greater heights of militancy, and the resulting wage demands had now produced a full-blown crisis of capitalism to which ruling-class Keynesians had no response.
However, once it became clear that the 1970s crisis was not leading to revolution, the profit-squeeze account came to be seen in the opposite light: as giving ideological sanction to schemes of wage moderation — “incomes policies” — long advocated on anti-inflation grounds by Keynesian experts in social democratic parties.
In the radicals’ view, the Svengalis of incomes policy and their political masters in the cabinet offices found it all too easy to muster willing recruits for wage moderation in the trade union bureaucracies — whose leaders, in turn, were all too eager to offer their services to anxious social democratic politicians hoping to “manage” the crisis in the interests of crass electoralism.
In 1969, a book called Marx and Keynes: The Limits of the Mixed Economy was published by Paul Mattick, a German council communist and self-taught adept of Marxian political economy who had settled in the United States in the 1920s to become a tireless — and, for decades, generally ignored — evangelist for the ideas of the largely forgotten Polish theoretician Henryk Grossmann, whose 1929 opus The Law of Accumulation and Breakdown of the Capitalist System was notable for being one of the few substantial works of pre-1970s Marxist writing to ground its theory of crisis firmly in Marx’s famous “Law of the Tendency of the Profit Rate to Fall.”
“It is my contention,” Mattick wrote with apparently remarkable prescience in his book’s introduction, “that the Keynesian solution to the economic problems that beset the capitalist world can be of only temporary avail, and that the conditions under which it can be effective are in the process of dissolution. For this reason the Marxian critique of political economy, far from having lost its pertinency, gains new relevance through its ability to comprehend and transcend both the ‘old’ and the ‘new’ economics.”
When these prognostications seemed to come true a few years later, an exhilarated cohort of youthful New Left Marxists, in quest of a new reform-proof crisis theory, embraced Mattick as their lodestar and dusted off Marx’s falling rate of profit (FROP) conjecture. One of them, David Yaffe, who prominently championed the FROP throughout the 1970s, stated the case squarely in a critical review of the Glyn/Sutcliffe book that appeared in the New Left Review in 1973.
“The crisis of profitability,” Yaffe wrote, “far from being caused by large wage increases, results from the contradictions of capitalist production itself which has its expression in the tendency of the rate of profit to fall.” Taking the wage-squeeze theorists to task for their apostasy, he explained their error in terms almost identical to those of Brenner discussing the problem of reformism two decades later:
If the capitalist mode of production can ensure, with or without government intervention, continued growth and full employment, then the most objective argument in support of the revolutionary socialist position breaks down. The reformist perspective then becomes a reasonable one.
Thus, over the course of the 1970s, by a process of ideological self-selection, the FROP came to be, as the late Simon Clarke put it in his study of Marxist crisis theory, “associated politically with a sectarian millenarianism” that was becoming increasingly conspicuous in certain ultramontane sectors of the shrinking post-’60s Marxist left.
In an exasperated counterblast published in 1973, Paul Sweezy decried “an interpretation of Marx’s theory of capital accumulation which appears to be shared, with variations, by a growing number” of Marxist economists, a group for whom Sweezy personally had become “a favorite target.” This school of thought — of which “Paul Mattick perhaps deserves to be called the dean” — was characterized by a “fetishization of the falling tendency of the rate of profit” and a general approach to Marxism that had “degenerated into a sterile orthodoxy.”
With the Mattick-ites charging their Marxist opponents with heresy and their opponents tarring the Mattick-ites as fundamentalists, it’s easy to see how the FROP could come to be perceived, by Marxists and non-Marxists alike, as, for better or worse, the purest standard of Marxian orthodoxy. To this day, in fact, it’s widely assumed that the FROP has always been the orthodox Marxist theory of crisis.
