Review (Part 3 of 3): John Smith, “The GDP Illusion: Value Added versus Value Capture.”

Review (Part 3 of 3): John Smith, “The GDP Illusion: Value Added versus Value Capture.” Monthly Review. July-August, 2012. p 86-102.

In two earlier reviews, I focused on the notions of economic surplus and imperialist rent as specific categories within the capitalist-imperialist world-economy. The intent was manifold: first, to demonstrate the mechanisms through which wealth is directed towards the core-zone First World from peripheral and semi-peripheral economies; second, to similarly demonstrate how this exploited wealth is saturated in core-zone economies; and finally, to show how wages received by workers in core-zone economies are supplemented or supplied from these two categories. The question of how specific workers relate to the process of capital accumulation has direct implications for radical and revolutionary theory, and the proposal that a large majority of First World workers fall outside any formal proletariat or progressive class by virtue of their wages and consumption is controversial even among those claiming to apply scientific, Marxian understandings to social change and revolution.

In this final part, I will be covering John Smith’s “The GDP Illusion: Value Added versus Value Capture.” 1 The significance of this article is that it helps expose precisely how national GDP statistics obscure the transfer of value between countries. Rather than providing any reliable indication of the amount of value a give country produces, the national GDP better serves to indicate the portion of value that is ‘captured’ (or realized as wages, profits, and state budgets) within a given national territory. The implication is obvious: the national GDPs of First World countries are far larger than the amount of value produced within them, and conversely the national GDPs of Third World countries are far smaller. As Smith states, the “main symptom” of the “GDP illusion” is “a systematic underestimation of the real contribution of low-wage workers in the global South to global wealth, and a corresponding exaggerated measure of the domestic product of the United States and other imperialist countries.” 2

Throughout his essay, Smith refers to three archetypal examples of today’s ‘global commodity': the iPhone, the t-shirt, and the cup of coffee. By looking specifically at these commodities, Smith explains, we can better understand how national GDP statistics serve to obscure the relationship between classes:

All data and experience, except for economic data, points to a significant contribution to the profits of Apple Inc. and other western firms by the workers who work long, hard, and for low wages to produce their commodities. Yet economic data shows no sign of any such contribution; instead, the bulk of the value realized in the sale of these commodities, and all of the profit reaped by Apple and Starbucks from them, appear to originate in the country where they are consumed… Economic statistics and their standard interpretation also obscure the relation of exploitation in the relations between northern firms and southern producers…. This distortion is the misrepresentation of value captured as value added.” 3

In my writing I have long stated that value produced in the Third World is realized in the First World, and that this has a qualitative effect on the economic processes and class relations in both. While Smith, like Baran and Amin, never state so clearly that a substantial portion of First World workers are net-exploiters whose livelihoods are dependent on imperialist parasitism, Smith’s essay, like those previously reviewed in this series, implies something similar and adds further weight to this argument.

Smith notes something fundamental. Apple Inc. does not own the factories that produce its commodities. Likewise, Starbucks owns no coffee plantations, and few apparel retailers make their own clothes. Thus while it stands to reason that the contribution of Third World workers is major factor in the profit attained by those who sell these commodities, standard economic extrapolation (which interprets a given selling price as corresponding to its value) would lead one to believe that the profits which are supplied to First World corporations are due entirely to labor carried out under their direct control. In reality, Apple and other corporations are able to purchase commodities from ‘arm’s length suppliers’ at prices that are vastly undervalued. The result is a transfer of value from the Third World suppliers to First World distributors masked by purchasing prices occurring in international trade. 4

Smith talks at length about Apple products and makes strong comparisons between different workers involved in their production and distribution. According to cited research on the 2006 30Gb iPod, Chinese assembly workers working on the iPod made 6 percent of counterpart US retail workers, 3.2 percent of the wages of US production workers, and 1.8 percent of the wages of US professional workers working for Apple directly. Whereas the production and sell of the model accounted for around 14,000 jobs in the US and 12,250 jobs in China, the total wage-bill for the former was $719 million and the latter $19 million. Under these conditions, Apple purchased the iPod from oversees manufactures for $144.40 and sold it at retail for $299. The 52 percent of ‘gross profit,’ or $154.60, is divided between the profits of Apple and its distributors and the wages paid to its US workers. More importantly, this $154.60 is mistakenly accounted and understood as value added within the United States. 5

As Smith notes, this has a distinct effect for profits in different zones of the capitalist world-economy. In 2010 Chinese corporations involved in producing iPhones made $2,400 in profits per employee. Apple, which is responsible primarily for designing, marketing, and retailing the product, made $263,000 per employee. 6

Smith makes similar notes regarding t-shirts and Starbucks, concluding that production under Third World wages partly explains why First World countries can have retail workers, delivery drivers, managers and administrators, accountants, advertisers, and a wide range of welfare benefits. “Oppression of workers in poorer countries is a direct economic benefit for the mass of people in the richer countries.” 7

Summarizing his points, Smith restated that what is commonly understood as value added is really value captured, “and that it does not in any way correspond to the value created through living labor employed within a given firm.” 8 He goes on to note that Marxist theory already upholds that some firms, such as those primarily engaged in finance or administration, are engaged in non-productive realization activities “that produce no value at all.” 9

Yet these understandings imply more. If the value captured by a firm does not typically represent the value produced through labor employed by it, it stands to reason that individual wages paid for such labor neither corresponds to a common percentage of total value it produces. 10 Smith agrees with this to the extent that he says, “Chinese, Bangladeshi, and Mexican workers receive in their wages a smaller portion of the wealth they have generated than do workers in the imperialist countries.” 11 Yet again, I would go further and state that it is entirely possibly and quite likely that even productive workers in First World countries are remunerated above the value they create. 12

In some respects, this should not be controversial. It is already well established that some workers are paid wages as part of process of realization. A bank for example does not make a profit through the value produced by (and exploited from) the tellers and security guards it employs. Rather, these workers are paid wages drawn from interest on loans. They are not engaged in the production of value, and thus in technical terms they can not possibly be exploited. The same could be said of those who work in public relations or civil service fields, two professions which produce no value yet still receive a wage. Under classical capitalism, it was still be appropriate to describe people in these occupations as proletarians or ‘semi-proletarians’ because they were typically drawn from and paid wages consistent with that class. Today this is not always the case. Rather, these tertiary sectors have grown exponentially and become a characteristic of parasitic core-zone economies.

