Profitability and Growth in Multiregion Systems: Prologue to a Historical Geography

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Profitability and Growth in Multiregion Systems: Prologue to a Historical GeographyAuthor(s): Michael WebberSource: Economic Geography, Vol. 73, No. 4 (Oct., 1997), pp. 405-426Published by: Clark UniversityStable URL: http://www.jstor.org/stable/144561 .

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Profitability and Growth in Multiregion Systems: Prologue to a Historical Geography

Michael Webber Department of Geography, The University of Melbourne, Parkville,

Victoria 3052, Australia

Abstract: Consider the OECD, and divide it into two regions: Japan and the rest. How have rates of profit, the history of capital accumulation and the growth of demand and supply, interregional investment and trade interacted to produce their historical geography? What can we learn from that data about theories of profit, growth, and interregional competition? In this paper, I estimate the parameters of a disequilibrium, dynamic, interregional model that illuminates these questions, paying particular attention to the manner in which investment is generated and flows between regions.

I find a complex relationship between productivity and costs, profitability and accumulation. These variables are not well correlated over space. The evidence prompts questions about the weight that is given to profitability in interpreting the growth of regions. More important are the availability of funds (generated by the existing capital stock), the production intentions of corporations, and the investment policies of financiers. Likewise, over time profitability and accumulation are correlated, but this correlation is strong only in the long run; in the short run, rates of growth are determined far more by production decisions and investment policies than by changes in the rate of profit.

Key words: growth, profitability, capital flows, regional dynamics, Japan, OECD.

Much recent economic geography- about either local implications or forms of global reorganization of production- draws on either regulation theory (Aglietta 1979; Boyer and Mistral 1978; Lipietz 1979, 1987), Marxism (Mandel 1978; Harvey 1982), or the theory of industrial divides (Piore and Sabel 1984). These theories underlie many geographers' understanding of how the organization and location of industries changes (Holmes 1988; Schoenberger 1988) and of how the industrial structure of regions evolves (Scott 1988). These theories are used in understanding the "real" world of production and services and, increasingly, the "symbolic" world of money and finance (Bond 1994; Corbridge 1994; Daly 1994; Daly and Logan 1989). Outside economic geography, and certainly in the political realm, ideas of comparative

advantage (Balassa 1981; Garnaut 1989), competitive advantage (Porter 1990), and the new international division of labor (Froebel, Heinrichs, and Kreye 1980) are more influential. In addition, recent theoretical innovations in orthodox eco- nomics-strategic trade theory (Krugman 1991), new growth theory (Grossman and Helpman 1990; Romer 1990), and new location models (Arthur 1994)-elucidate the role of the state in development and give expression to historical advantage or geographic inertia.

Whatever their differences, all such theories regard locational change as driven primarily by differences in costs and profitability. These theories focus on four significant variables: forms of technique, costs of production, investment and output growth, and employment levels and conditions. The causal orderings

405



ECONOMIC GEOGRAPHY

differ: technical conditions and costs of production are often taken as given in liberal and regulationist accounts but are endogenous in Marxist and some new growth theories. The dynamic structures also differ: employment conditions are costs in liberal and new growth theories but are both costs and sources of demand in regulationist and (some) Marxist accounts. Yet one feature is common to all theoretical traditions: investment and the growth of output are thought to be determined by costs of production. If costs are low and profits high, entrepreneurs invest more than if costs are high and profits low.

This series of papers (see Webber 1996) provides the formal, theoretical basis for a new view of the regional dynamics of production. The goal of the research project is to identify the extent to which investment and output decisions are autonomous rather than derived from comparative costs and rates of profit. I hypothesize that investment and output decisions are not simply matters of comparative costs and comparative rates of profit, but reflect firms' growth targets, the amount they save, and the size of their existing capital stock. The hypothesis is assessed in several stages.

The first step was to construct a theoretical structure to identify the appropriate variables and to order their linkages (Webber 1996). The new interregional model of capitalist accumulation generalizes the basis on which interpretations of postwar economic growth are derived. The model did not assume equilibrium: demand and supply are not necessarily equal, and capital may be oversupplied. The model pays particular attention to the determinants of investment and interregional flows of capital. The assumptions of this interregional, disequilibrium, dynamic model resemble the conclusions of empirical work on growth in East Asia (Dore 1986; Johnson 1982; Webber 1994; Woo 1991) and of so-called strategic trade theory (Helpman and Krugman 1989). Webber (1996) explained the evolution of profit rates in

the various regions and examined the limi- tations of the theory of the falling rate of profit in a nonequilibrium, multiregion system. The indeterminacy of some of the parameters within the model reflects the complexities of strategies described in Dicken (1992) and Corbridge, Martin, and Thrift (1994). The model demonstrates that values are spatially variable; that capital flows between regions even if rates of profit are equal; that net flows of capital do not necessarily point to higher profit loca- tions; and that rates of profit depend not only on the traditional notions of organic composition and rate of exploitation but also on rates of growth of demand, supply, and capital, as well as trade and investment policies.

The second stage of the project, dis- cussed in this paper, estimates the parameters of the model. Since the model hypoth- esizes that investment and output decisions are partially exogenous, it introduces new parameters, controlling such variables as the target rate of growth of supply and interregional investment flows. Are such parameters useful in interpreting the historical geography of production? Do their values make sense of the historical record? In this paper I ask what the numbers look like. Do they indicate that investment and output decisions are not simply matters of relative costs and rates of profit? Much of this paper is concerned with accounting: what are the values of key parameters and what is their value in explaining regional growth? The numbers derived must then be subject to explanation.

The first aim of this paper, then, is theoretical: understanding whether the recast model of regional development throws light on theories of international (regional) growth and development. I approach this theoretical aim in conjunction with, and by means of, an empirical problem: how to understand the exceptionalism of Japan as compared to the supposed norms of North America and Western Europe. How did rates of profit, capital accumulation and growth of output, interregional investment, and trade interact to produce the economic

406



PROFITABILITY AND GROWTH

geography of the past 30 years? The rise of Japan transformed the geography of production, trade, and investment; its explanation preoccupies geographers, economists, sociologists, and political scientists. This paper compares Japan's economic performance (in terms of the model parameters) with that of the other Organization for Economic Cooperation and Development (OECD) countries.

The paper uses data from 1960 to 1990 for Japan and the rest of the OECD to estimate the parameters of the model and to illuminate the theoretical and empirical questions. These estimates are also used to combine the theoretical and empirical questions: do the traditional variables of technology and profitability explain the relative growth of Japan, or must we also emphasize the production and investment decisions identified in the new model?

The issue of timing is crucial. Some interpretations of growth and slowdown in Japan and the rest of the OECD claim that Organization of Petroleum Exporting Countries (OPEC) oil price rises and other policy mistakes of the early 1970s caused the slowdown; others claim that profitability fell, because demand failed, or because productivity gains slowed, or because the technical composition of capital and the rate of exploitation became imbalanced. In part, these claims can be sorted by evidence about timing and geography: when and where did growth slow? When did profitability fall? What have been the histories and geographies of demand, technical change, and exploitation?

Japan has accumulated capital and expanded output faster than the rest of the OECD (referred to here as ROECD). Rates of accumulation and growth, dis- cussed in the first section of the paper, have fallen in both regions since 1973. While profitability moves in tandem with rates of growth, that relationship is not strong over the short run or between regions. Furthermore, in both regions profitability had begun to fall well before the events of 1973, as outlined in the next section.

