Differential Accumulation is an approach for analysing capitalist development and crisis, tying together mergers and acquisitions, stagflation and globalization as integral facets of accumulation. The concept has been developed by Jonathan Nitzan and Shimshon Bichler.

The concept of differential accumulation emphasizes the powerful drive by dominant capital groups to beat the average and exceed the normal rate of return. This concept is tied to a definition of capital as a social category rather than a material category (as seen by neo-classical and Marxist thinkers). "Capitalism is not an ?economic system?, but a whole social order, and its principal category of capital must therefore have an ?encompassing? definition."^[1]

...capitalization is a forward-looking process. What is being accumulated are claims on the future flow of profit. The pace of accumulation therefore depends on two factors: (a) the institutional arrangements affecting profit expectations; and (b) the normal rate of return used to discount them into their present value. The effect of rising industrial capacity on these factors is not only highly complex and possibly non-linear, but its direction can be positive as well as negative.

But then if capital is not ?tangible?, how should its accumulation be measured? Surely, the mere augmentation of money values tells us little about power, particularly in the presence of inflation or deflation. The answer is rooted in the relative nature of power. The power of the absentee owner is the power to control part of the social process, and that becomes meaningful primarily against the power of other owners.^[2]

Regimes of Accumulation

A firm can raise its profit through "breadth" by adding more employees to the organization. Conversely the firm can pursue "depth" by generating higher profit per employee. Each avenue of breadth and depth can be divided into pursuing differential accumulation through "internal" or "external" means. This gives us four categories of differential accumulation: internal breadth by amalgamation (buy or join other businesses), external breadth through greenfield investment (build new factories), internal depth via cost-cutting (make workers work harder or find ways to reduce the price of inputs), and external depth through stagflation (raise prices faster than the competition).^[3]

Dynamics of the Regimes

Nitzan and Bichler make several broad conclusions. (1) Of the four regimes, the most important are amalgamation and stagflation, which tend to oscillate inversely to each other. (2) Over the longer haul, amalgamation grows exponentially relative to green-field investment, contributing to the stagnation tendency of modern capitalism. (3) The wave-like pattern of mergers and acquisitions reflects the progressive break-up of socioeconomic ?envelopes?, as dominant capital moves through successive amalgamation at the industry, sectoral, national, and, finally, global level. In this sense, they argue that the current global merger wave is an integral facet of differential accumulation. (4) Periodic lulls in amalgamation tend to be compensated for by stagflation, which appears as a crisis at the societal level, but which contributes significantly to differential accumulation at the disaggregate level. An end to the present worldwide merger boom could therefore trigger global stagflation. (5) Stagflation crises have been previously 'resolved' when dominant capital broke its existing envelope, pushing to amalgamate within a broader universe of takeover targets. Given that there is nothing more to conquer beyond the global envelope, Nitzan and Bichler argue that future stagflation crises may prove much more difficult to tame.^[4]

Stagflation in differential accumulation theory

Differential accumulation theory sees stagflation oscillate inversely with periods where mergers and acquisitions are dominant as a major strategy of dominant capital groups to "beat the market" or exceed the normal, average rate of return on investments. If too many people try to "beat the average" a market imbalance results. Stagflation, which appears as a crisis at the societal level, contributes significantly to differential accumulation at the disaggregate level, that is, of dominant capital groups accumulating faster than smaller businesses. Since the 20th century, the dominant capital group which has benefited from stagflation has been the "weapon-dollar-petrodollar coalition" during periods of Mid-east crises and rising oil prices. These periods have oscillated between periods of relative "peace" during which mergers and acquisitions have been the dominant strategy for beating the average.

Similarities with "supply shock" and monetarist theories

Similarities with "supply shock" theories

Differential accumulation theory shares some similarities with the "shock" or "supply" theories in as far as the practice of mergers and acquisitions generally results in the merged companies shedding excess ("redundant") production capacity and laying off extra workers to boost profits. The cumulative effect of many mergers and acquisitions results in in a two-fold effect on the economy that can contribute to inflation and recession.

