Neoliberalism and unemployment: the need to restore economic policy

Facund Fora Alcalde

[email protected]

Abstract

Capital accumulation is the determinant of the level of employment and output. In the
last 30 years, investment has declined and, therefore, employment and output have
decreased. To explain this fact is the main concern of this dissertation. We assert that
within GVCs, investment in finance has been a competitive strategy. This behaviour has
meant the rise of profitability along with the slowdown of capital accumulation, given
the different institutional settings existing in the North and in the South. In this
situation, the equalisation of the living standards between these areas is the only
possible remedy to the lack of investment in the North and the lack of development in
the South. Consequently, to create international institutions with power over capital is a
need to improve people’s well-being.

Palabras clave: GVCs, Profits, Exploitation, Investment, Imperialism.

1. THE FEATURES OF CAPITALISM

1.1 The exploitation of labour

Under capitalism, people’s life depends on success in the market. Such success, as is
well known, consists in the achievement of the best use value per unit of exchange
value or, put in common language, a good quality-price relationship1 (Guerrero, 1995).
However, not everyone has the same capacity to compete in the market, i.e. to improve
the quality price relationship of his commodities. This is so because the way to improve
such relationship is through gains in productivity. Specifically, lowering the inputs
needed per unit of output enables firms to cut the prices of their commodities and thus
gain customers and profits.

The importance of productivity improvements for success in the market implies that
machinery becomes an essential productive factor. More concretely, the apparition of
capitalism implies that without the use of machinery it is not possible to survive. As
Shapiro (2012, p.7) explained, “a worker could not specialise his labour, become, for
example, a 'baker' or 'weaver', without the 'materials and tools' of the trade, or the goods
required for his subsistence during the time of the production and sale of its products”.
Consequently, in the capitalist system, those without property rights upon the means of
production depend on the owners of capital for their own surveillance. Therefore, “the
worker (...) cannot leave the whole class of purchasers, that is, the capitalist class,
without renouncing to his existence. He belongs not to this or that capitalist but to the
capitalist class” (Marx, 2000, p.276).

Consequently capitalists are the rulers of the working process and thus of the product of
it. For this reason, as owners of the means of production, capitalists can take profit of
the situation and pay less than what workers produce (Gintis and Bowles, 1981). In this
sense, it can be argued that “the possibility of labour productivity being higher than the
wage springs from the capitalist control of production and not from a market exchange”
(Screpanti, 2003, p.166).

1.2 Capital accumulation

However, the centrality of the market implies that competitiveness is a need for
capitalists’ surveillance as well. Such surveillance, as has been noted, is dependent on
capitalists’ ability to improve the productivity in their firms through the adoption of
ever improving machinery. As Shaikh (2016, p.259) notes, “competition (...) forces
individual producers to set prices with an eye on the market, just as it forces them
continually to try to cut costs so that they can cut prices and expand market share. Cost

1
Note here that the “quality” of any commodity depends on the amount of resources
spent in its production. This fact, which may seem obvious, has important consequences
because it shows that cost cutting and product innovation are the two sides of the same
coin and that, consequently, it is not adequate to differentiate between different sorts of
competition (e.g. between product and price competition).
cutting can take place through wage reduction, increases in the length or intensity of the
working day, and through technical change. The latter becomes the central means over
the long run”.

At this point it is worth noting that, the previously outlined need to invest is, indeed, a
need to get profits. This is not only the result of capitalists being the drivers of the
process, but the consequence of the link between profits and future investment. In this
sense Basu and Das (2016, p.2) argue that “not only does a high profit rate lure in new
capital, it also gives existing firms the wherewithal to expand”. Moreover, this
“wherewithal to expand” function of profits can be regarded, at the aggregate level, as
the effective demand condition for profits. Indeed, as noted by Kaldor (1956, p.96)
while “workers spend what they earn”, “capitalists earn what they spend” 2 . As a
consequence, the pursuit of profits is not “mere idiosyncrasy [but] is, in the capitalist,
the effect of the social mechanism, of which he is but one of the wheels” (Marx, 2000,
p.649).

We can conclude, then, that, under capitalism, investment decisions are ruled by
dynamics of profitability; which, as shown, depend on the exploitation of labour.
Consequently, our analysis brings us to the canonical Marxian result: capitalist
economies are ruled by the conflict between labour and capital.

2. THE INVESTMENT-PROFIT PUZZLE AND ITS EXPLANATIONS

2.1 The current situation

In the previous chapter we have shown the essential role that exploitation and
profitability have in the determination of investment decisions, which are the main
driver of economic activity. The empirical evidence relating both elements has proved
the theory outlined for many years. More concretely, empirical research has confirmed
the role of profitability as the leading force in the changes that occur in the capital
accumulation rate (Glyn, 1997, Basu and Das, 2016). However, as has been explained
in the introduction, the current situation is different from the one that has characterised
capitalist development since its first days. Specifically we can see in the Graphs 1 and 2

2
It is interesting to realize that profitability, understood as the amount of profit income
per unit of capital stock, can have different sources. Indeed, as shown by the
decomposition of the profit rate (P/K) its value is the result of multiplying the profit
share (P/Y) by the capacity utilisation (Y/Yfc) and by the technological level (Yfc/K),
where P=profits, Y=output, Yfc=output at full capacity, and K=capital stock.
Our emphasis on the objective of profit maximisation implies that, in the long run, firms
will try to produce under the most beneficial level of capacity utilisation.
“Consequently, it is hard to conceive of a steady-growth scenario in which firms are
content to accumulate at a constant rate despite having significantly more (or less)
excess capacity than they desire” (Skott, 2008, p.6). Capacity utilisation, then, can be
assumed to be fairly constant during time. For this reason, in this dissertation we will
assume the profit rate as a whole as the most relevant indicator of profitability for firms’
decisions.
below that while profit rates have been rising since the 80s, especially until the current
crisis, accumulation rates have been declining in the same period.