There are several influences over profitability, which I examine in the next three sections. One is productivity, which was lower in Japan than in the ROECD throughout the 1960s and 1970s; differences in levels of productivity thus do not explain the competitive success of Japan. Equally, productivity change slowed after profit rates began to fall and therefore could not have initiated a fall. A second effect on the rate of profit is wages and exploitation. However, there is no sign of any new trend in costs of production immediately preceding the slowdown of 1973-74. The final effect on the rate of profit is the output:capital ratio. The history and geography of that ratio parallel those of the rate of profit. While the infla- tions and instabilities of the early 1970s appear to precede the fall in profitability, trends in unit costs of production and in output:capital ratios are consistent with that fall and its geography.

In the penultimate section I analyze investment. The proportion of the surplus that is invested is far higher in Japan than in the ROECD, and the difference is increasing. That is, rates of capital accumulation in Japan are high (and rising) relative to those in the ROECD primarily because Japanese corporations invest a higher (and increasing) proportion of their surplus rather than because Japanese corporations earn higher rates of profit than those in the ROECD. These behavioral differences between the two regions reflect broad structural differences in the orientations of firms to growth and current market value. The most significant and powerful control over capital allocations to the two regions is the size of the existing capital stock; less important is the relative profitability of production.

Two elements of style deserve comment. First, the paper's conception of an underlying geography is a simplified one: a world economy divided into two regions, Japan and the ROECD. That simplicity reflects both an empirical question, the exceptionalism of Japan, and the fact that world production, trade, and investment are dominated by Japan, North America, and

407



ECONOMIC GEOGRAPHY

Western Europe. In a more complex regional structure, local-local and local- global links could be explored and a thicker geography entertained. But to estimate such a model is a huge empirical task, jus- tified only by the experience reported here. So I begin simply.

Second, influential accounts of postwar economic history (Aglietta 1979; Mandel 1978; Piore and Sabel 1984; Balassa 1981; Porter 1990; Froebel, Heinrichs, and Kreye 1980) present "thick" narratives. They describe in detail decisions, events, and geographic outcomes. Their formative narratives are underpinned by various log- ics, though all share a concern with costs of production. This paper is a prologue to such a historical geography: it seeks to revise the underlying logic rather than to rewrite the narrative. If the bare results of this paper support the hypothesis, then the model and its stylized historical geography need to be "thickened" by embedding them in a richer view of society and social dynamics. It would be important to know how the central variables-technology, costs, investment and output, and employment-depend on broader conditions within society. It would also be important to tell the stories of places, with the aid of the revised logic.

Rates of Capital Accumulation and Growth

Rates of capital accumulation and growth of output are major features to be explained (Figs. 1, 2, and 3). In line with Marxist theory and Webber (1996), capital is measured as the total stock of money advanced to pay for production (to buy plant, equipment, raw materials, or labor power). Figure 1 measures rates of capital accumulation-percentage increases each year in the total stock of capital-not shares of capital investment in gross domestic product (GDP). The quantity supplied by producers within an economy (Fig. 2) and the quantity demanded (actually purchased; Fig. 3) by consumers

z o 0.150

o 0.100

0

LLU o 0.050 cr

-- JAPAN -o- ROECD

0.000 . . . . . . 1960 1965 1970 1975 1980 1985 1990

YEAR

Figure 1. Rate of growth of capital stock, Japan and the ROECD, 1960-1990. Sources:

OECD (1960-90); UN (1960-90); Japan's trade data are from Japan, Office of the Prime Minister (1960-90). Note: Methods of estimating this and all other series used are described

in the Appendix.

0.150 -

\ - - JAPAN

L>] \ /\ / \--- ROECD

0 0.100 -

1960 1965 1970 1980 1985 190

-0.050 YEAR

Figure 2. Rates of growth of supply, Japan and the ROECD, 1960-1990. Sources: See

Figure 1.

0.150 -

. /S P'"-c JAPAN XA~~ Aj~ . oROECD

---- 7

W 0.100

0

0.050 0 C:~

1'60 1965 1970 p975 1980 1985

-0.050 YEAR

Figure 3. Rates of growth of demand, Japan and the ROECD, 1960-1990. Sources: See

Figure 1.

408

Ar




within an economy are indicated. All mon- etary units are in constant dollars, to assess quantitative expansion rather than changes driven by the value of money or the exchange rate.

Rates of growth of output and capital in Japan exceed those in the ROECD. Capital accumulates at an average annual rate of 0.088 in Japan, compared with 0.041 in the ROECD (t = 11.371, df = 29, p < 0.001). Rates of capital accumulation are greater than rates of growth of output. Thus, the rate of growth of supply averages 0.068 each year in Japan, compared with only 0.032 in the ROECD (t = 5.595, df = 29, p < 0.001). The average rate of growth of demand is 0.068 in Japan and 0.034 in the ROECD (t = 5.917, df = 29, p < 0.001). Demand is slightly lower than supply; the ratio of demand to supply averages 0.983 in Japan and 0.991 in the ROECD.

Rates of capital accumulation and growth vary over time (Table 1), being slower since the mid-1970s than before. In general the sharpest breaks in the series occur between 1972-73 and 1973-74. However, in Japan the rate of capital accumulation did not slow significantly until 1975-76. (Nevertheless, for consis- tency's sake, the data in Table 1 break all series after 1973.) In both regions, rates of capital accumulation since 1974 are only

half as fast as before. In Japan, rates of growth of supply and demand recently are about 40 percent of their pre-1973 levels, in the ROECD about 50 percent. That is, since 1973 Japan has continued to accumu- late capital twice as fast as the ROECD, but its exceptional rates of growth of output have been pared back toward the ROECD averages.

In both regions, demand (purchases) tends to rise relative to supply (output) (see Fig. 4). In the ROECD, demand/supply rises gradually (the linear regression coefficient is statistically significant, with t = 3.94 and p = 0.0005). In Japan, demand at first averages only 96.99 percent of supply;

1.01 -

t .00 ,-

Q 0.959 L JAPAN ? 11 -o ROECD

0.9..8 -

0.97 0

C)0.96

0.94 -

o 9I [? 0.cl,93t ,

1960 1965 1970 1975 YEAR

1980 1985 1990

Figure 4. Ratio of demand to supply, Japan and the ROECD, 1960-1990. Sources: See

Figure 1.

Table 1

Changes in Rates of Capital Accumulation and Growth

Rate of Growth of

Capital Output Demand

Statistic Japan ROECD Japan ROECD Japan ROECD

Mean,a 1960-73 0.119 0.055 0.105 0.044 0.104 0.047 Mean, 1974-90 0.065 0.031 0.039 0.024 0.041 0.024 Standard deviation, 1960-73 0.020 0.006 0.033 0.006 0.022 0.015 Standard deviation, 1974-90 0.017 0.005 0.023 0.019 0.024 0.015 t-statisticb 7.887 10.974 6.273 4.166 7.530 4.086

Sources: Data in Figures 1, 2, and 3. a Means are arithmetic averages of the annual rates of growth of capital, output, and demand. b The t-statistics on the means for the two periods are computed for separate variances. Two-tailed significance

tests on the t-statistics all give p < 0.001.

