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The Profit Squeeze Thesis A Critical Overview

This chapter examines the claim made by some theories that

the downtum in the trend rate of capital accumulation and output

growth in the advanced industrialised countries in the early 1970s

was caused by a squeeze on the profit margin due to the depletion of

the reserJe army of labour. A distinct break from the

underconsumptionist theories of stagnation, this explanation focuses

upon the contradictions of 'Keynesianism' or in other words the

regime of aggregate-demand-led growth of the post-war period.

Following a brief recapitulation of Kalecki's [ 1943] analysis of the

problems of full employment policy, the profit squeeze argument

would be critically assessed in a closed economy context, on the basis

of its capacity to explain not only the downturn but also the

protracted slowdown which has continued till date. The next chapter

would look at the argument in the context of an open economy.

Contradictions of Full Employment Policy

Kalecki's arguments regarding the unsustainability of full

employment policy did not rely upon a profit squeeze explanation. His

arguments were based upon the political opposition of capitalists to

the maintenance of full employment through demand management.

The opposition arises primarily out of the suspicion of private

business towards any kind of govemment intervention as such, which

14

The Prifit Squeeze Thesis

is looked upon as an encroachment on their own domain, thus

adversely affecting their 'state of confidence'. There is also a specific

dislike of private business towards the specific forms of government

intervention which are generally undertaken to maintain full

employment, like undertaking public investment and subsidising

mass consumption, since they are deemed to be changing the rules of

the game for the market economy. The maintenance of full

employment, moreover, through tightening the labour market reduces

the cost of job loss and enhances the bargaining power of the workers.

Although the level of profits is higher under a full employment regime,

brought about through higher government expenditure, the stability of

wages and prices comes under increasing pressure. 1

It was argued by Kalecki that the politically motivated response from

· private business against the rising political power of workers, would

eventually force governments to abandon full employment policies and

retreat to orthodox cuts in the budget deficit. This mechanism can

create a 'political business cycle' wherein deficit financed govemment

expenditure would bring the economy out of a slump only to retum

back to it through cuts in the budget deficit subsequent to a period of

full employment. However, the essence of Kalecki's argument goes

beyond an explanation of short-run business cycle fluctuations. The

thrust is on pointing out the impossibility of maintaining full

employment under capitalism, not because of the absence of economic

means to achieve it but due to the essential political character of the

system. Unemployment is a part of the 'normal' functioning of

capitalism.

1 "It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is unlikely to reduce profits than to increase prices, and thus affects adversely only the rentier interests. But 'discipline in the factories', and 'political stability' are more appreciated by the business leaders than profits. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the normal capitalist system. (Kalecki, 1943) (emphasis added).

15

The Prqfit Squeeze Thesis

Broadly, it can be said that most of the post-war period has followed a

pattem similar to the vision of Kalecki's political business cycle, if we

take the advanced capitalist world as a whole. The unprecedented

dynamism witnessed within the advanced world in the first two

decades after the war was triggered by Keynesian demand

management and govemments all over maintained a steady

commitment to full employment, by incurring budget deficits

whenever necessary, which led to the attainment of high levels of

growth. On the other hand the ascendancy of monetarism since the

1970s along with its deflationary doses of fiscal discipline and

monetary stringency has been followed by a slowdown growth which

persists even today. In the statistical appendix to this chapter, charts

1.1 to 1.6 show the annual growth rates of GDP of the advanced

economies from 1961 to 1999; (within the G-7 economies data was not

available for Germany and for Canada it was available from 1966); I

with a declining linear trend in the growth rates over the entire period

. for all the economies. Two central questions require thorough

investigation in order to provide a rigorous analysis of this slowdown

in the advanced capitalist economies:

1. What were the proximate causes for the post-war phase of

rapid expansion (the 'long' boom) to end, or alternatively,

what were the contradictions of the Keynesian demand led

growth regime and how did they unravel?

2. Why has the downtum not got reversed so far, with

recoveries being largely short lived and unable to sustain

themselves into a long rising trend?

It is one set of answers to these questions that we critically examine

below.

16

The ProfitS queeze Theszs

Supply-side Refutation of Underconsumption

A realisation crisis is set off by a decline in the level of aggregate

demand. In the long-run stagnation theories of Steindl ( 1952) and

Baran and Sweezy (1966), the crisis is essentially brought about by

underconsumption. With growing concentration of capital, the degree

of monopoly increases over time, squeezing the share of wages.

Aggregate demand falls as a result because consumption out of

profits, given the higher saving propensity of capitalists, fails to keep

pace with investment. Due to the rigidity of prices under monopoly

capitalism, the fall in the level of demand leads to cutbacks in

production and output rather than price adjustments, reducing the

rate of capacity utilization in the economy. Investment falls as a

consequence, leading to a cumulative decline in aggregate demand,

capital accumulation and output growth over time.

The Great Depression of the 1930s was widely argued to be a crisis

caused by underconsumption. The downturn in the 1970s in contrast,

it has been claimed, was caused by supply-side factors which brought

about a profit squeeze, with demand-side factors not playing any

significant role, at least in the initiation of the crisis.2 The supply-side

arguments are extended within a broader institutional framework,

under which the process of capital accumulation takes place.

Although quite insightful, the details of that framework would not be

examined elaborately for the present purpose.3 We shall rather

compare their main theoretical arguments with the demand-side

2 The argument can be understood in terms of the capitalist class being 'too weak' in the 1970s to sustain accumulation in contrast to the 1930s Depression when it was 'too strong'. Weisskopf, Bowles and Gordon (1985) write, "When the capitalist class is too strong it shifts the income distribution in its favour, reducing the ratio of working-class consumption to national income and rendering the economy prone to crises of underconsumption ... When the capitalist class is too weak, the working class or other claimants on income reduce the rate of exploitation, squeezing the profit rate and reducing the level of investment. .. They may also be characterized as demand-side and supply-side crises, respectively." 3 For an elaborate exposition of the Social Structure of Accumulation School (hereafter SSA), see Gordon, Edwards and Reich (1982) and Bowles, Gordon and and Weisskopf(l983). Also see Kotz, McDonough and Reich ( 1994 ). For the Regulation School perspective, see Aglietta ( 1979) and Lipietz (1986). Also see Glyn, Hughes, Lipietz and Singh (1990) for a detailed theoretical and empirical analysis (inspired by the 'Regulation School' but also drawing insights from the SSA School) of the making and unravelling of the post war 'Golden Age of Capitalism'.

17

The Profit Squeeze Thesis

paradigm of Keynes and Kalecki. In contrast to the Kaleckian

framework, where a slowdown in the rate of capital accumulation

brings about a fall in the rate of profit, the profit squeeze argument

suggests that the fall in capital accumulation was caused by a prior

fall in the profit rate. Let the rate of profit (r) be given by,

Where,

p p y y• r=-=-·-·-= n.u.z

K Y y• K

P = volume of profit

K = capital stock

Y =actual output

Y*= full capacity output

n = share of profits in income

u = rate of capacity utilization

z = full capacity output-capital ratio

(1.1)

The Kaleckian theory of investment posits that in the short period,

investment and consumption of capitalists are determined by past

decisions, since 'the execution of investment orders takes a certain

time, and capitalists' consumption responds t6 changes in the factors

which influence it only with a certain delay'.(Kalecki,1954, p.46].

Assuming that the workers do not save, gross profits realised in a

short period is the sum of gross investment and capitalists'

consumption made over the period. Thus investment and

consumption decisions determine profits and not vice versa. If

capitalists save a constant proportion s out of profits and all wages

are consumed, the ex post equality of investment (I) and savings (S)

(ignoring the 'certain delay' in undertaking consumption out of

current profits) implies,

l=S=s·P

I p ~-=s·-=s·r

K K (1.2)

18


Here, a decline in autonomous investment implies a fall in r.

