The mass of profits and economic crisis

In my book, The Great Recession (see chapter 24 and appendix B) available from, I argue that the best short-term indicator of an oncoming capitalist slump or economic recession is the movement of profits – in particular, the total mass of profit.

According to Marx’s law of the tendency of the rate of profit to fall, as the capitalist economy expands, there is an inexorable pressure for the value of what Karl Marx called constant capital (and what capitalist economists would call fixed assets in commercial property, machines and equipment) to rise faster than what Marx called variable capital (what capitalist economists would call employee income).  As that ratio of constant capital over variable capital  rises (Marx called the ratio, the organic composition of capital), then the rate of profit in the capitalist economy will fall.

Of course, Marx also explained that there lots of things that could happen to stop the organic composition of capital from rising (but only for a while) or to enable capitalists to extract extra value out of the workforce to compensate for a rising organic composition of capital.  But eventually, the law as such would begin to overcome those counteracting factors and the rate of profit would fall.

But if you read Marx’s writings carefully, he does not suggest that a falling rate of profit would be sufficient to cause an economic crisis for capitalism.  Most commonly, the rate of profit has to decline to the point that each new unit of investment by the capitalists is no longer matched by a rise in a unit of profit.  Then the overall mass of profit begins to fall.

Once that starts happening, you can be pretty sure that a slump in capitalist production is on its way.  Is the movement in the mass of profit a good leading indicator of an oncoming recession?  Well, let’s take the example of the Great Recession of 2008-9 itself and look at the US economy.

The data are clear.  The mass of corporate profits in the US economy peaked in Q306 at $1,655bn.  From then, the mass of profits went pretty consistently downwards to reach a bottom at the end of 2008 at $1,124bn, or a fall of 32%.  But no economist in the US was forecasting an economic recession at the end of 2006 – on the contrary, everybody was very confident about the prospects for world capitalism in 2007.   This Marxist indicator would have told them differently.

As it was, US national output continued to rise, but a slowing pace right up to mid-2008, by which time the credit crunch was well under way and a global financial crisis was about to explode.  The mass of profits had been falling for two years by then – so an excellent leading indicator.

US real GDP then fell from a peak of $13,415bn in Q208 to a low of $12,902bn in Q209, a fall of about 4% – a pretty deep slump by post-war standards.  But as that was happening, the mass of profits stopped falling and started to rise.  From its low in Q408, it has now risen to $1,359bn in Q309, the latest figure available, a rise of 21%.   So just as the mass of profit was a good leading indicator on the way down, it is a good one on the way up.    For just three quarters later, by Q309, US real GDP stopped falling and began to rise.

Only a Marxist economic analysis seriously focuses on profits as a guide to the health of the capitalist economy.  For Keynesians, it is the level of ‘effective demand’ i.e. consumer spending and capitalist investment.  For monetarists, it is the level and rate of growth of money.  For those of the Austrian school, it is the level and growth of credit or debt.  But none of these alternatives is in any way as good an indicator of the prospects of capitalist production, because they do not get to the heart of the process: namely production for profit.  Marx’s analysis does.

See the chart on the US mass of profits and real GDP here.

Mass of profits and real GDP

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