409



ECONOMIC GEOGRAPHY

then, in 1975, demand jumps in relation to supply and subsequently averages 99.48 percent. (The difference in means between the two periods, 1960-74 and 1975-90, has t = 7.625, with p < 0.0001 for two-tailed, unequal variances.) Japanese corporations initially produce a relatively large output in relation to demand, larger than in the ROECD, but since 1975 produce at about the same rate in relation to demand as the ROECD. In neither region does demand fall in relation to supply over time.

The various series are correlated (see Table 2). Despite the differences in average rates of capital accumulation, the regions' rates move in tandem and are highly correlated. However, the changes in rates of capital accumulation from one year to the next are not strongly correlated. That is, the correlation between rates of capital accumulation in the two regions arises from their common trend (both are declining), not from the similarity of their year-to-year changes. Rates of growth of supply and demand are less highly correlated and their year-to-year changes are even less correlated and perhaps negatively correlated. So correlations between the economic performance of the regions are stronger when measured by capital accumulation than by growth of output. Japan

and the ROECD share common trends, but not common year-to-year changes in economic performance.

Rates of capital accumulation are correlated with rates of growth of output. In the original series, rates of capital accumulation lag behind rates of growth of supply, by one (Japan) or two (ROECD) years. This correlation is largely because the series share a common trend: there is little (or even negative) correlation between year-to-year changes in accumulation and growth of output. Capital accumulation adjusts to changes in output rather than conversely, but over the long run rather than from year to year.

These are the facts to be explained. Japan's economy grows faster than that of the ROECD, and both slow after 1974. Rates of capital accumulation slow less than rates of growth of output. These data do not yet discriminate between the explanations for the slowdown; the timing thus far is consistent with several explanations. However, the year-to-year economic performance of the regions is not well correlated; they share a common trend, but their year-to-year changes are largely independent. Likewise, annual changes in accumulation and growth of output within each region are not well correlated. This

Table 2

Correlation between Rates of Capital Accumulation and Growth

Original Series Differenced Series

Series (Rates of Growth) Laga Correlationb Standard Error Lag Correlation Standard Error

Capital stock, Japan and ROECD 0 0.847 0.183 Supply, Japan and ROECD 0 0.599 0.183 2 -0.497 0.192 Demand, Japan and ROECD 0 0.603 0.183 -

Capital stock, supply, Japan -1 0.617 0.186 Capital stock, supply, ROECD -2 0.524 0.189 0 -0.421 0.186

a A negative lag means that the first named series moves after the second. So the rate of capital accumulation moves after the rate of growth of supply in both Japan and the ROECD. Lags are measured in whole years, and only lags within ?3 years were examined.

b Only correlations that exceed two standard errors in magnitude are reported.

410




evidence is problematic for simplistic explanations of economic geography change.

Profitability

According to virtually all brands of economic theory on which geographers draw, such changes and regional differences in rates of accumulation and growth are driven by changes in the rate of profit, the key to interregional competition for investment and regional dynamics. In one sense, the empirical evidence of this paper comprises a sustained investigation of the assumed centrality of profitability to regional dynamics and competition. I begin by mea- suring and assessing the history of the rate of profit: the surplus in production divided by the total stock of accumulated capital (Fig. 5).

The aggregate, economywide rate of profit in Japan fell from 0.241 in 1960 to about 0.075 between 1983 and 1990. The first sustained fall in profitability occurs in the early 1960s, but a more protracted fall begins in 1970. By contrast, the rate of growth of output does not diminish until 1973 and the rate of capital accumulation until 1976. Seeds of the fall in rates of profit were sown well before the OPEC oil price hike, the rise in global wheat prices, and the end of the Bretton Woods agree- ment in the early 1970s.

0.250

YEAR

Figure 5. Rate of profit, Japan and the ROECD, 1960-1990. Sources: See Figure 1.

In the ROECD, the initial rate of profit is well below Japan's, about 0.13. The rate of profit in the ROECD falls throughout the 1960s and 1970s, well before the trau- matic events of the early 1970s, bottoms in 1982 at 0.074, and stabilizes at about 0.09. Since 1983, profitability is higher in the ROECD than in Japan, even though rates of growth and accumulation are higher in Japan. In other words, since 1983 regional differences in profitability are inversely related to differences in rates of growth and investment.

These relations between profitability and growth and accumulation need to be investigated further. First, rates of profit in the two regions move together (r = +0.810 at lag 0), but largely because they share a common trend (the series of year-to-year changes in rates of profit has r = +0.329). Second, within each region, rates of profit are correlated with rates of capital accumulation and growth of output, more strongly in Japan than in the ROECD (Table 3). In Japan, the series of year-to-year changes in rates of profit, capital accumulation, and growth are also correlated. In the ROECD, changes in profitability are associated with changes in growth, but not with changes in capital accumulation. Finally, profitability moves in tandem with, but before, rates of capital accumulation and growth.

This evidence about rates of profit in Japan and the ROECD is important for historical economic geography. Rates of profit in both regions began to fall before the 1970s, before the price changes, financial events, and reductions in rates of growth of the early 1970s. This history is consistent with the view that in the long run changes in profitability drive changes in rates of growth rather than vice versa and that the traumas of the early 1970s were not the direct cause of the fall in profits. Furthermore, the relationship between profitability and growth is strong in the long run, but weaker in the short run and between regions. These conclusions are summarized in Figure 6.

The next problem is to understand differences between regions and changes over

411



Table 3

Relationships among Profitability, Accumulation, and Growth

Original Series Differenced Series

Series Laga Correlationb Standard Error Lag Correlation Standard Error

Profit, capital accumulation, Japan 0 0.900 0.183 1 0.429 0.189 Profit, growth of supply, Japan 0 0.713 0.183 0 0.588 0.186 Profit, capital accumulation, ROECD 0 0.856 0.183 Profit, growth of supply, ROECD 0 0.586 0.183 0 0.542 0.186

a A positive lag means that the first named series moves before the second. Lags are measured in whole years. b Only correlations that exceed two standard errors in magnitude are reported.

relationship is not strong in short run or between regions

Rate o r between regions Rate of growth

timing: Piore & Sabe low correlations tale of accidents is not in short run: so a cause of changes in \ / other causes profitability \ / are partly local

IOther cause

Figure 6. First pass at model of relationship between profitability and growth.

time in rates of profit. The rate of profit is defined in Webber (1996) as the ratio

demand - unit costs x supply. capital stock

The central determinants of profitability are the ratio of demand to supply, unit costs of production, and output:capital ratio. In turn, unit costs of production depend on productivity and real wages. Figure 4 has already shown that the ratio demand:supply rises faster in Japan than in the ROECD, so the ratio can have little to do with declining profitability or with the exceptional rate of profit in Japan. I therefore focus on productivity, wages, and such related measures as values and rates of exploitation.

Technical Change and Productivity

Productivity change animates capital accumulation and guides interregional competition. Changes in productivity originate within plants, as managers innovate, imitate, learn, achieve economies of scale, and relocate. Changes in productivity also arise from "composition effects," changes in relations between plants rather than within them. Composition effects include differences in rates of growth of plants at different levels of productivity and firms' entry and exit. Webber, Sheppard, and Rigby (1992) describe the different effects and how they may be measured. For now, we need simply note that the apparent rate of productivity change (in observed labor:output and constant capital:output ratios) reflects composition effects as well as real productivity changes within plants.

