Minqi Li’s Research Roadmap
(March 2010)
In 2002, I received the PhD in economics from University of Massachusetts Amherst and became a visiting assistant professor at Franklin and Marshall College at Lancaster, Pennsylvania. From 2003 to 2006, I was an assistant professor in the Department of Political Science of York University in Toronto, Canada. Since 2006, I have been teaching at Department of Economics of University of Utah.
Since 2006, I have published 1 peer reviewed book, 9 peer reviewed articles, 4 peer reviewed book chapters, 1 non-peer reviewed book, 3 non-peer reviewed articles, 2 non-peer reviewed book chapters, 4 working papers, 1 short article, and 2 book reviews. One of my books has been translated into Turkish. Since 2006, I have given 13 conference presentations and 14 invited lectures or talks.
In recent years, my research has focused on the following areas: (1) long-term movement of the profit rate and its impact on economic performance; (2) political economy analysis of financial imbalances with a focus on the Chinese and the US economy; (3) political economy analysis of energy and environmental issues. These issues are connected by the common theme: long-term cyclical movements and secular trends of the current world system. Studies on these issues contribute to better understanding of the historical evolutions of the current world system and its possible future trajectories.
The Tendency for the Rate of Profit to Fall?
The question of profit rate and capital accumulation is a traditional theme in political economy. In the tradition of political economy, the profit rate is a central economic indicator that helps to determine capital accumulation and the overall economic performance. There has been a large theoretical and empirical literature which debates the movement of the profit rate and its determinants.
Back to the 19th century, Marx made the hypothesis that as a result of capital accumulation, there would be a long-term tendency for the “organic composition of capital” (roughly corresponding to capital-output ratio) to rise, leading to falling rate of profit. In the late 20th century, there were many empirical studies that evaluated Marx’s hypothesis.
Most studies focused on the post-WWII period. These studies generally found that the profit rate in the advanced capitalist countries increased from the 1950s to the 1960s but declined from the mid-1960s to the early 1980s. The decline of the profit rate was considered to be one of the underlying causes of the economic crisis in the 1970s (see Gordon, Weisskopf, and Bowles 1987; Moseley 1991; Brenner 1998; and Shaikh 1999).
Related to this literature, some political economists have argued that there have been long waves in the history of capitalist economic development. The rises of successive institutional structures contributed to periods of rapid capital accumulation, while the disintegration of the institutional structures led to periods of crisis and economic stagnation. In the US, many long wave political economists are associated with the “social structures of accumulation” approach (Kotz, McDonough, and Reich 1994).
On the other hand, Dumenil and Levy (1993) studied the long-term movement of the profit rate in the United States from 1870 to the 1990s. Dumenil and Levy used a measure of the profit that intends to reflect Marx’s concept of surplus value. Dumenil and Levy found that despite some large movements over certain historical periods, in the long run both the profit share (that is, the share of profit in the output) and the capital-output ratio had tended to fluctuate around a constant trend.
Separately, Immanuel Wallerstein, the leading world system theorist, has been arguing that as the current world system expands and evolves, there have been secular trends for wage, taxation, and environmental costs to rise, implying long-term tendency for the profit share and profit rate to fall (Wallerstein 1998; 2003).
In Dumenil and Levy’s study, the profit is defined as the difference between output and wage cost. This definition of profit would be inadequate for testing Wallerstein’s hypothesis. In the paper I coauthored with Adam Hanieh (Li and Hanieh 2006), we redefined the profit as the output less the sum of wage and taxation costs. We then estimated the profit share, capital-output ratio, and profit rate for the US economy from the late 19th century to the end of the 20th century. We found that both the profit share and the profit rate tended to fall from the late 19th / early 20th century to the mid- / late 20th century. But the capital-output ratio had tended to fluctuate around a constant trend. These results contradict Marx’s hypothesis but are consistent with Wallerstein’s hypothesis.
In addition, we identified four long waves in the movement of the profit rate in the US economy from the late 19th century to the present, each lasting about forty years. The periods of the long waves correspond to the periods of long waves in the social structures of accumulation literature, suggesting that profit rate movements are likely to be associated with institutional changes.
In a later paper that I coauthored with Feng Xiao and Andong Zhu (Li, Xiao, and Zhu 2007), we extended the analysis to include the United Kingdom and Japan. The findings in the second paper are consistent with the findings in the first paper.
Current evidence seems to suggest that we have passed the peak of the profit rate long wave that started in the early 1980s and we are now in the midst of the long wave downturn. Several interesting question arise from this observation. In the past, profit rate downturns were associated with major economic and political instabilities. If the US and the global economy will experience a profit rate down turn in the coming one or two decades, how will the overall economic performance and political conditions be affected? Wallerstein hypothesizes that in the long run, wage, taxation, and environmental costs should rise. My studies suggest that there has been some evidence in support of this hypothesis. But will these trends continue to be valid in the coming decades? If these trends continue, how will the behavior the current world system be affected? Will the impact of these trends lead to some fundamental changes in the systemic dynamics? Further, environmental costs are not directly measured in national accounting and therefore are not fully taken into account in the current studies. When environmental costs are properly taken into account, will it fundamentally change our perceptions about both the historical evolution and the future trajectories of the current world system?
