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Differential accumulation and dominant capital 327
These three features of differential accumulation - its spread, integration and alternating regimes - are closely related. The first two processes work to reinforce one another; and their unfolding makes the breadth-depth cycles ever more interdependent and synchronized across sectors and societies.
The other side of this triple process relates to class. Ongoing differential accumulation means the centralization of commodified power in the hands of an ever more cohesive group of dominant capital, whereas the spatial inte- gration of the process makes this group increasingly transnational. The study of differential accumulation regimes therefore is a study of capitalist class formation. It helps us understand how this class comes into being, the methods it uses to build and consolidate its power, and the conflict and contradictions it faces in creordering its own history.
The remainder of the chapter outlines the general boundaries and paths of these processes, characterizes their features and briefly examines their inter- actions. The subsequent chapters look at these issues more closely, flesh out their history and assess their broader significance for the global political economy.
Regimes of differential accumulation
How can dominant capital achieve differential accumulation? To set the context, consider again the capitalization equation from Chapter 11. The formula consists of four elementary particles - future earnings (E), hype (H), a risk coefficient (? ) and the 'confident' normal rate of return (rc):
2. K = E * H rc * ?
For dominant capital, differential capitalization (DK) is the ratio between its own capitalization and the average capitalization. Equation (3) expresses this ratio by using the D subscript to denote dominant capital and no subscript to denote the average capital. The normal rate of return is common to dominant capital and the average and therefore drops from the ratio:
EH 3. DK = KD = ? ED ? * ? HD ?
K?
? ? D ?
Equation (3) presents the overall picture. On the quantitative side, it tells us that dominant capital can achieve differential accumulation by some combination of the following: (1) raising its differential earnings (ED/E), (2) raising its differential hype (HD/H) and (3) lowering its differential risk
? ? ? ? ? ? 328 Accumulation of power
(? D/? ). 17 On the qualitative side it means that in order to understand the concrete history of dominant capital, we need to examine the intertwined power processes that drive its differential earnings, hype and risk (as well as the processes that underlie the normal rate of return - which, although not in the equation - remains of crucial importance in setting the boundaries of the process).
But of these components, one clearly stands out: differential earnings (ED/E). As we have seen, this is the main long-term driver of the process. And since our aim here is to provide only a broad-brush description, the empirical analysis that follows focuses mostly on earnings and refers to hype and risk only in passing.
For a corporation, the level of earnings is the product of the number of employees multiplied by the average earnings per employee:
4. E = employees * E = employees * earnings per employee employees
The number of employees denotes the formal size of the organization, while earnings per employee measure the elemental power per unit of organization. According to this equation, the firm can raise its earnings in two ways. The first path, which we call 'breadth', is to augment the size of its organization by having more employees. The second path, which we label 'depth', is to increase the elemental power of its organization by raising its earnings per employee. 18
This decomposition merits clarification. Despite the apparent connota- tions, the categories of employment and earnings per employee have little to do with narrowly defined production and everything to do with broadly conceived power. Our choice of employment as a measure of organizational
17 Differential accumulation (DA) is the rate of change of differential capitalization (DK). Expressed in instantaneous rates of change:
DA ? differential growth of earnings + differential growth of hype - differential growth of risk.
Note that differential accumulation is based on differences between growth rates. Dominant capital can achieve differential accumulation even if its own capitalization is falling - provided that the average capitalization falls even faster. This understanding applies also to the underlying components of differential accumulation and is assumed throughout.
18 Note that this decomposition differs from the common view of earnings as the product of sales revenues and the earnings margin. Although both decompositions are correct by defi- nition, only the former corresponds to our separation between the corporation's size and its elemental power. To illustrate, sales revenues can be raised by increasing employment in order to produce more (size), or by raising prices (elemental power). Likewise, earnings per employee (which for us represent elemental power) can be raised by increasing prices and therefore sales revenues, or by widening the earnings margin. Formally speaking, breadth affects market share, but market share does not always involve breadth. Similarly, the earn- ings margin affects depth, but depth does not necessarily influence the earnings margin.
? ? Differential accumulation and dominant capital 329
size is not accidental. Ever since they first emerged in the power civilizations of the ancient river deltas, hierarchical organizations have been measured by 'head', or capita. They have been counted in slaves, soldiers, serfs, religious followers, factory workers and now, more generically, in employees. The number of 'heads' under one's immediate command - relative to the number of heads commanded by others - is indicative of one's immediate power.
But formal organizational size is merely the first, immediate dimension of power. In the past, rulers were able to use their slaves, soldiers, serfs, religious laity and factory workers to control others, often beyond the formal confines of their own organization. And the same is true, only many times over, with the broader category of employment.