The history of changes in productivity, and their impacts on profitability, is a central point of dispute between different interpretations of postwar historical economic geography. Freeman and Perez (1988) and Lipietz (1979, 1987) both regard lower rates of productivity growth as a cause of falling profitability and slowing accumulation. Mandel (1978) and Piore and Sabel (1984), by contrast, regard

412 ECONOMIC GEOGRAPHY




productivity change as an effect rather than a cause of changes in profitability and accumulation. The evidence from the United States broadly accords with the views of Mandel and Piore and Sabel: (1) productivity slowed in the 1970s, after profitability had already begun to fall and rates of accumulation tumbled; (2) the productivity slowdown originated in lower rates of investment (which slowed innovation and imitation) and in rising inflation (which spurred the entry of inefficient firms); (3) faster gains in productivity since 1981 have not been reflected in rates of profit (Webber and Rigby 1996, Chap. 9). Relations between productivity and profitability for a broader set of countries, Japan and the ROECD, are investigated in this paper. The pair of input:output coefficients (plant, equipment, and raw materials per unit of supply; and labor power per unit of supply) for Japan and the ROECD for each year between 1960 and 1990 are indicated in Figure 7.

In Japan, productivity change occurs in three phases. In the early 1960s productivity rises as labor inputs are reduced. In 1960, 102 person-years of work were needed to produce a million dollars worth of output, decreasing to only 70.5 by 1965. Constant capital inputs during this period increased by nearly 30 percent. After 1965, techniques began to economize on labor inputs, while constant capital inputs were

0.00012 -

?L

Z 0.00007 -

0

0.00002 0.12

1960

1965

1960 -- JAPAN 1974- 1963 -o- ROECD 1971

19890 ^ B^ 19837

2 0.17 0.22

CAPITAL INPUT, a

Figure 7. Technologies used within Japan and the ROECD, 1960-1990. Sources:

See Figure 1.

relatively constant. By 1971, labor inputs fell to 40.8 person-years per million dollars of output but constant capital inputs still averaged about $172,000 per million dollars of output through the early 1970s. Then in 1972 the Japanese economy began an irreg- ular process of substituting constant capital inputs for labor inputs. By 1990 each million dollars of gross domestic product needed nearly $216,000 of constant capital and 21.1 person-years of labor power.

There is one phase of productivity change in the ROECD, with pronounced cycles. From 1960 through 1990, constant capital inputs substitute for labor inputs. Labor inputs fell from 43.6 person-years per million dollars of output to 23.5; the constant capital input coefficient rose from $178,000 to $211,000 per million dollars. The cycles consist of periods in which constant capital inputs are substituted for labor inputs (1961-62, 1967-71, 1973-76, 1978-83, 1987-90) alternating with periods in which corporations economized on both constant capital and labor inputs.

The primary form of productivity change over the 30 years is a reduction in labor inputs. Constant capital input coefficients increase by about a half in Japan and by less than a fifth in the ROECD. By contrast, in 1990 labor inputs were only 21.3 percent of their 1960 value in Japan and 53.8 percent in the ROECD. There is an observed bias in aggregate technical change: labor is eliminated from production and replaced by inputs of plant and raw materials. Whether or not these data denote a labor-saving bias in individual plants depends on information (not available here) about composition effects on technical change.

Through much of the period, technologies are quite different in Japan and the ROECD. In the early 1960s, the Japanese economy required 15 percent fewer constant capital inputs but more than twice as much labor inputs to produce a dollar's worth of output as the ROECD. Still, techniques in Japan and the ROECD gradually became more similar, and by 1985 they were virtually identical. In this sense, Japan

413



ECONOMIC GEOGRAPHY

was not more (labor-) efficient than the ROECD until 1987, though it has generally been more (capital-) efficient.

Relative levels of productivity are summarized by the values of the commodities produced in the regions. Webber's (1996) model defines the values of commodities produced within a country, the value of commodities circulating within a country, and the average value of commodities in the entire multiregional system. The history of the first and last of these is pre- sented in Figure 8. (Since trade between the two regions is relatively low, the value of commodities circulating within an economy is close to the value of commodities produced within an economy.)

In general, values steadily decrease. In Japan, values fall by an average of 4.84 percent a year; the rate of value reduction in the ROECD is only 1.85 percent annually (t = 4.020, df = 30, two-tailed p < 0.001). Thus, levels of productivity in Japan gradually approach those in the ROECD; whereas in 1960 the average unit value of production in Japan is 2.33 times the ROECD, by 1986 that ratio falls to unity and by 1990 to 0.91. Noticeably, productivity advantage does not generate the enor- mous relative growth of the Japanese economy; productivity rises faster in Japan than in the ROECD, but productivity is lower in Japan than in the ROECD until the mid- 1980s. In other words, differences in

productivity do not account for the relatively rapid growth of Japan.

More light is thrown on the history of productivity by Figure 9, which illustrates annual average rates of productivity change in the two regions. Between 1960 and 1973, values fall at a rate of 2.84 percent a year in the ROECD; the rate of productivity change slows in 1973 and from then on averages only 1.17 percent a year. In Japan, productivity rises until 1971 at 7.80 percent per annum; after 1973, the rate of change slows, averaging only 2.78 percent annually. According to Maddison's (1987) estimates, Japan's faster rate of productivity change as compared to the United States' in the 1950s and 1960s can be ascribed primarily to: (1) its more rapid rate of investment in nonresidential capital; (2) its more rapid shift of employment out of agriculture and into secondary industry; (3) its ability to catch up with more advanced U.S. technology; and (4) its increasingly productive employment of labor that in the 1950s was hoarded by corporations. Maddison observes that productivity change in Japan slows markedly in 1973 because, first, after 1973 labor shifts out of secondary activities and into services, and second, by the 1970s gains from the release of previously hoarded labor are fully realized. This evidence is

0.02

0.00014 -

0.00012

^? s~--.- _ JAPAN 0.00010 - -o- ROECD

\_ -?- AVERAGE

0) 0.00008 -

0.00006

0.00004

0.00002 -

1960 1965 1970 1975 1980 1985 1990 YEAR

Figure 8. Values of commodities produced within Japan and the ROECD, 1960-1990.

Sources: See Figure 1.

Figure 9. Annual average rates of change of values of commodities produced within Japan

and the ROECD, 1960-1990. Sources: See Figure 1. Note: The data have been smoothed

using a five-year running mean.

414




broadly compatible with the data in Hamada and Honda (1994).

In other words, the rate of productivity change slows in 1973 in the ROECD and in 1972-74 in Japan (cf. Armstrong, Glyn, and Harrison 1991). Although annual changes in productivity are highly variable, the productivity slowdown does not appear before the early 1970s. It follows, contrary to Freeman and Perez and Lipietz, that the observed fall in profitability in the 1960s and early 1970s in Japan and the ROECD could not originate in a reduced pace of productivity change. Productivity does not slow until after rates of profit already begin to fall. Indeed, the bulk of evidence attests to the role of capital accumulation in pro- moting rates of technical change (Hamada and Honda 1994; Jorgenson 1995; Maddison 1987).

Wages and Exploitation The history of wages in the regions

might, however, have more influence on differences and changes in rates of profit. In the ROECD, real wages per person double between 1960 and 1990. Between 1960 and 1973, real wages rise by an average of 4.14 percent a year; from 1974, by 0.96 percent each year. In Japan, wages rise much faster; in 1960 real wages are only 32 percent of wages in the ROECD, but exceed ROECD wages after 1988. Real wages in Japan grow most rapidly between 1960 and 1976 (averaging 9.57 percent a year); since 1977, real wage increases in Japan have averaged 3.23 percent. Real wages grow most rapidly when and where the rate of profit falls most quickly.

