A ‘class’ rate of profit

by Michael Roberts

I recently attended a presentation by Simon Mohun as part of the London Seminar on Contemporary Marxist Theory at the School of Oriental and African Studies (SOAS).  Simon Mohun (SM) is Emeritus Professor at Queen Mary College, London and has made many important contributions to Marxist economics.   His presentation was entitled, The rate of profit, crisis and periodisation in the US economy.  SM said he aimed to try apply Marxist economic theory to the facts so that we could understand better the causes of capitalist crisis after the Great Recession.

SM’s presentation was similar to one that he made at the recent HM conference ( see my post, Measuring the rate of profit, up or down?, 20 November 2011).   SM looked at the data for the US rate of profit and found that the rate of profit had not fallen but risen, although punctuated by downturns leading to economic crises in 1929, 1979 and 2007-8.  How could he reach this conclusion when nearly everybody else, including me, had found a long-term trend decline in the US rate of profit, at least in the post WW2 period?

Well, the answer is that SM redefines what he calls the ‘conventional’ rate of profit into a ‘class’ rate of profit.  SM argues that the conventional measure of profits, based on net added value less employee compensation, does not express the true class relations under modern capitalism.  Modern capitalism can no longer be defined by a class that owns the means of production but must be defined by a class that ‘controls’ investment, employment and the workplace.  SM quoted John Kay, the Oxford economist, who had just written a piece on the crisis of capitalism in the FT (see my post, Capitalism in crisis – the apologia, 13 January 2012), in which Kay argued capitalism had moved on from Marx’s day and the ownership of the means of production was no longer the criterion of class.

Instead it was “control” of production.  Now managers rule and shareholders don’t in modern capitalist companies.  So the wages of managers who “control” the workers should be added to surplus value because they are “agents of capital”.

In the US data, SM applied this definition of a managerial class to the category of  ‘supervisory’ workers (19% of the workforce) i.e workers who boss or supervise others, to be found in the official US data.  By doing so, between 15-35% of all wages that goes to supervisory workers is then transferred to profits.   When SM does that (not surprisingly) , he finds that there has been a rising, not falling, rate of profit in the US since 1890!   This leads Mohun to the conclusion that capitalism is really a ‘vibrant and dynamic’ mode of production, just interspersed with the occasional crises (a much overused word, in his opinion).  And this class rate of profit is a better indicator of crisis than the conventional one, as when it fell on three occasions, a crisis ensued, while the conventional rate was not such a good indicator.

I have big problems with this approach. First, I don’t accept the thesis that ownership of the means of production is now an irrelevant criterion for the class nature of capitalism.  Marx’s original key category for class rule still seems on the spot to me.  In a past post, I showed a recent study found that ownership through interlocking shareholdings was key to the control of global investment  (see my post, It’s a not so funny old world, 5 November 2011).  And anyway, Marx was perfectly aware of ‘joint stock’ companies and the growing ‘arms length’ control that shareholders allowed to managers. Sure, chief executives of the big banks and corporations have been able to get away with huge increases in bonuses, share options etc at the expense of shareholders.  But if they eventually don’t deliver on profits, dividends and the share price, they will find themselves out of a job (even if it is with a large ‘golden handshake’).

Also, on SM’s workings, nearly one on five US workers are apparently ‘agents of capital’ whose incomes are really profit.  This would include a manager or supervisor on an office floor who might have, say, two employees to manage.  Does this ‘agent of capital’ have any say on the distribution of profits or investment in a company, on hiring and firing, or even his own remuneration?  I don’t think so.   SM recognised that his category of suprevisory workers was too large and included people who were clearly not ‘agents of capital’.  But he argued that most of the income earned by these ‘supervisory workers’ went to the top layers, in other words, income was skewed to the top.  So reducing the 19% to a lower figure would make little difference to the amount to transfer from wages to profits.

Well, I have had a look at that.  I think it is more likely that just 1% of those 19% supervisory workers are really ‘agents of capital’ (the top 1% of income earners, if you like).  These are the managers who occupy the boardrooms, the CEOs and very senior management who make decisions on behalf of the shareholders and other managers.  Indeed, an excellent study of where the top 1% of income earners get their money (J Bakija, A Cole and Bradley Heim, Jobs and income growth of top earners, November 2010), found that the majority of the top 1% of earners were top executives in corporations.  On Mohun’s workings, supervisory workers are 19% of the workforce and currently receive some 35% of all wage income (2007).  That’s a ratio of about 2 to 1. 

Now, according to Piketty and Saez’s recent study of US incomes (Atkinson, Piketty and Saez, Top incomes in the long run of history, 2011), the top 1% of income earners took 23.5% of all income in 2007.  But this includes all income (dividends, capital gains etc) and not just income from work.  Income from work (excluding capital gains and other capital incomes) was only one-quarter of that.  So the top 1% took just 6% of all wage income, as against 35% taken by the 19%.  And if you switch only 6% of wage income into profit, then SM’s ‘class’ rate of profit is unlikely to be much different from the ‘conventional’ rate.  Even if this is still underestimates the proportion and 10% of that 35% went to the top echelons, that is still less one-third of SM’s estimate.

Interestingly, SM produced a ‘conventional’ rate of profit measure (based on current costs of fixed assets, of course! ) for the US that totally matches mine.  It showed a fall just before the current crisis and at most key turns.  It looks fine to me.   Indeed, SM originally presented this conventional rate in a paper to an earlier HM conference (see SimonMohun-Trends).  He concluded then that “US capitalism is characterised by long secular periods of falling profitability and long secular periods of rising profitability and crises are associated with major turning points” (see his figure 7 in that paper).  I see no need to change (or support) that view with the invention of a class rate of profit.