by Michael Roberts
In this blog on economics and economic
issues from a Marxist viewpoint, I seem to have become obsessed by two
things in particular: measuring the rate of profit and criticising
Keynesian economics. I don’t think these are bad obsessions because I
maintain that the level and trajectory of the rate of profit on advanced
capital in a capitalist economy is the best underlying guide to the
health of that economy. And also, it is essential for us to understand
the theories and arguments of John Maynard Keynes and his followers in
order to see that even the most radical approach to the ‘economic
problem’ (as Keynes called it) won’t work to resolve the contradictions
in the capitalist mode of production.
But anyway, let me return to the first obsession of mine once again.
We now have the latest data for the US up to 2011 in order to measure
the rate of profit a la Marx (to use the term of Gerard Dumenil
and Dominique Levy, the French Marxist economists). The US Bureau of
Economic Analysis recently released updated figures on net fixed
assets. This provides the missing part in measuring the profitability
of capital in the US for 2011 from a Marxist viewpoint.
How do we measure the rate of profit? Well, there are a host of
ways, most of which I have discussed in lots of previous posts (and more
at length in one of my papers, (The profit cycle and economic recession).
But I still like to use Marx’s basic formula for the rate of profit
i.e. total surplus value divided by the stock of advanced capital
(constant (means of production) and variable (labour). My favourite
measure is to take the annual net domestic product of any economy
(that’s gross domestic product less depreciation) less employee
compensation (wages and benefits paid by the employers) to get surplus
value. Then I divide that by a measure of the cost of employing the
labour force (employee compensation again) plus constant capital (which
can be measured by the stock of fixed assets owned by the capitalist
sector after allowing for depreciation). There are lots of other ways:
just looking at the corporate sector, for example, before and after tax
and so on. But my ‘whole economy’ measure is the simplest, takes into
account all sectors in the economy, and is the easiest for comparisons
between countries or in measuring a ‘world rate of profit’ (see my paper
on this roberts_michael-a_world_rate_of_profit.).
One vexing issue is whether to measure net fixed assets in historic
or current cost terms. Marx measured profitability more or less like
capitalists, namely you start with a stack of money (M) to invest in
employing labour and machinery (C) and, thanks to the power of labour in
production (P), the value of those commodities rises above the original
investment (C’) and is realised in sales for more money (M’). So the
initial advance of capital is given in money and is not altered by the
production process, even if the value of the commodities may alter
during and by the end of the process (see my post, http://thenextrecession.wordpress.com/2012/02/21/trying-to-understand-the-difference/).
That means you should measure the stock of fixed assets in historic
terms and not in current cost terms, which revises (nonsensically) the
value of the original advance in current costs. This conclusion comes
from what is called the Temporal Single System Interpretation (TSSI) of
Marx’s accumulation and profitability law. The TSSI is not supported
by the bulk of Marxist economists who reckon that measuring fixed assets
in current costs is either correct or better (there is an endless
amount of papers and debate on this question including on this blog –
see http://thenextrecession.wordpress.com/2011/07/29/measuring-the-rate-of-profit-and-profit-cycles/). So most of the measures of profitability are on a current cost basis.
But does it make a lot of difference? Well, I reckon that it does
not make that much difference in the outcomes. And so does a recent
paper by Deepankur Basu (Basu on RC versus HC)
in which he looks at the two different measures of the net stock of
capital for the US economy and finds that both generate pretty similar
trends over the long term “making the choice irrelevant for the empirical analysis of profitability trends”.
I know this is disputed, but Basu’s conclusion is really a concession
to the historic cost measure in admitting that it is just as good as the
current cost one used by most Marxist economists in measuring the rate
In my measures I use the historic cost measure because I think it is
closest to Marx’s view and so theoretically more correct. And as the
figure below shows, it removes much of the exaggeration and volatility
in the rate of profit exhibited by the current cost measure, which is
prone to the distorting effect of inflation or deflation in the price of
capital goods. But, as you can see, whichever of the two cost
measures you use, the trends in the rate of profit in the US are the
There is another issue of measurement. Many Marxist economists
exclude variable capital from the denominator for the rate of profit
because employee compensation is turned over much quicker than in one
year, so the size of variable capital in the equation is much more
difficult to calculate. Well, I did some variations on this: making a
plausible estimate of the turnover of variable capital, excluding
altogether, or keeping it all in. The results for profitability are
much the same. For more on the issue of the turnover of variable and
circulating capital in measuring the rate of profit, see Peter Jones’
recent excellent paper (Jones_Peter-Depreciation,_Devaluation_and_the_Rate_of_Profit_final).
Phew! That’s got some of the most important measurement issues
sorted. So what do the results tell us? First and foremost, the US
rate of profit shows a secular downtrend from 1947 right up to 2011.
And second, the latest data continue to confirm my own view of the
movements of the US rate of profit that I first expressed in my book, The Great Recession,
namely that we can discern a profit cycle in the US, at least since the
war. From 1947-65, there was high profitability, which although
falling in the 1950s, stabilised through the mid-1960s.