The effect of wage differences and changes on profitability is mediated by the history and geography of productivity. Wages and productivity are assessed in two ways: unit cost of production [a+Dl in the usual notation] and rate of exploitation [(1 - kD)IXD = (1 - unit costs)/DI in the usual notation]. The measures vary inversely (adjusted R2 > 0.99 in both regions). Since the notion of unit costs is more common, it is used here (Fig. 10).

0.9 r

0.8

0.7

0.6 0.5

0

0.3

0.2

0.1 - JAPAN -.- ROECD

1975 YEAR

Figure 10. Unit costs of production, Japan and the ROECD, 1960-1990. Sources: See

Figure 1.

The unit cost, a+D1, is dimensionless: a has dimensions of dollars per dollar; D has dimensions of dollars per person-year; and 1 has dimensions of person-years per dollar. It represents the proportion of output value absorbed by production costs. The remaining proportion of output value, not absorbed by production costs, pays for unsold output or is surplus. If all output is sold, 1 - unit costs represents the profit margin per unit of output.

Unit costs are consistently lower in Japan than in the ROECD; Japan's unit costs average 0.68, compared to 0.77 in the ROECD. So Japan's rate of exploitation exceeds that in the ROECD. That is, while Japan's level of productivity until recently was lower than that of the ROECD, its level of real wages was even lower (again, until recently). In both regions, unit costs tend to rise, by an average 0.0080 a year in Japan and 0.0021 in the ROECD (linear regression coefficients, p < 0.0001). Japan's unit costs of production approach those of the ROECD: Japan's unit costs begin the 1960s at 80 percent of the level of the ROECD, but the two costs are indistin- guishable by 1987.

The evidence is important for theories of postwar profitability and growth. First, unit costs of production rise and rates of exploitation fall in both Japan and the ROECD throughout the 1960s and early

415



ECONOMIC GEOGRAPHY

1970s. There is no sign of any new trend in unit costs immediately before the slowdown of 1973-74. This evidence contra- dicts the thesis that rising costs and falling rates of productivity growth in the late 1960s and early 1970s provide one cause of the slowdown of 1973-74. Second, unit costs of production peak in the ROECD in 1975 (and again in 1982) and in Japan in 1983. Since then costs of production tend to fall and rates of exploitation in both regions to rise, as wages lag behind productivity growth. The slow recent recovery in rates of profit (Fig. 5) seems to be due to increasing pressure on labor rather than new forms of productivity growth and new sources of expansion.

Output:Capital Ratio The final component of the rate of profit

is the output:capital ratio, the ratio of supply to the fixed capital stock (Fig. 11). The average value of the ratio is similar in Japan and the ROECD. This similarity conceals an important difference, however. The output:capital ratio (OCR) is higher in Japan than in the ROECD but falls faster. Ratios fall quite consistently over the period, but with a sharp break between 1973 and 1975 when the Japanese ratio falls below the ROECD. That is, the pace of accumulation in Japan exceeds the rate of growth of supply (the same happens in the ROECD,

0.6

0.5

0.4

^ 0.3 - 0

0.2 -

o -- JAPAN

0.1 - - ROECD

1960 1965 1970 1975 1980 1985 1990 YEAR

Figure 11. Output:capital ratios, Japan and the ROECD, 1960-1990. Sources:

See Figure 1.

but to a lesser degree) as the substitution of plant, equipment, and machinery for labor power demands an increased fixed capital stock to supply the market for commodities. Broadly, the differences between the two regions and the trends over time in output:capital ratios are consistent with the differences and trends in rates of profit.

The histories and geographies of wages, productivity, and unit costs of production support the thesis that profit rates depend on costs of production and on output:capital ratios; see the revised diagram of cause and effect (Fig. 12). What remains to be deciphered is the relationship between profitability and rates of growth.

Interregional Investment and Trade

Links between the regions are of two kinds: trade and investment. Despite increasing globalization, Japan and the ROECD remain relatively closed economies (Table 4). In neither region do trade links with the world outside the OECD account for more than 6.5 percent of GDP. About half of Japan's trade is with the ROECD, and about 70 percent of all OECD countries' trade is with other OECD countries.' The significance of interregional trade is assessed in the model by the proportion of domestic consumption (final or intermediate) imported. In 1960, 4 percent of Japan's domestic consumption was imported from the ROECD, which rises to nearly 6 percent in 1990. In the ROECD, less than 1 percent of domestic consumption was imported from Japan until the mid- 1970s, and by 1990 only 2 percent.

The demand for investment derives initially from target rates of increase of supply.

1In this paper, both regions' trade with countries outside the OECD is ignored, so that all numbers refer to a model with two regions. On average slightly more than 4% of the regions' trade is excluded. Appropriate adjustments to other national data have been made (see Appendix).

416




Table 4

Trade Links, Japan and Rest of the OECD, 1960-1990

Percentage of GDP 1960 1970 1980 1990

Japan, imports 8.28 9.30 14.84 10.45 Japan, exports 6.50 8.28 11.85 11.13 Japan, exports to ROECD 3.21 4.35 5.46 6.57 Japan, exports to rest of world 3.29 3.93 6.39 4.56 ROECD, imports 10.00 11.79 15.02 20.95 ROECD, exports 11.01 12.78 16.09 20.84 ROECD, exports to Japan 0.34 0.75 0.95 1.15 ROECD, exports to rest of world 2.92 2.95 4.53 4.39 ROECD, exports to ROECD 7.75 9.08 10.62 15.29


In the model, corporations are thought to choose a rate of increase of supply that depends on the rate of profit; the simplest such assumption is that the target rate of increase in supply is directly proportional to the rate of profit. As economic prospects change and as the "animal spirits" of investors drive them in different directions, so the coefficient of proportionality (,I) fluc- tuates from year to year (Fig. 13). On average, excluding 1974 and 1975, when target levels of supply fall, Japanese corporations choose to expand supply at 0.50 of the rate of profit; in the ROECD, the target is 0.33. Target rates of expansion of supply are higher in Japan than in the ROECD, implying that, for given rates of profit, Japanese corporations seek to expand output faster than ROECD corporations.

Target rates of expansion of supply do not fall significantly over time. Target rates in Japan are 0.54 until 1973 and 0.51 after 1975; in the ROECD, 0.38 and 0.31. In the long run, then, changes in rates of profit rather than in target rates of expansion dic- tate the reductions in the rate of growth of output. That is, rates of growth slow primarily because the rate of profit falls; as the previous sections indicate, the rate of profit falls largely because of rises in unit costs (as changes in technology fail to offset increases in real wages) and falls in the output:capital ratio. The long-term problem is not the OPEC price increases and other disruptions of the early 1970s. The exceptional growth of Japan is a matter of

1.0 -

relationship is not strong in short run

E------ 7 -or between regions a__ .s . .'i.

accidents are not a /ow correlations cause of changes in \ / in short run: so profitability but OCR & \ J other causee costs of production are are partly local

Other causes

Figure 12. Second model interpretation: wages, productivity, and costs. Note: OCR

refers to the output:capital ratio.

0.8

0.6

? 0.4

0 0.2 cc

1960 1965

-0.2 a-- JAPAN

-0.4 -- ROECD

1970 1980M 1985 1990

YEAR

Figure 13. Target rates of growth of supply, Japan and the ROECD, 1960-1990. Sources:

See Figure 1.

