Sean Davis,'Publicly Traded On-Line Broker Firms Are Likely to Post Modest Profit
                                                             Gains,' The Wall Wall Street Journal, July 8, 1998, p. B9A.

                                                             George Anders,'Cybersqueeze, Comparison Shopping Is the Web's Virtue- Unless You're
                                                             a Seller: Amazon.com, Others Face Weak Pricing and Losses Even as Their Stocks Soar',
                                                             The Wall Street Journal, July 23, 1998, p. A1,A8.

Marx originally described a system-wide falling rate of profit crisis as part of his analysis of advanced capitalism. In Marx's model, the increasing use of machinery with a decreased use of human labor would ultimately so increase total production, that total consumption power would be too low to keep production recycling back into consumption. 1 A great inventory bulge would lead businesses to lay of excess workers and the downward spiral of laid-off workers and decreasing sales would so affect sales, the profits would fall.

Today, the Internet threatens to bring about another type of falling rate of profit crisis (falling rate crisis). An article in The Wall Street Journal described how the Internet is allowing consumers to compare national prices on given articles, particularly automobiles and to obtain the lower prices:

"There is nothing more terrifying than a consumer who knows everything about the pricing of your product," says Kenneth Orton, president and chief executive of Preview Travel Inc., an on-line travel agency based in San Francisco. Its services include a Web-based "bargain finder" that scans for cheap air fares. 2

This year, only about $3.3 billion in consumer business will be conducted by electronic commerce, but this number does not include the number of consumers who simply use the Internet to obtain comparative pricing data, and who then complete the transaction at convnetional brick-and-mortar stores. This type of falling rate crisis is also indirectly related to Marx's belief of problems related to the use of automation to decrease employment. Consumers armed with close to actual cost data for various items are a real threat to the profit margins for retailers, and then ultimately to the manufacturing sector itself.

As consumers develop the ability to use the Internet to obtain the lowest prices, the retail businesses will continue to use the Internet to cut their labor costs:

                                                 But as merchants figure out how to cut transaction costs, eliminating salespeople
                                                 , middlemen, delivery charges, and processing costs, they may wind up slashing prices,
                                                 but maintaining or even increasing profit margins. Believers in the "new economy" of
                                                 the Information Age ascribe huge importance to this possibility. 3

In some ways, this possible merchant response resembles what happened more generally during the 1930s. Then businesses responded to the Great Depression by continuing the trend set during the 1920s, by cutting jobs each year through efficiency increases, at least within the monopoly sectors. Thus instead of a falling rate of profit crisis for the monopoly business sectors, a falling rate of employment hit the working population. And a falling rate of pay crisis probably extended across the entire American working class, exacerbating the effects of rising relative and/or absolute employment rates. Both of these trends temporarily helped business to maintain profits, but also depressed total comsuming power within the country, making future job losses 'necessary' for private business. This downward spiral was not stopped and the economy returned to good rates of growth and job increases until serious direct federal intervention during World War ll.

Private business use of the Internet by just three companies totalled about $3 billion in 1997 according an April report by the Commerce Department. These same three companies could see their Internet commerce approach $17 billion in three to five years, with total business-to-business Internet commerce approaching $300 billion in the same time span. Almost all of this Internet commerce will likley result in cost savings (i.e., job decreases) to the companies, not to total increased employment.

The Wall Street Journal's writer tried to find a silver lining in his article:

                                                  Some market analysts doubt that the Internet will always be a price destroyer...Over
                                                  time, though, the Internet may turn out to be more of a price leveler than a price cutter.
                                                  To economic theorists, perfect market information tends to make prices converge [my
                                                  emphasis]. Mr. Orton of Preview Travel says the spread of bargain finders may serve to
                                                  narrow the wide gap between similar seats on a given flight. 4

Of course, since the market has never known perfect information or anything close to it, these 'economic theorists' could well just be 'blue-skying'. It just as possible that the achievement of perfect information will simply drop retail prices to a level, that many brick-and-mortor retail stores can no longer remain in business, putting tremendous pressure upon the manufacturers to lower their own wholesale prices further as well. In this view, the Internet is simply another means for achieving a falling rate of profit crisis; one which private business grabbed as a means for increasing profits, but which so drastically decreased human labor, that a huge economic and political crisis resulted- one potentially worse than the Great Depression, where at least federal intervention and war resolved matters.

__________________________________________________________________________________________

1 Marx's terminology was the 'organic composition of capital', the ratio between fixed capital (machinery) and variable capital (wages). Back

2 Bernard Wysocki Jr., 'Internet is Opening Up A New Era of Pricing,' The Wall Street Journal, June 8, 1998, p. A1. Back

3 Bernard Wysocki Jr., 'Internet is Opening Up A New Era of Pricing,' The Wall Street Journal, June 8, 1998, p. A1.Back

4 Bernard Wysocki Jr., 'Internet is Opening Up A New Era of Pricing,' The Wall Street Journal, June 8, 1998, p. A1.Back

Return To SouthernBanking.Com