But the truth is almost the opposite: in the eight decades between Friedrich Engels’s death and the OPEC oil shocks, the FROP played almost no role in the various crisis theories of most leading Marxist authorities. Rosa Luxemburg was famously contemptuous of the idea. Karl Kautsky mentioned it as a factor tending to promote the centralization of capital, but not as an important cause of crisis. The relevant chapter of Sweezy’s hugely influential 1942 textbook of Marxian economics, The Theory of Capitalist Development, noted that the law “has been the object of numerous criticisms from both followers and opponents” of Marx, and devoted a whole section to “A Critique of the Law.” Ernest Mandel in his 1967 Introduction to Marxist Economic Theory included a dutiful five-page section on the law and then studiously ignored it for the rest of the book.
There’s even good reason to doubt Marx’s own commitment to the idea. Clearly the FROP was a theory Marx wanted to believe was true. Just as physicists and mathematicians have been known to hope that an especially elegant theory or theorem will end up being confirmed by a future proof or experiment, Marx wanted to find a way to make the FROP work because, within the context of his theory, it led, as Duncan Foley put it in his 1986 Marxian economics textbook, to “a beautiful dialectical denouement.”
But Marx was a scrupulous scholar, and every time he tried to work out the details of the concept in his notes and drafts of the 1850s and 1860s, he found himself — as the German Marxologist Michael Heinrich has shown — lost in a maze of algebra that could only prove that a falling profit rate was a possibility, not a necessary outcome of capitalist development.
The Law of the Tendency of the Rate of Profit to Fall entered the corpus of Marxian thought thanks to Engels’s incorporation of some of these materials in the posthumously published third volume of Capital. But, as Sweezy noted in 1942, Marx’s analysis in that section was “neither systematic nor exhaustive” and “like so much else in Volume III it was left in an unfinished state.”
How central, then, was the FROP to Marx’s view of capitalism? In Marx’s Theory of Crisis, Clarke made a compelling case: “Perhaps the best indication of the importance that Marx attached to the law of the tendency of the rate of profit to fall is that he did not mention it in any of the works published in his lifetime, nor did he give it any further consideration in the twenty years of his life that followed the writing of the manuscript on which Volume Three of Capital is based.”
In other words, exactly a century before Mattick’s youthful disciples excitedly rediscovered the FROP, Marx had definitively lost interest in it.
In the decades after 1973, Marxism as a political force suffered punishing defeats. But at the level of scholarship, it enjoyed a remarkable renaissance. Marxist economics in particular saw a tremendous increase in its level of theoretical sophistication and technical competence thanks to a generation of radicals who had joined the academy during the Vietnam War era.
One of the leading lights of that cohort was Anwar Shaikh of the New School for Social Research, who emerged over the course of the 1970s and 1980s as the preeminent scholarly proponent of the FROP and the broader approach to Marxism with which it is associated: “classical Marxism,” in Shaikh’s terminology; “fundamentalist Marxism” (or, more politely, “orthodox Marxism”) in the mouths of its detractors.
But however orthodox, Shaikh is a scholar’s scholar, not a blinkered doctrinaire. His 2016 summum opus, Capitalism: Competition, Conflict, Crisis — a 1,026-page treatise presenting the fruits of his four-decade-long research program — is a work of remarkable erudition, notable for its consistent conceptual clarity, careful attention to empirical evidence, and refusal to settle for hand-waving or appeals to authority. Shaikh’s book does for Marxian political economy what Paul Samuelson’s 1947 Foundations of Economic Analysis did for neoclassical economics: setting it on a firm theoretical foundation informed by the most rigorous modern methods. And among the many topics it addresses is Shaikh’s version — Shaikh would say Marx’s version — of the theory of the falling profit rate.
Thus, by the time Robert Brenner presented his alternative falling-profit-rate theory, the falling-profit-rate theory — the classical FROP of the third volume of Capital — had acquired an odd status within Marxism. It had never been especially popular with the leading Marxist authorities, and was now in especially bad odor thanks in part to the strident dogmatism of some of its noisiest champions. And yet, it had quietly benefited from two decades of careful and intelligent reconstruction at the hands of Shaikh and a few other serious scholars, including Duncan Foley and the French researchers Gérard Duménil and Dominique Lévy.
