Economic surplus and capitalist diversity

Introduction

A theory of capitalist diversity must as a basic minimum have clear and unequivocal answers to two ontological questions: What is capitalism? What is capitalist diversity? The answer to a third evaluative question on the significance of the phenomena identified is equally necessary, but seldom stated explicitly. The starting point of this critique is that the varieties of capitalism framework (VoC) cannot provide sufficient answers to the first two questions, and that its implicit assessment that capitalist diversity is a, or perhaps the, historically significant phenomenon of the current epoch is questionable. This evaluative question is particularly important in that its explicit formulation is conspicuously absent from either the VoC accounts or the broader literatures on capitalist diversity. ¹ Accordingly, whilst I would agree with Bruff (2011: 482) that the comparative capitalisms (CC) literatures can be defined as ‘a body of knowledge comprised of contributions which take institutions as their starting point when considering the evolution of national political economies’, a second common assumption can be identified in that all contributors (critical or otherwise) see diversity as something praiseworthy, puzzling or somehow surprising; i.e. there is a broad consensus that capitalist diversity is both theoretically problematic and historically significant.

In contradistinction to the mainstream approaches, Marxian political economy has a logically consistent conception of capitalism as a mode of production. Although a number of approaches are of relevance for considering these issues in the manner below (e.g. Mandel 1968; Mattick 1981), the concept of economic surplus as developed and applied by the dependency school (e.g. Baran & Sweezy 1970) will be utilised to provide a coherent answer to the second ontological question mentioned above (see also a recent special issue of Monthly Review [2012]). It will be argued below that the Marxian conception of capitalism suggests two important assumptions that should precede the analysis of capitalist diversity: first, that while there is some divergence between the institutional structures of advanced capitalist economies, the final objective of such differing structures is precisely and always the same search for profit (if institutions seriously impeded this, they could not exist for any extended period of time); and second, this implies that whilst empirically interesting, this diversity should not obscure the fundamental fact that this diversity is taking place within capitalism (cf. McDonough 2013; see also in this special issue Bruff & Hartmann, Jessop, Hardy, Hartmann, and Gough). ²

However, the concept of economic surplus as it appears in the works of the dependentistas is at present insufficient for the task of challenging the consensus described above. ³ Accordingly, the structure of this paper will be as follows. The first section will introduce VoC – which, owing to its ambitions to provide a general and systemic account of capitalism, is the key point of reference when mainstream scholarship is engaged with – and a materialist critique of its premises. Following this, the category of economic surplus will be introduced and subsequently refined in order to make it applicable. Next, economic surplus will be utilised in order to arrive at a new definition of capitalist diversity, before the analysis of the previous sections will be used to give a critical assessment of the significance of the phenomena with which VoC is concerned. Finally, a short conclusion will draw together and restate the main findings of the discussion.

Varieties of capitalism

This section offers a brief summary of Hall and Soskice’s (2001) contribution, which provides a clear exposition upon which the subsequent critique can be trained. The VoC approach is comprised of four main elements:

Such is the panorama of the contemporary business environment sketched by Hall and Soskice, and given the theoretical nature of our quarrel, it is not necessary to say any more about the particulars of the approach here (for more, see both of Coates’s papers in this special issue, plus those by Jessop and Bieling). For Marx (2011: 188), critical analysis of capitalism (diverse or otherwise) must begin from recognition that:

Nature does not produce on the one side owners of money or commodities, and on the other men possessing nothing but their own labour-power. This relation has no natural basis, neither is its social basis one that is common to all historical periods. It is clearly the result of a past historical development, the product of many economic revolutions, of the existence of a whole series of older forms of social production.

This fundamental tenet of historical materialism allowed Marx to give a coherent definition of capitalism in terms of forces and relations of production, the analytical virtue of which consists in no small part in the theory’s ability to distinguish between capitalism and other forms of social production. In contrast, nowhere do Hall and Soskice provide what they take to be either the natural or social basis of capitalism or capitalist diversity, and the VoC literature has continued to exist in this theoretical vacuum ever since. This led the literature into the neoclassical trap of seeing all economies as essentially variations on the theme of exchange, and since exchange in some form or another has been a feature of every economy from the Neolithic period onwards (Laclau 1977), an a-historic generality which cannot perceive the basic categories of relevance to capitalism – capital and labour, wage and profit, value and reproduction – is the result. Pushed to its extremity, this view implies an almost endless range of institutionally diverse forms of exchange to be celebrated and elaborated ad nauseam. ⁵ In other words, the historically specific set of relations of production that define capitalism are taken for granted and concomitantly ignored (see also Bruff & Hartmann in this special issue). Historical materialism, on the other hand, suggests that there are basic characteristics of capitalism arising from the production process which fundamentally limit the range of this possible variety of institutional setups, and that a genuine variety of historically significant institutional configurations could only arise on a different set of basic characteristics which could not be described as any variety of capitalism. This is not to deny that there is history within capitalism, but rather to caution against the fetishisation of capitalist variety.

