University of Utah



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.

For the semi-periphery to play this stabilizing function, it needs to be just large enough so that the political challenge from the periphery can be contained, but not so large that not enough surplus is left for the core (thus depressing the profit rate in the system). The problem with the “rise of China” is that it dramatically expands the size of the semi-periphery. In the short run, China’ rise has helped to increase the global profit rate. However, in the long run, the over expansion of the semi-periphery is likely to push up the wage costs, taxation costs, and environmental costs in the system.

As China becomes deeply integrated into the global market, China has become the world’s manufacturing center. China’s competitive advantage has been based on the massive supply of cheap labor force. It is well known that currently the Chinese workers are provided with very little social and legal protections and environmental regulations in China are very weak. China’s incorporation into the global market has a led to a “global labor arbitrage” (according to Stephen Roach, the former chief economist at Morgan Stanley), that is, dramatically undermining the bargaining power of the global labor. This has been a significant factor that has contributed to the rise of the global profit rate over the past three decades.

However, as urbanization and industrialization proceed, one would expect that over time the Chinese workers are going to demand more economic, social, and political rights. Based on the experience in the rest of the world, at some stage of China’s development, there will be pressure for political democracy as well as more social welfare. In one or two decades, China may have to face rapid increases in labor cost and social spending. Given China’s economic and population size, this could lead to a reverse global labor arbitrage, pushing up the global labor costs and lowering the global profit rate.

More importantly, China’s rapid economic growth is taking place at a time when the global ecological crisis is approaching the advanced stage. This raises the question how much ecological space remains for China’s economic expansion.

Peak Oil, Climate Change, and the Limits to Growth

China has recently surpassed the United States to become the world’s largest carbon dioxide emitter. China consumes about half of the world’s total coal consumption and is the world’s second largest oil consumer. China’s ecological footprint is about twice as large as its own bio-capacity. How long can China continue to pursue rapid economic growth without overwhelming its own environment while dramatically accelerating the global ecological crisis?

There has been a growing body of evidence now suggesting that the world oil production is likely to peak in the near future (Campbell 2005; Korpela 2005; The Oil Drum 2009). Dave Rutledge, chair of the Division of Engineering and Applied Science at California Institute of Technology, studied the historical series of world oil and natural gas production and concluded that about one-third of the world’s ultimate recoverable resources of oil and natural gas have already been exploited, implying a peak of the world total production of oil and gas around 2015 (Rutledge 2007).

Rutledge applied the technique of Hubbert Linearization, a method first proposed by American geologist Marion King Hubbert. In 1956, Hubbert predicted that the US oil production would peak in 1970, a prediction that was later confirmed. Hubbert Linearization assumes that the production of a nonrenewable resource will follow the pattern of logistic distribution so that as production approaches and passes the peak, a linear relationship will be formed between the cumulative production of the resource and the growth rate of the cumulative production (which is in effect the ratio of the current production over the cumulative production). The regression results about the linear relationship could then be used to project future production trajectories.

Following Rutledge’s method, I applied the Hubbert Linearization to China’s energy production (Li 2010). I find that China’s total energy production may peak around 2040. Under relatively optimistic assumptions about energy efficiency improvement, China may continue to enjoy relatively rapid economic growth until about 2030. However, after 2030, China’s economic growth will decelerate rapidly and growth rates will turn negative after about 2050.

While these findings seem to suggest that the Chinese economy could continue to expand for several decades under the assumption of natural depletion of resources, the paper also finds that under the projected scenario China will emit far more greenhouse gases than is allowed by China’s fair share of “global carbon budget” (that is, the cumulative carbon dioxide emissions in the 21st century that are allowed under the requirement of climate stabilization).

There is now both a scientific and global political consensus that global warming relative to the pre-industrial time needs to be limited to 2 degrees Celsius, considered to be a safe limit to prevent catastrophic climate change. To achieve this goal, the Intergovernmental Panel on Climate Change recommends a 50-85 percent reduction of carbon dioxide emissions by 2050 from 2000 levels (IPCC 2007).

Based on the IPCC recommendation, one can estimate the allowed level of fossil fuels consumption in 2050. Making reasonable assumptions about the 2050 potential of “clean energies” (such as nuclear and renewable energies) and energy efficiency, one can estimate the 2050 level of world GDP that is consistent with the goal of climate stabilization. The key question is to find the range of plausible levels of clean energy in 2050.

Nuclear energy currently is based on the non-renewable uranium which cannot last very long. Renewable energies are currently more expensive than fossil fuels and some (such as wind and solar) are intermittent resources. Nuclear energy and most of the renewable energies can only be used to generate electricity. Biomass is the only renewable energy that can be used to directly make liquid fuel but its potential is limited by available land and fresh water.