In order to understand the profit squeeze argument it is required to

further decompose the terms in 1.1.4 The share of profits in income (n)

can be written as,

Where,

JV w L w Jl' = 1--= 1--·-= 1--·b

y p Q p

W =wage bill

w =wage rate

p = price level

L = labour input

Q = real output

(1.3)

b = inverse of average labour productivity

The supply-side theorists argue that with the protracted period of full

employment during the post-war period, the strength of workers grew

vis-a-vis the capitalists due to the depletion of the reserve army of

labour. This increased the bargaining strength of the workers and led

to a rise in the rate of growth of money wages (w). Maintaining that

the rate of increase in the price level was less than the rate of increase

in the unit labour costs, the supply-side theorists argue that a

squeeze in the share of profits n occurred during the late 1960s. It has

also been argued that the tightening of the labour market brought

down the cost of job loss which allowed the workers to successfully

resist attempts to increase work intensity, thus leading to a slowdown

in the growth of labour productivity (rise in b). This is also believed to

have contributed to the profit squeeze, with the implicit assumption

that labour saving technical progress was either not taking place or

happening at a rate which was insufficient to arrest the decline in

average labour productivity. The decline in n is said to have brought

down r (holding the capital output ratio z constant), bringing about a

4 This follows Weisskopf ( 1979).

19


slowdown in the rate of accumulation. The contribution of a rise in the

capital output ratio (a fall in z in) to the downturn of the 1970s is also

considered to be quite significant by some supply-side theorists

besides the decline in the profit share, while others attribute it almost

entirely to the squeeze on profit share. 5

The argument, in the context of the downturn in the U.S. economy in

the 1970s, is also extended to include the effect of deteriorating terms

of trade for the U.S. and increasing incidence of taxation on profits as

proximate causes for the (post-tax profit) squeeze.6 Let income or

output be measured gross of imported inputs and taxes and

distributed into four contending shares- profits, wages, imports and

the tax bill. Now if we assume that all taxes are paid out of profits and

that imports constitute inputs for production only and are not

consumed by workers, then

Where,

r'=P+W+N+T

~7r'=~=l-[;+ ~+ ~] (1.4)

' 1 [w b' Pn ] ~7r = - -· +-·n+t p p '

Y' = gross output as defined above

P =post-tax profit

1r' = share of post-tax profit in gross income

N = imported input bill

T =tax bill

b' = labour per unit of gross output

Pn = price of imports in domestic currency

n = volume of imports per unit of gross output

t = share of taxes in gross output

5 For instance Lipietz (1986) argues that a slowdown in labour productivity and rise in the capital output ratio across the advanced countries provide the explanation rather than a wage-push theory. On the other hand Weisskopf (1979) shows that the profit share contributes most robustly to the cyclical falls in the profit rates for the U.S. non financial business sector for the period 1949-1975. 6 Unravelling of Pax Americana and the capital-citizen accord, according to the analysis of the SSA School (Bowles, Gordon and Weisskopf, 1986).

20

I

~


It is suggested that rising w, b', pn and t without a compensating rise

in p led to the profit squeeze in the 1970s. The crisis which followed is

thus explained by supply-side factors like growth of money wages,

falling labour productivity, rise in import costs and incregsed taxation.

It needs to be noted here that the decline of the profit share ;r' in 1. 4

is not the same as a decline of n in 1.3, but a ceteris paribus decline

of the former entails a fall in the latter.

A closer look at these profit squeeze explanations reveals a serious

problem. As was noted earlier, the causality in 1.2 runs from

investment to profit and not vice versa. Within the Kaleckian

framework investment is considered to be autonomcus in a given

period, and the rate of profit gets determined by the level of

investment relative to capital stock. In terms of 1.1, r is given by I/K.

The share of profit n or the profit margin is given from outside by the I

'degree of monopoly'. For a given rand n, the capacity utilization rate

u adjusts, z being a constant. If there is a fall in n due to wages

growing faster than prices, it does not have any effect on r, since

u increases due to greater consumption demand out of rising wages.

In other words a squeeze on the profit share does not lead to a

decline in the profit rate. Alternatively, if income distribution is

considered to be getting determined endogenously as in Kaldor

(1956), then the capacity utilization rate is considered to be

given along with z for 1.1. With I/K determining the rate of profit

in 1.2, 1t gets determined ex post. Here also a fall in the share of

profits cannot be logically argued to be a prior cause for a fall in the

profit rate and investment.

In defiance of this logic, empirical studies claim to have found that the

profit margin got squeezed across the advanced economies, despite

high levels of employment and capacity utilization. Glyn, Hughes,

Lipietz and Singh ( 1990) suggest that labour productivity slowdown ·--·~

1\i~iS Thesis !(:}/''<, -..... r. '\ '1-- : 3 ~ 6 332.042 '\,<·'~~\

21 86515 Ca \< ••• • ··;),~:,... .1 ::~ :

1//11/1///lll//l///lll/1//lll/1 · ,: /s. TH10628 ( ,·

i '


and declining output capital ratio, especially in the manufacturing

sector, had affected the advanced capitalist countries since the late

1960s and the early 1970s. This they argue, led to a profit squeeze

since tight labour markets enabled workers to successfully defend (in

fact actually increase) their real wage, which did not allow the

capitalists to maintain their mark-ups by completely offioading the

adverse movement in input costs and labour productivity into higher

prices. Limits to price increases were also set by intensified

international competition. It is further argued that the profit squeeze

was aggravated by the 1973 oil shock which precipitated the recession

of 1974-75. Recovery after 1975 did not reach a level so as to restore

the profit share, which in 1979 is found to be between half to two

third of its post-war peak levels in the different advanced countries.

On the basis of these observations, the argument that the profit rate

would remain unaffected in the face of declining profit share, due to

increased demand and high capacity utilization, is called into

question. It is cited that the rate of profit fell along with the declining

profit share, even as capacity utilization remained very high at the

cyclical peaks in the late 1960s and early 1970s. Bowles, Gordon and

Weisskopfs (1989) fmdings on the U.S. economy are on similar lines.

Their regression analysis finds that the profit share tests very

significant in explaining the fall in the profit rate during the early

1970s. This is interpreted within the framework of their SSA model,

in terms of the unravelling of the post-war institutions underlying

'capitalist power': rising product wages, effective profit tax rate and

real price of imports (see 1.4). Since the capacity utilization rate

continued to remain at high levels during this period, they explain it

in terms of a range of values of capacity utilization over which there is

a trade-off between gross profits and accumulation. 7

7 " ••• there is a range of values of capacity utilization over which there is a trade-off between

profitability and accumulation ... From the point of view of capitalists, this can be characterized as a regime of "overaccumulation"-accumulation is more rapid than they would like from the vantage

22


The relationship between capacity utilization and the profit rate, as

postulated by them, is represented in figure 1.1 below. Increasing

levels of capacity utilization would lead to higher profit rates till u*

where a maximum rate of profit r* is attained. If the capacity

utilization rate goes beyond u*, the rate of profit would decline

because of the decline in the cost of job loss associated with high

levels of capacity utilization and employment.8 However, the

mechanism through which the profit rate would fall with a ceteris

paribus fall in the cost of job loss, or alternatively with an increase in

employment, has not been explicitly stated. A positive relation is

empirically shown to exist between the profit rate and a measure of

the cost of job loss.

r

u* u

figure 1.1

The logic of the SSA model, simply stated, suggests that a decline in

the share of profits (wages rising more than prices due to higher

bargaining power of workers at high levels of employment) leads to a

fall in the profit rate at high levels of capacity utilization. It is true that

at high levels of employment wages may rise due to the enhanced

strength of workers. But if it is argued that the profit margin would

fall because of rising money wages, it precludes the possibility of

point of profit maximization." See Bowles, Gordon and Weisskopf (1989), pp. 120-121. (emphasis added). 8 The actual argument of Bowles, Gordon and Weisskopf is that capacity utilization is negatively related to 'capitalist power'. The cost of job loss is one of the indices of capitalist power.

23

The ProfitS queeze Thesis

capitalists raising prices in order to defend their income share.