Because of the classical FROP’s perceived canonical status, and because it, as much as Brenner’s version, has always been intended to serve as a “reform-proof” theory of crisis, the two theories deserve to be assessed side-by-side.
Shaikh vs Okishio
The profit rate is the rate of return capitalists earn on their investments in physical capital: machines, buildings, raw materials, etc. The arithmetic is the same as with any other kind of investment: Just as a savings account offering 5 percent interest pays annual interest of $5 per $100 on deposit, a profit rate of 5 percent means the average capitalist earns $5 of profit per $100 invested in physical capital. (Note that this means that for any level of profit, a bigger capital stock implies a lower profit rate.)
The point of departure for the classical Marxian falling-profit-rate theory is the centrality of laborsaving mechanization to economic growth. Long-run growth requires rising labor productivity — more and more output per worker — and to get rising labor productivity the labor force must normally be equipped with more and more capital per worker.
The key question is the balance between these two trends. If the growth rate of capital per worker, in percentage terms, is not matched by at least as great a growth rate of labor productivity (also in percentage terms), then it will take an increased quantity of capital to yield a given volume of output. And if that happens, unless the share of output going to profits rises to compensate, the profit rate — profit per unit of capital — will fall.
Marx’s concept of the “tendency of the profit rate to fall” depends on the idea that some force is at work within the competitive process making it at least highly likely that, over the long run, labor productivity will fail to keep up with capital intensity and the profit share of output will fail to rise sufficiently to compensate. But what could that force be?
For as long as Marx’s FROP has been debated — for more than a century — one criticism in particular has been perennial. Recall that the profit rate is by definition the product of two terms: the share of output going to profits (as opposed to wages); and the volume of output produced per unit of capital. The first of these variables is determined by class struggle between labor and capital over the division of the product. The second term is determined mainly by the technical methods of production put into use by capitalists.
The challenge that critics have always put to Marx’s theory is this: Why would any capitalist ever willingly introduce a method of production that yields a profit rate lower than the prevailing one? The profit rate might decline for any number of reasons. But surely the least plausible cause is the one variable over which capitalists have direct, conscious control — the choice of production methods.
This line of thinking led a long line of writers, starting with the Russian scholar Mikhail Tugan-Baranovsky in an influential 1901 monograph, to reason that the capitalist’s “choice of technique” must, if anything, have the effect of pushing the rate of profit constantly higher, not lower, as Marx had claimed.
In 1961, the Japanese economist Nobuo Okishio published a landmark paper showing that Tugan’s critique of the FROP was, at least, logically correct: at a given set of ruling market prices, and assuming no change in the real wage, any production method that a profit-maximizing capitalist would introduce must have the effect — once it’s been generalized throughout the economy — of raising, rather than lowering, the general profit rate.
The advent of the mathematically forbidding Okishio Theorem was a key reason — alongside the unavailing arguments of the FROP’s most dogmatic believers — for the falling-profit-rate theory’s descent into disrepute. Because of it, many scholars broadly aligned with Marxism became persuaded that the theory had been definitively, scientifically discredited.
It was in response to the Okishio critique that Shaikh in the late 1970s turned the focus of his research to the details of firm- and industry-level competitive behavior. Drawing on Marx but enriched by the work of certain dissident microeconomists — especially the eccentric (and very conservative) postwar English price theorist P. W. S. Andrews — Shaikh developed a theory of intra-industry competition that he named (in contradistinction to the mainstream categories of “perfect” and “imperfect” competition) “real competition.”
The “theory of real competition” gives Shaikh the master motif of his intellectual project. He seeds the text of Capitalism with acid characterizations of the competitive process, forming a vivid tableau of fear and predation: it is “antagonistic by nature and turbulent in operation. It is the central regulating mechanism of capitalism and is as different from so-called perfect competition as war is from ballet.” The martial metaphor is ever present: competition is “a war among firms.” It is “war by other means.” It follows the “imposed rationality of warfare.” “Bellum omnium contra omnes.”