Profit Rates
16

14

12 Germany

10 France
Italy
8
United Kingdom
6
United States
4
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016

Graph 1. Profit rates in developed economies 1960-2016. Source: Own elaboration.

Data: AMECO database. US Bureau of Economic Analysis, Fixed Assets Accounts,
table 1.1. Note: Profit rate equals net operating surplus divided by net capital stock (in
percentage).

Capital Accumulation Rates

6

4 Germany

3 France
Italy
2
United Kingdom
1
United States
0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016

Graph 2. Capital accumulation rates in developed economies 1960-2016. Source: Own

elaboration. Data: AMECO database. US Bureau of Economic Analysis, Fixed Assets
Accounts, table 1.2. Note: Capital Accumulation rates equal the growth rate of the net
capital stock adjusted for inflation (in percentage).
 Share of Investment in Net Operating
Surplus
50

40
Germany
30
France
20 Italy
10 United Kingdom

0 United States
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
Graph 3. Share of investment in net operating surplus in developed economies 1960-
2016. Source: Own elaboration. Data: AMECO database.

There have been different attempts to find the sources of such divergence. The purpose
of this chapter is to summarize the main points highlighted by these explanations and
point out their weaknesses.

2.2 The Post Keynesian approach

2.2.1 Financialisation

In the previous chapter we have shown the nature of the firm: how did it appear and
which are its main activities. However, according to some scholars, the fact that
managers are not always the owners of the firm might affect the conclusions that we
drew earlier.

The Post Keynesian view of the firm is based on the existence of different goals a part
from profitability. Furthermore, the achievement of each goal yields different benefits
for the different agents that manage firms. More concretely, profits are the source of
income and wealth of the owners. However, managers might be more interested in
increasing the firm’s size in order to be more powerful and ensure its surveillance in the
long term (and the managers’ own wage). Consequently any change in the firms’
priorities must be the result of changes in its internal power structure; especially of the
conflict between owners and managers, the former being interested in profits while the
latter in the firm’s growth (Stockhammer, 2004).

The political changes occurred during the early 80s modified the management priorities
of firms through the empowerment of shareholders in front of managers. Specifically
the financial liberalisation encouraged a different view of the firm by the owners of
capital who were increasingly concerned with companies’ financial success, a new and
profitable source of incomes. Furthermore, the financial deregulation increased the
power of investment funds which were more focused on the achievement of high short
term profits. Indeed, North-American households went from owning the 90% of
corporate stock in the 50s to owning 49% of public shares in the 2000s, while US
institutions were responsible for the 75% of all stock trades in the year 2000 (Crotty,
2003).

Conequently, according to this theory, the new way to understand firms’ activities
implied a raise in financial investment that was preventing the use of firms’ profits in
the accumulation of capital (Orhangazi, 2008). In this sense, Duménil and Levy (2004)
proved that capital accumulation follows closely the rate of retained earnings (in France
and the US), which might support the idea that the bigger the weight of interests and
dividends in the gross operating surplus, the lower the capital accumulation.

Following the PK explanation, then, we can assert that the decline in capital
accumulation is the result of changes in the governance of firms, which have put
financial success in the highest levels of the management priorities. This is, indeed, a
plausible explanation given the temporal correlation that exists between financialisation
and the decline of investment, as shown in Graph 4.

Financialisation and Capital

Accumulation in the US
5

3
Financialisation
2
Capital Accumulation
1

0
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010

Graph 4. Financialisation and Capital Accumulation in the US 1950-2013. Source:

Own elaboration. Data: U.S. Federal Reserve Bank, Flow of Funds Account, Schedule
Z.1; U.S. Bureau of Economic Analysis, Fixed Assets Accounts, table 1.2. Note:
Financialisation is measured as the share of dividends and stock buybacks in
corporations’ internal funds (see Milberg and Winkler, 2013, p.220); Capital
accumulation is the growth rate of the real net private non-residential capital stock (in
percentage). The variables shown are expressed in natural logarithms (only in this
graph).
This negative relation between investment and financialisation is supported by deeper
econometric research. Specifically, Stockhammer (2004: 739) finds “strong support” for
the role of financialisation in the decline of accumulation, especially in the cases of
France and the US, controlling for the profit share, the level of capacity utilisation and
the price of capital. Focusing on firm-level data from the US, Orhangazi (2008) finds
significant negative effects of financial profits and financial payments carried on by non
financial firms on their capital accumulation rates. Consequently, the presence of a
negative relationship between financialisation and capital accumulation is a sound
description of current features of capitalism.

2.2.2 Criticisms

The Post Keynesian explanation of the divergence between profits and investment relies
on a specific theory of the firm in which it has different goals a part from profits
maximization. These other goals are mainly related to the achievement of power
(Lavoie, 2014, p.128). In the PK school power can be understood as the “ability of an
individual or a group to impose its purpose on others” (Galbraith, 1975, p.108).
However, if power is the ability to impose anyone’s purpose on others we can’t assert
that the purpose of firms is to gain power, as Lavoie does, because it is a circular
reasoning that says nothing about the goal of the firm. In short, Lavoie asserts that the
objective of the firm is to be able to impose its objective. Therefore this approach is
criticisable for overemphasizing the importance of power as such as well as for
disregarding its sources.

