Capacity utilisation and the rate of profit

Every month the US government publishes a measure of the utilisation of existing industrial capacity (i.e plant and equipment).  This is measured as a percentage of total capacity.  What makes it interesting is that it can give you a guide to just how much over-capacity relative to profitable sales is building up in a capitalist economy.

I have argued in my book, The Great Recession and in various post son this blog that the average rate of profit across the capitalist economy moves in a cycle with an up-phase of about 16-18 years and similar down-phase.  Since 1946, there has been one complete cycle, an up-phase from 1946-65 and a down-phase from 1965-82, followed by a new up-phase from 1982-97 and now the current down-phase from 1997 to 2014-16(?).

I claim the main cause of this cycle is the cyclical movement of what Marx called the organic composition of capital, or the rise and fall in the value of constant capital (plant and equipment) relative to the value of labour power (wages and employee compensation).  In the period when the rate of profit fell from 1965-82, the organic composition of capital rose and it was vice versa between 1982-97.

Of course, there are other influences on the rate of profit, which Marx called counteracting influences.   The two most important ones are a rising rate of surplus value (or exploitation of the workforce) and a cheapening of the value of constant capital when new technology is introduced.  Between 1982-97, these counteracting influences were so great that they enabled the rate of profit to rise.   However, from 1997, the inexorable tendency of the rate of profit to fall reasserted itself, at least in the US.

If this explanation is right, you would expect that in periods of falling profitability, capitalism would start to build up ‘excess capital’ or capacity in industry and in periods of rising profitability, the opposite would be the case.

Yesterday the latest figures for capacity utilisation were published.  It shows that in the period of the falling rate of profit from 1964-82, capacity utilisation fell (excluding the effects of the business cycle and recessions).  In other words, capacity built up relative to  profit or US capitalists ‘overinvested’ (i.e the organic composition of capital rose).

In the period of rising profitability from 1982-97, capacity utilisation was stable or rising slightly, suggesting cutbacks in the organic composition of capital or underinvestment.   Since 1998, profitability has been falling and so has capacity utilisation.  And there is a secular trend down in capacity utilisation, as there has been in profitability.

And remember, the independent variable here is the organic composition of capital (and capacity utilisation) and the dependent variable is profitability.

One thought on “Capacity utilisation and the rate of profit

  1. Micheal,

    Very important information. I think there are 3 reasons for this secular trend. A) cyclical overinvestment B) a shift to unproductive labour/services C) A falling wage share. See for A; Chapter 9 The Profit Cycle and Kondratiev and for B; Chapter 7 the secular decline in profitability, of your great book The Great Recession (2009) for C; the article The Rate of Profit is the Key.

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