Cooking the Books: No Profits, No Growth (2013)

The Cooking the Books Column from the January 2013 issue of the Socialist Standard

Growth –the accumulation of capital –is what capitalism is all about. There can be a debate about whether this growth is a good (increasing society’s ability to produce and so, in theory, to eliminate poverty and deprivation) or a bad thing (damaging the environment and depleting resources because of the unplanned way it happens), but this is rather academic as it’s going to happen anyway. Or not. Growth under capitalism is not a straight line but more like the blade of a saw with peaks and troughs. At the moment the economy is in a trough, with production 4 percent below the last peak in 2008.

Governments know enough about capitalism to realise that the way-out of the current situation for them is ‘growth’. This would lead not only to increased consumption and a fall in unemployment but also to a rise in government revenue from taxation and so ease its debt problem. Which is why the Coalition has adopted a ‘growth strategy’. But growth is not something governments can control.

Growth comes about by profits being re-invested in expanding production and productive capacity, and so depends on profits being made. The flip side is that if profits are not being made there can be no growth. In fact, growth stops precisely because it has become unprofitable to produce at the same level as previously. Which is what happened in 2008.

Growth won’t resume until it again becomes profitable, as the government has found out by the failure of one of its policies – encouraging private investment in infrastructure projects. Philip Lachowycz, of Fathom Consulting, noted in the Times (26 November):

‘The main plan has been to kick start investment for around 500 proposed infrastructure projects with pension fund capital worth £20bn. So far the proposals have completely failed to take-off. The government has been unable to encourage the private sector to invest in new roads, housing or anything else for that matter. Official data show that infrastructure spending is down 11 percent from a year ago and the government has raised less than £1bn.’

The CBI demanded that the government insure capitalist firms against any losses from this but the government has refused so the private investment has not materialised (so much for the much-vaunted ‘risk-taking’ that capitalist apologists trot out to justify profits). But, says Lachowycz,:

‘There is a simpler explanation –the chronically low rate of return. At Fathom Consulting we calculate that the real rate of return on all fixed capital expenditure has collapsed in recent years and stands at only 0.5 per cent. For infrastructure specifically, it is lower still, and may even be negative.’

On their website accompanying the article is a graph of the ‘real rate of return on fixed capital investment’ from 1988 to 2012, showing a fall from 4 percent in 2007 to 0.5 percent today. But it is not only the return on investment in fixed capital that is too low:

‘OK, but surely everybody agrees that the UK has a severe shortage of housing and should now embark on a major house building programme? Not us. For housing specifically, we find that the rate of return is deeply negative, as house prices remain significantly overvalued relative to income.’

What a condemnation of capitalism this rather cynical but eminently realistic comment represents! People need houses, hospitals, schools and other amenities but they are not going to get them because the ‘rate of return’ is too low or negative. Time to get rid of the profit system.