In Shaikh’s hands this is not mere rhetoric; he is able to formally demonstrate that, given certain plausible assumptions about the evolution of technology — namely, that the set of feasible innovations is usually skewed in the direction of technologies that increase labor productivity, but at the cost of greater capital intensity — the type of offensive competitive behavior described by his theory will in fact lead to a long-run tendency for the aggregate profit rate to fall.
The key feature of competitive behavior in Shaikh’s theory is its relentless tendency toward aggressive price cutting and cost cutting. In the competition-as-warfare metaphor, price is the weapon of choice.
Okishio’s model has innovating capitalists adopting more efficient production methods for the purpose of reaping higher current profits by charging the same price as competitors while producing at lower cost. But for Shaikh, that ignores the inherently strategic and antagonistic nature of capitalist competition. Rather than sitting back and enjoying an augmented flow of profits at the old price, Shaikh’s innovating capitalist wields his newfound cost superiority as a bludgeon, pressing his advantage against rivals by mercilessly cutting the price below what his competitors can afford to charge. He has no choice but to act this way, according to Shaikh, because in the field of capitalist competition, “do unto others ere they do unto you” is the maxim of the game.
Shaikh’s critique of Oshikio, it must be said, is ingenious. Individual capitalists might prefer to use only those production methods that would increase the rate of profit. But they can’t, because they’re trapped in a destructive competitive game that forces them to adopt ever-more-capital-intensive methods while resorting to profit-destroying price reduction in the interests of competitive survival.
Hence the “beautiful dialectical denouement” noted by Duncan Foley: the very force the makes for capitalism’s vitality — profit-driven technical innovation — is also the source of its decline.
Escape From Competition
However, all of this only holds if such behavior is indeed “the norm in the business world,” as Shaikh claims. This is where Shaikh goes wrong, on grounds of both logic and evidence.
For Shaikh, competition between firms is like war between states. But this analogy must be inexact, because most of the time most states are not at war. By the logic of the analogy, Shaikh would seem to be saying that most of the time most firms are not in competition with one another. But he’s definitely not saying that: throughout his book he argues vociferously against theories of imperfect competition and monopoly that seek to downplay the intensity of intra-industry competition.
The reason most states are usually not at war is that war is costly. Even leaders who have no compunction about starting or escalating a war from which they think they can benefit — think Richard Nixon — often find themselves spending much of their time in power trying to avoid wars that they believe would leave them worse off.
In Shaikh’s theory, firms that adopt cost-cutting innovations do so with the warlike intention of harming their less-efficient competitors via price reduction. But he has trouble credibly explaining exactly how they ultimately benefit from doing this, even in the long run. At several points in the text, when he gets to this point in the argument, his prose trails off in a cloud of uncharacteristic vagueness: the low-cost firm’s “advantage is made clear” by its aggressive price cuts; they demonstrate to the higher-cost competitors that “the future has arrived,” “that they are doomed.”
But what if the competitors don’t agree that they’re doomed? What if they, too, are willing to accept a lower profit rate in order to stay in business? Then the kind of buccaneering behavior that Shaikh presents as a time-honored recipe for competitive success would in fact be ruinously risky — and therefore something intelligent capitalists would try to avoid.
This isn’t just a priori speculation. A book on pricing by “three preeminent McKinsey & Company experts” (The Price Advantage) advises managers that “price wars rarely have any real winners — and few healthy survivors.” For that reason, “the best-run companies go to almost any lengths to avoid price wars.” Most price wars that do happen break out by accident, as a result of misperception and miscalculation: “The price war that is initiated as a deliberate competitive tactic is somewhat rare — and rarer still is the one that achieves a positive outcome for either the industry at large or a specific supplier within the warring industry.”