The important thing is that in starting from Marx, the problem of capitalist diversity appears in a very different light. The inability to recognise the uniformity of objective in all contemporary capitalist activity, and thus the failure to deduce that the diversity of institutional environments must be in some way secondary to the more fundamental process of the production and realisation of value, places much of the VoC literature squarely in the exchange-centred neoclassical tradition (cf. Coates 2013). For example, in taking institutions as causal factors when explaining the relative successes of different economies, VoC necessarily separates institutions out from their historical context, and reifies them into new basic categories of variable character in place of the alternative sociological categories of capitalism per se (labour and capital, value and reproduction). The latter, in contrast, derive their critical power precisely from the fact that they are universally applicable rather than being conditional on the minutiae of institutional arrangements separated out from relations of production.

Economic surplus

We have charged that the reductive institutionalism embodied in VoC leads to a very loose conception of capitalism, and this necessarily impacts on the analysis of capitalist diversity. A generic historical materialist critique has already been outlined, and in this section a concept capable of both expanding this critique and offering a rival analytical basis for the discussion of capitalist diversity will be brought forward. This concept is economic surplus as used by the dependency school, although it is argued that in order to achieve an understanding of the specific theme of capitalist diversity, a certain amount of clarification is needed. As a distinct category of analysis, economic surplus owes most to the work of Baran (1957, 1971), in which he argued that the way surplus was produced, which classes appropriated it, and the way in which it was disposed of were the key determinants of a societies’ development trajectory. As such, Baran’s work was part of the revival of interest in classical political economy, of which the publication of Sraffa’s short treatise (1960) was undoubtedly the centrepiece. A forgoing premise of the following section is that this can fruitfully be extended to give an analysis of capitalist diversity capable of going beyond institutionalism.

Stated most simply, economic surplus is the sum of resources a society has at its disposal to achieve growth minus the needs of subsistence; i.e. the amount that could potentially be reinvested into increasing future social output. A foundational insight of classical political economy was that the existence of a surplus in itself does not guarantee growth; it may be consumed in the form of luxuries by a wealthy class of rentiers, or amassed into monuments, pyramids or extravagant corporate headquarters serving no (re)productive purposes. Hence questions of distribution between social classes, which under capitalism takes the historically specific form of the ratio between wages and profits, were seen to be of vital importance. As Baran and Sweezy (1970: 23) put it:

The size of the surplus is an index of productivity and wealth, and how much freedom a society has to accomplish whatever goals it may set for itself. The composition of the surplus shows how it uses that freedom: how much it invests in expanding its productive capacity, how much it consumes in various forms, how much it wastes and in what ways.

The composition of surplus expresses the material reality of capitalism, and therefore also capitalist diversity, and provides a starting point from which the role of institutions can be integrated without elevating them to the status of causal factors.

A useful distinction can be drawn between ‘actual’ and ‘potential’ surplus, with actual surplus (S_A) describing current output (Y) minus current consumption (C), and potential surplus (S_P) describing a hypothetical optimal condition in which output reflects the full utilisation of all available land, labour, and capital (Y_max) – in line with some objective function maximised within given constraints – minus essential consumption (C_ess). For the sake of clarity, these two concepts can be written down in the following manner:

S A = Y − C = I

(1)

S P = Y m a x − C e s s

(2)

Baran experimented with derivations of the concept over the course of his career: according to Lippit (1985), whose notation we borrow here, there are in fact six distinct formulations to be found within his work. We will have recourse only to three here. The crux of the matter is the necessity of the inequality S_P > S_A, since advanced capitalist economies typically reproduce luxury consumption on an unprecedented scale, and are therefore never operating with an actual surplus that is even approximate to the maximum potential for generating surplus. Potential surplus is, therefore, a powerful tool for critiquing the rationality of an economic system by demonstrating how resources are not currently being used in the most productive manner possible. Actual surplus, on the other hand, is employed not in dealing with hypothetical situations, but with the real functioning of a system of accumulation, and should be identical with saving/investment (I).

