by Michael Roberts
The other session at the Historical Materialism London conference that I participated in was on The Relation between Profits, Investment and Crises.
This was organised by Al Campbell from the University of Utah. In his
paper, Al outlined how in the last two decades a gap opened up between
the growth in profitability and the rate of investment and accumulation (Al Campbell).
Al showed that the share of investment in total US profits fell from
the early 2000s until the Great Recession and still stands well below
the average share in the 1980s and 1990s.
So what was going on after 2000? Al strips out profits that were
distributed as dividends to shareholders and interest to lenders and
bond holders to expose retained earnings and finds that “the answer
(and it is an answer as far as it goes) – the amount of real investment
tracks retained profits. Retained profits have fallen as a share of
profits, and so real investment has fallen correspondingly.”
But why has there been such a reduction in retained profits for
productive investment and an increase in the share of profits going in
dividends and interest? And what do the shareholders and bondholders do
with their share? Do they spend it (capitalist consumption) or do they
save it (in cash) or do they re-invest it (financial assets)?
From the data, Al reckons the reduction in the share of retained
profits is not because interest costs have risen (interest rates are at
all-time lows) or because companies pay more to shareholders. More
likely, it is because the profitability of productive investment has
stayed low so there is an ’over-investment’ of productive capital and
the unused profits are either hoarded as cash by companies, or
distributed in increased dividends and more recently used in huge share
buyback programmes to drive up the prices of company stock.
Al asked the question: is there empirical evidence to explain this
profit-investment gap? Well, I think there is some. I raised the same
puzzle in a paper to HM London 2016, The Great Recession: a Marx not a Minsky moment. (Marx not Minsky) This is what I said then: “Usually,
US corporations have invested more than they had available in corporate
savings. The only period that this was not the case is 2000-07. But
note, corporate savings between 2000-7 did not grow faster (5.3% pa)
than in other periods. What happened was that capex grew much more
slowly (4.0%). That suggests that corporate savings were switched into
financial rather than productive investment.”
There clearly is some cash hoarding. But this hoarding was
concentrated in the large tech companies, which either kept this cash
abroad to avoid tax and/or increased bond issuance on the back of these
assets. At the start of the credit crisis in 2007, companies with more
than $2.5bn each in cash and near cash items, such as short-term
investments, held 76 per cent of the $1.98tn of cash reserves of the
non-financial members of the S&P 1200. By the third quarter of
2013, this had risen to 82 per cent (of a total $2.8tn), the highest
percentage since before 2000. Of non-financial companies in the S&P
Global 1200 index, just 8.4 per cent hold 50 per cent of the cash.
Indeed, 40% of companies actually reduced their cash balances. Most
small to medium size have no cash piles. Indeed, as I showed in that
2016 paper, cash as a share of total corporate financial assets is not
particularly high historically.
The switch is from productive assets to financial assets. I found in
the 2016 paper, that there appears to be a surplus of corporate savings
over investment in capex from about 2000 (red line in graph below).
However, when you add in financial asset investment (green line), there
is a huge deficit (net borrowing), which takes off at the end of the
1990s. So non-financial companies increasingly borrowed to speculate
(often in their own shares) and not invest productively.
Alan Freeman, a leading Marxist economist, attempts to answer the same question in a new paper.
Rate_of_profit_investment_and_the_causes (1)
Alan poses: “If American and British companies only invest the
minority of their surplus, what do they do with the rest? Do they keep
it in the form of money – a classic form of crisis? Do they invest it
abroad – a classic form of imperialism; Do they invest it in financial
assets – ie saleable monetary instruments?” Freeman reckons it must be a combination of all those. But “in any case, they don’t use it to boost new production.” Here Freeman shows that rise in the purchase of US financial assets compared to productive assets.
Freeman suggests that there has been a switch to holding financial
assets (shares and bonds) rather than investing in productive assets
because “the lower the productive rate (of profit), the larger the proportion that remains in the form of currency or financial assets.”
And Alan goes on to show that rates of profit in Europe, the US and
Japan have continued to fall if you include financial assets.