Operating through their corporate organization, capitalists are able to project their indirect power over society as a whole. This indirect power takes numerous forms - from the creation of loyal and predictable consumers, through the taming of voters, to the control of subcontractors, the subjuga- tion of governments, the shaping of public policies, the moulding of culture, the crafting of ideology, the harnessing of religion, the use of armies and police forces and the crafting of international relations. The relative effective- ness of these multiple forms of indirect power gets crystallized in the magni- tude of differential profit per employee. This latter measure represents the elemental power of the capitalist organization, its ability to extend its power beyond its immediate size.
Equation (5) formalizes this logic at the differential level (using the subscript D to denote dominant capital and no subscript to signify the average). Differential earnings (ED/E) are given by the ratio of differential employment and differential earnings per employee:
E employees earnings per employee 5. D = ? D? * ? D?
? ? ? . E employees earnings per employee
A dominant capital firm can accumulate differentially: (1) by expanding its employment faster than the average; (2) by raising its earnings per employee faster than the average - or by some combination of the two. Each avenue - breadth or depth - can be further subdivided into 'internal' and 'external' sub-routes, leading to a four-way taxonomy:
Table 14. 2
Breadth Depth
Regimes of differential accumulation
External Internal
Green-field Mergers & Acquisitions Stagflation Cost cutting
? ? ? 1 External Breadth: Green-field Investment. A firm can achieve differential accumulation by building new capacity and hiring new employees faster
330 Accumulation of power
2
than the average. This method is labelled 'external' because, from a societal perspective, it involves a net addition of employees. 19 Its upper ceiling is the extent of proletarianization. The more immediate limit comes through the negative impact it has on depth: 'excessive' green-field growth creates a downward pressure on prices and hence on earnings per employee.
Internal Breadth: Mergers and Acquisitions. Strictly speaking, internal breadth involves differential earnings growth through inter-firm labour mobility. This growth can happen when a firm adds new capacity and employment against cutbacks elsewhere, although such movements relate more to industrial restructuring (labour mobility between sectors) than to the size redistribution of firms (labour moving from small to large firms). The situation is different with corporate amalgamation via mergers and acquisitions, where no new capacity is created. By taking over other companies, the firm increases its own earnings relative to the average (which is virtually unaltered). We call this route 'internal' since it merely redistributes control over existing capacity and employment. Merger and acquisition activity perhaps is the most potent form of differ- ential accumulation, serving to kill three birds with one stone: it directly increases differential breadth; it indirectly helps to protect and possibly boost differential depth (relative pricing power); and it reduces differen- tial risk. This path is limited, however, both by the availability of take- over targets and by socio-political and technological barriers.
Internal Depth: Cost Cutting. The purpose is to cheapen production faster than the average, either through relative efficiency gains or by larger reductions in input prices. The process is 'internal' in that it redis- tributes income shares within a given price. Although cost cutting is relentlessly pursued by large firms (directly as well as indirectly through outsourcing), the difficulty of both protecting new technology and controlling input prices suggests that the net effect commonly is to meet the average rather than to beat it.
External Depth: Stagflation. Our emphasis on stagflation rather than inflation is deliberate: contrary to the conventional wisdom, inflation usually occurs with, and often necessitates, some slack. Now, for a single seller, higher prices commonly are more than offset by lost volume, but things are different for a coalition of sellers. Dominant capital, to the extent that it acts in concert, can benefit from higher prices, since, up to a point, the relative gain in earnings per unit outweighs the relative decline in volume. Of course, for the process to become continuous (inflation rather than discrete price increases), other firms must join the spiral. But small companies have little political leverage and usually are unable to collude, so the common result is to redistribute income in favour of the
3
4
? 19 For any given firm, green-field investment of course can draw on inter-firm labour mobility as well as on new employment. From an aggregate perspective, however, labour movement between firms is properly classified as internal breadth.
Differential accumulation and dominant capital 331 bigger ones who can. We refer to this method as 'external' since the redis-
tribution occurs through a (pecuniary) expansion of the earnings pie.
Some implications
In addressing the implications of this taxonomy, it is important to distinguish the case of an individual large corporation from the broader analysis of domi- nant capital as a group. A single firm may successfully combine different facets of breadth and depth. However, the same does not hold true for domi- nant capital as a whole. If we look at breadth and depth not as firm strategies, but as overall regimes of differential accumulation, it quickly becomes apparent that the broader conditions that are conducive to one regime often undermine the other. For the sake of brevity, we group our tentative argu- ments here into eight related propositions:
? Proposition 1. Understood as broad regimes, breadth and depth tend to move counter-cyclically to one another. Breadth presupposes some measure of employment growth as well as relative political-economic stability. Depth, on the other hand, commonly implies restrictions, conflict, and stagflation. Although strictly speaking the two regimes are not mutually exclusive, they tend to 'negate' one other, with more breadth being asso- ciated with less depth, and vice versa.