Moreover, the argument that a squeeze in the profit share/margin

leads to a fall in the profit rate is problematic, since we have already

noted that the rate of profit does not necessarily fall due to a fall in the

profit share. According to the underconsumptionist logic, the level of

aggregate demand is inversely related to the average profit margin and

a decline in the profit share (a rise in real wages) results in an

increase in consumption demand and capacity utilization, which

prevents a fall in aggregate profits or the profit rate. 9

Notwithstanding these problems the SSA model posits that r reaches

its maximum value r* once u reaches u*. Following this, it is further

argued that accumulation would continue to rise ('as a result of the

independent positive effects of capacity utilization1 taking the capacity

utilization rate beyond u*, such that r starts falling below rc. The

range of values of u to the right side of u* gives the regime of

'overaccumulation', where increasing accumulation leads to a falling

profit rate (which is said to be 'in its own right producing a dampening

effect on accumulation1. Now, if we recall1.2,

l=S=s·P

I p =>-=s·-=s·r

K K

Since s is a constant, investment and the profit rate can never move in

opposite directions as suggested by the regime of 'overaccumulation ',

as it violates the ex post investment-savings equality. Existence of

equilibrium is not possible under such a regime. If we drop the

assumption of a savings function where all savings are out of profits

we can revise 1.2 as,

9 Robinson (1962) argued, "An all-round rise of profit margins would not increase total profits unless it was preceded by a corresponding increase in gross investment or in distribution to rentiers .... Its effect is to reduce sales; more or less the same gross profit is earned in a smaller volume of output, with lower real wages, less employment and under-utilisation of plant. Conversely, a cut in margins increases the real-wage rate without reducing profits". (p.42).

24

The Prrifit Squeeze Thesis

!_:::::~= sc ·P+sjY-P)=(s -s )·r+s ·u.·z K K K c w IV

(1.2')

Here, sc and sw are the saving propensities of capitalists and workers

respectively. For the 'overaccumulation' argument to be tenable the

saving propensity out of wages (sw) must be sufficiently positive and

the elasticity of the profit margin to changes in capacity utilization

must be large enough. However, neither are these conditions explicitly

specified, nor their economic justification argued in the SSA model,

which makes it logically incomplete.

The Bhaduri-Marglin Synthesis: A Sceptical Note

The main problem with the SSA model lies with the fact that it

considers a fall in the profit margin to be synonymous with a fall in

the profit rate. Once it is understood that such a relationship does not

hold, it is not at all clear why capital accumulation, {vhich is modelled

to be positively related with capacity utilization and the rate of profit,

would fall following a squeeze in the profit margin. This anomaly is

addressed within a revised 'Keynesian' framework in an influential

paper by Bhaduri and Marglin ( 1993). In order to synthesise the

underconsumptionist or stagnationist view with the profit squeeze

explanation for the downturn and slowdown in accumulation, they

suggest a reformulation of the investment function as:

(1.5)

instead of the Kalecki-Robinson type investment function,

(1.6)

Within the Kaleckian framework, investment is argued to depend on

the profit rate as in 1.6, as an indicator of future profitability, which is

given by the proportion of gross profits to the capital stock in a given

25


period. But Bhaduri and Marglin argue that an investment function

which depends solely on the rate of profit is 'theoretically

unsatisfactory' because 'it does not go behind the rate of profit to its

individual constituents'. They argue that for an investment function

like 1.6,

.. .it is simply assumed that a given rate of profit will

produce the same level of investment as results from high

capacity utilization and a low profit margin or from low

capacity utilization and a high profit margin. An

investment function which depends simply on the rate of

profit is insensitive to the influence of the existing degree

of capacity utilization, e.g. it neglects the possibility that,

despite a high profit margin, investors may not be inclined

to invest in additional capacity if massive excess capacity

already exists. (ibid. p.103)

They further argue that the 'influence of existing capacity utilization

on investment' is not captured 'satisfactorily' by introducing the

capacity utilization rate u as an additional argument in 1.6 because it ;

'imposes unwarranted restrictions on the relative response of

investment to the two constituents of the profit rate'.lO According to

them these 'problems' can only be avoided by considering the two

determinants of the profit rate as 'independent separate arguments' in

an investment function as in 1.5. The investment behaviour as

postulated in 1.5 implies that investors use 'current average

profitability' (given by 1t) and the 'average degree of capacity utilization'

to predict the 'marginal profitability on new investment' and the

'future state of demand', respectively. However, the interrelation

between the 'two constituents of the profit rate' is ignored by them.

1° For 1=/(r, u), if it is suggested that lu > 0, it precludes the possibility of a decline in the rate of profit r due to a decline in the share of profit 1t at any level of capacity utilization. See Appendix A in Bhaduri and Marglin (1993 ).

26


The justification given for the investment function of 1.5 does not

seem to be convincing. Investment in a period is dependent upon

expectations of future profits, which in tum is predicted on the basis

of the current rate of profit r. Bhaduri and Marglin posit that since r

equals the product of u and n (and a constant z) following 1.1,

investment can be conceived to be depending separately upon u and n.

Their logic suggests that u and n can vary independently of each other

in order to determine r. In other words they consider it possible to

conceive that in 1.1, for a given u, r rises or falls depending upon

whether n rises or falls, and since investment depends upon r, it

would also depend upon n. The problem with such a conception is

that if u and n are both considered to be varying over time, they

cannot be considered to be varying independent of each other. There

has to be a functional relationship between them. Within the

Kaleckian framework, the profit margin is fixed from outside and i

investors would be unwilling to invest in the face of high excess

capacity, independent of whether the profit margin is high or low. The

underconsumptionist logic suggest that with a given fall in n (rise in

real wages), u would rise automatically because of higher consumption

demand and therefore r would not fall along with a fall in n. Since the

rate of profit does not depend upon the profit share/margin, there is

no good reason why investment would depend upon it in order to

predict future profits.n

Bhaduri and Marglin argue that this notion of investment underlying

the underconsumptionist argument is bound by the time and space of

the Great Depression, and cannot be accepted as a general theory of

investment. They assert that there are 'two ways to expand output',

and the incentive to invest does not only depend on consumption

demand but also on the profit margin/ share, and a fall in the profit

margin can also depress investment, independent of consumption

11 Robinson's quote in footnote 9, suggests that with profits in a period given by investment, the relationship between the profit share and capacity utilization resembles a rectangular hyperbola in the u-7t space. It is of course assumed by her that savings are made only out of profits.

27

The Prcjit Squeeze Thestj-

demand. With the investment function of 1.5, they propose to carry

out 'thought experiments' in terms of exogenous variations in the real

wage rate in order to exl3.1Iline the relation between real wage and

unemployment.

Any increase in real wage rate, depressing profit margin

and profit share, must decrease saving and increase

consumption to validate the under-consumptionist

thesis ... Nevertheless, aggregate demand (C+I) may still

rise or fall depending on what impact that lower profit

margin/ share has on investment. Since it is plausible to

argue that, other things being equal, a lower profit

margin/ share would weaken the incentive to invest, the

contradictory effects of any exogenous variation in the real

wage become apparent. A higher real wage increases

consumption but reduces investment, in so far as

investment depends on the profit marginfshare ... (ibid.

p.lOl)(emphasis added).

Here it is evident that they are not distinguishing between investment i

decisions and investment expenditure. Even if we believe that

investment decisions respond instantaneously to capacity utilization

and the profit share in the way they suggest, those investment

decisions translate into investment expenditure only with a lag,

something which they ignore. Moreover, their formal model (discussed

below) builds upon the basic idea that an exogenous increase in real

wages (a squeeze in the profit margin/share} has ambiguous effects on

investment and aggregate demand since it can lead to a fall in the rate

of profit. This methodology of considering exogenous movements in

the real wage is problematic. In the General Theory Keynes assumed

that the real wage gets simultaneously determined with output, given

the profit maximisation principle of perfectly competitive firms where

the real wage equals the marginal product of labour. In Kalecki, the

28

The Prcftt Squeeze Thesis

real wage is assumed to be stable over time, since prices are

determined by a mark-up over prime costs, the mark-up being given

by the 'degree of monopoly'. Bhaduri and Marglin depart from this and

consider exogenous movements of the real wage (profit margin)

without explaining what causes the real wage to move. In other words

they do not have a theory of price determination. In the absence of a

theory of prices, the idea that real wages or the profit margin/ share

can vary exogenously, leads to logical incompleteness. 12 We shall see

the implications of this in a while. Although the investment function of

1.5 is questionable, we still proceed further to examine the formal

exposition of the argument.