Then we entered a downphase in profitability, a period of crisis,
eventually to hit a low in the deep recession of the early 1980s.
After that, profitability rose, not back to the level of the 1960s, but
still up significantly. This was the so-called neo-liberal era.
However profitability peaked in 1997 and I reckon that it is now in
another downphase that is not yet over. In that sense, the neo-liberal
era came to an end in the late 1990s, although there was another burst
in profitability in the early 2000s, driven by the credit boom.
We can sum up the movement in the US rate of profit by measuring the
change in the rate in the different phases in the graph below. Between
1947 and 2011, the US rate of profit fell over 30%. Most of that fall
was between 1965-82 when it fell over 20%. Then there was a recovery in
the rate of nearly 20% from 1982 to 1997. Since then, the rate has
fallen about 9% (so far), only half the rate of the previous downphase.
Now one of the interesting things that I have tried to dig out of the
data is how much growth there has been in what Marx defined as the
‘unproductive’ parts of the capitalist economy, i.e. the sectors that do
not contribute to creating new value but merely usurp or appropriate
value created by the productive sectors. This is important, because
only the productive sectors can drive the capitalist economy forward,
even if the unproductive sectors may be necessary to maintain the
capitalist mode of production and its social relations. Very crudely
(and it is crude – there is yet another long debate among Marxists on
how to define unproductive and productive labour), the unproductive
sectors can be be identified as government, along with finance,
insurance and real estate (FIRE). The productive sectors can thus be
encompassed (crudely) by the non-financial corporate sector of the
The graph below shows that the share of surplus value in total
surplus value held by this sector has declined, especially in the
neo-liberal period. So, over the long term, the available profits for
investment in the productive sector of the economy are being restricted.
Indeed, profitability in this productive sector did not rise even in
the neo-liberal period, unlike profitability in the whole economy, while
the rate of profit in the financial sector took off, after a long
period of decline. The financial sector rate of profit coincided with
the rise in so-called financialisation. But it was at the expense of
stagnation in the rate of profit in the productive sector.
In a period when the share of financial sector profits rose at the
expense of profit in the non-financial sector, you might expect that to
affect growth in new investment. And the data show just that. As the
share of financial profit rose from under 15% of all profits in the
early 1980s to nearly double that by the end of the century, the rate
of growth in net investment (after depreciation) plummeted.
So what is happening in the latest downphase in US profitability?
Well, so far the fall in the rate of profit from the peak in 1997 has
not been as great as in the last downphase between 1965-82. Over those
17 years, US profitability dropped by 23%. So far from 1997, after 14
years, the drop has been just 3% (see graph below). Now if I am right
about my argument that there are discernible phases and cycles in
profitability, then the US rate of profit must have further to fall
before this downphase is over and it’s got to happen over the next three
years or so.
The rate of profit has not fallen as much as in the previous
downphase because this time we have had a very sharp rise in the rate of
surplus value. Under Marx’s law of profitability, a rising rate of
surplus value is the most important counteracting factor to Marx’s law ‘
as such’, which is that there will be a tendency for the rate of profit
to fall because there is an inherent rise in the organic composition of
capital. This measures the value of constant capital (means of
production) to variable capital (labour power).
Marx expected this ratio to rise over time as capitalists ploughed
more capital into technology to raise the productivity of labour.
However, as only labour power can create new value (not machinery and
raw materials), and the value of labour power begins to lag the value of
constant capital, the rate of profit will tend to fall.
As the graph below shows, when the organic composition of capital
fell, as in the neo-liberal period, due to the slump in the early 1980s
and then from the cheapening effects of new technology in the 1990s, the
rate of profit rose. But in the 2000s, those cheapening effects have
worn off and organic ratio has risen back to levels not seen since the
crisis period of the 1970s. But this time, the rate of profit has not
fallen as much because the rate of exploitation (surplus value) has also
risen, unlike in the 1970s.
The rise in exploitation and growing inequality (well recorded by
many and in this blog) may lead to social upheavals down the road, but
it does help to keep the rate of profit up. But there are limits on
increasing the rate of exploitation and the US economy has probably
reached them, especially with productivity growth slowing and real GDP
growth so weak. So the current rate of profit can only be sustained by a
sharp fall in the organic composition of capital. That can only happen
if there is large depreciation of the value of the means of production
(and in fictitious capital, as I have discussed in previous posts). And
that means another slump or recession, perhaps equivalent to 1980-2.
Indeed, after making some reasonable assumptions about the data for
2012, I reckon the Marxist rate of profit fell in 2012 back to levels of
the early 2000s – but we’ll see. A crucial indicator that another
slump is in offing is the mass (not the rate) of profit. Every time the
mass of profit has
fallen absolutely in the productive sector of the economy, it has been
followed within a year or two by a slump in investment and production
(the red boxes in the graph below).
We were not yet in negative territory in 2011. But if you look at
corporate net cash flow, fairly close to a Marxist measure of the mass
of profit, there has been a downturn in the first two quarters of
2012. So maybe the next recession is not too far away.
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