If S I J

417

- I n-.- * _t

0.0



ECONOMIC GEOGRAPHY

differences in profitability and in behavior between the regions' corporations.

In other words, Japanese and ROECD corporations behave differently. The bases of this long-lasting difference are much debated. A compelling explanation is pro- vided by Odagiri (1992), who claims that in Japanese firms lifetime employment and internal promotion cause increased competition among workers (and so increased effort) and a strong preference for growth as a way of increasing the probability of promotion, particularly when shareholder control is relatively ineffective. He hypoth- esizes that Japanese corporations and the labor market are organized in such a way that managers pursue growth, subject to the constraint that low market value endan- gers the security and independence of a firm and its workers, whereas European and U.S. managers are constrained to pursue market valuation rather than growth. The result is a stronger preference for growth over current valuation in Japan than elsewhere. So rates of investment in Japan are higher than in other countries, as are rates of investment in research and development and aggregate rates of growth of output. The long-term average target rates of expansion of supply index this difference between corporate cultures.

In the short run, though, the values of 15 vary widely. Their coefficient of variation is 0.42 in Japan and 0.56 in the ROECD. And in the short run, the relations among rates of growth of output, profitability, and target rates of growth are different from those in the long run. A comparison of Figures 5 and 13 with 1, 2, and 3 shows that recessions owe more to changes in target rates of supply than to conditions governing profitability. During the recessions of 1974-75 and 1982, rates of profit are not particularly low; rather, corporations seek unusually small increases in supply. Variations in the value of IP need to be explained outside the model; for example, the recession of 1974-75 may have been induced by producers' uncertainties about oil supplies, inflation, and political stability.

Related to the target rate of expansion of supply is the proportion of the surplus of each region invested in new capital (Fig. 14). In Japan, consistently, a high proportion of the surplus is reinvested, an average of 73.0 percent over the 30 years; in the ROECD only 42.3 percent of surplus is invested. This difference, compara- ble to evidence about target rates of expansion of output, reflects the observations of Dore (1986) about the means by which the Japanese financial system keeps interest rates low and directs savings into productive uses (see also Daly 1994). The difference in behavior is widening, as Japanese corporations invest ever-increasing proportions of their surplus and corporations in the ROECD ever-decreasing proportions. Japanese corporations respond to the fall in profitability by trying to maintain a level of reinvestment (thereby increasing the proportion of surplus reinvested), whereas ROECD corporations respond by tending to reduce the share of surplus they rein- vest. This evidence is consistent with Odagiri's (1992) hypothesis.

The final important parameter describing investment is the proportion of all investment directed to Japan. The history of this parameter has two phases (Fig. 15). First, from 1960 to 1975, the proportion of all investment located in Japan rises from less than 14.1 percent to 32.5 percent. Since then, the proportion of all funds invested in Japan shows no trend, fluctuating between

1.0 -

0.9 -

0.8 -

0 f_ 0.6 -

a. o0.5 -o

0 0.4 - a- 0.3 -

0.2 - --_- JAPAN 0.1 - -o- ROECD

0.0 ' I 1960 1965 1970 1975

YEAR 1980 1985 1990

Figure 14. Proportion of surplus that is invested, Japan and the ROECD, 1960-1990.


418




0.40 -

z 0.35 -

a. 0.30 -

Z 0.25 -

O 0.20 -

a 0.15 - 0 0 0.10 -

0.05 -

0.00 19f 1965 1970 1975 1980 1985 1990

YEAR

Figure 15. Proportion of all investment located in Japan, 1960-1990. Sources: See

Figure 1.

about 23 percent and 39 percent. How are we to understand this history?

The proportion of investment directed at Japan depends on allocations by financial capitalists and corporations. It seems reasonable to suppose that the share of all capital invested in Japan depends on the relative profitability of production in the two regions. If production in the two regions were equally profitable, however, it is also reasonable to suppose that rates of capital accumulation in the two regions would be equal, implying that the share of all new investment locating in Japan would be proportional to the sizes of the existing capital stock. Furthermore, capital is produced from the surplus arising from production in each region; and if investors are spatially myopic, then all investment would occur in their "home" region and the share going to Japan would depend on both the relative sizes of the capital stock and the rates of profit. For these reasons, it is expected that both profitability and size of the existing stock influence the share of capital investment located in Japan. One general model reflecting these arguments is

1

KR Jj JtR 1 + ao(-.)ai exp[a2(- --)] (1)

KJ 3TR 3I1

where ao, al, and a2 are parameters to be estimated. This equation states that if rates of profit are equal, the share of investment

allocated to Japan increases as Japan's share of the existing capital stock increases; the increase in investment share may be less or more than proportional to the capital stock share. Furthermore, for a given share of capital stock, capital is accumulated more or less rapidly depending on relative rates of profit.

Equation (1) can be linearized as

i1-qj In

Jo +R - +I n KR ao + al -- + a2 In - .

JR jtE J Kj (2)

In Equation (2), the share of investment going to Japan is the dependent variable; relative profitability and relative sizes of the existing capital stock are the independent variables. The relative level of profitability, however, depends on such other variables as relative levels of productivity and relative rates of growth of supply. In other words, profitability is not really an independent variable and regression estimates of the parameters of Equation (2) are therefore biased, unless relative profitability is also modeled. Suppose, therefore, that relative profitability depends on relative levels of productivity, relative rates of growth of supply, and a variety of other factors that can conveniently be summarized by a time trend:

Jtj JtR

iR IiJ

Bo +Blt+B2 - +B3 - - . (3)

The pair of equations, (2) and (3), are estimated by two-stage least squares; Equation (3) is estimated first and the predicted values derived from Equation (3) are substituted for the first independent variable in Equation (2). The results are summarized in Tables 5 and 6.

419

s0

qJ -



ECONOMIC GEOGRAPHY

Table 5 illustrates the fit of Equation (3), which predicts the relative profitability of the two regions. The equation fits the data well (adjusted R2 = 0.9406, p < 0.0001). The first two independent variables significantly affect the relative profitability of the two regions: there is a negative time trend (profitability in Japan falls relative to the ROECD), and an effect of the relative values of commodities produced in the two regions (other things being equal, lower relative values are associated with higher relative rates of profit). However, the

effect of relative rates of growth of supply on relative profitability is not significant. Not too much importance should be placed on the individual coefficients in Table 5, for the variables "year" and "relative growth of supply" are intercorrelated. (This correlation does not affect the ability of Equation (3) to predict relative rates of profit for Equation (2).)

The model allocation of capital to the two regions is highly significant (Table 6). As Figure 16 indicates, the model accu- rately fits the general form of the data

Table 5

Results of Estimating Equation (12)

Analysis of Variance df SS MS F Significance F

Regression 3 10.3326 3.4442 153.9592 <0.0001 Residual 26 0.5816 0.0224 -

Total 29 10.9142

Independent Variable Coefficient Standard Error t p

Intercept 261.6843 18.2601 14.3309 <0.0001 Year -0.1319 0.0092 -14.3254 <0.0001 Relative value -1.2163 0.1456 -8.3523 <0.0001 Relative growth of supply 0.0175 0.0114 1.5412 0.1350


Table 6

Prediction of Capital Allocation to Japan and the ROECD

Analysis of Variance df SS MS F Significance F

Regression 2 3.8414 1.9207 71.5274 <0.0001 Residual 27 0.7250 0.0269 -

Total 29 4.5664 -

Independent Variable Coefficient Standard Error t p

Intercept -0.9833 0.2291 -4.2915 0.0002 Predicted relative profits -0.2223 0.0963 -2.3084 0.0289 KR/KJ 1.2212 0.1495 8.1712 <0.0001


420




0.40 -

0.35 -

z 0.30 -

3 0.25 -

o 0.20 -

0 0.15 -

0 a: 0.10 -

0.05 -

0.00 1960

--- ACTUAL -- PREDICTED

1965 1970 1975 1980 YEAR

1985 1990

Figure 16. Actual and estimated proportions of all investment allocated to Japan, 1960-1990. Sources: See Figure 1.