In a recent post,
I too made similar points and offered up some empirical work from other
scholars on this puzzle. Also, I have recently used the KLEMS database
to calculate the profitability of the US productive sector. Between
1987 and 1997, the profitability of the productive sector rose 12%, then
fell sharply, provoking the mini-recession of 2001. Profitability then
recovered to previous levels by 2004. But then four years of decline
led into the Great Recession. The recovery in profitability after the
slump of 2008-9 was weak and started to fall as early as 2011. This can
explain the weak investment in productive activities in the period
after 2009 that I call the Long Depression.
I have argued on this blog that the profitability of capital is key
to gauging whether the capitalist economy is in a healthy state or not.
If profitability persistently falls, then eventually the growth in the
mass of profits will slow and even fall absolutely and that is the
trigger for a collapse in investment and a slump. This was the basis of
my own paper in this session, on the Profits-Investment nexus. Profits-Investment Nexus
In my view, the Marxian theory of crises is based on the movement of
business investment. A fall in investment, not consumption, is the
swing factor in generating a crisis of overproduction and a slump.
Keynesians and post-Keynesians might (partially) agree. But they think
that business investment decisions depend on ‘uncertainty’, ‘confidence’
or so-called ‘animal spirits’.
In contrast, Marx starts his analysis of capitalism with the
discovery of surplus value through the exploitation of labour. Profit
is thus the driving force of capitalist accumulation. What drives
business investment is profitability, profits and the expectation of
profits, not ‘animal spirits’. And what the profit-investment puzzle of
the last two decades reveals is that it is the rate of profit in
productive investment that matters. If it is low or is falling, then
capital switches abroad, or hoards cash or invests in financial assets
(what Marx called fictitious capital). If companies borrow to do so,
then a credit bubble inflates, which bursts when profits in productive
assets fall.
In the session, Bucknell University’s Erdogan Bakir provided powerful support for this theory of crises. (erdogan bakir) As Erdogan says in his paper: “Marx
theorizes the increasing fragility, vulnerability or sensitivity of the
contract-credit system in the mature expansion. As the expansion
overheats, the ability to fulfill contractual obligations will be
increasingly threatened by any significant decline in the gross rate of
profit.” Bakir identifies a profit cycle where profitability
rises, then Marx’s law of the tendency of the rate of profit to fall
kicks in, and profitability falls back. He identifies 11 such cycles in
the US post-war economy.
Eventually, the share of profit in total output falls,
creating the conditions for a slump in investment and production. So it
goes from the rate to the mass (this follows closely my thesis
presented in the debate with Professor David Harvey at this year’s HM – see my post on HM1).
In the boom part of the cycle, production and investment rise and
interest rates are low to encourage credit. But in the later part of
that cycle, interest rates rise, corporate debt reaches highs and
profitability starts to fall. Thus, there is a scissor effect on
capitalist investment.
The current cycle since 2009 has been the longest post-war cycle in
the US and profitability has fallen since 2014, the longest period of
decline. The US economy is now in its late part of the current cycle.
But meanwhile, the stock market booms – way out of line with corporate
profits. Another recession is overdue.
What this HM session suggested is that the next recession has been
delayed because of the unprecedented expansion of fictitious capital
since 2000 as central banks push down interest rates to zero and
implemented huge injections of money into the banks. Companies have
relied on fictitious profits from rising share and bond prices while
profitability in productive investment (even overseas) remained low and
falling. But this contradiction cannot last, if Erdogan Bakir’s thesis
of the profit cycle holds.
Every year, HM hears an address from the winner of the Deutscher Memorial prize “for a book which exemplifies the best and most innovative new writing in or about the Marxist tradition”.
Last year, the winner was Kohei Saito, associate professor of political
economy at Osaka University, for his book on Karl Marx’s Ecosocialism: Capital,Nature and the Unfinished Critique of Political Economy.
I missed his address but I’ll try and review that book in the near
future. This year’s winner, announced after the conference, was Brett
Christophers from Uppsala University, Sweden with his book, The New Enclosure: The Appropriation of Public Land in Neoliberal Britain. Again, I shall try and review that book soon.
Finally, there were many other sessions at HM on all sorts of
subjects and issues, including others on Marxist political economy. But
I had no time to attend these. The three posts on HM are the best that I
could do.
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