Measuring the US rate of profit: up or down?

by Michael Roberts

November 20, 2011

There was another fascinating session at last weekend’s Historical Materialism conference in London – at least it was fascinating for us nerds who like to compile and analyse empirical data on the rate of profit ad infinitum!  Three titans in this field presented papers together: Michel Husson, the French Marxist economist (author of several papers on the rate of profit, see for example, Michel Husson on the rate of profit) , Andrew Kliman from Pace University, New York and author of that paradigmic book on Marx’s value theory, Reclaiming Marx’s Capital,  http://www.amazon.co.uk/Reclaiming-Marxs-Capital-Inconsistency-Dunayevskaya/dp/0739118528/ref=sr_1_1?ie=UTF8&qid=1321789640&sr=8-1) and Simon Mohun from Queen Mary College, London, an important contributor to Marxist empirical analysis (among others, see this paper  SimonMohun-Trends).

All presented papers on how they reckoned the rate of profit in the US had moved during the so-called ‘neo-liberal’ period of capitalism from the early 1980s onwards.  And guess what?  None of them agreed with each other!  Husson said it was clear that the US rate of profit (like rates in other major capitalist economies) had risen during that period; Kliman was adamant that it had not – indeed it had fallen ‘persistently’; while Mohun said it has risen all the time even in the 1970s!

The main reason for the divergence was the assumptions, categories and ways of measuring the rate of profit.  One key difference between Husson and Kliman is that the former reckons that using replacement or current costs to measure fixed assets is fine, while Kliman says that it is crucial that historic costs are used.  Kliman argues that capitalists measure the rate of profit as profits against what they paid for assets at the time.  Using replacement costs is not realistic as it is measuring fixed assets after production has taken place and not at the cost  capitalists paid originally.  This distorts the results dramatically, he claims.  It is also ‘unethical’ to use a rate of profit and call it that when it is no such thing in reality.

My own view on this issue has been spelt out in my book, The Great Recession (http://www.amazon.co.uk/Great-Recession-Michael-Roberts/dp/144524408X/ref=sr_1_1?ie=UTF8&qid=1321792544&sr=8-1) and in two papers to the Association of Heterodox Economists The causes of the Great Recession and The profit cycle and economic recession, apart from in numerous posts (in particular see my recent post, The debate on the rate of profit (again), 26 October 2011; http://thenextrecession.wordpress.com/2011/10/26/the-debate-on-the-rate-of-profit-yet-again/).

Suffice it to say, that I think Kliman is right about using historic costs, but that contrary to Kliman, it don’t think it makes much difference empirically.  See this graphic for the US rate of profit (using the whole economy measure that I prefer) based on both current (replacement) and historic cost measures for fixed assets.  The cyclical movements and underlying trends operate for both.

That is Husson’s argument too, but I don’t agree at all with Husson’s interpretation of the data that concludes that because the US rate of profit rose from 1982 onwards, this means that Marx’s law of profitability was irrelevant to the Great Recession. Husson reckons that as profitability rose, investment growth slowed because capitalists made profits not from the productive investment sectors, but from switching into unproductive sectors like property and credit – what Marx called fictitious capital.  The crisis in neo-liberalism that culminated in the Great Recession was due to the collapse of this credit-based growth – what he calls ‘chaotic regulation’.

I argue in my papers that Marx’s law operates as the ultimate and underlying cause that breeds the proximate causes of the housing boom and slump, the credit bubble and the leveraging of debt that eventually led to the financial collapse.  I note that Kliman in his new book, The failure of capitalist production (http://www.amazon.co.uk/Failure-Capitalist-Production-Underlying-Recession/dp/0745332390/ref=sr_1_1?ie=UTF8&qid=1321791323&sr=8-1) makes these same points (I’ll be reviewing Kliman’s book in a future post).  But I back up this conclusion with empirical data that shows the US rate of profit peaked in 1997 at a level that has not been surpassed since, suggesting that Marx’s law started to operate inexorably on capitalist production and the countervailing factors to the falling rate of profit had weakened.  Indeed, from early 2006, the mass of profit in the US began to decline, well before the financial collapse, again suggesting that this is a good forward indicator (and cause) of capitalist crisis.

As Kliman said in the session, if you think the causes of the Great Recession are to be found in the financial sector and in ‘uncontrolled credit’ (this seems to be the position of Dumenil and Levy – see my post, The crisis of neo-liberalism and Gerard Dumenil, 3 March 2011), then there is a solution based on regulation of the financial system and credit creation, which is short of a transformation of the capitalist mode of production.  If you reckon the cause lies in the mode of production itself (i.e. the production of surplus value) and not in its distribution (credit, rent, interest), then you are saying that credit control and tight regulation of the banking sector will not be enough to stop boom and slump in capitalism.

Mohun ignored the argument between Kliman and Husson on measurement of fixed assets and neo-liberalism.  He focuses on the causes of crisis in the class battle between capitalists and labour over the sharing out of value between wages and profit.  Profitability, for him, is mainly affected by changes in the rate of surplus value and not by the inexorable tendency for the organic composition of capital to rise, as Marx argued.  He presented a paper (as yet unpublished) in which he argued that if you adjusted the amount of national income going to employees by deducting that going to ‘supervisory’ workers (who ought to be defined as capitalists as they were CEOs and top managers whose incomes depended on profits made in the company), then the share of profit relative to wages has been rising through the neo-liberal period and this has driven up profitability.  But most important, whenever this ‘adjusted capitalist rate of profit’ peaks, it is a better indicator of crisis than the ‘conventional’ measure.  For example , it peaked in 2000 and we had the hi-tech bubble burst; it peaked in 2007 and we had the Great Recession.

Well, I’m not really convinced.  First, on Mohun’s definition, these capitalists hidden in the employed workforce data constitute 18% of the US workforce – no 1% here!  Most ‘supervisory’ workers are not capitalists.  If you supervise two or three in a team at the office, does that make your relatively modest income capitalist profit?  I don’t think so. Indeed, Kliman in his paper shows that, in the US, the wage share has not fallen if you include all the non-wage benefits (health insurance, pensions etc) in employee compensation and/or put it in real terms (after inflation).

And using the peak profitability as a cause of crisis is both too direct and too doubtful.  A falling profitability does not exactly coincide with crisis – that requires a fall in the mass of profit, I think.  And using peak points to identify changes is less valuable than using troughs.  But that’s another story.  I await Mohun’s paper when it is published.

So there we have it – the debate will continue.  But one important point was raised and it has been raised by comments to this blog.  Marx’s economic analysis was based on one economy, a world economy.  Marx’s law of the tendency of the rate of profit to fall was based on a world rate of profit.  So just looking at the US rate of profit is not really correct.  But there can be no world average rate of profit, given capital and labour controls and other national state restrictions to the free movement of value for capitalists.  As Kliman said in the session, and it’s a point made in my book, the US is the largest and most important capitalist economy (as the UK economy was in the 19th century when Marx analysed it for his ideas), so the rate of profit there is very important in the explaining the laws of motion of capitalism, if not enough.  Also the US data are the best we have.

However, we do need to look at other national rates of profit to see if we can learn more about what is going on.  In my book, I did devote some chapters to other national rates of profit and that seemed to provide some confirmation of Marx’s law of profitability.  But we need more research.  Some has been done recently and I have also recently revisited the data for the rate of profit in the UK.  I’ll show my results and conclusions in a future post.