Profits and investment in the economic recovery

There cannot be a closer connection in the capitalist system of production and exchange than that between profits and investment.  In various previous posts, I have argued that the key to any economic recovery under capitalism will be a recovery in private sector investment, not consumption as the Keynesians claim.  In an earlier post (see Greenspan gets it, 8 October 2010), I produced a graphic that showed how the rise and fall in profits and profitability drives the rise and fall in investment.

Here is that graphic again.  The green line shows the year on year change in US corporate profits (or internally-generated revenues) against the year-on-year movement in private fixed investment (red line).  Profits clearly lead investment in booms and slumps.  And profits are recovering now, allowing investment to come back.

Let’s take this argument a little further by looking more closely at the current economic recovery, as usual by using US data that include Q3’10.  The evidence on profits is clear.  US corporate profits peaked in early 2006 – that’s the absolute amount, not the rate of profit, which I have shown elsewhere peaked earlier in 2005.  From its peak in early 2006, the mass of profits fell until mid-2008, made a limited recovery in early 2009 and then fell to a new low in mid-2009.  After that, the recovery in profits began and previous peak in dollars of early 2006 was surpassed in mid-2010.

What was the reaction of investment to this movement in US profits?   When US corporate profit growth started to slow in mid-2005 and then fell in absolute terms in 2006, corporate investment went on growing for a while as companies used up reserves or increased borrowing in the hope that profits would be restored.  But when that did not materialise, investment growth slowed during 2007 and then fell absolutely in 2008, at one point falling at a near 20% yoy rate.  Profits started to recover at the end of 2009 and two quarters later, so did investment.

It’s what you would expect.  It tells you that profits were falling well before the credit crunch began.  So, as I have argued elsewhere, the crisis was not really financial in origin but did indeed follow a classic Marxist crisis of profitability even if the eventual trigger for the slump was in the financial sector.  Second, the movement of profits leads the movement of investment, not vice versa (as many Keynesians would argue).

What is different about the recovery after the Great Recession is its weakness compared to previous recoveries after slumps in the US.  Profits are recovering now, but at a much slower pace than in previous recoveries.  It has taken eight quarters from the trough in 2008 to get back to the previous profits peak.  In earlier recessions, the profits peak was restored within four quarters.  The reason for that was explained in my previous post, The cycle of profitability and the next recession, 18 December 2010.

And the investment recovery this time still has some way to go.  After the 1980s and 1990s recessions, it took eight quarters to restore investment to its previous nominal peak and only four quarters in 1974-5.  But in the Great Recession, investment has only started to recovery 12 quarters after its peak in Q3’07 and is still 19% below that peak.  This is a very weak recovery.

5 Responses to “Profits and investment in the economic recovery”

  1. Matt Says:

    First, thanks very much putting these charts together in the context of a Marxist perspective.

    I’d like to know your view on the structural aspects of the situation, not only in connection with the classical marxist theory of overaccumulation as the driver for economic crises, but also on the non-temporal aspects of the structural crisis (David Harvey), particularly in terms of the structure of the world market especially as many of the profits of key U.S. multinationals come from overseas investment, as well as the longer term “temporal” aspects, such as expressed by Robert Brenner, who states that U.S. capitalism has experienced a chronic state of overaccumulation, and therefore lower average profits, since the 1970’s – something your first chart appears to bear out.

    What I am getting at is that I think that the present crisis marks the terminus of the situation – or the accumulation regime, if you will – that has persisted for the last 30-odd years, and whose political expression has been in the Anglo-American world, “Reaganism-Thatcherism”, or more commonly, the misnomer called “neo-liberalism”. Typically these “terminal” phases are not got out of within the framework of the pre-existing “accumulation regime”, but require a transition to something else, and this requires, or results in, a lot of non-temporal structural changes.

    So for example, the U.S., and U.S. capital, recovered from the Great Depression – the terminal crisis of the accumulation regime that emerged at the end of the 1890’s – by 1) opening up the still semi-developed South and West of the U.S., by big state investment in massive infrastructural projects launched in the New Deal (for me this is what the New Deal was essentially about, just as I believe the Civil War was basically about the deleterious effects of slavery on Midwestern land values, and therefore Midwestern development) and continued after the war into the 50’s and 60’s; 2) the repressive disciplining of the working class and the trade unions under the WW2 martial law regime, both in the military and in the factories; 3) the gigantic restructuring of the world market (including the world states system which, after all are “but” territorially defined markets) under the hegemony of the U.S. won by its military victory, the centerpiece of which was the installation of the U.S. dollar as the world reserve currency. It was in this way, rather than from the wartime military spending per se, that a way out was found from the terminal crisis of the old regime of accumulation.