Equating the classical savings function of 1.2 with the investment

function of 1.5, they derive the locus of an IS curve given by:

l=S ~ i(n, u) = s · ir = s · 1r · u · z

(1.7)

Differentiating 1. 7 after normalising z= 1, and rearranging the terms

we get

du i" -s·u

dtr S · 1r- iu (1.8)

Here iu and i" are the derivatives of investment with respect to u and n.

For the output adjustment process to be stable, savings have to be

more responsive than investment to changes in capacity utilization.

Assuming that this stability condition is satisfied, it follows that the

sign of the denominator in 1.8 is positive,

(1.9)

12 Bhaduri and Marglin provide an explanation for considering exogenous movements in the real wage in terms of devaluation of the domestic currency. Suggesting that devaluation can be considered as causing exogenous changes in real wages cannot substitute for a theory of domestic price determination. The problems with the devaluation argument would be examined in the next chapter when we deal with the open economy. In a closed economy setting a complete macro model has to specify how domestic prices are determined.

29


With the argument that changes in the profit margin have ambiguous

effects on investment, the sign of the numerator in 1.8 becomes

ambiguous. This ambiguity makes both upward and downward

sloping shapes possible for the IS curve, given 1.9.

u u I"

I' s

I S"

stagnationist regime exhilarationist regime

figure 1.2

The downward sloping IS curve in figure 1.2 is said to be representing

the 'stagnationist' regime, where the response of investment to

changes in the profit margin is weak and therefore a squeeze on the

profit margin leads to higher capacity utilization. If the economy is

placed in this regime then the underconsumptionist logic holds.

su > il! du

~-<0 dlr

(1.10)

The upward sloping IS curve is called the 'exhilarationist' regime,

where 'the capitalist class is energetic and private investment

responds vigorously to a higher profit margin/share'. If the economy is

placed in this regime then a squeeze on profit margins causes a fall in

investment and capacity utilization, in contrast to the logic of

underconsumption.

30

su < i!r du

=>->0 d:rr

The Profit 5 queeze Thesis

(1.11)

The model suggests that u would rise or fall along with a fall in 1t

depending on whether the economy is in a stagnationist or an

exhilarationist regime. 13 However, the model does not show how u gets

determined for a given value of n. This is because the determination of

u would require another equation in the model, or in other words

another relationship between u and n. The problem with the regimes

as discussed in the model becomes obvious when we try to find

equilibrium values for u. The stability of equilibrium, both under the

stagnationist and the exhilarationist regime, even in the case of linear

IS curves, would depend upon the sign and magnitude of the slope of

the other relationship between u and 1t, which is required to determine

the equilibrium. Non-li:;:1earities in the IS schedule (investment

function) further complicate the problem of finding a stable

equilibrium. (These are discussed in further detail in the Appendix to

this chapter}.

The problem of establishing equilibrium is avoided by considering

exogenous variations of the profit margin without explicitly stating the

relationship between u and n. But then we simply do not know at

which point of the IS schedule the economy is at a given point of time \

and how it moves from one point in the schedule to another.

Moreover, in the absence of a story of why the variations in the profit

margin are taking place (a theory of price determination} this analysis

does not capture the actual movement of the economy in time. 14 The

13 As we have noted above, the lag between investment decisions and investment expenditure has not been taken into account by Bhaduri and Marglin. Once such lags are considered the condition for the existence of the exhilarationist regime becomes more stringent. 14 In this regard Bhaduri and Marglin (1993) states, "The recognition that quantities (capacity utilization) and prices (the real wage) may adjust simultaneously in a more general dynamic model raises a deeper conceptual issue regarding the IS-curve itself. It can be treated either as a locus of stationary capacity utilization ... as has been implicitly assumed in our (and Hick's) analysis, or as a locus of stationary price level. .. as we believe, is implied in Keynes' General Theory. Ultimately it boils down to one of the most important unsettled questions of modem macroeconomic: does excess

31


analysis of the model is carried out in terms of shifts of the IS

schedule. Under the stagnationist regime of the model, a fall in the

profit margin would always lead to a rise in capacity utilization. But

the rate of profit may rise or fall depending upon the 'elasticity' of

investment with respect to the profit margin and capacity utilization. If

the IS curve is flat like I'S' in figure 1.2, a decline in 1t may be more

than compensated by a rise in u so that the rate of profit rises. On the

other hand if the curve is steep like I"S", then a fall in 1t can lead to a

fall in the rate of profit if the rise in u is insufficient. Alternatively,

under the upward sloping IS curve representing the exhilarationist

regime, investment always responds more strongly to profit margins

than capacity utilization. Here an increase in u can only occur with an

increase in 1t.

The explanation of the downturn in the 1970s, in terms of the profit

squeeze, is provided by suggesting that the IS curve shifted from I'S' to

I"S" over time.1s With a steeper IS curve, a fall in 1t is said to have

brought about a fall in the rate of profit, because u did not rise

enough. Under the 'co-operative stagnationist regime' (where the IS

schedule is flat) a 'wage-led' growth strategy i.e. a rise in real wages

would not have led to a fall in the rate of profit since the rise in u

would have been enough to compensate for a fall in 7t, validating the

underconsumptionist regime. With a steeper IS schedule, i.e. a higher

responsiveness of investment to the profit margin (in in 1. 7) compared

with the responsiveness to capacity utilization, a fall in 1t caused the

profit rate to fall. But no reason for the shift in the regime or the

change in the investment behaviour, which is the most crucial

element of the explanation, is elaborated by Bhaduri and Marglin.

demand for commodities lead primarily to quantity or to price adjustment? We cannot pretend to have an answer; but dynamic analysis cannot be undertaken without addressing this important, and as yet unsettled, question." (ibid.p.l20). (emphasis original). 15 This argument, while implicit in Bhaduri and Marglin (1993), is explicitly stated in Marglin and Bhaduri (1990). It is noteworthy that in the latter paper an explicit relationship between u and n other than the IS schedule is also stated (as the PE schedule) rather than considering exogenous changes in the real wage. The analysis is carried out in terms of shifts in both schedules causing movements in the equilibrium, without discussing the stability properties of the equilibrium.

32


Since their explanation for the profit squeeze involves a shift in the IS

schedule, there has to be a story to explain why the IS schedule shifts.

In the absence of any explanation in Bhaduri and Marglin ( 1993) to

substantiate why the investment behaviour changes over time, the

analysis of their model does not say much. There is, however, a

relevant discussion in Marglin and Bhaduri (1990) which tries to

explain how 'investment demand evolved over the period 1945-80':

Profit margins were high practically everywhere in the

capitalist world, (in the immediate post-war period) higher

than before the war broke out .. .In the United States the

productivity gains of the better part of a decade had yet to

be translated into higher real wages, and in war-tom

Europe and Japan real wages had declined more than had

productivity. Profit margins improved well into the 1950s.

But lackirlg confidence in the future, fearing that

depression, which was widely predicted as the 'natural'

aftermath of war, would make ·additional capacity

redundant, capitalists were initially reluctant to commit

themselves to new plant and equipment. Investment, in

short, was not very responsive to the current profit

margin; in our terminology pre-war history had an

adverse impact on the mapping from the current level of

the profit share to the anticipated profitability of

investment. Under these circumstances, the IS schedule

may well have sloped downwards and been relatively flat;

the strategy of wage-led growth may have been the best

indeed, the only - game in town ... But as time passed,

profit margins remained high and even improved; more

important, the anticipated depression never materialized.