Indeed, in a market based economy the ability of firms to affect their outcome depends
on each firm’s capacity to compete, a fact that is linked to the capacity to appropriate
surplus product. For this reason, Husson (2009, p.2) comments that “it is a distorted
view of the theory of capitalism to make the dynamics of accumulation dependent on
the distribution of profits between companies and stockholders. It is opposed both by
Marxist theory and conventional theories which postulate that the remuneration of
shareholders is justified by their provision of savings and therefore investment”.
Consequently, the pursuit of power has to be regarded as the pursuit of power in the
market in the sense of achieving a valuable commodity, something that has to be done
by exploiting labour.

For this reason, under our approach (and contrary to the PK theory) it is not surprising
that in the comparison between owner- or management-controlled firms “most studies
seem to show that there is no discrepancy with respect to growth of sales and assets,
advertising, salaries, the variability of investment and dividends. Most importantly,
there is no differential with respect to profitability variables” (Lavoie, 2014, pp.130-
131). Moreover, still at the empirical level, there is important evidence that management
working places have increased in number and reward since the 80s (Goldstein, 2012;
Gordon 1996). This evidence highlights the fact that during the financialisation epoch,
managers have increased in number and importance; something odd in the PK
explanation of the puzzle according to which managers should have reduced their
influence in companies’ governance.

2.3 Imperialist rent and Unequal Exchange

2.3.1 Monopoly Capitalism

Since its first days capitalism has been characterised by a permanent need to expand its
boundaries in the pursuit of markets. The expansion of capitalism, though, hasn’t been
balanced but markedly uneven.

In this sense, some scholars have defended the idea of “super-profits” achieved by some
firms not through success in the market but through certain specific elements that allow
an extra exploitation of resources (workers and suppliers) (Smith, 2010; Amin, 2012;
Higginbottom, 2014). In this case the dissociation between profits and investment could
be explained by the capacity of some firms to achieve profits without exploiting their
workers but through the appropriation of others’ surplus. As can be seen, under this
approach the investment-profit puzzle could appear if a country’s firms could specialize
in this sort of profits.

However, the existence of such phenomenon relies on the existence of some sort of
“unique” feature of Northern firms that enables them to get profits without investing
them. In the capitalist system, then, “unique” elements emanate only from firms’
success in exploitation. For this reason, a proper explanation of any changes occurring
in capitalist development has to be linked to the pursuit of profits through exploitation.
The current features of capitalism that enable the dissociation between profits and
investment, then, have to be explained by the way in which exploitation and
competition (and thus the realization of profits) are carried on. Consequently, we turn
now to see the probably unique theory of international surplus transfers that doesn’t rely
on monopolies (Shaikh, 1979).

2.3.2 Unequal Exchange

The Unequal Exchange tradition bases its explanations in the different institutional
settings that rule in Core and Peripheral countries that imply different prices in the
world market and thus different competitiveness and incomes. In this sense, Emmanuel
(1972a), the main developer of this theory, argued that the Prebisch-Singer findings had
to be explained by the international immobility of labour relative to the mobility of
capital. Specifically, Emmanuel explains that the international mobility of capital leads
to the equalisation of profits rates between countries, as it does between industries in a
given country. On the other hand, labour tends to be immobile. Therefore, in the world
economy capital moves around looking for the most profitable conditions while labour
has to accept its national conditions, implying that profit rates are equalized across the
globe while labour rewards are not.
Consequently, Third World firms will sell their products at lower prices than those at
which Western firms sell their products in the international market. This fact, along with
the different specialisation between countries (which could be assumed to exist due to
historical causes), implies that terms of trade are not balanced; this is, Third World
economies receive less for their production than what they would receive if there was
equalisation of wages. As a consequence if the capacity to trade with LDCs is achieved
by just a few firms based on developed countries, they will be able to get higher profits
without investing simply by trading with LDCs’ firms. Therefore, Emmanuel’s thesis
could be an explanation of the patterns shown by accumulation rates and profit rates in
the developed world.

As can be seen Emmanuel’s explanation is based on the existence of differentials in the

wage level of different countries. However in a market based economy in which profit
rates are equalized between industries and countries, this situation can last only in two
cases. First, if different countries produce the same products, wage disparity between
them should be explained by different productivities in each country; this is so because
higher productivity means lower unit labour costs and thus prices and profit rates could
be equal between countries while wages being different. On the other hand, when two
countries produce different commodities and thus there is no competition between them,
different wages mean different international prices of each country’s production. In this
situation the prices of the commodities sold by the low wage country will be lower than
those of the high wage country in order to internationally equalise profit rates. These
conditions for the validity of the Unequal Exchange theory pose some questions on this
theory as an explanation for the investment-profit puzzle.

2.3.3 Criticisms

Following the previous reasoning, for the theory of Unequal Exchange to be complete
and coherent, it needs to explain the causes of the persistence of different productive
specialisations by different countries. This is, Unequal Exchange requires some sort of
barrier preventing Northern firms to move their production to low-wage areas; without
any barrier “why should the high-wage, high-price products go on being produced in the
high-wage countries? Given free mobility of capital between countries why should any
investment go to the high-wage countries at all?” (Brewer, 1990, p.219).