    Interesting, it is hard to see how such massive transformations could be enacted this time around. There is no candidate state to replace the U.S. in all these spheres (see Arrighi, Wallerstein).

    Thought? Or perhaps you have written on this elsewhere?

    • michael roberts Says:

      Matt

      There are far too many instructive points in your comment to answer in full at this place. I’m not sure I know all the answers anyway! Your analysis seems similar to the social structure of accumulation theorists, which I have a lot of time for. While I have highlighted the cyclical nature of Marx’s law of profitability as a key to the booms and slumps of capitalist production, that does not deny the secular trend where profitability continues to decline in US capitalism (see the chapters in my book, The Great Recession, for more on this) – a chronic state as you say. Of course, US capitalism is the hegemonic capitalist power now in the process of relative decline, just as Britain was in the late 19th century after its hegemony peaked in the 1850s. In other rising capitalist economies, the rate of profit may not be in secular decline (eg newly industrialised Asian states – I leave out the question of whether China is a capitalist or a fully industrialised economy for now). Advanced capitalist economies have reached their ‘sell-by’ date in the history of social organisation, although that does not mean they cannot stagger on for decades or even centuries (after all, the slave society of the Roman Republic/Empire lasted 300 years after it peaked). Hopefully, things move quicker under capitalism!

      The end of neoliberalism is a confusing concept, I think. Neoliberalism is an ideology that remains strong within the strategists of capital, despite the Great Recession. However, clearly a section of the capitalist leaders are looking for alternatives, Keynesian-style, to avoid future crises. They look in vain, of course. I think you are right that, with no dominant capitalist power able to impose a new economic order as the US could in 1945 or Britain did in the 1850s, the ability of capitalism to come up with a new strategy is severely reduced. We are in a period more like the inter-war years when no one capitalist state was powerful enough, or in the 1890s imperialist age. And this time, the resort to world war to change market shares or to divert social struggle is very unlikely. That opens up better opportunities for class struggle as opposed to nationalist rivalry. But if I’m right that, after another recession (say 2014-16), advanced capitalist economies can free themselves sufficiently of ‘dead’ capital, there could be a new period of ‘prosperity’ under capitalism. But that assumes no political change from below.

  2. Matt Says:

    Thanks for the time taken in you extended reply. While I feel obliged to fill in with more practical background about myself and my motivations, I’ll hold off for the time being – perhaps it is time for me to start up my own wordpress blog – in favor of not losing this train of thought at a critical point expressed in you last sentence:

    “But if I’m right that, after another recession (say 2014-16), advanced capitalist economies can free themselves sufficiently of ‘dead’ capital, there could be a new period of ‘prosperity’ under capitalism. But that assumes no political change from below.”

    You are quite likely right about the timing, based on your statistical research, but I would insert “if” before “advanced capitalist economies”, as there is no guarantee that the inventory of ‘dead’ capital will be sufficiently ‘cleared’ to permit a recovery that would lead in to a subsequent “golden age prosperity”. In fact I think the New Deal/Postwar resolution was exceptional in the history of capitalism; what we saw in the 1970s-80s (or in the 1870s-80s, or in the 1830s-40s), a sort of anarchic set of half-measures that eventually produce a different accumulation “regime” sufficient to restart broad based growth. But the theoretical bottom line here is that nothing is really inevitable. It is a matter of calculating the probabilities.

    To do so, one must begin with a break down of the category ‘dead capital’. A pertinent question: Do your figures include the profits and investments of financial capitals, or those that specialized in landed property? For these two forms of capital are by (my) definition ‘dead capitals’, insofar as they take the form of money capital from ‘past’ accumulations (‘savings’), fictitious capitals in the form of both credit money and land ‘price’ (i.e., the trade in title deeds), or diversions (to investment destinations unknown) from profits of enterprise or from wages (land rent). However, from the point of view of the capitalist, there is no difference between these types of capitals as investment destinations; the only criterion is an above average rate of profit.