Since potential surplus is seldom realised outside wartime (practically the only time at which developed capitalist societies will tolerate a significant contraction of consumption), the most useful measure of surplus we can work with when considering capitalist diversity is somewhere in between the two conceptions outlined above. This can be written as follows:

S = Y − C e s s

(3)

This gap between national income and essential consumption (which is comprised not only of physiological but also moral/historical elements) is what is henceforth meant by surplus. In this way, we can define economic surplus as the amount that could potentially be reinvested into increasing future social output which is given from equation (3). The rest of this paper will attempt to argue the importance of this in terms of conceptualising and analysing capitalist diversity.

Refining the concept

Hopefully the outline presented above conveys a sense of how the concept of surplus can provide a clearer account of what capitalist diversity is and how it can be analysed. However, as it is presented above, the concept can easily be refined in both its quantitative and qualitative dimensions via the use of matrix algebra. The necessity of refining the concept as a tool of analysis is found in the crude nature of the mathematics displayed in equations (1)–(3). Obviously, the complexity of the socioeconomic categories in question forbid their construal as integers: as has been known for some time, square, non-negative matrices are fully capable of describing the complex set of interdependencies out of which a surplus available for reinvestment could emerge, and in fact, adequate description is very difficult without such methods. ⁶ Scheibenreif and Hanappi (2008: 194) agree that it is ‘the methodology of augmented and enhanced, dynamic input-output frameworks, which is most promising as a starting point for this [here: comparative capitalisms] research project’. They argue that only by utilising

such a well elaborated concept … can it be attempted to determine the position of the different strata of the global political economy today. And only with such a scientific evaluation at our disposal can the political implementation of improvements in a labour movement perspective be envisaged. (2008: 190)

This can be achieved by integrating insights from input-output analysis, which allows a comprehensive disaggregation of such concepts as (Y) and (C_ess) to reveal both the real interdependencies of the economy as well as the precise conditions upon which a surplus becomes possible. It is hoped that this conception of economic surplus will allow for an exploration of the space between economic base and institutional diversity by providing a well-defined object towards which comparative research could be oriented. Since capital formation, military expenditure and luxury consumption amongst other things must all come out of the surplus, the identification of economic surplus as a discrete category allows us to highlight alternative uses and to show how the realisation of these alternatives would depend upon class structures. Indeed, it follows that since the surplus is a sum on top of and in addition to the simple reproduction of the system, social conflict is the pivot by which varying amounts of surplus are directed to different uses; the utilisation of surplus, expressed in its composition, is the arena of class struggle over the fruits of society’s collective labour. This is important for understanding capitalist diversity, and provides a logically coherent viewpoint from which the limitations of firm-centric institutionalism can be seen, and by which descriptive work on national capitalisms can be reunited with critical political economy.

Lange (1965: 218–19) was the first to perceive ‘a close analogy between the relationships obtained by Leontief and the analysis of reproduction given by Karl Marx in the second volume of Capital’, and due to the work of Bródy (1970) it is now generally accepted that the theoretical devices of input-output economics are thoroughly compatible with Marx’s theory of value. The dimensions of the original model are well known, and thus will be stated as simply as possible here, with the emphasis placed on the ease with which the categories of the labour theory of value can be interpreted in such terms, and the analytical strength this in turn lends to the more specific category of economic surplus.

Noting that at any particular point in time the technological input coefficients of any productive process, i.e. the quantity of one product consumed as an input in the production of a single unit of another product, are relatively stable, it thus becomes possible to construct a matrix, A, in which each element represents some such coefficient. Assuming a vector of final demands, b, to be given, the model then suggests that the problem of allocating a society’s productive resources will be solved when a vector of output proportions, x, is found which both covers the inputs necessary as intermediate products as well as the final bill of goods destined for consumption. Bringing these entities together into an equation we have:

− x A x = b

(4)

the solution to which is

x = [ 1 − A ] − 1 b .

(5)

The significance of the model for this engagement with VoC is in the concise and rigorous conditions it can establish for the possibility that a surplus will arise out of any economic system. By clearly stating the quantitative relations among the physical data of a productive economy, the specific concept of surplus, as well as the more general categories of simple or expanded reproduction, can likewise be defined and finessed further than their verbal formulation will allow. If new vectors c = (c₁, …, c_n) and v = (v₁, …, v_n) are specified, respectively standing for personal consumption per hour of labour and direct labour-power coefficients into production, the conditions for simple reproduction, i.e. production with no surplus, can be stated as follows. Simple reproduction means that the maximal eigenvalue of the complete matrix, A, as defined below, must be equal to one, | A | = 1.