The Political Economy of Financial Imbalances
Back to the 1970s, the global economy suffered a crisis characterized by low and falling profit rates. Revival of the global economy required reestablishment of conditions of capital accumulation and especially the recovery of the profit rate.
In this context, many governments pursued policies that expanded the role of the market and private enterprises, often with the effect of giving capital a stronger bargaining power vis-à-vis labor and national governments. These policies are now referred to by many as neoliberal policies.
Empirical studies found that the neoliberal policies had indeed succeeded in reviving the global profit rate. However, with lower labor income share, mass consumption tended to lag behind overall economic growth. Further, with greater mobility of capital, some national governments were constrained in their ability to achieve macroeconomic stabilization. In the early 2000s, some economists already analyzed the structural problems with the neoliberal institutional structure (Crotty 2000; Felix 2001).
From 2003 to 2007, the global economy enjoyed a period of rapid growth. Global financial imbalances became a prominent feature of the global economy in this period. While the US was running large and rising current account deficits, China and other Asian economies ran large current account surpluses. Some economists argued that this arrangement constituted the so-called “Bretton Woods II” international monetary system and was inherently stabilizing. On the other hand, Martin Wolf of Financial Times, Nouriel Roubini of New York University, Kenneth Rogoff, and the economists at the Levy Economics Institute, among others, had argued that the global financial imbalances were fundamentally unsustainable.
In several papers, I attempted to link the literature of the structural problems of the neoliberal institutional structure with the literature on global financial imbalances (Li 2004; 2007; 2008a). The redistribution of global income from labor to capital was necessary for the revival of the global profit rate. However, the policies and institutions designed to revive the profit rate also had the effect of depressing mass consumption and intensifying financial instability. In this context, the large and rising US current account deficits had played a stabilizing role as the US deficits allowed the rest of the world (especially China and the Asian economies) to pursue export-led growth and accumulate foreign exchange reserves.
However, the US deficits could not be sustained indefinitely. The US current account deficits largely reflected excess spending by the US households financed by unsustainable debt. Moreover, the foreign exchange reserves accumulated in the rest of the world had led to excessive increase in money supply which fueled the global inflationary pressure during 2007-2008.
During the 2009 crisis, private spending in the advanced capitalist economies collapsed. This collapse would have led to the Second Great Depression had there not been a massive increase in government deficit spending throughout the world. This experience once again confirms Hyman Minsky’s argument. According to Minsky (1986), modern capitalist economy is fundamentally unstable and a big government sector is indispensable to prevent economically and socially devastating depressions.
Minsky did point out that big government interventions under capitalism had certain limitations. Government bailing out of private enterprises during times of crisis in effect socialized private risks. This could encourage excessive risk-taking on the part of private investors, forcing the government to intervene on increasingly costly terms. Moreover, as government ran deficits during times of crisis, unless the deficits were offset by surpluses during periods of economic expansion, the long-term government debt position might become unsustainable. This dilemma was referred to by Pollin and Dymski (1994) as “the Minsky Paradox.”
In my recent working paper, I evaluated the performance of the US economy in light of the Minsky Paradox (Li 2009a). I find that since the 1970s, periodic financial crises have from time to time forced the US government to run large fiscal deficits. However, these deficits were not offset by surpluses in the periods of economic expansions. Moreover, while before the 1970s, the interest rates were often below economic growth rates, since the 1970s the interest rates have generally stayed at levels comparable to economic growth rates. The combination of these two factors has led to rising US debt-to-GDP ratio over time. If this trend is not halted or reversed, in the future, the US government’s ability to stabilize the economy may be fatally undermined.
In the coming years, the global economy can no longer count on the heavily indebted American consumers. On the other hand, both Europe and Japan are struggling with economic stagnation. Will China become the next engine of the global economy and lead the world into a new period of vigorous expansion? In a recent paper I coauthored with Chiara Piovani (Piovani and Li, forthcoming), we find that China’s economic growth has been led primarily by exports and investment. In the coming years, China can no longer rely upon exports to lead economic growth as the advanced capitalist economies fall into stagnation. On the other hand, we find that China’s investment level is already excessive relative to what is required to sustain a steady capital-output ratio.
We also find that China’s consumption level is unusually low and in recent years the fall of consumption as a share of GDP has roughly paralleled the fall of wage income as a share of national income. We recommend the Chinese government to pursue a massive public employment policy that could not only directly increase effective demand but also improve workers’ bargaining power and increase mass consumption.
The Rise of China?
In recent years, some have speculated about the possibility for China to replace the US as the next hegemonic power in the world system. In his last book, Adam Smith in Beijing, Giovanni Arrighi (2008) discussed the world historical implications of the rise of China. Arrighi hoped that China would lead the global transition from the current world system to a more egalitarian, sustainable new world system.
In my recent book, The Rise of China and the Demise of the Capitalist World Economy (Li 2008), I shared Arrighi’s opinion that the world has entered into a period of systemic crisis. However, I contend that China will be unable to replace the US and become the world system’s effective hegemonic power. Instead, China’s deeper integration into the existing global order is generating new historical forces that will have the long-term effect of destabilizing the current world system.
According to Wallerstein (1979), the states in the world system are divided into three structural positions: the core, the periphery, and the semi-periphery. While the periphery produces much of the surplus, the system’s surplus is concentrated in the core. The semi-periphery shares a portion of the surplus and serves as the politically stabilizing middle layer in the system.