The consequence was that prospective profits increased

even more than actual profits: the mapping from <u, 1t> to

~(capacity utilization and profit share to expected rate of

33


profit) shifted outwards. And the derivative in: increased

more than did the derivative iu. (Marglin and Bhaduri,

1990) (p.175)

This is followed by a diagrammatic exposition of the argument, with

the help of a PE curve, which is assumed to be a relationship where

the mark-up varies positively with capacity utilization, along with the

IS curve. (As has been noted earlier in footnote 13, there is no

discussion on the stability of the equilibrium in this paper. But for the

assumed slope of the PE curve the equilibrium under the stagnationist

regime is stable).

u

I" E

S"

S' 1t

shift of the IS schedule

over the 1950s and 1960s

figure 1.3

u E I">Y. E'

p

P' S"

profit squeeze in the late 1960s

The IS curve, while shifting rightward due to economic growth, is also

claimed to have become steeper over the 1950s and 1960s. The

'productivity-growth slowdown and wage acceleration' of the late

1960s is shown as a downward shift of the PE curve, which caused

the rate of profit to fall with a squeeze on the profit margin, because of

the modest increase in capacity utilization given the steep IS curve.

The discussion in Marglin and Bhaduri ( 1990) does not throw much

light into the causes of the shift in investment behaviour either. There

is a suggestion that the maintenance of a high level of demand and

capacity utilization over time caused in: to increase more than iu. With

34

The Prrjit Squeeze Thesis

a history of high demand and low unemployment, the 'state of

confidence' of capitalists may get adversely affected as had been noted

by Kalecki ( 1943), although the rate of profit would be quite high. But

that decline in the 'state of confidence' does not imply a greater

sensitivity of investment to the profit share/margin as suggested by

Marglin and Bhaduri. That arises more among other things, from the

unease caused by the increased bargaining strength of the workers

which may get reflected in frequent demand for increases in money

wages, rather than an actual increase in their real wage. If money

wages rise, the capitalists can raise prices and maintain their mark

up. But if the incidence of such wage-price increases becomes

increasingly frequent over time, price stability gets undermined. This

can undermine the 'state of confidence' of the capitalists.

The possibility of inflation undermining business confidence has not

been coAsidered by Marglin and Bhaduri. In their model neither is

there a convincing explanation of the IS schedule becoming steeper,

nor of a downward shift of the PE schedule. It is far from clear why

investment would become more sensitive to the profit margin if it is

sensitive to it at all, at a higher level of capacity utilization. If capacity

utilization is at a high level and capitalists expect it to remain so, they

would continue to invest notwithstanding the existing share/margin of

profit. And if the profit/margin is claimed to be getting squeezed at

high levels of capacity utilization (a downward shift of the PE

schedule), there has to be an explanation why capitalists are unable to

raise prices (thereby being forced to accept a lower mark-up).

Marglin and Bhaduri ( 1990) go on to suggest that despite the fall in

the share as well as the rate of profit in the late 1960s investment

continued to show 'resilience' and the 'growth rate continued high well

into the 1970s'. The problem regarding investment-saving equality,

which we encountered while dealing with the overaccumulation

argument of the SSA model, is addressed by suggesting that,

35


"(a)pparently the share of profit devoted to saving rose after the golden

age began to tarnish ... ". Then it is also argued that 'new elements

enter(ed) the picture' like increasing energy costs, withdrawal from

demand management policies and doubts regarding the 'very integrity

of the intemational financial system' which caused a decline in

investment and growth in the 1970s, which can no longer be

explained by the profit squeeze. Thus the downturn in investment is

attributed to factors like oil price shock and contractionary policies.

But the profit squeeze argument is defended by suggesting:

But this resilience of the investment share to the fall in

profitability should not suggest that profits are irrelevant

for accumulation. If profit margins of the 1950s and early

1960s had been maintained in the 1970s and 1980s, then

investment demand might have continued to increase,

perhaps by enough to offset the decline in the full

capacity capital/ output ratio caused by the increase in

the price of energy. Moreover, to the extent that restrictive

demand- management policies were themselves a

response to profit squeeze and an attempt to restore profit

margins, the case for restrictive policies would have been

weakened considerably. In short, no accumulation crisis

need have occurred. (ibid. p.180)

In Bhaduri and Marglin (1993), they further go on to interpret the

supply-side policies initiated as a reaction to the stagnation of the

1970s by the neoliberal govemments in the advanced countries, which

were mainly aimed at smashing the bargaining power of labour and

cutting wages, as an effort to move the economy from a steep

stagnationist regime experiencing a profit squeeze to an exhilarationist

regime where investment and capacity utilization can grow along with

cuts in the real wage.

36


Thus the profit squeeze explanation of the downtum ultimately gets

reduced to a much weaker argument which only suggests that the

downturn of the 1970s, which was caused by other factors, could have

been avoided had the squeeze in the profit margins not occurred in

the late 1960s. The main thrust of the profit squeeze thesis, rather

than trying to explain the downturn in accumulation per se, seem to

be in explaining the logical possibility of a decline in the rate of profit

following a squeeze in the profit margin even in the face of rising

capacity utilization and investment; a phenomenon which has been

claimed by empirical studies to have occurred during the late 1960s

and early 1970s. Earlier, several studies had found a secular increase

in the share of profits over the post-war period till the late 1960s.16 It

is conceivable that the rising trend of the profit share got reversed in

the late 1960s, due to wages growing faster than prices, causing a

squeeze on mark-ups. But Steindl (1979) noted on the basis of the

studies of Turner et. al. (1972) and King (1975) that the downward

trend of the share of profits before tax in the 1960s, did not apply to

profits after tax for U.K. and other countries. He also found the

increasing burden of income tax and other deductions from wages,

rather than high levels of employment, to be a mbre plausible

explanation for the explosion in wages. But even if we accept that the

wage explosion of the late 1960s took place due to high levels of

employment causing wages to rise faster than prices, it is difficult to

accept that the rate of profit fell as a consequence of the fall in profit

margin, even when investment continued to rise till the early 1970s.

As far as the exhilarationist regime of the Bhaduri-Marglin model is

concemed, its existence is highly doubtful. If the exhilarationist logic

held, then the downtum would have got reversed following the

adoption of the neoliberal policies and restoration of the profit margin.

16 Patnaik ( 1986) quotes figures from Perlo ( 1973) and Mandel ( 1978) to show that the share of wages (measured in three different indices) in U.S. manufacturing decreased significantly betwee:1 1947 and 1967. Patnaik suggests that" ... the gains on account of rising profit-margins of the oligopolists remain partly concealed under excessive depreciation provisions, enormous salaries for corporate executives and the like."

37

The Prrfit Squeeze Thesis

Bowles, Gordon and Weisskopf (1989) have noted that all the indices

influencing the profit margin in the U.S. (see 1.4), which according to

their findings had worsened during the late 1960s and early 1970s,

improved in the 1980s. They found that growing unemployment had

reduced the growth of wages. The profit tax rate as well as the real

price of imports also declined under the impact of conservative

policies. However, the increase in the profit share did not lead to an

improvement in the profit rate or the rate of accumulation. The

claimed sensitivity of investment to the profit margin under the

exhilarationist regime therefore never materialised. 17

A capitalist economy can never be meaningfully analysed in terms of

the exhilarationist regime. That is not to say that a squeeze in the

profit margin can never occur, but to suggest that the fall in the profit

margin cannot be the proximate cause for either a fall in the rate of

profit or a slowdown in investment. The regime of overaccumulation is

a non-starter. The cause for the downturn in the 1970s lay elsewhere.

And other things remaining the same, policies meant to increase the

profit share by suppressing wage growth in pursuit of exhilaration,

can lead to slower growth and greater unemployment. In the absence

of the possibility wherein savings out of profits adjust automatically,

an increase in the profit share cannot be justifiably argued to have a

stimulating impact upon investment. There is, however, one

possibility wherein a fall in money wages might raise investment

sufficiently to more than compensate for the decline in consumption,

which was noted by Keynes (1936). He had argued:

A reduction of money-wages will somewhat reduce prices.

It will, therefore, involve some redistribution of real

income (a) from wage-earners to other factors entering

into marginal prime cost whose remuneration has not

17 Glyn (1997) also found a weak relationship between profit margin and manufacturing accumulation in the advanced industrialised countries since the 1980s. He explains it in terms of greater variability in profits, high real interest rates and a decline in demand growth and profitability in manufacturing relative to the service sector.