Almost identical advice is given in a management book (Confessions of the Pricing Man) by the German pricing consultant Hermann Simon, the founder of the global advisory firm Simon-Kucher. In his firm’s annual survey of managers, 82 percent of those respondents who reported that their company was currently involved in a price war believed it had been instigated by a competitor; only 12 percent said their company had started it as a deliberate tactic. “Unless you have an unbeatable cost advantage which prevents your competitors from responding in kind, it is almost impossible to establish a sustainable competitive advantage through lowering prices,” Kucher writes.
The McKinsey experts echo that claim, but they also quantify it: “If you have ever imagined that reducing prices to gain share and increase profits might be a sound strategy for your business, think again. Unless you have a dominant cost advantage — by this we mean costs that are at least 30 percent below the competition — reducing prices all too often triggers a suicidal price war.” (Shaikh at one point characterizes the cost advantage of the innovating firm in one of his numerical examples as “robust, being on the order of 10%.”)
Thus, for Shaikh’s theory of real competition to be valid, real-world technical innovation would have to be driven by a competitive strategy that — according to these experts — is rarely seen and almost never works.
But we don’t need to rely on qualitative testimony. Over the past twenty years, the growing availability of massive datasets measuring production variables at the plant level, as well as retail product sales at the transaction level, have made it possible to directly observe the kinds of microlevel competitive processes that, in the past, entered economists’ models only in the form of supposedly “plausible” assumptions (i.e., professionally agreed-upon guesses).
These data consistently reject the picture of relentless price competition depicted in Shaikh’s theory (and in Brenner’s), in which firms compete mainly by trying to sell the same product as their competitors but more cheaply.
Rather than price, the main dimension of competitive struggle is what one important paper in this literature called “idiosyncratic demand” and what other papers call “product appeal”: the number of units of a product that a firm can sell at a given price.
One widely cited 2014 study analyzed transaction-level sales data on nearly half a million products produced by more than fifty thousand firms. “Our results,” the authors concluded, “point to demand differences (which could arise from quality or taste variation) as being the principal reason why some firms are successful in the marketplace and others are not.”
Product appeal accounts for 50 to 70 percent of the variance in firm size at a given moment in time; less than 25 percent is due to differences in price or cost. When the authors looked at changes over time, “the results become even more stark,” they write. “Virtually all firm growth can be attributed to firm appeal.”
The story is the same even in industries producing apparently standardized products, such as corrugated cardboard boxes and ready-mix concrete. A seminal 2011 paper by economists from the Census Bureau and the University of Chicago studied detailed plant-level census data on production and prices at thousands of individual factories in precisely such industries. They, too, found remarkably wide and persistent variation between different plants in levels of idiosyncratic demand. And these differences turned out to be far stronger predictors of firm survival and growth than superiority in cost or price.
“A one standard deviation increase in demand shocks accounts for a decrease in the likelihood of exit that is 3 to 4 times larger than the decrease in the likelihood of exit from a one standard deviation in physical productivity,” the authors write. “It is difficult to avoid the interpretation that demand effects are a predominant determinant of survival.”
Shaikh once elegantly summarized Marx’s picture of capitalist competition as a two-front struggle: a struggle against labor to reduce costs, in which the predominant weapon is mechanization; and a struggle against competing firms for market share, in which the dominant weapon is price reduction.
Each of these processes tends to reduce the profit rate: the former by raising the level of capital intensity; the latter by reducing the profit share.
However, the new microdata-based research confirms the centrality of what we might call a third front: the struggle against competition itself, in which the weapon of choice is product differentiation. Product differentiation decouples competitive success from cost and price, allowing capital to chart an alternative, profit-preserving path through the maze of competition.
Whatever its flaws, Shaikh’s falling-profit-rate theory grows out of a rich conceptual framework that opens numerous avenues for theoretical reflection. In comparison, Brenner’s theory gives us much less to think about.
On the surface, Brenner’s by-now-familiar account seems straightforward: thanks to a postwar onslaught of lower-cost producers entering global manufacturing industries, a problem of chronic excess capacity emerged that pushed down manufacturing prices and, therefore, overall profit rates. The resulting deficiency of profitability caused low investment and stagnant growth.