A = [ A , c , v , 0 . ]

(6)

Complete matrix, A, contains all the information described in the technology matrix, A, with the addition of a further row and column to represent the final sector, labour-power. This is in accordance with the insight of classical political economy that it is ultimately this complex entity whose reproduction and the satisfaction of whose needs the process of production is carried on for in the first place. Concomitantly, if | A | < 1 then it is possible to extend the production process on account of the surplus given by the inner proportions of the complete matrix. What this inequality effectively states is that the reproduction of one hour of labour-power takes less than one hour of work, and therefore value is seen to be nothing other than the quantity of direct and indirect labour embodied in the social product.

It is a pleasing dialectical notion (in the sense of the unity and transcendence of opposites via their interaction) that it is abstract reasoning which leads to this conception of labour-values, and that this in turn expands the possibilities of concrete historical research both by pointing out the real relations of interdependency between seemingly independent sections of society, and by showing how the relevant data could be organised. It has been charged in the past (Brenner 1977) that the dependency concepts operationalised here are neo-Smithian; i.e. they are too focused on exchange at the expense of production. The refinement of the concept of economic surplus suggested above seeks to avoid this critique on the grounds that production is absolutely central to the interpretation used here, which allows the magnitude of the surplus to be ascertained from the conditions of production independent of exchange. ⁷

As will be argued in the next section, the theoretical tools outlined above allow for a clear statement of the problem – and as has been observed, the existence of a clear statement of the problem is often halfway to its solution. ⁸

Defining capitalist diversity

To restate the central thrust of the critique developed earlier, every economy must allocate society’s resources between various activities. Throughout history this has been accomplished by a variety of organisational structures, and in the Marxist tradition, modes of production are held to be the most meaningful and significant concatenations of this. However, the basic qualitative characteristics of capitalism which have conquered the globe in the last two centuries are precisely that: basic characteristics which can be and are realised in various myriad forms across the spatial expanse of global capitalism. As such, the empirical observation that institutions differ between economies should not obscure the basic similarities of all national capitalisms, and neither should this distract from the prime task of analysing and explaining capitalist development itself on a global scale.

Here we are taking issue with the implicit answer to the evaluative question that, as proposed in the introductory section of this paper, any theory of capitalist diversity must answer: Que significa? As mentioned before, this issue is seldom tackled head-on, although answers can be inferred. For instance, Hall and Soskice (2001: 66) write that their theory ‘anticipates institutional change in all the developed democracies, as they adjust to contemporary challenges, but provides a framework within which the import of those changes can be assessed’. As such, they do recognise the open question of the significance of the phenomena they discuss. Arguably, they don’t push this question further precisely because they refrain from enquiring into the materiality of institutional diversity as we are trying to do here. This leads to the conclusion that the fact that capitalist societies dispose of their surplus in varying ways whilst remaining essentially capitalist is in itself not a theoretically puzzling occurrence.

This means diversity is affordable in the sense that various social factors can come into play to determine the composition of the surplus within the limits set by capitalist accumulation needs. This last stipulation is key; when a demand on the surplus comes into contradiction with the requirement of maintaining profitability, resulting social struggles will in turn play a part in determining the reproduction of institutions. This is to say that the developed economies discussed within the VoC and the broader CC literatures are not walking a tightrope in achieving their reproduction, and because of this institutional arrangements can vary. Rather, the inherently contested nature of social institutions means instead that the truly surprising thing would be if institutional structures displayed little or no divergence (see also Gough and Bailey/Shibata in this special issue). However, the possible ranges of diversity are bounded by the only institutions which are not up for debate, those which determine the fundamentally capitalist nature of the societies in question – i.e. those institutions of law and social morality relating to the existence of private property and ‘free’ markets. In this sense, capitalist diversity must be conceptualised as always essentially bounded, and the task becomes one of explaining not diversity itself, but rather how it is conditioned and by what factors. Whilst acknowledging the extreme complexity of this issue, it is argued that this can be attempted by grounding the study of institutions in the analysis of the economic surplus that they both consume and help to reproduce.

Assessing capitalist diversity in the mainstream literature

An alternative account of capitalist diversity has been proposed by offering a definition of diversity as the historically conditioned and socially contested utilisation of economic surplus. This is the insight that allows us to make our way back from the precipice of seemingly endless diversity to the proposed starting point of the theoretical unity of all capitalisms. The task now remains to come to some assessment of the significance of capitalist diversity.

Beginning from the insight of historical materialism that capitalism is inherently unstable and crisis-prone due to the anarchy of the market, a suitable starting point for demonstrating the analytical flaws inherent to VoC’s appraisal of the theoretical significance of capitalist diversity would be Hall and Soskice’s own discussion of uncertainty. This is a repeating theme scattered throughout the canonical introduction to their approach, and broadly speaking, two weak points can be identified: the (under)theorisations of profitability and monopoly. Hall and Soskice (2001: 31) register that firms experience ‘fluctuations in current profitability’, and try to integrate this into their account. In fact, such fluctuations are often appealed to as an explanatory factor for changing institutional complementarities.