38


been reduced, and (b) from entrepreneurs to rentiers to

whom a certain income fixed in terms of money has been

guaranteed. What will be the effect of this redistribution

on the propensity to consume for the community as a

whole? The transfer from wage-earners to other factors is

likely to diminish the propensity to consume. The effect of

the transfer from entrepreneurs to rentiers is more open

to doubt. But if rentiers represent on the whole the richer

section of the community and those whose standard of life

is least flexible, then the effect of this also will be

unfavourable. What the net result will be on a balance of

considerations, we can only guess. Probably it is more

likely to be adverse than favourable .

. . . The contingency, which is favourable to an increase .in

the marginal efficiency of capital, is that in which money

wages are believed to have touched bottom, so that further

changes are expected to be in the upward direction. The

most unfavourable contingency is that in which money

wages are slowly sagging downwards and each reduction I

in wages serves to diminish confidence in the prospective

maintenance of wages. When we enter on a period of

weakening effective demand, a sudden large reduction of

money-wages to a level so low that no one believes in its

indefinite continuance would f?e the event most favourable

to a strengthening of effective demand. But this could only

be accomplished by administrative decree and is scarcely

practical politics under a system of free wage-bargaining.

(Chapter 19, p.265)(emphasis added).

Keynes' argument of course has nothing to do with the exhilarationist

regime since investment is not argued to be positively responding to a

higher profit share as in Bhaduri and Marglin, but to shifts in the

39


marginal efficiency of capital brought about by expectations of rising

money wages and prices.

Profit Squeeze or Conflict Inflation?

A rise in unit labour costs, due to rising wages or falling labour

productivity or a combination of both, can lead to a squeeze on the

profit margin if there is no compensating increase in the price level.

This implies that the capitalists are forced to accept a reduction in

their mark-up, by the simple Kaleckian formula of cost determined

prices.

p = [1 + m]w · b (1.12)

If the mark-up is exogenously given, as in the Kaleckian framework, it

follows that for a profit squeeze to happen the underlying 'degree of

monopoly' has to decline. It is argued by the proponents of the profit

squeeze thesis that at high levels of employment workers' bargaining

power rises vis-a-vis the capitalists, which raises w and b. But at high

levels of employment the position of capitalists is also strong due to

high rates of capacity utilization and favourable demand conditions. It

is more likely therefore that the capitalists would raise p rather than

accepting a fall in m and the contending claims of capitalists and

workers would cause wages and prices to accelerate into spiralling

inflation, rather than causing a secular decline in the share of

profits. 18

The wage-price dynamic of a conflict inflation model captures the

process, where workers and capitalist have a target real wage and

profit margin respectively, the targets being positively related to the

level of employment and state of aggregate demand in the economy,

18 This was the more likely outcome of an increase in the bargaining power of workers according to Kalecki. See Footnote I.

40


and adjust their claims according to the anticipated divergence from

the target.l9

For workers,

Where,

For capitalists,

Where,

w = a[vw- v]+ P · p: and, vw = vw(L), V:, > 0

w = change in money wage

Vw = target real wage

v =real wage (w /p)

L = rate of employment

(1.13)

p: = anticipated change in price level

a,p =adjustment coefficients

p = r[v-vJ+ 0. p: and, vc = vc(u), v; < 0

p = change in price level

(1.14)

Vc =real wage target of capitalists,

inversely related to the mark-up (m)

u = rate of capacity utilization

y,o =adjustment coefficients.

Accelerating inflation can take place in this setting if the conflicting

claims of the workers and capitalists cannot be reconciled, leading to

a divergence between Vw and Vc. The derivative of Vc is negative

because at high levels of capacity utilization firms try to raise their

mark-ups to generate more internal funds, in order to take advantage

of expanding markets and reduce them when sales are low. If a price

leader firm raises its mark-up and price in order to generate more

internal funds, at a high level of capacity utilizaticn. for the entire

19 The conflict inflation model below follows Rowthorn (1977).

41

The Prqftt Squeeze Thesis

economy, follower firms would have less incentive to desist from

raising their prices since they would conceive the responsiveness of

their individual market demand to such a price increase to be low.

Therefore, with rising levels of capacity utilization the target mark-up

for capitalists would also rise.

The wage explosion of the late-1960s, reflecting the rising bargaining

power of the workers, was also accompanied by rising prices in the

advanced economies. Charts 1.7 to 1.12 in the statistical appendix to

this chapter show that for all the advanced economies (data for

Germany was not available) although the inflation (increase in

consumer prices) rates rose along with increasing rates of wage

growth from the late 1960s, wage growth was higher than the inflation

rate till the early 1970s. In the aftermath of the oil price shock in

1973, however, accelerating inflation resulted across the advanced

economies, which reflect the' obstinacy of the monopoly power of the

capitalists. From 1973 to the end of the inflationary phase in the early

1980s, both wage growth and inflation remained very high, with the

inflation rate surpassing the wage growth rate in some years for

Canada, Japan, U.K. and the U.S. It is only in France and Italy that

the rate of wage growth remained unambiguously higher than the

inflation rate over the entire inflationary phase. Thus accelerating

inflation seems to be a more general result of the high bargaining

power of workers due to high employment, rather than a continuing

squeeze of profit margins across the advanced economies. Moreover,

as Kaldor ( 1985) had noted,

... the major new element of the 1970s was inflationary

expectations, and the volatility of expectations, not those

relating to consumer prices and the cost of living but to

the prices of staple products, raw materials, and energy,

which directly or indirectly enter into costs ... after 1971

raw material prices rose sharply at the first sign of

42


increased demand and fell steeply at the first signs of a

recession; the sensitivity of prices to changes in world

industrial production was three times as high as before.

This instability may have had something to do with the

suspension of the gold standard; so long as the dollar

remained convertible to gold (even if only in a very

restricted form) the commodity dealer's belief in the

existence of a long-run normal price for commodities was

not destroyed; inflationary trends, even if prolonged, were

more likely to be treated as temporary affairs. { .. .It was

only in 1971 j 72 that an explosive rise of commodity

prices began; this preceded the "oil-shock" at the end of

1973.) Now that no currency is convertible except into

other currencies and then to constantly varying exchange

rates, there is no form of money that can be expected to I

remain stable in terms of real value. (pp. 78-79){emphasis

added).

We believe that it was the actual experience and future fears of

inflation caused by several factors {as described by Kaldor above),

money wages rising faster than productivity being one of them, that

undermined the demand led growth regime of the post-war period.

Accelerating inflation, in contrast to a profit squeeze, can be argued to

have had a negative impact upon private investment. The erratic

movement of wages and prices, which occur during accelerating

inflation, disturbs the ability of capitalists to calculate their future

streams of income from investment projects, thereby leading to a

deterioration of the investment climate. If inflation is fully anticipated,

upward movement in wages and prices does not affect investment

decisions adversely and hence steady inflation does not undermine

steady accumulation. But if inflation is accelerating, and since the

rates at which the prices of different commodities rise vary, the

movement of relative prices between commodities would show greater

43


variance. This makes calculations of future retums difficult and

enhances the risks of long-term investment thus adversely affecting

the pace of accumulation.2o

Accelerating inflation within the advanced economies had adverse

implications for the stability of the intemational monetary system as

well. In the recent phase of capitalism, the collapse of the Bretton

Woods system, beginning with the suspension of the gold standard

and eventually leading to a regime of floating exchange rates following

the oil price shock of 1973, provided a structural break as did the

Great Depression during the 1930s. The institutional setting which

provided the backdrop for continued growth and prosperity across the

advanced economies got disrupted due to spiralling inflation. High

levels of employment within the advanced world, which were

maintained through demand management in the post-war period,

were responsible fol this inflation because due to the enhanced

bargaining strength of workers, their ex ante claims could not be

squeezed in the event of rising primary commodity prices and the oil

price shock. In response to the inflationary experience, govemments

everywhere resorted to contractionary policies, which coupled with the

depressed climate for private investment in the situation of overall

inflation, precipitated the recession of 1974-75. This marked the end

of the protracted period of growth and prosperity of the post-war

period and the beginning of the downtum in economic growth in the

advanced economies.