(adjusted R2 = 0.8295, p < 0.0001). The model does not predict year-to-year fluctu- ations in allocations closely-it essentially fits the trend in allocations over time. This property of the model arises from the fact that both the predicted relative rates of profit and the relative levels of fixed capital stock change smoothly over time rather than fluctuating from year to year.

Both independent variables are significant. The more significant control over capital allocations is the existing capital stock (p < 0.0001). Since the dependent variable in the linearized regression equation is ln(1-qj)/q], the positive sign on a2 means that capital tends to be allocated more to the region in which the existing capital stock is larger. The effect of relative rates of profit on the allocation of capital is also significant (p < 0.05). Again, the negative sign on the coefficient a( means that as the predicted rate of profit rises in Japan relative to the ROECD, so more capital is allocated to Japan. Both independent variables affect the allocation of capital in the expected manner.

The more important control over the allocation of capital investment is size of the existing capital stock (Table 6). The parameter on this variable is more significant than the parameter on relative profits. Furthermore, changes in the size of the capital stock have a greater effect on

capital allocations than changes in predicted relative rates of profit. For example, from 1961 through 1990, the ratio KR/KJ fell from 12.69 to 3.64, inducing a rise in the share of new capital allocated to Japan from 11.9 percent to 38.2 percent; at the same time, the predicted relative rate of profit fell from 1.19 to -0.57, causing the share of new capital allocated to Japan to fall from 26.2 percent to 19.4 percent.2 In other words, while the rate of profit certainly affects the allocation of capital, that effect is neither as significant nor as powerful as the effect of the size of existing stocks of capital.

Interpretation This paper seeks to bring empirical data

to bear on debates about the interpretation of history and theoretical economic geography. It uses a model of growth in a system of regions; the model intrinsically avoids assuming that growth proceeds along an equilibrium path. Although the model's emphasis on the distinction between demand and supply is not really supported by the data (demand and supply have grown at about the same rate in each region and are highly correlated), the model provides a consistent framework within which the parameters governing the system can be estimated.

Interpretations of historical economic geography must explain two central facts: that growth (capital accumulation or growth of output) is faster in Japan than in the ROECD and that the rate of growth slows in both regions after the early 1970s. Several comments are supported by the results. First, Japan's rate of growth was indeed boosted by its higher rate of profit, at least in the first half of the period. But, second, that higher rate of profit is not

2 Here, the effect of changes in the ratio KR/Kj is calculated by evaluating the regression equation at the mean relative rate of profit; equally, the effect of relative rates of profit is evaluated at the mean value of KR/KJ.

421



ECONOMIC GEOGRAPHY

earned by higher levels of productivity (that is, by lower values). The crucial difference in profitability between Japan and the ROECD therefore originates in rates of exploitation, and perhaps outside the production system (Daly 1994, 181-82). Third, the faster pace of productivity change in Japan does not prevent its rate of profit falling below the ROECD's profit rate since 1983; even after 1983, Japan's rates of capital accumulation and growth of output exceed those in the ROECD. The historical relationship between productivity, profitability, and accumulation is complex.

Rates of profit also fall. The rates of profit in Japan and the ROECD fell during the 1960s, and therefore the events of 1973 cannot have been a main cause of lower profitability. This evidence is consistent with data about manufacturers' profit rates in Australia, Canada, and the United States. Furthermore, rates of profit fall before productivity growth starts to slow; the productivity slowdown must be a consequence rather than a cause of lower rates of profit, at least initially. Webber and Rigby (1996) tell a similar story about productivity and profitability in U.S. manufacturing.

The data in this paper reflect too on linkages between regional blocs in the world economy. The trade data attest to the formation of a trading bloc, largely isolated from the remainder of the world. Exports from the OECD (including Japan) to the rest of the world were no more than 3 percent of GDP in 1960 and 4.5 percent of GDP in 1990. To a large extent, the OECD forms an isolated trading bloc, a set of countries that are interconnected (nearly 80 percent of the OECD countries' trade is with other OECD countries) but isolated from the rest of the world. Total exports from Japan (to the rest of the world and to the ROECD) were running at about 6.5 percent of GDP in 1960, rising to 11.1 percent in 1990. Exports from the ROECD (to Japan and the rest of the world) were about half this, rising from 3 percent of GDP in 1960 to 5.5 percent in 1990. In this sense, Japan is more connected to other countries (and the rest of the world) than is the

ROECD. While most of the world's measured economic might is concentrated in the OECD, most of the world's people are not; perhaps these trade data warn that recent geographic change has seen the global economy breaking into virtually isolated blocs.

The data can also be interpreted to comment on theoretical economic geography. One contribution is to the theory of regional growth. Centrally, the evidence questions the weight given to profitability in interpreting the relative growth of regions. It is a standard assumption of regional growth theory that regions that grow faster are regions in which production is more profitable (and the reasons for profitability are then to be sought). An ear- lier paper (Webber 1991) questions this assumption on purely theoretical grounds. In this paper I provide direct empirical evidence that controverts the assumption and supports the hypothesis that supply and investment decisions are not purely reflec- tions of cost and profit changes or differences. First, the allocation of capital to Japan and the ROECD historically has been governed more by the relative size of the capital stock and less by the relative profitability of production. Second, since 1983, the rate of profit in Japan is below that in the ROECD, yet capital accumulates faster and output grows more in Japan than in the ROECD. Standard regional growth theory also assumes that productivity is a key to profitability. The evidence suggests that this is not always so. Productivity is lower in Japan than elsewhere (though improving faster); and as Japan's productivity approaches that of the ROECD, its rate of profit falls relative to rate of profit elsewhere. Within this model, more attention is paid to the availability of funds (generated by the existing capital stock), the production intentions of corporations, and the investment policies of financiers (see Pryke 1994). Profitability is not irrelevant, but it is not the central variable, either. In brief, the naive model of regional growth dynamics needs to be revised along the lines of Figure 17.

422




relationship is not | Regional I strong between regions Rogion | rate of profit rate of growth

costs of production target rates of growth technology, OCR of supply, proportion ol

/ profits saved, size of existing capital stock

Other caues

Figure 17. A model of interregional growth determinants.

The data also contribute to theories of crisis. Though crisis theory is no longer a popular topic within economic geography, its purported central conclusions are widely used to interpret the economic slowdown in the OECD since the early 1970s. Profitability, through the theory of falling rates of profit, is central in such interpretations, which argue that capital is accumulated more slowly and output grows less because the rate of profit has fallen. There is, indeed, evidence that these variables are correlated. But this correlation is strong only over the long run; in the short run-of one, two, or three years-rates of capital accumulation and growth of output are determined far more by production decisions (p1) and by investment policies (sj, SR, qj) than by changes in the rate of profit. It may be that in the long run rates of profit control the availability of savings that can be invested; but in the shorter term, other variables determine what proportion of the available savings is actually invested, and where. Events such as the OPEC price rises, the end of Bretton Woods, and cere- als shortages thus affect growth in the short run; but in the longer run, profitability and its determinants (productivity and costs) are more crucial in determining regional rates of growth. The long-term model of growth within each region thus has the appearance of Figure 18.