In one of my recent papers, I assume that the critical limiting factor will be the extent of electrification of energy consumption (that is, the percentage of energy consumption that can be electrified). Under between plausible and optimistic assumptions, I find that climate stabilization will have to require between very slow growth and negative growth of the global economy from now to 2050 (Li 2008c).

In 2009, I was invited to contribute to the special forum issue on “Capitalism and Climate Change” of Development and Change, an issue that included contributions from some of the world’s leading climate change scholars. In my contribution, I extended the analysis to include various scenarios for the Chinese and the US economy. In this paper, I used the construction rates of clean electricity generating capacity as the critical limiting factor in determining the 2050 potential of clean energy. Again, I find that between very slow growth and negative growth for the world, the US, and the Chinese economy would be required to meet the objective of climate stabilization (Li 2009b).

Future Directions

After the deep global recession in 2009, the global economy is at a turning point. The immediate question is how to reestablish the conditions for vigorous expansion of the global economy. The world can no longer count on the debt-financed US consumers to lead the expansion of the global effective demand. Under one scenario, the US government may replace the US consumers to lead the expansion of the global demand, and the US will run large double deficits (fiscal deficits and current account deficits). However, such a scenario may soon lead to the rapid escalation of the US government debt and precipitate the US economy into a severe fiscal crisis.

Alternatively, China may play a growing role in leading the global demand expansion. Instead of relying upon exports, the Chinese economy needs to be restructured to be led by domestic demand. Ideally, China will pursue economic and social reforms that would allow an increase in the labor income share of GDP as well as mass consumption. In reality, China has relied upon massive increase in investment to maintain rapid economic growth. This could leave China with massive excess capacity in the coming years and pose significant risks to both the Chinese and the global economy.

These are important and fascinating questions to be explored. I will build upon my previous studies on global financial imbalances and continue to work on the subject. In particular, I will evaluate the alternative scenarios under which conditions for vigorous global economic expansion may be established. I will consider the advantages and disadvantages of each of the plausible scenarios, evaluating their respective upside and downside risks, making judgment about possible trajectories of the global economy in the coming years and providing policy recommendations.

One factor that could seriously complicate the prospect of the global economy has to do with the possible near peak of the world oil production. If the world oil production will indeed peak and start to decline in the next few years, this could plunge the global economy back into recession.

To evaluate this particular risk to the global economy, I will continue to work on the question of resources depletion while improving the application of the Hubbert Linearization technique. My objective is to develop an analytical framework that may be used to project the future world energy production and its constraint on the future global economic growth. Such a framework will help to illustrate the constraints imposed by resources depletion on economic growth. The information derived could then be used by governments or other institutions to develop policies to either respond or adapt to the changing economic conditions.

Moreover, I would like to return to Wallerstein’s hypothesis of secular rises of wage, taxation, and environmental costs. For several reasons, these costs may continue to rise relative to economic output in the future.

First, due to population aging, the advanced capitalist countries may have to face steep rises of pension and healthcare costs in the coming decades.

Secondly, with the rising percentage of immigrant workers in the labor force in the advanced capitalist countries, the governments may be under the social pressure to extend the social protection networks to cover the immigrant workers.

Thirdly, as the Chinese and Asian workers demand more economic, social, and political rights, it will lead to rising labor costs in Asia. This could in turn lead to a reverse global labor arbitrage that pushes up the global labor costs.

Fourthly, due to the deepening global ecological crisis, governments and businesses may be forced to spend more to clean up the environment and substitute the more expensive renewable resources for the relatively cheap nonrenewable resources.

Against these tendencies, technological advances may help to dampen some of the costs. It is therefore very important to conduct empirical research on the movements of the profit rate in the global economy. I will follow on my previous research on the subject, continuing the analysis of the movement of the profit rate, identifying the causes behind the observed movement and providing reasonable explanations. The findings will help to throw light on the cyclical movements and secular trends of the current world system.

Finally, I will continue to participate in the debate on climate change and its economic implications. I will take into account the latest advances in the field, updating my analysis of energy efficiency and clean energy potential and reconsidering the relationship between climate stabilization and economic growth. I will further extend my analysis and contribute to the literature on the proper economic and geopolitical arrangements required for climate stabilization and ecological sustainability.

References

Arrighi, Giovanni. 2008. Adam Smith in Beijing. London; New York: Verso.

Brenner, Robert. 1998. Turbulence in the World Economy. London; New York: Verso.

Campbell, Colin J. 2005. Oil Crisis. Brentwood, Essex, UK: Multi-Science Publishing Company Ltd.

Crotty, James. 2000. “Trading State-Led Prosperity for Market-Led Stagnation: from the Golden Age to Global Neoliberalism.” The Political Economy Research Institute of University of Massachusetts Amherst, Published Study 7.

Dumenil, Gerard and Dominique Levy. 1993. The Economics of the Profit Rate. Aldershot: Edward Elgar.