Emmanuel seemed to realise of this issue and consequently argued that his thesis
explained a mechanism through which different institutional settings encouraged and
reinforced productivity differentials. Concretely, Emmanuel thought that “it is possible
to state that Unequal Exchange is the elementary transfer mechanism and that, as such,
it enables the advanced countries to begin and regularly give new emphasis to that
unevenness of development that sets in motion all the other mechanisms of exploitation
and fully explains the way that wealth is distributed” (Emmanuel, 1972b, p.265). This
statement shows clearly the impossibility of the Unequal Exchange theory, in the way
formulated by Emmanuel, to give a full account of the investment-profit puzzle. Indeed,
if we take as valid Emmanuel’s link between institutional settings and productivity the
Unequal Exchange theory can’t explain the lack of investment in any firm because,
under this view, all extra profits are eventually invested to sustain the differential
productivity.

3. OUTSOURCING AND IMPERIALISM

3.1 Globalisation: the expansion of hierarchy

In the first chapter we have shown that capitalist profit arises from unpaid labour which
is performed because of the power that capitalists have in the productive process.
Therefore, capitalists have to expand their power along with the expansion of the
production level (i.e. the firm’s size), in order to capture higher profits. For this reason
we can assert that the capacity to exercise power throughout the production process, and
thus exploit labour and get profits limits the extent to which firms can expand
themselves. More concretely, capitalists have to ensure that managerial control is good
enough to provide the profits desired, which is something that becomes more difficult
the bigger the firm becomes (Hymer, 1970).

From the previous reasoning follows that, for firms to increase their size, it is needed
the development of certain elements which allow the control of the production process
at a larger scale. This is, indeed, what has happened in the last decades. More
concretely, improvements in communications and information technologies have
reduced both managerial and transportation costs that come along with the expansion of
production elsewhere (Milberg and Winkler, 2013, p.51). Moreover, the penetration of
capitalist relations in new countries and regions raised the reserve army in LDCs
encouraging a downward pressure on wages and also empowering capital in front of
labour (Ibid.).

It can be said, then, that the apparition of globalisation has proved the falsity of the
Emmanuelian barriers to offshoring. This is, the links between productivity and wages
haven’t worked in the way expected by Emmanuel and, once power over labour has
been able to increase its reach, firms have relocated their production in order to exploit
the lower wages. Consequently, globalisation has to be understood as the process of
overcoming those constraints that avoided the extraction of surplus value in a large
scale, which has given place to the development of Global Value Chains (GVCs)3.

Global Value Chains have been defined as the “full range of activities which are
required to bring a product or service from conception, through the intermediary phases
of production (...), delivery to final consumers, and final disposal after use” (Kaplinski
and Morris, 2000, p.4). Indeed, this definition could be the description of any firm’s
activity. For this reason GVCs have to be conceived as vertically disintegrated firms in
which hierarchy persists but takes a new form. GVCs, then, can be understood as

3
In the literature about GVCs, these are called Global Commodity Chains (GCCs) as
well, despite small and non standard differences of meaning. We will use both terms
indistinctly.
different nodes of production that are not linked by formal property relations but by
hierarchic relations. In this sense, Milberg (2010, p.1-2) notes that “the lead firm may
own its suppliers, purchase inputs from another firm or it may enter into a variety of
joint or cooperative ventures with its suppliers”. For this reason if GVCs are mainly
configured by different firms linked by hierarchic financial relations (evidence provided
in the next section), it is because the leading firms can maximise their profits with this
configuration.

Therefore, the development of Globalisation through the creation of GVCs has also
modified the way in which Emmanuel described Unequal Exchange in a further way:
nowadays the improvement of developed countries’ firms’ profits does not depend on
trading with LDCs’ firms but on the establishment of a leading position in GVCs where
the latter firms are established in the bottom nodes of the chain. Therefore, the
achievement of “super profits” is not directly linked to success in the home market but
to success in financial markets. The latter is the source of power within GVCs and thus
the source of the appropriation of others’ productive improvements; an issue explored in
the next section.

Following the previous reasoning, then, we can expect a positive relation between profit
rates and the raise of GVCs. This is indeed what Graph 5, Figure 2 and Table 2 indicate:
offshoring intensity and the profit rate show a positive relationship since the 80s.
Furthermore, this relation is significant at 5% as indicated by the p-value = 0.0045 in a
t-test under the null-hypothesis of no correlation between both variables. Empirical
evidence, then, is coherent with our thesis that profits obtained in the US were being
imported from abroad.

Furthermore, our evidence fits the econometric research carried on by Milberg and
Winkler (2013) for the United States between 1998 and 2006, who found that (when
lagged one period) offshoring in services and materials is significantly associated with a
higher share of profits in gross domestic product.

Profit Rate and Offshoring Intensity

in the US
50 14
12
40
10
30 8 Profit Rate (left axis)
20 6
4 Offshoring Intensity
10 (right axis)
2
0 0
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
Graph 5. Profit Rate and Offshoring Intensity in the US 1963-2014. Source: Own
elaboration. Data: U.S. Federal Reserve Bank, Flow of Funds Account, Schedule Z.1;
U.S. Bureau of Economic Analysis, Fixed Assets Accounts, table 1.1. U.S Bureau of
Economic Analysis, Input-Output Accounts, Use Tables/Before
Redefinitions/Producer Value. Note: Profit Rate equals corporate profits (before taxes
including IVA and CCadj) divided by private non residential capital stock; offshoring
intensity equals the share of imported intermediate inputs in total intermediate inputs
(see Milberg and Winkler, 2013, pp.44-46).