? Proposition 2. Of the two regimes, breadth is the path of least resistance. There are two reasons for this pattern. First, usually it is more straight- forward and less conflictual to expand one's organization than it is to engage in collusive increases in prices or in struggles over input prices. Although both methods are political in the wide sense of the term, depth commonly depends on complex corporate-state realignments that are not necessary for breadth. Second, breadth is relatively more stable and hence easier to extend and sustain, whereas depth, with its heightened social antagonism, is more vulnerable to backlash and quicker to spin out of control.
? Proposition 3. Over the longer haul, mergers and acquisitions tend to rise relative to green-field investment. While both routes can contribute to differential accumulation, as capitalism spreads geographically and dominant capital grows in importance, so does the threat of excess capacity. Mergers and acquisitions alleviate the problem whereas green- field aggravates it. 20 The broader consequence of this shift is for chronic stagnation to gradually substitute for cyclical instability.
20 The notion of excess capacity, associated mainly with Monopoly Capital writers such as Kalecki (1971), Steindl (1952) and Baran and Sweezy (1966), is admittedly problematic. Here, we use it to denote the potential threat to prevailing earning margins from higher resource utilization. To illustrate, recall from Figure 12. 2 that, since the Second World War, US margins, measured by the combined profit and interest share of GDP, have been positively related to the rate of unemployment. In this context, a move from higher to lower unemployment increases utilization and threatens margins.
? 332 ?
?
?
?
?
Accumulation of power
Proposition 4. The relative growth of mergers and acquisitions is likely to oscillate around its uptrend. Corporate amalgamation involves major social restructuring and hence is bound to run into roadblocks. The result is a wave-like pattern, with long periods of acceleration followed by shorter downturns.
Proposition 5. The underlying logic of mergers and acquisitions implies progressive 'spatial' unification and, eventually, globalization. For amalga- mation to run ahead of overall growth, dominant capital must succes- sively break its 'envelopes', spreading from the industry, to the sector, to the national economy, and ultimately to the world as a whole. In this sense, differential accumulation is a prime mover of spatial integration and globalization.
Proposition 6. Cost cutting is not a real alternative to an amalgamation lull. The pressure to reduce cost is ever-present, but its effect is more to meet than to beat the average. The principal reason is that productivity improvements are neither inherently related to corporate size nor easy to protect. Similarly, reductions in input prices seldom are proprietary and often spill over to other firms.
Proposition 7. A much more potent response to declining mergers and acquisitions is inflationary increases in earning margins. This method is often facilitated by previous corporate centralization, and although the process is inherently unstable and short-lived, it can generate very large differential gains. By its nature, though, such inflation is possible only through a vigilant limitation of production, as a result of which inflation appears as stagflation.
Proposition 8. Over the longer term, differential accumulation depends primarily on mergers and acquisitions. In the shorter term, it can benefit from sharp stagflationary crises. The main engine of differential accumu- lation is corporate amalgamation, a process that thrives on overall growth and the successive breakup of ownership 'envelopes'. Occasional discontinuities in the process, however, push dominant capital toward an alternative regime of stagflationary redistribution. The result is a pendulum-like oscillation between long periods of relative political- economic stability accompanied by green-field growth and low inflation, and shorter periods of heightened conflict, stagnation and inflation.
The remaining chapters of the book highlight the significance of these propositions with an examination of the US experience over the past century. Brevity and the exclusive focus on the United States make this analysis suggestive rather than exhaustive. Nonetheless, the United States and US- based firms have had a leading role in shaping modern capitalism, so their experience may offer insight into other cases as well as into the nature of capi- talist development more broadly. Finally, a word of caution. Although the
Differential accumulation and dominant capital 333
United States offers the best historical data, these are not always suited for our disaggregate analysis and occasionally force us into rough approxima- tions, roundabout estimates and bare speculations. Our conclusions therefore are tentative and open to challenges, and they invite further research and discussion.
15 Breadth
It is difficult to describe the rapacity with which the American rushes forward to secure the immense booty which fortune proffers to him. . . . for he is goaded onwards by a passion more intense than the love of life. Before him lies a boundless continent, and he urges onwards as if time pressed and he was afraid of finding no room for his exertions.
