EXCESS CAPACITY
As I understand it, excess capacity has developed in Asia because of a kind
of excessive competition. Each of the big conglomerate groups wanted to
be in everything; each wanted to have its own auto company, its own steel
company, its own hotel chain, etc. There does not seem to have been
much rational calculation about what the market would bear. Loans for
these over-ambitious expansion plans were generally available from their
conglomerate group banks at low rates of interest and facilitated by
expansionary monetary policy.
This is a kind of "anarchy of capitalism" cause of the crisis. There is
no overall planning and each group of capitalists tries to be the biggest
and the best, which creates an oversupply, especially in key industries.
This is not the whole story, but I think it is part of the story.
John questions whether excess capacity is compatible with my theory of
the falling rate of profit. John argues that, to the contrary:
If your rate of profit is falling, then clearly the demand for
constant capital is growing faster than output.
This is not so "clear" to me. I do not understand what it means. What is
meant by the "demand for constant capital"? As I understand it, constant
capital is the money-capital invested in the means of production. In what
sense is there a "demand" for this money-capital. And how can this
money-capital be compared quantitatively (greater or less) with output,
which is defined in real, physical terms? (Do you mean here the output of
final goods or the output of means of production?).
I don't see why my interpretation of the falling rate of profit is
incompatible with excess capacity. My interpretation implies that
constant capital is increasing faster than variable capital. If constant
capital is increasing rapidly, then the supply of output is probably also
increasing rapidly, which would seem to at least create the possibility of
an excess supply of output.
EXCESSIVE DEBT
John asks:
Is debt excessive? Relative to what?
As I understand it, the "Asian model" of capitalism is based on a heavy
reliance on debt financing. Debt-equity ratios are typically 3-4:1 and
sometimes higher. In the US, a debt-equity ratio of 1:1 is considered high
and risky.
I do not understand all the reasons for this heavy dependence on debt
financing, but Wade and Veneroso argue in a recent New Left Review
article (March-April 1998) that one reason is that households prefer to put
their savings in banks rather than buy stocks.
In any case, whatever the causes, the effect of this high level of debt makes
Asian firms especially vulnerable to a downturn of the econmy and of their
incomes. Debt then becomes urgently excessive in the sense that the
firm's income is not sufficient to service their debts. In such a crisis
situation, even if firms survive, they are not likely to invest, as long as
their debt burdens remain heavy. And if firms don't invest, then the
economy cannot recover. That is why the working off of this heavy debt
burden - in some way - is a precondition for recovery.
FALLING RATE OF PROFIT
I am less sure about the falling rate of profit in Asia than I am about the
other two causes. I have heard that the rate of profit has declined in Japan,
and in S. Korea, and maybe in other countries. But I have not actually
seen any estimates, and especially not any rigorous estimates. If anyone
knows of any estimates of the rate of profit in Asian countries, please
send me the references.
I am also not sure whether the estimates being referred to are in terms of
current costs or historical costs.
Assuming that the rate of profit has declined, the next question would be:
WHY? What are the causes? I doubt if there has been a decline in the rate
of surplus-value. I would guess that the composition of capital has
increased significantly in these economies, since there has been rapid
technological change. I donıt know what to expect for the ratio of
unproductive labor to productive labor in these economies.
In any case, the main point for the purposes of this discussion is that for
many firms throughout Asia the current operating profit is less than the
debt payments due.
John also asked why would capitalists continue to invest if their
observable rate of profit were declining. I don't have a complete answer
to
this question, but I can think of several reasons:
1. Capitalists may not necessarily think that the past downward trend in
the rate of profit will continue, at least not for them. They may think that
a new investment will increase their rate of profit, even though their
competitors' rate of profit may remain low and perhaps even decline
further.
2. Competition may force some capitalists in some situations to continue
to invest, even though they expect their rate of profit to decline. Because
if they didn't invest, they would fall further behind in the competitive
battle over costs. The alternative to investing is not to not invest and keep
your rate of profit high; the alternative is to not invest and suffer an even
lower rate of profit. Shaikh has emphasized this coercive nature of
competition ("competition is war"). And Jim Crotty has argued that this
is exactly what happened in the US economy in the 1980s, and that the
continued investment, in spite of declining profits, was made possible by
increasing debt financing.
3. In some cases in Asia over the last decade or so, some capitalists may
have been so determined to enter particular industries, that there were
willing to invest even knowing that they were risking a low rate of profit.
The newly investing capitalists perhaps believed that they would be able
to win the competitive battle that would ensue; i.e that the losses and
bankruptcies caused by oversupply and falling profits would be suffered
by other capitalists, not themselves. Or they thought the rapid growth
would never end.
DEVALUATION OF CAPITAL
John asks further whether the devaluation of capital through bankruptcies
can be incorporated into what he calls a "simultaneous" framework, which
he attributes to me. By "simultaneous" framework, John appears to mean
the Sraffian interpretation of Marx's theory, according to which values
and prices of production are determined fundamentally by given physical
quantities of inputs and outputs. I have tried to argue many times that my
interpretation of Marx's theory is fundamentally different from the
Sraffian interpretation, even though I assume that constant capital is
valued in current costs. I have argued that the initial givens in Marx's
theory are not the physical quantities of inputs and outputs, but are
instead quantities of money-capital. Therefore, I would interpret Johnıs
question, as it applies to my interpretation, as the following: can the
devaluation of capital through bankruptcies be incorporated into a theory
which assumes that constant capital is valued in current costs?
I think the answer to this question is yes. According to my interpretation,
constant capital has a value prior to production. If there has been no
devaluation of capital, due either technological change or to bankruptcies,
then the value of constant capital continues to be the actual historical
capital invested in means of production. However, if in a crisis some firms
go bankrupt and the means of production of these firms are sold to
surviving firms at cheap prices, then the value of the constant capital
invested in these means of production will be reduced (devalued) to the
lower cheap prices, i.e. constant capital will be valued at current costs.
In this way, the rate of profit for surviving firms is increased.
I would liked to remind everybody of the original questions
that began this discussion and that I am most interested in right now:
Are widespread bankruptcies of capitalist firms a necessary precondition
for recovery from the Asian crisis? Or, can the crisis be overcome without
bankruptcies (and deeper depression) through government bailouts,
expansionary policies, etc.
Any further thoughts?
Fred