Inflation continued to rise in most advanced countries over the 1970s

which eventually led to the adoption of neoliberal policies by the

governments in the advanced economies in the early 1980s. These

20 See Patnaik (1996) where he incorporates accelerating/decelerating inflation as an argument in an autonomous investment function, with a negative derivative. (pp. 42-43). Dutt (1992) develops a long run dynamic model with conflict inflation and endogenous variations in income distribution affecting the dynamics of accumulation through demand side effects. The results show cyclical growth with oscillations in the real wage ar.d the capital-labour ratio with possible zones of crisis where the real wage, employment and capacity utilization moves in a cumulative downward spiral feeding upon each other.

44


conservative policies were primarily directed at smashing the

bargaining strength of the workers in order to prevent a repetition of

the inflationary experience of the 1970s. The efforts to maintain price

stability by maintaining high levels of unemployment and restraining

money wages has eventually led to a squeeze on aggregate demand

which has aggravated the problem of slow growth and unemployment.

The political economy of such anti-inflationary regimes would be

discussed in greater detail in a later chapter. What needs to be noted

here is the enduring relevance of the demand-side factors, such as

those emphasised within the Kaleckian framework, in explaining the

dynamics of capitalist economies.

Concluding Observations

It has been argued in this chapter that the grounds for refuting

the Kaleckian paradigm are neither theoretically persuasive nor borne I

out through evidence. While the maintenance of high employment

through demand management was responsible for the eventual

unravelling of the post-war phase of high investment and growth, it

was not because of a profit squeeze caused by higher money wage

growth relative to prices in the late 1960s. High levels of employment

and bargaining power of the workers led to spiralling inflation which

was greatly accentuated by increases in primary commodity prices,

most importantly the oil price shock of 1973. The experience of high

rates of inflation had a detrimental effect on investment decisions and

undermined business confidence, which combined with restrictive

government policies to precipitate the recession of 1974-75. Several

other factors were also emphasised by Steindl ( 1979), which

contributed to the suppression of aggregate demand and prevented a

fast recovery from the recession.2 1 The experience of the downturn in

21 Writing in defense of his theory of stagnation, Steindl (1979) provided five reasons for the 'stunted growth' since the early 1970s; (a) increase in the 'unwanted amortization funds' (depreciation funds) relative to replacement demand following the period of high growth, which led to a rise in firm level savings (following Bhaduri (1972) and Harrod (1970)), (b) increase in personal savings contributing to a slackening of demand, (c) exhaustion of the possibility for the European economies to draw upon the

45

The Prrfit Squeeze Thesis

the early 1970s therefore does not refute the demand-side paradigm in

terms of which capitalist dynamics had been analysed by a host of

writers starting from Kalecki to Steindl and Baran and Sweezy.

Moreover, the experience of slow growth since 1980s which has

continued through the 1990s cannot be explained in terms of higher

bargaining power of workers due to high levels of employment.

Theoretically, in the longer run there would always be a tendency for

capitalism to adjust its rate of accumulation, even the 'natural rate of

growth' if necessary, through labour migration or capital exports or to

adjust its capital intensity through technical progress, in order to

maintain the reserve army of labour which is vital for its stability.22

Empirically, unemployment has risen across the advanced economies

after the 1970s. On the basis of available data, charts 1.13 to 1.19 in

the statistical appendix show that the unemployment rate rose in all

the advanced e~onomies over the 1980s (data for Germany was

available only from 1993), reaching to more than 10 percent in

Canada, France, Italy and U.K. While the unemployment rate came

down in the U.S. and U.K. during the late 1990s, it rose significantly

in Japan over the 1990s and continued to remain at high levels for the

other G-7 economies. Moreover, charts 1.7 to 1.12 show that both the

inflation rates and the wage growth rates fell progressively across all

the advanced economies since the early 1980s. The persistence of slow

growth during this period is clearly not related to high employment or

wage-price inflation, let alone a persistent fall in the profit share due

to wages rising faster than prices. The analysis in our study, regarding

stock of technological knowhow from the U.S. along with their catching up, which dried up a convenient source of technical progress which was a stimulus for investment, (d) energy and environment related problems undermining business confidence due to additional burdens and (e) the change in the political attitudes of the governments (following Kalecki's political business cycle) in maintaining full employment. Steindl categorically rejected the suggestion of a falling profit share causing a fall in profits. He emphasised that profits got lowered only in account of excess capacity following the onset of the mid-1970s recession. He also noted a long-run increase in non-enterprise savings which had a depressing effect on capacity utilization. 22 For an analytical and historical account of the irrelevance of the 'natural rate of growth' for stability under capitalism see Patnaik ( 1996) pp. 32-36.

46


the protracted nature of the slowdown therefore concentrates upon

other causes.

A whole set of new factors have come into play in the advanced

countries since the 1970s, after the undermining of the post-war

institutions which led to higher growth. Before entering into that

domain, however, the problems dealt with in this chapter need to be

looked at within an open economy context. There is an influential

argument that intensified competition has largely contributed to

supply-side pressures on accumulation. There are variants of this

basic theory which argue from different perspectives how international

or inter-firm competition adversely affects growth, by squeezing profit

margins. These are critically examined in the next chapter.

47


Appendix

In the concluding section of their paper, Bhaduri and Marglin

( 1993) talk about the problems related to the stability properties of

their model in a dynamic context. However, even within their short

period analysis the model has problems in generating stable

equilibrium. In order to determine the equilibrium level of u we need

another relationship between the capacity utilization rate and the

profit margin, besides the IS curve of 1. 7. Let us assume that the

degree of monopoly and therefore the profit margin is positively related

to aggregate demand, from which we can derive the following

relationship: 1

dn , n = n(u ),- > 0

du (A.l)

Let us call it the MM curve. This upward sloping curve in the u-n:

space, along with the IS curve determines the equilibrium. Now, it can

be easily seen that for linear IS and MM curves, while the

stagnationist regime has a stable equilibrium (figure A.1), the

equilibrium in the exhilarationist regime is unstable if MM is flatter

than IS (figure A.3). If we consider a downward sloping MM curve,

similar instability would be observed in the stagnationist regime.

1 This relationship is also assumed in Marglin and Bhaduri ( 1990).

48


u

IS MM

~------------------------------n

u

stable equilibrium stagnationist regime

figure A.l

MM

IS

L-------------------------------------n stable equilibrium

exhilarationist regime

figure A.2

49

The Prqftt 5 queeze Thesis

u IS

MM

~-------------------------------------n

unstable equilibrium exhUarationist regime

figure A.3

Once non-linearities are introduced the problem of obtaining a stable

equilibrium becomes more difficult. For a C-shaped IS curve [which is

cited as an example of a non-linear IS schedule in Appendix B of

Bhaduri and Marglin (1993)] there are two values of capacity

utilization for a given profit margin. The lower value of u (say ul) lies in

the stagnationist regime. If we assume that the non-linear investment

schedule cuts the savings schedule from below at u1, the equilibrium

of the stagnationist regime violates the stability condition of the

output adjustment process, i.e. the investment schedule becomes

steeper than the savings schedule. If the investment schedule is flatter

at lower levels capacity utilization (the IS curve would be mirror image

50


of the C-shaped curve), then the equilibrium u2 of the exhilarationist

regime is unstable.

multiple equilibria under non-linear IS schedule

s

u,

u1 unstable

figure A.4

51

s S S, I

s

u, u, u,

u2 unstable


Statistical Appendix

Chart 1:1 GOP Growth Rates In Canada (1966 to 1999)

8

6

4 ., Gl -; ~ .s= 2 'i ~

(!) 0

CD co 0 N """

CD co 0 ;b <0 co CD CD ,.._ ,.._ ,.._ ,.._ ,.._ co co co 0> 0> 0> Cl Cl Cl 0> Cl Cl Cl Cl

v CD CO Cl Cl Cl 0> 0> 0>

-2

-4

Year

Source:- World D9velopment Indicators CD-ROM, 2001, The World Bank.

Chart 1:2 GOP Growth Rates In France (1961 to 1999)

8

7

6

5 II) Gl 4 -; ~ .s= 3 'i ~ 2

(!)

0 0>

-1 0>

-2

Year

Source:- World Development Indicators CD-ROM, 2001, The World Bank.