? Alexis de Tocqueville, Democracy in America
It is hard to think of a capitalist growth episode more exhilarating and prom- ising than the nineteenth-century advancement of the 'American frontier'. The promise of abundance, riches and endless opportunities (minus the Indians) excited tellers of stories and theories alike and lured millions to try their luck in the land of unlimited possibilities (Zinn 1999).
Yet, as the opening quote from de Tocqueville points out, even in this historically unique period, with a wilderness large and fertile enough to accommodate everyone, the pursuit of growth was decidedly differential. Growth itself may seem unbounded, but the control of growth is always bounded. No capitalist can ever control more than the entire social process. This is the whole. The only way for some owners to gain more power over this totality is for others to give up some of theirs. In the rush for power, there is never enough room for everyone.
The present chapter examines how dominant capital increases its power by augmenting the relative size of its corporate organs. To reiterate, there are two basic ways of doing so: (1) green-field investment that buys newly built facilities and hires new employees,1 and (2) mergers and acquisitions that take over the existing facilities and employees of other firms. We spend relatively little time on green-field growth, which, as we shall see, is the less important avenue. The bulk of the chapter is devoted to corporate amalgamation and its far-reaching implications for the capitalist creorder.
1 Throughout the chapter, we use the term 'green-field investment' to denote the purchase of newly produced plant and equipment. The production of these items is distinct from the process of accumulation.
? Green-field
Dominant capital can run its green-field investment at different speeds: it can sprint ahead of the pack, expanding its employment faster than the overall growth of the business sector; it can run with the pack, expanding at the same rate as the business sector; or it can trail the business sector. Of these strat- egies, the first two are relevant for our inquiry. Both augment the external breadth of dominant capital (differential employment per firm); but as it turns out, both act as a double-edged sword in that they also undermine external depth (differential profit per firm).
Running ahead of the pack
The consequences of running ahead of the pack are fairly clear. When larger firms hire new workers faster than the overall expansion of private employ- ment, their corporate size grows relative to that of the average firm (particu- larly since, as we shall see shortly, the size of the average firm tends to fall even as overall employment rises).
But, save for exceptional circumstances, this strategy is suicidal. Recall that the ultimate purpose is to increase not the relative size of the organiza- tion (breadth), but of relative profit (the product of breadth and depth). And it turns out that that this strategy usually loses in depth more than it gains in breadth, leading to falling differential profit.
As the reader now knows, 'letting industry loose' undermines the funda- mental tenet of 'sabotage' without which profit and accumulation are impossible. The vulnerability here is so great that even the mere anticipation of 'excessive' growth is often enough to trigger panic, price war and sharply lower differential profit per firm. Perhaps this is the reason that most domi- nant-capital executives respond to green-field 'opportunities' with the suspi- cion of a New-York-City driver who has just spotted an empty parking space. Their typical knee-jerk reaction is to look for the proverbial road-sign warning: 'Don't even THINK of parking (your cash) here'.
Running with the pack
Fortunately for dominant capital, there is no need to lead. Simply going with the crowd and letting employment expand in tandem with the business sector as a whole is sufficient to generate external breadth. The success of this 'sound' strategy has to do with the different expansion patterns of large and small firms.
Large companies react to overall growth mainly by increasing their employment ranks. Smaller companies, by contrast, respond by growing in number (through the birth of new firms) as well as in size (by hiring more workers). This difference is important since newborn firms, by their very nature, tend to be smaller than the average (recall our discussion of aggregate
Breadth 335
336 Accumulation of power
concentration in Chapter 14). The implication is that, even if green-field growth is spread proportionately between dominant capital and the rest of the business universe (since both expand at the same clip), as long as some of this growth results in the birth of smaller firms, the net impact is to reduce average employment per firm and, therefore, to augment the differential breadth of dominant capital.
The evolution of this process in the United States is illustrated in Figure 15. 1, which shows the number of corporations, the overall level of employment and the average number of employees per firm (with series rebased for comparison). 2 The overall picture is one of pronounced diver- gence. From 1926 to 2008, the number of corporations has risen nearly
10,000
1,000
100
10
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Figure 15. 1 US employment, number of firms and size of firms * Corporations only.
** Nonfarm private employment divided by the number of firms.
Source: U. S. Internal Revenue Service (number of corporate tax returns; the numbers for 2004- 2006 are extrapolated based on recent growth rates); Historical Statistics of the United States (series codes: D127 for non-agricultural employment; D139 for non-agricultural government employment till 1938); U. S. Bureau of Economic Analysis through Global Insight (series codes: EEA for nonfarm private employment from 1939 onward).