Table 2. Correlation coefficients: Offshoring Intensity and Profit Rate, US 1983-

2006. Source: Own elaboration.

d_ProfitRate versus d_OffshoringIntensity (with least squares fit)

8
Y = 0.0201 + 4.81X

2
d_ProfitRate

-2

-4

-6
-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8
d_OffshoringIntensity

Figure 2. Relation between Offshoring Intensity and the Profit Rate in the US 1984-
2006. Source: Own elaboration.
Consequently, the main problem of the Unequal Exchange theory (i.e. the requirement
of barriers preventing the offshoring of Northern firms towards cheap labour countries)
can be surpassed by the analysis of power within GVCs. More concretely, the specific
configuration of international relations in the form of GVCs allows the existence of
power relations, which bring along transfers of profits from productive firms in the
South to leading MNCs in the North. Moreover, given that these transfers are carried on
inside GVCs (and therefore don’t depend on markets but on hierarchy), their existence
doesn’t depend on arms-length trade nor on productivity differentials, as in Emmanuel’s
theory. The specific mechanisms through which this power is exercised are explored in
the next sections.

3.2 Financial Capital and Exploitation

The main concern of this dissertation i.e. the divergence between profits and investment
can be seen as a proof of the hierarchical relations between firms that exist in the
structure of GVCs. Indeed, despite production taking place in different areas we
shouldn’t expect persistent divergences between profits and investment to occur in the
same location because it wouldn’t make sense to invest somewhere where it is not
worth doing so. Therefore, if GVCs were simple arms-length relations between firms
(with no hierarchies between them), increased profitability would have been translated
into increased capital accumulation. However, as noted before, capital accumulation has
been declining during the same years in which profitability has raised, which implies
the existence of some sort of power relations between firms that allow profits without
investment.

However, an argument based on the existence of “power” seems to rely on a

monopolistic approach to capitalist functioning, totally opposed to the description of the
system done in the first chapter. Under our approach, then, the patterns of profit and
accumulation rates can only change if the objective circumstances for extracting profits
change; a transformation that, as we have shown, has occurred in recent decades with
the apparition of GVCs.

At this point, the concept of financial capital becomes especially important. As shown
in the first chapter, capital is not simply the “means of production” but a property right
that enables the appropriation of surplus labour by the owners of capital, given the
conditions under which workers find themselves in capitalism. As Serfati (2011, p.15)
explains, “capital is based on social relations which give its owner the right to command
labour and to capture some part of the value created in the production and
commercialisation process. Ultimately, financial capital represents an accumulation of
claims on labour”. Consequently, power over labour can be exercised indirectly through
financial capital and, therefore, the development of finance can be regarded as an
expansion of capitalist power and thus of profiting possibilities.

In this sense, Palpacuer and Tozanli (2008, p.81-82) have argued that access to finance
has been a key tool in the development of GVCs, concretely that “these [leading] firms
have relied on financial markets to support their international growth by financing
acquisitions”; a fact that totally fits the empirical result of the expansion of GVCs in the
form of “capital flows [going] from the low-wage to the industrialized countries”
(Milberg, 2008, p.421). For this reason the purchase of options, stocks and other
financial instruments has become a need for leading MNCs if they want to establish
distribution channels, agreements and other sorts of hierarchic relations by which enable
indirect exploitation (Serfati, 2008). Therefore firms’ power arises, nowadays more than
ever, from the “possession of financial and property claims against which rents have to
be paid to it” (Ibid., p.45) 4.

However, it is worth noting here that the raise of financial capital goes beyond the
expansion of FDI as a form of remote control enabling the reception of incomes from
abroad. In this sense, Gereffi et al (2005, p.80) highlight that “the rising integration of
world markets through trade has brought with it a disintegration of multinational firms,
since companies are finding it advantageous to ‘outsource’ an increasing share of their
noncore manufacturing and service activities both domestically and abroad. This has led
to a growing proportion of international trade occurring in components and other
intermediate goods (Yeats, 2001)”.

Consequently, we have to realize that, in the context of GVCs, the attractiveness of

financial capital resides on the power that it gives to leading firms because its control
enhances the financial dependence of the bottom parts of the chain on the leading ones.
This is, the achievement of financial success (which can be thought to be positively
related with the level of financialisation of firms) allows the leading firms to threat their
suppliers with a break of their contracts and therefore the latter can impose favourable
conditions for them. This fact fits perfectly with the empirical shift towards a
“financialized economy where firms have developed their own financial activities”
(Husson, 2009, p.2). In this sense, the numerous financial crises that developing
economies have suffered can be seen as the macroeconomic expression of a
microeconomic threat that enables hierarchy between firms.

The previous reasoning is made clearer by acknowledging the shift towards core
competences by manufacturing firms that has been reported during the years of
globalisation and financialisation. These competences are defined as activities that
provide access to a variety of markets and make a significant contribution to the
perceived customer benefits of the end product (Prahalad and Hamel, 1990). The shift
towards core competences, then, highlights the importance that market access has in an
economy dominated by GVCs (Heintz, 2003). This fact becomes especially interesting
4
Furthermore, Milberg (2008) explains that “heightened M&A activity is not just an
indicator of financialisation (...) but also a cause of financialisation itself” because firms
tried to avoid being absorbed by other firms. This behaviour doesn’t make sense under
the shareholder control of the firm, which is supposed to be concerned only with the
raise of dividends, which shouldn’t be affected by any absorption; instead trying to
avoid any absorption is the expectable outcome of firms struggling for the leadership of
GVCs.
if we take into account that empirical research has found that one of the main elements
conferring power to leading firms in GVCs is success in satisfying “the expectations of
consumers” and other agents involved in the purchase of products (see, for example,
Humphrey and Schmitz, 2001). In this context, financial success can be used as a tool to
ensure financial stability and thus the satisfaction of consumers’ and partners’
expectations (Haslam et al., 2013). Even more, financial power can be an important
support in the development of “brand names” which are related to market access and
thus to power in GVCs. In this sense, Milios and Sotiropoulos (2009, pp.170) write that
success in financial markets (...) is important because it “sends signals of profitability to
the money markets” 5 which enables “regular continuation of financing” and thus
ensures the reliability of firms’ contracts. It can be said, then, that success in financial
markets reinforces its importance in firms’ priorities through its role in the struggle for
international and money markets, which are key elements in the leadership of GVCs.

