by Michael Roberts
Recently, Larry Elliott, the economics correspondent of the British liberal newspaper, The Guardian raised again the puzzle of the gap between rising corporate profits and stagnant corporate investment in the major capitalist economies. Elliott put it “The multinational companies that bankroll the WEF’s annual meeting in Davos are
awash with cash. Profits are strong. The return on capital is the best
it has been for the best part of two decades. Yet investment is weak.
Companies would rather save their cash or hand it back to shareholders
than put it to work.”
Why was this? Elliott posed some possibilities: “corporate caution is that businesses think bad times are just around the corner”, but as Elliott pointed out the hoarding of corporate cash was “going on well before Brexit became an issue and it affects all western capitalist countries, not just Britain.” So he considered other reasons that have been raised before: “cutting-edge
companies need less physical capital than they did in the past and more
money in the bank unless somebody comes along with a takeover bid” or that “the people running companies are dominated by short-term performance targets and the need to keep shareholders sweet”.
So company managers use the cash to buy back their shares or pay out large dividends rather than invest in new technology. “Shareholder
value maximisation has certainly delivered for the top 1%. They own 40%
of the US stock market and benefit from the dividend payouts, and the
share buybacks that drive prices higher on Wall Street. Those running
companies, also members of the 1%, have remuneration packages loaded up
with stock options, so they too get richer as the company share price
There is some element of truth in all these possible explanations for
‘the gap’ between corporate earnings and investment that opened up in
the early 2000s. But I don’t think that corporate investment is
abnormally low relative to cash flow or profits. The reason for low
business investment is simpler: lower profitability relative to the
existing capital invested and the perceived likely returns for the
majority of corporations.
I have dealt with this issue before in previous posts and in debate with other Marxist economists
who deny the role of profitability in directing the level of corporate
investment and, ultimately growth in production in the major capitalist
The point is that the mass of profits is not the same as
profitability and in most major economies, profitability (as measured
against the stock of capital invested) has not returned to the levels
seen before the Great Recession or at the end of neoliberal period with
the crash in 2000.
And the high leveraging of debt by corporations before the crisis
started is acting as a disincentive to invest and/or borrow more to
invest, even for companies with sizeable amounts of cash. Corporations
have used their cash to pay down debt, buy back their shares and boost
share prices, or increase dividends and continue to pay large bonuses
(in the financial sector) rather than invest in productive equipment,
structures or innovations.
For example, look at the UK’s corporate sector. Sure the mass of
profits in non-financial corporations has jumped from $40bn a quarter in
2000 to £85bn now. And it may be true that “the return on capital is the best it has been for the best part of two decades”, as Elliott claims. But it is all relative. The
rate of return on UK capital invested has dropped from a peak of 14% in
1997 to 11.5% now. Profitability recovered after the Great Recession
trough of 9.5% in 2009 but it is still below the peak prior to the crash
of 12.3% in 2006. And UK profitability has stagnated since 2014, prior
Thus it should be no surprise that UK businesses have stopped investing in productive capital.
It’s the same story in the US, where not only is the average
profitability of US corporations falling, but so are total profits in
the non-financial sector. Profit margins (profits as a share of
non-financial corporate sales) measure the profit gained for each
increase in output and these have been falling for some quarters.
And more recently, total profits in non-financial corporations have been contracting.
So again, it is no surprise that business investment is also contracting among US corporations.
I have dealt before with the argument that Elliott offers again that companies are “awash with cash”.
First, it is only a small minority of very large companies like
Apple, Amazon, Microsoft etc that have large cash hoards. The majority
of companies do not have such hoards and indeed have increased levels of
corporate debt. And there is a sizeable and growing minority that have
profits only sufficient to service their debt interest with none left
for expansion and productive investment. According to the Bank for
International Settlements, the share of these ‘zombie’ companies has
climbed to over 10%: “the share of zombie firms – whose interest
expenses exceed earnings before interest and taxes – has increased
significantly despite unusually low levels of interest rates”.
But perhaps the most compelling support for my argument that weak
business investment in the major capitalist economies is the result of
low profitability is some new evidence that I have gleaned from the EU’s
AMECO statistical database. http://ec.europa.eu/economy_ finance/ameco/user/serie/ SelectSerie.cfm
Based on the simple Marxist formula for the rate of profit of capital
s/c+v, where s= surplus value and c= constant capital and v= variable
capital, I used the following AMECO categories. s = Net national income
(UVNN) less employee compensation (UWCD); c = Net capital stock (OKND)
inflated to current prices by (PVGD); v = employee compensation (UWCD).
From these data series, I calculated the rate of profit for each of the
major capitalist economies.
Of course, the AMECO categories do not match proper Marxist
categories for many reasons. But they do give cross-comparisons, unlike
national statistics. And my results seem reasonably robust when
compared with national data calculations. For example, when I compared
the net rate of return on capital for the US using the AMECO data and
Anwar Shaikh’s more ‘Marxist’ measure for the rate of profit in US
corporations for 1997-2011, I found similar peaks and troughs and
The results for profitability in the major capitalist economies,
using the AMECO data, confirm that the rate of profit is lower than in
1999 in all economies, except Germany and Japan. Japan, by the way,
still has the lowest rate of profit of all the major economies. Indeed,
the level of the rate of profit is highest in the UK, Italy and an
enlarged EU (which includes Sweden and Eastern Europe), while the lowest
rate of profit is in the US and Japan.
All countries suffered a severe slump in profitability during the
Great Recession, as you might expect. Then profitability recovered
somewhat after 2009. But, with the exception of Japan, all economies
have lower rates of profit in 2016 than in 2007, and by some
considerable margins. And in the last two years, profitability has
fallen in nearly all economies, including Japan.
The table below shows the percentage change in the level of the rate of profit for different periods.
So the AMECO data show that profitability is still historically low
and is now falling. No wonder business investment in productive capital
has remained weak since the end of the neo-liberal period (graph below
for the US) and now is even falling in some economies.
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