But as a long line of critics has pointed out — including Shaikh in his review of Brenner’s The Economics of Global Turbulence, published in a 2000 issue of Historical Materialism — a fall in prices in one sector of the economy (manufacturing in this case) shouldn’t have any particular effect on the overall profit rate, because one sector’s output prices are every other sector’s input prices.
Brenner was perfectly aware of this when he wrote The Economics of Global Turbulence. So he included a fallback argument: Perhaps, as a byproduct of the falling prices that resulted from excess competition, real wages increased, and this was what caused the fall in the profit rate?
This line of argument would seem to make Brenner’s a wage-squeeze theory. Brenner, however, is a vehement critic of wage-squeeze theories, insisting (correctly) that the wage share didn’t rise nearly enough in the 1960s and 1970s to account for the magnitude of the observed fall in the profit rate.
So, later in The Economics of Global Turbulence, he retreats to his original theory that falling prices in one sector caused a general fall in the profit rate — even though, elsewhere in the text, he acknowledges that that isn’t possible.
Thus, when it comes to the ultimate causes of “stagnation,” Brenner’s argument is a kind of Schrödinger’s cat of crisis theories: it’s a theory of excess competition when you’re looking at it and a wage-squeeze theory when you’re not. Like the cat, neither survives scrutiny.
(Shaikh was not alone in judging Brenner’s monograph “difficult to read” because “the arguments involved appear in different sections, are sometimes implicit rather than explicit, and can be contradictory.”)
There are further problems at a theoretical level. Brenner’s theory lacks a logically credible mechanism linking low profitability to stagnation. On the one hand, he suggests that the cause of stagnation is underinvestment due to low profit rates. But at the same time, he claims low profit rates are brought on by overinvestment. One would think that years of underinvestment would eventually eliminate the excess capacity — or, alternatively, that never-ending overinvestment would be incompatible with stagnation. But in Brenner’s theory there is somehow always an economy-wide investment drought alongside continual excess capacity.
It may be tempting to assume that there’s some subtle argument here — maybe an investment drought in some sectors alongside excess capacity in others; or maybe sequential cycles of dearth and excess. But neither of these could explain stagnation that is both chronic and continual and also economy-wide.
I think the most likely explanation is the simplest: Brenner’s argument simply contains an error of reasoning. Or, if you like, it contains an unresolved tension between the having of one’s cake and the eating of it, too.
However, the most serious problems with the thesis are empirical, not theoretical. Part of the difficulty of grappling with the Brenner theory is that it’s hard to pin down what it’s a theory of. Brenner presents it as an explanation of the origins of global “stagnation” — but without, as far as I can tell, ever defining what counts as stagnation. By the plain meaning of the word, though, it’s hard to see how the post-1973 global economy qualifies as stagnant.
To be sure, since 1973 the exceptionally high postwar growth rates of what Brenner calls “the long boom” have not been repeated. And over the fifteen years since the outbreak of the Great Recession the richest countries have, on average, experienced unusually slow rates of growth.
But to call the post-1973 period one of “ever-worsening stagnation” for the global economy as a whole, in which “some countries . . . are able to achieve a recovery only at the expense of other countries” — as Aaron Benanav put it in his recent defense of the Brenner thesis in the New Left Review — is simply wrong.
The chart below shows the rate of per-capita GDP growth since 1870 for the seventy countries that have data going back that far in the Maddison Project Database, the standard source for such statistics. Since these countries currently account for about 83 percent of world GDP and have a combined population of 5.6 billion, the chart can be taken as a close proxy for the “world” growth rate.
The numbers show that over the course of the so-called long downturn (1973 to 2018, the latest year in the dataset), the average annual world per-capita growth rate has been 2.53 percent — well above both the historical average (2 percent) and median (2.16 percent) growth rates for the hundred or so (overlapping) forty-five-year periods in this time frame. And this despite the fact that the period in question encompassed the worst financial crisis since the Great Depression and its aftermath.