Therefore, the changes occurred in the “objective conditions” of international

exploitation of labour acted as an incentive for the development of financial capital.
This is, the possibility of international production enhanced its development as a power
enforcement tool within GVCs. We can say, then, that the engagement of corporations
in financial activities has been carried on with the purpose of increasing success in
financial markets because of the benefits that such success has with regard of leadership
in GVCs.

Consequently, for the reasons given above we expect that in the relation between
financialisation and offshoring, the former will be leading the latter. This is so because
the motivation for the development of GVCs depends on the amount of profits obtained
in them, which depends on the use of financial capital. This is, the importance of GVCs
in the economic system will be higher the higher their capacity to yield profits, which is
linked to the development of financial capital.

Such a causal relation is proved here with the use of a Granger-Causality test. We focus
on the F-tests under the null hypothesis of no correlation between lags of one variable
with current values of the other. In table 8 we can see the results 6 : lags of
financialisation show a low p-value (0,0041) in the F-test, which means that we reject
the null hypothesis of no significance of three lags in the explanation of the current
values of offshoring intensity7. On the other hand, we can’t reject that lags of offshoring

5
As explained by Duff (n.d.): “Funding a company through debt, rather than selling
company stock to attract capital, avoids diluting the stockholders' percentage ownership
of the company. (...) If the firm finances itself through debt, the creditors shoulder the
risk. However, if the debt results in increased earnings, the return on shareholder
investment is exponential.”
6
The results are robust to heteroskedasticity and autocorrelation (HAC). The variables
are measured in first differences to avoid spurious correlation as explained above.
7
The tests are done with three lags of the variables but the same results are obtained in
the tests with less and with more time lags. However, there is a (usual) reduction of
intensity don’t have explanatory power on current values of financialisation, as shown
by the p-value (0.9042) of the F-test. Therefore, it can be argued, that changes in
financialisation have led to changes in the presence of GVCs in US economy during the
Neoliberal epoch.

significance of the correlation existing between variables along with the increase in the
time lags.
Table 3. Granger-Causality Test between Offshoring and Financialisation 1984-2006.
Source: Own elaboration. Data: U.S. Federal Reserve Bank, Flow of Funds Account,
Schedule Z.1; U.S Bureau of Economic Analysis, Input-Output Accounts, Use
Tables/Before Redefinitions/Producer Value. Note: Financialisation and Offshoring
Intensity are measured as indicated in graphs 4 and 5.

The causal relation just shown seems to confirm our theory: the raise in financialisation
was carried on by firms with the purpose of increasing their power in GVCs, which
would be used to enforce favourable contracts enhancing these firms’ profitability and
competitiveness. In this sense, further evidence at the firm level data also supports this
thesis. In his analysis of some of the largest US firms, Milberg (2008, p.439)
acknowledges that “higher levels of shareholder value [relative to net incomes] are
associated with greater import reliance in global value chains”. Despite he doesn’t seem
to realise, this fact is an important support for our theory in front of the PK explanation
of the puzzle: if firms show different shares of paid dividends in their total income, this
means that their strategies (in financial markets) are being different and therefore our
theory would predict different power positions in the value-chains where they operate.
Specifically, under our approach the higher the engagement in financial markets the
higher the leadership in GVCs and thus the higher the reliance on imports for
productive purposes, which is, indeed, what data shows. Therefore, the empirical
evidence according to which higher weights of shareholder value are linked to higher
reliance on GVCs can be seen as another proof of the link between financialisation and
leadership in GVCs8.

We can conclude, then, that leading firms’ profits have been used in financial markets in
order to increase leading firms’ power over their suppliers and thus enhance higher
levels of profitability. This is, financialisation is a competitive strategy that has
enhanced the dissociation between profits and investment.

3.3 Imperialism persists

Up to now we have shown the way in which certain technological and political changes
have triggered the development of GVCs governed by financial capital. More
concretely, we have emphasized the divergent relation between accumulation and
profitability that different capitals can show depending on their power position within
GVCs. For this reason, under our point of view profits without investment could occur
within the same nation between different capitals. For this reason the link between
Unequal Exchange and the investment-profit puzzle appears when the former is carried
on between different nations with different institutional frameworks, implying different
comparative advantages for the development of one sort or another of capitalist activity.
This is, if profits and investment follow divergent patterns at the aggregate national
level this must be the result of the specific exploitation conditions that rule nowadays,
which are geographically determined; a fact that allows the maintenance of the
divergence between profitability and capital accumulation in certain locations 9 (as
happened in Emmanuel’s explanation of Unequal Exchange).

We can assert, then, that our theory still requires the existence of some sort of barrier
preventing the specialisation a la North (i.e. specialisation in finance) in the South.
However, our theory doesn’t need the existence of wage or productivity differentials to
explain the differentials in profits and accumulation rates. Instead, we have exposed that
the specific profiting possibilities of firms are linked to the comparative advantage of
each country’s firms to focus on finance or on manufacturing, and thus assume an
unproductive role or a productive one in the value chain.