• Reduced supply and competition (causes higher prices or inflation)
• Higher unemployment and lower economic output (causes recession)

The first effect is a reduction in overall production capacity of the economy (reduced supply), which pushes up prices (inflation). Reduced competition also causes prices to rise. Recession results because production capacity has been reduced and unemployment rises.

Similarities with monetarist theories

Stagflation can be aggravated when a central bank increases the money supply to fight the recession that has resulted following a period of prolonged differential accumulation.

Plain-language example

Imagine that the economy is made up of three railroads and each railroad has ten locomotives and 10 engineers. The locomotives and engineers represent the production capacity or the supply of the economy (labor and capital). The train cars represent the demand for goods and services which is based on the money supply. The price for goods and services is determined by the market. In this example it's represented by the freight rates to move train cars.

The railroads now have three choices on how they can increase profits:

• First, a railroad can invest in more locomotives and hire more engineers so that they can pull more cars for the market price. This will result in an "average" return on investment for a railroad.

• Second, a railroad can reduce the cost to pull the same number of cars for the market price by making its existing locomotives and engineers more efficient (increase productivity). This also will result in an average return on investment.

• Third, a railroad can decide it wants to "beat the average" by reducing competition and costs so that it can pull fewer train cars but charge more money per car. Because prices are determined by the market, they must change the market to do this.

Now, lets say that railroad number one decides that it wants to "beat the average return" on its investment. So, instead of investing in more locomotives, it decides to buy (acquire) or merge with railroad number two.

After "railroad one" and "railroad two" become one railroad, there is less competition. The new railroad decides to reduce its costs by taking 5 locomotives out of service and laying-off 5 engineers to reduce its costs by reducing "excess" capacity. Now it can decide to raise its freight rates since there is less competition (in economic terminology, the market equilibrium sets the price so they've changed the market equilibrium).

The new merged railroad sees a temporary increase in profits because two things have occurred:

• The railroad has reduced costs (and increased the profit = revenue - cost)
• The railroad can raise prices because there are fewer locomotives available and less competition.

The new "economy" is now made up of only 25 locomotives instead of 30 and there are now five unemployed engineers. With fewer locomotives, the two remaining railroads can not pull as many cars. With less excess capacity, they can't respond as quickly to rising demand (i.e., they can't pull more cars).

The results are

1. Higher unemployment and fewer trains (recession);
2. Higher freight rates (inflation); and
3. Lower overall productivity (cost per unit of work).

So temporary stagflation results.

Finally, the recessionary situation is exacerbated when a central bank expands the money supply as a means of fighting the recession- for example by lowering interest rates. The economy borrows more money to pay the higher freight rates but because there are fewer locomotives and fewer railroads prices rise still further but only over the short-run.

Over the long run, other entrepreneurs are bound to see that there's a way to make money in this market by building new railroads and do so. This will increase production, increase employment and decrease prices and end the recession and the inflation until the next wave of mergers and acquisitions occur.

In this way, differential accumulation theory describes an oscillating cycle of periods of recession and inflation that are followed by periods of expansion and lower inflation.

Notes

1. ↑ Nitzan 1998, p. 175
2. ↑ Nitzan 1998, p. 204
3. ↑ Nitzan 2001, p. 232
4. ↑ Nitzan 2001, p. 233

References

• Differential Accumulation: Toward a New Political Economy of Capital. Nitzan, Jonathan. (1998). Review of International Political Economy. Vol. 5. No. 2. pp. 169-217. (Journal Article; English).
• Regimes of Differential Accumulation: Mergers, Stagflation and the Logic of Globalization. Nitzan, Jonathan. (2001). Review of International Political Economy. Vol. 8. No. 2. pp. 226-274. (Journal Article; English).

External Links

• Bichler and Nitzan Archives