Meanwhile, the so-called long boom (1948 to 1973) saw the highest growth rate of any twenty-five-year period in the history of post-1870 capitalism (3.51 percent) — making it a particularly inapt benchmark for comparison.
The Falling Profit Rate: A Statistical Mirage?
The second basic empirical problem with Brenner’s falling-profit-rate theory has to do with the falling profit rate itself, whose existence turns out to be equally questionable.
The profit rate is inherently difficult to measure. The problem is not so much one of measuring profits, though this presents a slew of data challenges. Rather, it’s the denominator, the capital stock, that poses a serious problem. (Shaikh devotes a sizable fraction of the nearly 150 pages of technical appendices in Capitalism: Competition, Conflict, and Crises to the problems of capital stock measurement.)
The capital stock is supposed to embody the sum, in money terms, of all past physical investments (buildings, equipment, software, etc.) minus the sum of all past depreciation of those investments due to wear-and-tear or obsolescence. (There are further complications relating to current prices versus historical prices, but I’ll leave those aside.)
The annual flow of investment spending is relatively straightforward to measure, but the same cannot be said of depreciation. In the United States, the ugly truth is that all official capital stock measures have, for years, been based on a single set of estimates of asset depreciation rates produced by two academics, Frank C. Wykoff and Charles R. Hulten, more than forty years ago.
This is a serious problem, because even small changes in asset service lives can have a huge impact on the measured capital stock: the longer the life of the average capital asset, the more years’ worth of cumulated investment is embodied in the capital stock at a given moment in time and hence the lower the measured rate of profit.
As it happens, new research published separately by the Bureau of Labor Statistics (BLS) and the Organization for Economic Cooperation and Development (OECD) has confirmed long-standing suspicions about even the approximate accuracy of official capital stock estimates.
An OECD paper on depreciation measurement released this past January notes that “statistical agencies in different countries tend to use very different assumptions regarding the depreciation and retirement of assets,” and that estimates of “depreciation and retirement patterns tend to be based on thin empirical evidence or old research.”
It then systematically compares the methods used for estimating capital stocks in the United States, Canada, the UK, France, Germany, and Italy, and concludes that in all five non-US countries, depreciation estimates are “higher, or much higher, than those used in the United States.” Adopting other countries’ statistical methods would “reduce the net investment rate and the net capital stock of the US private sector by up to one third” — which would, of course, have a big upward effect on measured profit rates.
Just how big was demonstrated by a team of research economists at the BLS and the Bureau of Economic Analysis — the two agencies that jointly produce the official US capital stock statistics — in an article published last year in the BLS’s Monthly Labor Review.
The authors looked to Canada for insight on measuring depreciation. Canadian capital stock measures are regarded as being particularly reliable thanks to a mandatory survey of businesses carried out annually since the mid-1980s by Statistics Canada that gathers information on rates of wear and tear, obsolescence, asset retirement patterns, resale values, and so on. This is obviously a superior method to the use of a handful of forty-year-old studies.
The researchers wanted to see what would happen to the measured US capital stock if the Canadian asset-life figures were applied to US data, so they constructed two alternative time-series estimates of US depreciation rates on the basis of the Canadian numbers.
The difference these make to the profit rate can only be described as massive. Whereas the net profit rate for the business sector implied by published US capital stock estimates stagnates in the 18 to 20 percent range throughout the period since 1985, the alternative estimates using Canadian depreciation patterns show US profit rates doubling, or nearly so: rising from 16 percent in the late 1980s to 28 percent or 32 percent in the pre-pandemic years.
The unreliability of measured depreciation rates poses a major problem for theories of economic performance based on the premise of falling profit rates because, as it turns out, the decline in measured profit rates since the 1960s is entirely attributable to changes in measured depreciation.
A simple way of showing this is to look at the data presented in the World Profitability Dashboard, an online interactive tool maintained by a team of Marxian economists led by Deepankar Basu of the University of Massachusetts, based on their dataset of profit rates in dozens of countries. The marquee graph featured on dashboard’s homepage shows the apparently falling “world” profit rate — the average profit rate of the twenty-five countries for which the dataset contains continuous data since 1960.