Taken broadly, these results seem to jus- tify an attempt to construct a more complex model of interregional growth dynamics. The results point to long-term structural differences between the two regions and to complex patterns of interac-

relationship is strong in - long run not in short run l I

Rate of profit * Rate of growth

accidents are not a /n the short run, product cause of changes in \ decisions and investmer profitability but OCR &\ / policies are important, costs of production are \ / less so in the long run

IOther causes I

Figure 18. Dynamics of growth within a region.

tion of productivity and costs, profitability and growth. Of course, a more formal system of growth accounting would be needed to confirm the interpretations suggested in this paper.

Appendix: Empirical Methods

This paper calculates the parameters and values of variables for two regions. The first region is Japan. The second is the rest of the ROECD, defined to include the other members of the Group of Seven (United States, Canada, France, Germany, Italy, United Kingdom) together with Austria, Belgium, Denmark, Finland, Greece, Iceland, Ireland, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, Australia and New Zealand. In this paper, "Germany" refers to the former Federal Republic of Germany.

The basic principle followed in computing all the economic series has been to compile data in constant price units of national currency. For Japan, the data are compiled in 1990 yen and then transformed into 1990 U.S. dollars. So apart from (admittedly major) issues of valuing improvements embodied in commodities, the basic data on capital stock, output, and the like are in constant units (tonnes, say). For the ROECD, the aggregation has been performed by the OECD using exchange rates to $U.S. that were then current. Again, the series are converted to $U.S. of 1990. For both Japan and the OECD, data were converted to current dollars using the implicit price deflator for GDP. The series for the ROECD are then the constant price OECD data (in $U.S. 1990) less the constant price Japan data (in $U.S. 1990). This order of manipulation-reducing to constant

423



ECONOMIC GEOGRAPHY

units of national currency and then transform- ing into dollars via the 1990 exchange rate- eliminates the effects of the value of the yen on the apparent size of the Japanese economy.

By preference, data have been taken from OECD Historical Statistics, since this presents information for the entire set of countries and has already performed the aggregation. Data estimated for the 1960s and 1970s from the UN's Yearbook of National Accounts Statistics are derived in the following way. First, data were collected on the proportion of GDP spent (or contributed) by each item of account for the Group of Seven countries. Second, these data were used to estimate the weighted (by GDP) average proportion of GDP spent on each item. That proportion was finally multiplied by the known OECD GDP to estimate the OECD expenditure (or contribution) of that item. Japan's contribution (in $U.S. 1990) was subtracted from this total to obtain the ROECD figure. The only data not from these sources is the value of Japan's exports and imports as a proportion of GDP, which come from Japan Statistical Yearbook.

A general revision has been performed on all data. They have been converted to the equiva- lent of a system that comprises only Japan and the ROECD. The rest of the world has been ruled irrelevant. Japan's external trade (exports and imports) has been reduced to trade with the ROECD. Trade with the rest of the world has been subtracted from total trade and GDP and the proportion (trade with rest of world/GDP) has been subtracted from every series used. A similar revision has been conducted on the ROECD data, except that not only trade with the rest of the world but also trade internal to the ROECD has been excised: the ROECD has been treated as one country.

The general structure of national accounts, followed by both the UN and the OECD, is as follows. The "contribution of the factors of production" is

GDP = compensation of employees (Dl) + operating surplus (surplus) + consumption of fixed capital (depreciation)+ indirect taxes less subsidies (ignored).

Expenditures are

GDP = final consumption expenditure + increase in stocks + gross fixed capital formation + exports - imports.

In turn, the financing of gross capital formation is

GCF = consumption of fixed capital + net savings - surplus of the nation on current transactions,

while the expenditure is

GCF = increase in stocks + gross fixed capital formation.

So:

Kt+I = Kt + gross fixed capital investment + change in stocks - consumption of fixed capital.

For 1960, an estimate of the gross fixed capital stock of business in the Group of Seven is available in Armstrong, Glyn, and Harrison (1984, 469). That was factored up to include change in stocks (which Armstrong, Glyn, and Harrison ignored), by assuming that the ratio of stocks to fixed capital stock was the same in 1960 as the ratio of change in stocks to gross fixed capital investment in 1990; and to include nonbusiness fixed capital stock by assuming that the ratio of nonbusiness to business fixed capital stock in 1960 was the same as the proportion of gross fixed capital formation in 1990 that was directed to residential construction. So the fixed capital data used in this paper approximates the total, economywide, business and nonbusiness fixed capital stock and the data in Figure 1 are estimates of the rates of capital accumulation,

1+1 S (Kt+l- Y)/Kt.

The level of supply (xs) is estimated as GDP. This measures value added, the gross output of industries less their intermediate consumption. Estimates of GDP eliminate double counting (when the outputs of one industry are inputs into another), so value added measures net output.

The level of demand (xD) for the goods produced in Japan or the ROECD is estimated as GDP minus change in stocks. The change in stocks represents commodities that are produced but not sold. Net exports (to ROECD or Japan, respectively) are included in demand, because they constitute production that is demanded by residents in the other region.

Measurement of rates of profit is a wildly con- tentious topic in Marxist theory. Commonly, profitability is measured within manufacturing, and depends on total sales, total costs of constant capital inputs, labor costs of direct produc-

424




tion workers, and fixed capital stock. In Webber (1996), however, this definition has been extended to include the fact that some commodities may not be sold (supply exceeds demand) and that some capital may circulate within an economy without finding productive use. So in this paper I estimate the surplus as the national account item "operating surplus" and the capital stock as the accumulated gross capital investment. Their ratio is an economywide measure of profitability. It includes expenditure on so-called "unproductive workers"; these are far too difficult to identify theoreti- cally or to estimate empirically at the scale of these calculations.

The labor input coefficient is estimated as I = (total employment)/GDP, expressed in units of persons per $U.S. of 1990 of xs (= GDP). D, the real wage, is therefore D = (compensation of employees)/(total employment), again expressed in $U.S. 1990.

The constant capital input, a, is estimated with Equation (10). Since total surplus and capital stock are known, estimates of rates of profit, supply, and demand can be used to identify (a + Dl). The labor input coefficient and the real wage are known, so an estimate of a follows. From a and I follow the values of commodities produced in a region. These data and the trade coefficients, 6, determine the values of commodities circulating in a region and the average value of commodities in the system as a whole.

The coefficients PI and PR measure the target rates of expansion of supply as a proportion of the rate of profit. They are estimated from the already calculated information on Xs and t for each region.

The share of total investment that locates in Japan is qj, measured as

AKj qJ

= AKJ + AKR

The quantities s1 and SR are estimated from the pair of simultaneous (but not independent) equations:

= qj (j + SRR 1-k

k kR = qR (sjtj 1-- + SRzJR)

subject to the proviso that the ratio SJ:SR shall equal the ratio

Sj net savings ofJ/operating surplus of J

SR net savings of R/operating surplus of R

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Documents

Profitability and Growth in Multiregion Systems: Prologue to a Historical Geography