We see national political economies as systems that often experience external shocks emanating from a world economy in which technologies, products, and tastes change continuously … These shocks will often unsettle the equilibria on which economic actors have been coordinating and challenge the existing practice of firms … Thus, much of the adjustment process will be oriented to the institutional recreation of comparative advantages. (2001: 62-3)

It is a little illogical to give such explanatory significance to shocks, and then not to enquire any further. This stands for a major theoretical contrast between any Marxian take on diversity and that found in VoC literature, in that the fluctuating profitability referred to by Hall and Soskice is treated as data, i.e. it appears as an element used in the explanation of the variables, but is not itself explained within the system of the same theory. It is clear that for Hall and Soskice, ‘profitability’ is just such a given: they do not enquire into what it derives from, nor do they investigate possible explanations for the changes it experiences. This is a direct consequence of firm-centrism, since for even the largest firm the rate of profit is externally given, and this demonstrates how the adopted firm-centred perspective logically precludes their enquiry from covering one of the most important problems in political economy. For Marx, on the other hand, the profit rate is something derived from more fundamental data: i.e. labour-values formulated in the equation c + v + s = w, and we have seen above how Marx’s mathematical symbolism can be quickly updated to allow for a more nuanced conception of the interdependencies of production to emerge. The failure to even begin to enquire into what might determine profit rates renders VoC analysis partial, incomplete and essentially descriptive. ⁹

These problems are compounded by the ‘relational’ approach, which is coupled to the emphasis on the private firm as the central actor, which leads to other economic actors only appearing insofar as they stand in some (usually rather passive) relation to firms and their activities. This finds expression in Hall and Soskice’s hypothesis that adjustment following a sudden shock (they abstemiously avoid any mention of crises) is invariably firm-led - a position that would have to be questioned post-2008, when the necessity of state intervention for the continued functioning of capitalism of any variety has been fully demonstrated. Instead, the surplus approach offers objective criteria for assessing agency in terms of the relative ability of social classes to influence the composition of the surplus, and hence does not prejudge the question of agency.

The aim of the VoC approach has always been to identify comparative rather than absolute institutional advantages, and to use the demonstrated existence of these to undermine the proposition that capitalist societies will converge on a single model. Hall and Soskice (2001: 37; original emphases) want to explain why ‘production of that type should be concentrated in that particular nation, while other nations specialize in other kinds of production … We think that such a theory can be found in the concept of comparative institutional advantage’. However, this proposed engagement with comparative production structures simply cannot be undertaken within the confines of the exchange-centred concepts that VoC embraces. There is of course a whole range of economic phenomena the analysis of which these concepts excel at (the field of micro-economics), but they are famously poor on three points central to production and development: the study of the real economy, the division between wages and profits, and the causes of growth. Instead the insights of the classical school, in which such ‘macro’ concerns have always been central, provide a much more fruitful starting point.

The second way uncertainty is under-theorised is in terms of monopoly and its effects on the firm. That the refusal to acknowledge the existence of monopoly is to the detriment of the VoC understanding of contemporary capitalism can be shown quite simply. For instance, Hall and Soskice (2001: 23) note that in so-called coordinated market economies, ‘firms often fund their [investment] activities from retained earnings’. They do not recognise that in so-called liberal economies, this path is often only open to monopolies, with small- and medium-sized enterprises normally heavily reliant on access to capital markets for finance provision. Monopoly may thus appear very differently in the two ideal types. The VoC approach, however, effectively forbids such paths of enquiry, since it sees firms as inhabiting an essentially competitive world (see also Coates’s second paper and Hartmann’s paper in this special issue), and this leads to a total non-perception of monopoly, even as a possibility.

Conclusion

Through an engagement with the paradigmatic VoC framework, this paper has sought to both provide a critique of institutionalism as an approach to capitalist diversity, and to offer a more robust alternative centred on concepts sourced from Marxian political economy. It has been claimed that the theoretical language appropriate for describing national and regional differences begins from universal categories of capitalism per se before proceeding to the specific category of economic surplus. The central spine of the argument underlying the above is that the road of capitalist development, is followed for one purpose only: the accumulation of capital, the essential unity of which should not be forgotten in any analysis of capitalist diversity. Accordingly, no critical analysis of capitalism should fetishise its variety and lose sight of the fundamental unity of all capitalisms before its structural limits.