    And so I think that the haphazard “resolution” of the accumulation crisis of the 1970’s in the US involved a shift *into* greater investment into these forms of ‘dead’ capital – the so-called “financialization” trend – together with an accelerating export of productive capital overseas in search of lower wages. This trajectory was set by the failure of liberal Keynesian politics in the 1970’s – make note, we’ll return to this theme below.

    At first this produced uneven results in the 1980’s, and only received further sustenance in a series of ‘superstructural accidents’: the dissolution of the Soviet Union, the US victory in the Gulf War, and the deepening commitment to the ‘capitalist road’ by the Chinese state. This lease on life produced what appeared to be a new “golden age” in the 1990s, but not for industrial capital in the US generally, outside a narrow sector of technologically advanced sectors (computer, IT telecom for whom this *was* a golden age); instead the entire structure of accumulation was qualitatively altered by a giant growth of the financial and landed property sectors (Michael Hudsons’ infamous ‘FIRE’). This explains the overall lower mass of profits for this period, depending on how your charts actually measure this. This is a feature of the present economy noted by other informed observers, btw, see for ex. http://www.washingtonsblog.com/ and scroll down to the profits chart: “The answer lies in who is generating the profits and how they are doing it. It seems that the fantastic profits are not being generated by domestic non-financial companies employing middle class Americans producing goods. Pre-tax domestic nonfinancial corporate profits are not close to record levels as a share of national income. They exceeded 15% of national income once in the late 1940s, and repeatedly topped 12% in the 1950s and 1960s; in the third quarter of this year, they were 7.03% of national income. I wonder who is making the profits. According to BEA data, financial industry profits and “rest of world” profits — that is, the money U.S.-based corporations make overseas — are relatively much higher now than they were in the 1950s or 1960s..”

    That cycle has clearly reached its terminus in the present crisis, without in the meantime having really arrived at a longer term resolution of the profitability problems of US industrial capital. The response has been a second defeat for liberal Keynesian politics (watch them gnash their teeth at http://www.project-syndicate.org ), as the political system has demonstrated its complete captivity to the cause of preserving ‘dead capital’ by giving the financial sector (in the US and abroad) a $9T reboot, and this rebooted accumulation regime shows every inclination to returning to business as usual.

    So it is precisely that without the prospect of a movement from below, there will be no clearing of ‘dead’ – or is that ‘undead’? – capital. The problem goes even deeper: it is not only that the ‘zombies’ have the political regime entirely in their grip, it is also that they are the chief dealers in and beneficiaries of the “world’s reserve currency”, the USD. That status in turn is the pillar upon which rests the global alliances and operations of U.S. imperialism. Hence the political regime is not merely a captive, but has its own active interest, in keep USD denominated dead capital in play.

    Finally, today differs from the 70s-80s in one crucial respect: The openly public prop to the financial sector runs concurrently with a brutal, frontal assault on workers’ wages, in both their social and private forms, that differs from the ‘salami-slicing’ tactics of that period, and is intimately bound up with the all-out diehard support of finance capital. In choosing imperialism and finance, the regime has also chosen to make war on the mass basis of its legitimacy, though this has yet to sink in to the masses, even as it appears in the brain of a Jeffry Sachs.

    There is therefore much more at stake this time around, and no transition to an as yet unknown future will be easy.

  3. purple Says:

    The profit fall in 2006 does not explain the meltdown of the financial system in 2008 very completely. The decline was not great, and foretold a bump in the road, not what we got and have. There are other factors that going on.

    • michael roberts Says:

      Purple

      This is complicated. I reckon the underlying cause of the Great Recession was that the rate of profit (at least in the US) has been in a ‘downphase’ since 1997, namely that the peak rate then has not been surpassed even in 2005. That breeds more and deeper crises than in the upphase (as 1982-97). The tendency for the rate of profit to fall was exerting pressure on capitalists to look for higher profits in unproductive sectors and extend the credit boom and fictitious capital. That ended in tears. Sure, there were key trigger factors for the credit crunch, financial collapse and the recession that centred around the property bubble, global imbalances and weapons of financial mass destruction. Every capitalist crisis wears different clothing but the problems of the body inside are the same.

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