2 Note that not all 'active corporations', as the IRS classifies them, accumulate. Many firms are incorporated solely for legal purposes, tax evasion, etc. , and often have neither assets nor employees. The proportion of such firms is fairly large but also fairly stable. According
? ? ? ? ? log scale
? ? ? ? ? Number of Firms *
Nonfarm Private Employment
? ? ? ? ? ? ? ? ? ? ? ? ? 1926=100
www. bnarchives. net
Average Employment per Firm **
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Breadth 337
sixteenfold, whereas overall employment has grown only threefold. As a result of this difference, average employment per firm has dropped by over 75 per cent (note the logarithmic scale). 3
The process wasn't always even. During the two decades between the mid- 1920s and mid-1940s, the number of firms remained relatively stable, first because of the Great Depression, and subsequently due to the Second World War. Consequently, changes in overall employment during that period were reflected more or less fully in the average size of firms, which fell throughout the Depression only to rise rapidly thereafter.
In the longer run, however, this early pattern proved an aberration. As noted, capitalism is subject to strong centrifugal forces, one of which is the inability of business enterprise to control the overall number of independent capitalists on the scene. And indeed, after the war, the number of firms started multiplying again, while their average size trended down more or less contin- uously. Since large-firm employment has increased over the same period, we can safely conclude that overall employment growth served to boost the differential breadth of dominant capital.
The indirect impact of employment growth, operating through depth, is more complex and harder to assess. On the one hand, the multiplicity of small firms keeps their profit per employee low - partly by precluding cooperation and pricing discretion and partly by undermining formal political action. This fact bears positively on the differential depth of dominant capital. At the same time, unruly growth in the number of small firms can quickly degen- erate into excess capacity, threatening to unravel cooperation within domi- nant capital itself. The balance between these conflicting forces is difficult if not impossible to determine.
All in all, then, green-field growth is no panacea for dominant capital. Although the process boosts its differential breadth, it has an indeterminate and possibly negative effect on differential depth. One way to counteract this latter threat is to scare the underlying population with 'overheating' and educate 'policy makers' about the benefits of 'balanced growth' - a
to the IRS, in 2004 roughly 12 per cent of all active corporations had no assets (zero book value) - a bit less than in 1935, when 13 per cent of corporations were in the same position. The long-term stability of this ratio means that the attendant bias need not concern us here.
3 Our measurements here are not strictly comparable: we contrast the number of corporations with overall non-agricultural private employment (that also includes proprietorships and partnerships), rather than with corporate employment only (for which data are not publicly available). However, we can assess the accuracy of this comparison indirectly, by looking at the share of corporations in nonfarm private GDP (using data from the U. S. Bureau of Economic Analysis, Tables 1. 3. 5 and 1. 14). This share rose from 61 per cent in 1929 to 67 per cent in 2007 - a 10 per cent increase. Now, if we assume that relative employment trends roughly track relative GDP trends, the implication is that, over the entire period, corporate employment rose by only 10 per cent more than overall nonfarm employment. Compared to the threefold rise in nonfarm private employment reported in the text, this bias is too small to affect the overall results.
? 338 Accumulation of power
stagnationary recipe that has been applied with considerable success over the past half-century. 4 But the more fundamental solution to the problem is corporate amalgamation.
Mergers and acquisitions
A mystery of finance
Our discussion of amalgamation begins with Figure 15. 2. The chart plots a 'buy-to-build' indicator, expressing the dollar value of mergers and acquisi- tions as a per cent of the dollar value of gross fixed investment. In terms of our own categories, this index corresponds roughly to the ratio between internal and external breadth. (The data sources and method of computing this index are described in the Data Appendix to the chapter. )
The chart illustrates two important processes - one secular, the other cyclical. Secularly, it shows that, over the longer haul, mergers and acquisi- tions indeed have become more important relative to green-field investment
1,000. 0
100. 0
10. 0
1. 0
0. 1
? ? ? ? ? log scale
? ? ? 1999
218%
? ? ? ? ? ? ? ? ? ? ? ? trend growth rate: 3. 4% per annum
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Buy-to-Build Indicator
? ? ? ? ? ? 1896
0. 3%
(mergers & acquisitions as a per cent
of gross fixed private domestic investment)
www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? 1880 1900
1920 1940 1960 1980 2000 2020
Figure 15. 2 US accumulation: internal vs external breadth Source: See Data Appendix to the chapter.
? 4 For a neo-Marxist analysis of this long-term policy bias, see Steindl (1979).
Breadth 339
(Proposition 3 in Chapter 14).