52


Chart 1:3 GOP Growth Rates In Italy (1961 to 1999)

10

8

6 Cl)

.! 4 cu a:: .c i 2 e C)

0

-2

-4

Year


Chart 1:4 GOP Growth Rates In Japan (1961 to 1999)

14

12

10

8 Cl) Cll "i 6 a:: .c i 4 e C) 2

0

-2

-4

Year


53


Chart 1:5 GOP Growth Rates In United Kingdom (1961 to 1999)

8

6

4 U)

.! I! ..c 2 i ~ (!)

0 O'l O'l O'l

-2

-4

Year

Source:· World Development Indicators CD-ROM, 2001, The World Bank.

Chart 1:6 GOP Growth Rates In United States (1961 to 1999)

8

6

Ill 4

CD ~ 0:: ..c 2 i ~ (!) 0

-2

-4

Year


54


18.00 ..r: 16.00 'i 14.00 e (!) 12.00 CD Cl 10.00 ~ 8.00 c 6.00 0 ;: 4.00 cu ;;::

,

Chart 1:7 Inflation and Growth of Wages In Canada (1960 to 1999)

.,

;r\ /\. .·/ \ ~ \. .. I '-' \-.

- I "(, · ..... -·· / ~ ,.

~ \· ..

2.00 .s 0.00 ---- --v

0 N <b co CX) 0 N ~ co CX) 0 N ~ co CX) 0 N co co co co 1'- 1'- 1'- 1'- CX) CX) CX) CX) 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> ..... ..... ..... ..... ..... ..... .....

Year

\· • - - • • · Wage Growth --- hflation \

Source:-Wage growth, International Financial Statistics CD-ROM, 2001, IMF.

..r: .. il: e

(!) CD Cl

~ c .g cu

;;:: .5

Inflation, World Development Indicators CD-ROM, 2001, World Bank.

25.00

20.00

15.00

10.00

5.00

Chart 1:8 lnfHion and Growth of Wages In France (1960 to 1999)

. .. : .

'

Year

\· • • • • • ·Wage Growth --- hflation I Source:-Wage growth, International Financial Statistics CD-ROM, 2001, IMF.


55

'8i 0>

. ' ~

co CX) 0> 0> 0> 0>

.t:

i e (!) Gl 01

~ c 0

i ;;::: .E

30.00

25.00

20.00

15.00

10.00

5.00


Chart 1:91nflatlon and Growth of Wages In Italy (1960 to 1999)

Year

I· · · · · · · Wage Growth ---Inflation j

Source:-Wage growth, International Financial Statistics CD-ROM, 2001, IMF. Inflation, World Development Indicators CD-ROM, 2001, World Bank.

Chart 1:10 Inflation and Growth of Wages In Japan (1960 to 1999)

30.00

25.00 .t:

i 20.00 e (!) Gl 15.00 01

~ 10.00 c .2 -; 5.00 ;;::: .E

Year

\· • • • • • · Wage Growth --- Inflation j


56


i 25.00

Chart 1:111nflatlon and Growth of Wages In United Kingdom (1960 to 1999)

5 20.00 +----------~H:------;~--'-------------., tJI ~ 15.00 +----------:+-...:,..-.lt---c-rf-+-------------

~ 10.00+-----------------~-,r---~rtr---~~--------~~--------------i ;;:: ..!: 5.00

0.00 0 N ~ <0 co 0 N ;:!: <0 co 0 N ~ <0 co 0 N ~ <0 <0 <0 <0 1'- 1'- 1'- 1'- co co co co 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ......

Year

I· · · · · · ·Wage Growth --hflation I Source:-Wage growth, International Financial Statistics CD-ROM, 2001, IMF.

.r. ... :r: 2

(!) .. tJI

~ c 0

i ;;:: .E


16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Chart 1 :121nflatlon and Growth of Wages In United States (1960 to 1999)

1\ I\ / \ /..\._;···f. ..... ,

.. .. ··-f \/ \ .:/~ I \ ~

· ....... ·"/-/ "' v ~;' ... ···~ .. .· ._ .. .._... .... __,

Year

<0 co 0>

I·---- · ·Wage Growth --hflation j

0 0> 0>

N 0> 0>


57

<0 co 0> 0> 0> 0> ......

... ......... ·.·

<0 0> 0>

~

co 0> 0>


c "E Gl E >o 0 a. E Gl c

~"::J

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

1-

1-

0 CX) Ol

1-

o; Ol

Chart 1:13 Unemployment(% of total labour force) In Canada (1980 to 1998)

("") CX) Ol

U) CX) Ol

Ol CX) Ol

Year

N

ffi ("") Ol Ol

U)

ffi


14.00

12.00

- 10.00 c "E 8.00 Gl E >o 0 a. 6.00 E Gl c 4.00 "::J

2.00

0.00

J-

1-

1-

.,.... CX) Ol

Chart 1:14 Unemployment(% of totalla.bour force) In France(1980 to 1998)

i

~ Ol .,....

Ol CX) Ol

Year


58

<0 Ol Ol

,.._ Ol Ol

CX) Ol Ol

~

~

Ol Ol Ol

Ol Ol Ol


14.00

12.00

- 10.00 ~ .. c

8.00 Gl

[ .2 6.00 01. E Gl c

4.00 ;:)

2.00

0.00

Chart 1:15 Unemployment(% of total labour force) In Germ any ( 1993 to 1999)

,._ co a>

co co a>

a> co a>

0

8l

-

1-- 1--

1-- 1--

1-- r-

[£ Year

- -

r-- 1--

1-- 1--

r- 1--

r- 1--


14.00

12.00

~ 10.00

c 8.00 Gl

E >. 0

6.00 a. E Gl c 4.00 ;:) -

2.00 1- 1- -

0.00 g a> ....

Chart 1:16 Unemployment(% of total labour force) In Italy (1980 to 1997) .

r- - i

-

- - -

- - -

- '-" r-

'-r

1-

-

-

,._ co a> ....

1- 1-

- t-

- 1-

1-

-

-

0 a> a>

Year

-

~

-

-

- -

- - -

- - -

- - 1-

o; a> ....

-

-

-

-

10 a> a>

-

-

-:-

-

Source :-World Development Indicators CD-ROM, 2001, The World Bank.

59

,._ a> a>

-

-

-

-1--

r-

r-

<0 a> a>

-

-

-

,._ a> a>

co a> a>

-

-

-

r-

r-

co a> a>

a> a> a>

-

r-

1-

1-

1-

a> a> a>


5.00

4.50

4.00

~ 3.50

c 3.00 G>

[ 2.50 0 ii E 2.00

G>

:5 1.50

1.00

0.50

0.00

1-

1-

co ~ m m ,....

Chart 1:17 Unemployment(% oftotallabour force) In Japan ( 1980 t.:> 1999)

M CX) Ol

II) CX)

m ,.... CD CX) Ol

..... Q) m ,....

1-

r-

-

-

m Q) m

0 m m

Year

N m Ol

M m Ol

'<I' m Ol

II) m Ol


14.00

12.00

- 10.00 ~

- - -

-c: 8.00 Gl - 1- -E >. 0

Chart 1:18 Unemployment(% of total labour force) in UK (1980 to 1999)

' r- 1- -

1- - - r- 1- - -

CD Ol Ol

ii. 6.00 1- - - - - -E Gl c:

:::::1 4.00

2.00 r-

0.00

"' Q) Ol

1- -

-

- - 1-

r- r- 1-

Q) CX)

Ol

-

- 1- 1-

0

8l Year

1- -

,.... 8l

- ,...--

II) m Ol


60

CD

8l

..... Ol m

Q) m Ol

-

-

-

Q)

8l

m m m

-

-

!---

m m m

~ e... .. c Gl E >. 0 Q. E Gl c

::;)

12.00

10.00

8.00

6.00

4.00

2.00

0.00 0 co m

1-

... co m ....

- r-


Chart 1:19 Unemployment(% of total labour force) In US (1980 to 1999)

<'l co m

-

lO co m

-

co co m

r- r-

co co m

-

-

-

1-

Year

-

~

.... Cl m

<'l m m

lO m m

co m m

m m m


61

-

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