Therefore, under our point of view the most important elements with regard to the
realization of profits is not, as Emmanuel believed, the wage level but the usually

8
Instead, under the PK approach, different weights of the shareholder value linked to
different reliance on imports don’t have any theoretical explanation.
9
This fact is coherent with the evidence that, while Southern nations have increased
their share of the total trade of manufactures, their share of global income hasn’t
changed remarkably (Smith, 2010).
mentioned institutional features existing in the First World: respect for private property,
entrepreneurs’ freedom, social peace, and what Marshall called “industrial atmosphere”
in general 10 . It is not surprising then, that “capitalist friendly” (hegemonic)
environments account for higher levels of development of capitalist exploitation in the
form of financial capital, while workers’ direct exploitation promotes a more difficult
engagement of society with the economic system.

More concretely, the different institutional settings of Core and Peripheral countries
reinforce themselves with the development of the different sorts of economic activities
carried on by the firms based on each country. On the one hand, the “financial based”
and governance activities of the leading firms require and promote a socially peaceful
environment in which “capitalist sympathetic” behaviour is assumed by most of the
population. In these places workers’ exploitation is one of the sources of profits but not
the only one, a fact that poses lower pressure on the working conditions of the North
than on those of the South, and thus promotes a more “quiet” society. On the other
hand, given the extraction of profits that Northern firms carry on from their Southern
“partners”, the accumulation of capital in the South heavily relies on labour
exploitation; a fact that makes the capital-labour conflict even harder and thus hinders
any possibility to create the proper environment for Southern firms’ upgrade in GVCs.

Therefore, the divergence between profits and investment is the consequence of the
development of certain productive possibilities that have allowed the remote
exploitation of Southern labour by MNCs based on the North, through the use of
financial capital. In each area the specific institutional settings have been reinforced by
each sort of economic activity (finance and manufacture), encouraging the appropriation
of profits without productive investment in the North. Otherwise, the development of
financial capital by itself wouldn’t have dampened the accumulation of capital and,
probably, would have finished earlier. For this reason, imperialism in the form of
outsourced production is the current way in which capitalism manifests itself but is not
a change in the normal capitalist functioning. Indeed, at the core of outsourcing
imperialism we still find the main capitalist engine: the exploitation of labour with the
purpose of profit maximisation.

4. CONCLUSIONS AND POLITICAL IMPLICATIONS

In the capitalist system, profits arise from the exploitation of labour in the production
process. Their realization, though, depends on the sale of this production in competitive
markets. Consequently, firms pursuit the maximisation of profits through the
improvement of their competitiveness. This is, indeed, the reason that shows as flawed

10
Note here that, by relying on the whole “institutional” differences, we avoid falling in
the mistake of treating wages as an independent variable as Emmanuel did. Instead, in
our example institutions are explained by economic forces as shown in the next
paragraph. Furthermore, the reliance on institutional differences as the source of
international inequalities has been widely acknowledged by many economists (see
UNCTAD, 2009).
the current analyses of the investment-profit puzzle: they are not coherent with an
analysis of capitalism’s essential features.

Instead, we have shown that the divergence between profits and investment can only be
explained by the changes that globalisation has brought along. Specifically, the political
and technological developments have almost eliminated transportation (of commodities
and, more important, of information) between different geographical areas. Therefore,
capitalist control of the working process can be expanded world-wide under the current
situation.

This power has been enforced through informal mechanisms that have implied the
apparition of GVCs. In this frame, those firms specialised in achieving access to
international commodity and money markets will be able to profit without investing.
This is so because the achievement of access to these markets depends on profitability
and thus is not subject to the normal mechanisms of competition. Instead, profits arise
from the productivity improvements carried on by the lower nodes of the chain.
Consequently, Northern firms achieve their profits given their specific role in the value
chain. Furthermore, this role is better performed, the better the success in financial
markets. For this reason, Northern firms have invested their profits in financial markets
with the purpose of ensuring this role in the chain and thus the dependence of the
suppliers on them.

Moreover, firms’ specialisation is geographically determined (Emmanuel, 1972), which

implies that the investment-profit puzzle will appear in those areas specialised in
finance, while cheap labour countries will develop their manufactures without
improving their incomes (Smith, 2010).

For these reasons, the equalisation of the living standards between the North and the
South are necessary to prevent the lack of investment in the North and the
underdevelopment of the South. However, because capitalists’ profits come from
unpaid labour, the lower the living standards the higher the profits, ceteris paribus.
Therefore, to end with these problems requires the development of institutions with
power over capital, looking not for profits but for people’s well-being.

5. REFERENCES

Amin, S. (2012). The Surplus in Monopoly Capitalism and the Imperialist

Rent. Monthly Review, 64(3), p.78.

Basu, D. and Das, D. (2016). Profitability and Investment: Evidence from India's
Organized Manufacturing Sector. Metroeconomica.

Brewer, A. (1990). Marxist theories of imperialism. London: Routledge.

Crotty, J. (2003). The Neoliberal Paradox: The Impact of Destructive Product Market
Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal
Era. Review of Radical Political Economics, 35(3), pp.271-279.

Duff, V. (n.d.). Does an Increased Debt Affect the ROE and ROA?. [online]
Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/increased-
debt-affect-roe-roa-36892.html [Accessed 24 Aug. 2016].

Duménil, G. and Lévy, D. (2004). Capital resurgent. Cambridge: Harvard University

Press.