Here’s what the website’s graph looks like:
To show the impact of (measured) depreciation trends on this apparent downward trajectory, I’ve separated the profit rate into two components: what we might call the “undepreciated” profit rate, which is simply the ratio of annual gross profit to annual gross investment; and a “depreciation factor,” the ratio of annual gross investment to the measured capital stock. The profit rate is, by definition, the product of these two numbers.
Between 1960–73 and 1973–2019, the “world profit rate” showcased by the World Profitability Dashboard fell by one quarter (from an average of 9.9 percent to an average of 7.2 percent) — but this came in spite of a nearly one-fifth increase in the “undepreciated” profit rate (i.e. the profit-investment ratio, which rose from .99 to 1.16). The reason for the drop was a nearly 40 percent decline in the depreciation factor.
This is not an arcane technicality. Falling profit rates are supposed to signal that investment is becoming less and less remunerative — that fewer and fewer dollars’ worth of profit are being generated from each dollar of investment. But the data show very clearly that that simply isn’t happening: the ratio of current profit to current investment has been rising, not falling.
(The Basu dataset includes the government and residential sectors in its investment data, but the chart below, based on Eurostat data, demonstrates that the basic pattern holds when those sectors are excluded, at least for the four major countries for which such data exist going back to 1960.)
“It should be evident,” says Brenner, “why, for revolutionaries, so much is riding on their contention that extended periods of crisis are built into capitalism.” His argument can be summarized in three steps: (1) crises are caused by the unplanned , anarchic nature of capitalism; (2) therefore, “governments cannot prevent crises”; (3) the inability of governments to prevent crises gives revolutionary politics a rationale.
But capitalist crises cannot be due to the mere absence of planning. Precapitalist societies also lacked planning, and yet (as Engels observed in Anti-Dühring) they did not have crises. A crisis is a failure of coordination between the myriad individual units of an economy — households, firms, manors, etc. Precapitalist economies didn’t suffer crises because they had too limited a division of labor to require much coordination in the first place.
It follows from this that any adequate analysis of modern capitalist crisis must start, not from the absence of planning, but from the existence of a vastly extended division of labor. With a far-flung division of labor, the activities of millions or billions of people must be minutely coordinated and anything that disrupts this intricate coordination throws a wrench into the gears of production.
It’s the extended division of labor that explains the susceptibility of all modern economies — capitalist and centrally planned alike — to coordination failures, and thus to crises of different kinds. Under capitalism, such failures take the form of effective demand deficits, which cause unemployment. Under centrally planned socialism they took the form of Hilferding-esque disproportions between the different branches of industry, which caused endemic shortages. (The shortages, in turn, caused disguised unemployment in the form of shop-floor downtime: “unproductive slack” in János Kornai’s terminology.)
Brenner is right to see a connection between the recurrence of “extended periods of crisis” and the prospect of systemic transformation of the mode of production. But he’s wrong to see this as part of the case for socialism. Historically, the connection has only ever played out in the “wrong” direction: extended periods of economic crisis have led to transitions from socialism to capitalism but never, so far, from capitalism to socialism.
In the 1890s, the “sudden and dramatic” onset of a period of “affluence based on booming business” — as Eric Hobsbawm characterized the pre–World War I Belle Époque in The Age of Empire — made it “evident that those who had made gloomy forecasts about the future of capitalism, or even about its imminent collapse, had been wrong.” The revisionist controversy — the first great intellectual crisis of Marxism — was a direct result of the system’s unexpected return to vitality.
And yet, just this year, Benanav, in his New Left Review defense of the Brenner thesis, prophesized that “whatever ups and downs it experiences along the way, capitalism seems to be running out of steam.” Hope indeed springs eternal: the world growth rate in the “booming” Belle Époque years averaged 1.4 percent. In the so-called long downturn that began in 1973, that number was 2.5 percent.