Third Worldists tends to say that a majority of workers in core-zone countries (such as the US) receive wages that are not simply a greater proportion of the value they produce, but is over and above the value they produce (if they produce any at all). This is rendered possible mainly through imperialist super-exploitation of Third World workers. As follows, First Worlders workers are functionally and fundamentally disunited from the Third World-centered proletarian class.

While much of the ‘left,’ especially in the First World, remains bitterly ignorant of imperialist parasitism and its qualitative effect on workers in the First World, the concept is not particularly difficult to understand, especially from a Marxist perspective.

Under abstract capitalism, capitalists are able to extract surplus value from workers because they hold a distinct advantage: the ownership capital. Out of this situation, a worker produces a given amount of value. From this total value, a proportion is paid to the worker as wages while the rest is realized by the capitalist as surplus value or profit.

Under the today’s actual capitalist system, because of distinct advantages imperialist countries hold over the world in areas of intellectual property, capital holdings, cultural hegemony, exclusive control over advanced technology, and military might, they are able to capture for themselves an extra portion of surplus value. This is known as imperialist rent.

The process of extracting imperialist rent is a feedback. As imperialists extract rent from exploited countries, the former’s general advantage over the latter is extended. Thus, imperialists are able to secure an even greater rate of rent from exploited countries in the future (at least this is the imperialists’ obvious hope).

Imperialist rent has two notable parallel effects: maldevelopment in the Third World and embourgeoisment in the First World. Imperialist rent maintains the global South in a state of structural poverty and economy dependence on the global North. Conversely, imperialist rent is the main contributor to the socially widespread opulence and decadence in the core. Because of this structure of imperialism, wages above the abstract value of labor can be paid to a minority of workers in the world-economy while individual firms are still able to procure a profit through the realization of value.

As a final note, while GDP is best understood as a measure of value captured and not value added on the national scale, the global GDP still retains its function as an indicator of the total value produced in the world-economy. 13 Hence, the fact that the US contains less than five percent of the world’s population yet its economy represents 25 percent of the world’s GDP is significant. As reasoned by Smith, 25 percent of the world’s value is not necessarily produced in the US, but it is captured there. 14

An honest conversation about the role of imperialism has been avoided for too long. While academics like John Smith and Samir Amin might have their own reasons for backing away from the full implications of their analyses, there is little excuse for this among the wider ‘revolutionary left.’

Critics of Third Worldists frequently state that our analysis effectively ‘divides the working class.’ Yet the fact is First Worldists, i.e. left-wing apologists for First World imperialism, have held hegemonic positions in the discourse of ‘left-wing’ and ‘revolutionary’ politics for the past four decades. Speaking logically, if any paradigmatic ‘left-wing’ trend has been capable of affecting any division between workers, it has been First Worldism, which has predominantly shaped what is understood as ‘left-wing politics’ during this period. For such First Worldists, defending their dogma and their cherished (and quite mythical) First World proletarian masses against honest Third Worldist critique is given priority over attempting to understand through honest investigation the world has it exists. This is a trend that must be overcome.

Marxism is the science of organizing for revolution. It seeks to understand the world in order to change it, not to serve as a rhetorical device for applying analogies in worn out, superficial ways. Capitalism today is capitalist-imperialism. Unless Marxism can account for this development in a way that advances potentials for revolutionary struggle, it can only be described as Marxism in name only.

John Smith’s “The GDP Illusion: Value Added versus Value Capture” along with Paul Baran’s “Some Theoretical Implications” and Samir Amin’s “The Surplus in Monopoly Capital and the Imperialist Rent” all serve to illustrate that the development of capitalism to monopoly capitalism is a qualitative shift, one which has rendered the division of the world as one increasingly between exploiter classes tied to imperialism and peoples exploited by imperialism.

Nonetheless, monopoly capitalism signifies other shifts in capitalism: increasing militarism, waste, and decadence; the further erosion of whatever grounds of justification capitalism may have; and the heightened stakes of class struggle generally.

Marxism, which is fundamentally based on historical materialism, must rise to understand these development and provide an illuminating analysis for organizing for an alternative: the revolutionary movement of society towards communism.

 ***

1John Smith, “The GDP Illusion: Value Added versus Value Capture.” Monthly Review. July-August, 2012. p 86-102.

2Ibid. p 86

3Ibid. p 86-87

4Ibid. p 87

5Ibid. p 88-89

6Ibid. p 90

7Ibid. p 92

8Ibid. p 99

9Ibid.

10Instead wages are typically paid at a given rate according to the value it realizes for a firm.

11Ibid. p 95

12Brown, Nikolai. “A Model for How First World Wages are Based on Third World Exploitation.” Anti-Imperialism.com. May 31, 2012.

13This is so because total value captured will correspond to the total value produced when considering the world-economy as a whole.

14As an aside, and to restate what I had previously noted parts 1 and 2 in this series, while the global GDP indicates the magnitude of value produced in the world-economy, under monopoly capitalism this value becomes increasingly detached from fulfilling reasonable necessities and is less and less relates to a measurement of ‘real wealth.’