Emmanuel, A. (1972a). El Intercambio desigual. [México, D.F.]: Siglo veintiuno

editores.

Emmanuel, A. (1972b). Unequal exchange. New York: [Monthly Review Press].

Galbraith, J. (1975). Economics and the public purpose. Harmondsworth: Penguin.

Gereffi, G., Humphrey, J. and Sturgeon, T. (2005). The governance of global value
chains. Review of International Political Economy, 12(1), pp.78-104.

Gintis, H. and Bowles, S. (1981). Structure and Practice in the Labor Theory of
Value. Review of Radical Political Economics, 12(4), pp.1-26.

Glyn, A. (1997). Does aggregate profitability really matter?. Cambridge Journal of

Economics, 21(5), pp.593-619.

Goldstein, A. (2012). Revenge of the Managers: Labor Cost-Cutting and the

Paradoxical Resurgence of Managerialism in the Shareholder Value Era, 1984 to
2001. American Sociological Review, 77(2), pp.268-294.

Gordon, D. (1996). Fat and mean: the corporate squeeze of working Americans and the
myth of managerial "downsizing". New York: Free Press.

Guerrero, D. (1995). Competitividad: teoría y práctica. Barcelona: Ariel.

Haslam, C.J., Andersson T. and Tsitsianis N et al. (2013). Apples Financial Success:The
Precariousness of Power Exercised in Global Value Chains. Accounting Forum.
37(4), pp.268-279.

Haslam, C.J., Andersson T. and Tsitsianis N et al. (2013). Apples Financial Success:The
Precariousness of Power Exercised in Global Value Chains. Accounting Forum.
37(4), pp.268-279.

Heintz, J. (2003 The New Face of Unequal Exchange: Low-Wage Manufacturing,

Commodity Chains, and Global Inequality. SSRN Electronic Journal.
Higginbottom, A. (2014). ‘Imperialist Rent’ in Practice and Theory. Globalizations,
11(1), pp.23-33.

Humphrey, J. and Schmitz, H. (2001). Governance in Global Value Chains. IDS

Bulletin, 32(3), pp.19-29.

Husson, M. (2009). Financial crisis or crisis of capitalism?. 1st ed. [ebook] Available
at: http://hussonet.free.fr/denkeng9.pdf [Accessed 18 Jul. 2016].

Hymer, S. (1970). The Efficiency (Contradictions) of Multinational Corporations. The

American Economic Review, 60(2), pp.441-448.

Kaldor, N. (1955). Alternative Theories of Distribution. The Review of Economic

Studies, 23(2), p.83.

Kaplinski, R. and Morris, M. (2000). Handbook for Value Chain Research. 1st ed.
[ebook] Available at: https://www.ids.ac.uk/ids/global/pdfs/VchNov01.pdf
[Accessed 24 Jun. 2016].

Lavoie, M. (2014). Post-Keynesian economics. 1st ed. Cheltenham, UK; Northampton,

MA, USA: Edward Elgar.

Marx, K. and McLellan, D. (2000). Karl Marx. 2nd ed. London: Oxford University
Press.

Milberg, W. (2008). Shifting sources and uses of profits: sustaining US financialisation

with global value chains. Economy and Society, 37(3), pp.420-451.

Milberg, W. (2010). Post-Hearing Statement to the US International Trade Comission.

The Economic Effects of Significant Import Restraints: Seventh Update. [online]
Available at:
http://www.theairnet.org/files/research/milberg/Milberg%20ITC%20testimony.pdf
[Accessed 24 Jun. 2016].

Milberg, W. and Winkler, D. (2013). Outsourcing economics. Cambridge: Cambridge

University Press.

Milios, G. and Sotiropoulos, D. (2009). Rethinking imperialism. Basingstoke [England]:

Palgrave Macmillan.

Orhangazi, O. (2008). Financialisation and capital accumulation in the non-financial

corporate sector:: A theoretical and empirical investigation on the US economy:
1973-2003. Cambridge Journal of Economics, 32(6), pp.863-886.

Palpacuer, F. and Tozanli, S. (2008). Changing governance in European food chains:

the rise of a new divide between global players and regional producers.
Transnational Corporations, 17, pp.69-97.
Screpanti, E. (2003). Value and Exploitation: A counterfactual approach. Review of
Political Economy, 15(2), pp.155-171.

Serfati, C. (2008). Financial dimensions of transnational corporations, global value

chain and technological innovation. Journal of Innovation Economics, 2(2), p.35.

Serfati, C. (2011). Transnational corporations as financial groups. Work Organisation,

Labour & Globalisation, 5(1), p.10.

Shaikh, A. (1979). Foreign Trade and the Law of Value: Part I. Science & Society,
43(3), pp.281-302.

Shaikh, A. (2016). Capitalism. New York: Oxford University Press.

Shapiro, N. (2012). The Function of Firms: Alternative Views. In: P. Arestis,

ed., Microeconomics, Macroeconomics and Economic Policy. Essays in honour of
Malcolm Sawyer, 1st ed. Houndmills, Basingstoke, Hampshire: Palgrave
Macmillan.

Smith, J. (2010). Imperialism and Globalisation of Production. PhD. University of

Sheffield.

Stockhammer, E. (2004). Financialisation and the slowdown of accumulation.

Cambridge Journal of Economics, 28(5), pp.719-741.

Stockhammer, E. (2006). Shareholder value orientation and the investment-profit

puzzle. Journal of Post Keynesian Economics, 28(2), pp.193-215.