Felix, David. 2001. “Why International Capital Mobility Should Be Curbed, and How It Could Be Done.” Conference paper prepared for Financialization of the Global Economy, December 7-8, 2001.

Gordon, David M., Thomas E. Weisskopf, and Samuel Bowles. 1987. “Power, Accumulation, and Crisis: The Rise and Demise of the Postwar Social Structure of Accumulation,” in Victor D. Lippit ed., Radical Political Economy: Explorations in Alternative Economic Analysis. New York: M.E. Sharpe, 226-246.

IPCC. Intergovernmental Panel on Climate Change. 2007. A Report of Working Group III of the Intergovernmental Panel on Climate Change: Chapter 3 (Issues Related to Mitigation in the Long-Term Context) .

Korpela, Seppo A. 2005. “Prediction of World Peak Oil Production”, in Andrew McKillop with Sheila Newman (eds.) The Final Energy Crisis. London: Pluto Press.

Kotz, David M., Terrence McDonough, and Michael Reich. 1994. Social Structures of Accumulation: the Political Economy of Growth and Crisis. Cambridge: Cambridge University Press.

Li, Minqi. 2004. “After Neoliberalism: Empire, Social Democracy, or Socialism?” Monthly Review, 55:8, pp. 21-36.

____. 2007. “U.S., China, and the Unraveling of Global Imbalances.” The Political Economy Research Institute of University of Massachusetts Amherst, Working Paper 146.

____. 2008a. “An Age of Transition: The United States, China, Peak Oil, and the Demise of Neoliberalism.” Monthly Review, 59:11, pp. 20-34.

____. 2008b. The Rise of China and the Demise of the Capitalist World Economy. London: Pluto Press; New York: Monthly Review Press.

____. 2008c. “Climate Change, Limits to Growth, and the Imperative for Socialism,” Monthly Review, 60:3, pp. 51-67

____. 2009a. “Socialization of Risks without Socialization of Investment: the Minsky Paradox and the Structural Contradiction of Big Government Capitalism,” The Political Economy Research Institute of University of Massachusetts Amherst, Working Paper 205.

____. 2009b. “Capitalism, Climate Change, and the Transition to Sustainability: Alternative Scenarios for the US, China, and the World,” Development and Change, special forum issue, 40:6, November 2009, pp.1039-1061.

____. 2010. “Peak Energy, Climate Change, and the Limits to China’s Economic Growth.” The Chinese Economy (forthcoming).

Li, Minqi and Adam Hanieh. 2006. “Secular Trends, Long Waves, and the Cost of the State: Evidence from the Long-Term Movement of the Profit Rate in the US Economy 1869-2000.” Review: A Journal of the Fernand Braudel Center for the Studies of Economies, Historical Systems, and Civilizations, XXIX:1, March 2006, pp. 87-114.

Li, Minqi, Feng Xiao, and Andong Zhu. 2007. “Long Waves, Institutional Changes, and Historical Trends: A Study of the Long-Term Movement of the Profit Rate in the Capitalist World-Economy.” Journal of World-Systems Research, XIII:1, December 2007, pp. 33-54.

Minsky, Hyman P. 1986. Stabilizing an Unstable Economy. New York: McGraw-Hill.

Moseley, Fred. 1991. The Falling Rate of Profit in the Postwar United States Economy. New York: St. Martin's Press.

Piovani, Chiara and Minqi Li. Forthcoming. “One Hundred Million Jobs for the Chinese Workers!: Why China’s Current Model of Development Is Unsustainable and How A Progressive Economic Program Can Help the Chinese Workers, the Chinese Economy, and China’s Environment,” Review of Radical Political Economics (forthcoming).

Pollin, Robert and Gary Dymski. 1994. “The Costs and Benefits of Financial Instability: Big Government Capitalism and the Minsky Paradox,” in Gary Dymski and Robert Pollin (eds.), New Perspectives in Macroeconomics: Explorations in the Tradition of Hyman P. Minsky. Ann Arbor: University of Michigan Press.

Rutledge, Dave. 2007. “Hubbert’s Peak, the Coal Question, and Climate Change”, ASPO-USA Conference, Houston, Texas, October 19, 2007. .

Shaikh, Anwar. 1999. “Explaining the Global Economic Crisis,. Historical Materialism, V, Winter, 103–144.

The Oil Drum. 2009. “World Oil Production Forecast-Update November 2009”, posted by “ace”, November 23, 2009 .

Wallerstein, Immanuel. 1979. The Capitalist World-Economy: Essays by Immanuel Wallerstein. Cambridge: Cambridge University Press.

____. 1998. Utopistics: or Historical Choices of the Twenty-first Century. New York: The New Press.

____. 2003. The Decline of American Power. New York and London: The New Press.

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