Measuring the rate of profit and profit cycles

I recently presented a paper to the annual conference of the Association of Heterodox Economists in which I reviewed various attempts to measure the rate of profit in the US and elsewhere from a Marxist approach.  Apart from my own measures, there have been several different ones made since the Great Recession descended upon us.  I attach my paper (see at end), which also gives the references to the various authors mentioned below.

It has been my view, regularly presented in this blog, that Marx’s law of profitability suggests a cyclical and a secular movement in the rate of profit (ROP) combined.  The cyclical movement in the ROP in the major capitalist economies is clearly discernible – and in the case of the US economy, the cycle of profitability appears to be about 32 years from trough to peak to trough.  But there is also a secular process where the ROP appears to be on a declining trend over long periods in the life of modern industrial capitalism.

The causes of both the cyclical and secular movements in profitability are broadly two-fold.  The first is driven by the change in the organic composition of capital (or capital productivity).  Any change is brought about through crisis and the destruction of the value of accumulated capital.  The second is driven by the change in the share of unproductive to productive labour and a long term tendency for the organic composition of capital to rise.  A rising organic composition of capital will eventually lead to a fall in the ROP and vice versa.  A rising share of unproductive to productive labour will lead to a fall in the ROP and vice versa.

The evidence of the post-war period (at least in the US) shows that profitability can be divided into four periods of 16-18 years, making up two full cycles.  The first period from 1946-65 was one of rising or high profitability (the so-called Golden Age).  The second period from 1965-82 was one of falling profitability (a crisis period).  The third period of 1982-97 was one of rising profitability (now called the era of neo-liberalism).  The fourth period of 1997-2014? is again one of falling profitability.  As for the secular trend: each trough or peak in profitability has been lower than the previous one throughout 1946-2011.

This is displayed by the following graphics, measured by both current (CC) and historic costs (HC).  In the first graphic, the secular decline in profitability is exposed, whichever way you measure it.

The cyclical movement in profitability (R) is revealed clearly in the second graphic (measured in replacement or current costs) and its inverse relationship with the organic composition of capital (OCC).

There has been much debate about the causes of the Great Recession of 2008-9 and, for that matter, previous economic slumps in capitalist production.  Some have argued that each crisis of capitalism can have a different cause.  But as Guglielmo Carchedi has pointed out “some Marxist authors reject what they see as “mono-causal” explanations, especially that of the tendential fall in the rate of profit.  Instead, they argue, there is no single explanation valid for all crises, except that they are all a “property” of capitalism and that crises manifest in different forms in different periods and contexts.  However, if this elusive and mysterious ‘property’ becomes manifest as different causes of different crises, while itself remaining unknowable, if we do not know where all these different causes come from, then we have no crisis theory”.  (see my post, The crisis of neoliberalism and Gerard Dumenil, 3 March 2011).

Carchedi comments further “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence.  If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the “monocausality” of crises.  So the cause of an economic crisis like the Great Recession must lie with the key laws of motion of capitalism.  The most important law of motion of capitalism, Marx argued, was the law of the tendency of the rate of profit to fall.  So it must be relevant to a Marxist explanation.

Marx was clear on what his definition of the ROP was – the general or overall rate of profit (ROP) in an economy was the surplus value generated by the labour force divided by the cost of employing that labour force and the cost of physical or tangible assets  and raw materials that are employed in production.  His famous formula followed: P = s/c+v, where P is the rate of profit; s is surplus value; c is constant capital (means of production) and v is the cost of the labour power.

Marx is clear that the ROP applies to the whole economy.  It is a general ROP derived from the total surplus value produced in an economy as a ratio to the total costs of capitalist production.  All that surplus is produced by the labour power of workers employed in the ‘productive’ capitalist sectors of production.  But some of that value gets transferred to unproductive capitalist sectors in the form of wages and profits and to non-capitalist sectors in the form of wages and taxes.  So the rate of profit is the total surplus value divided by total value of labour in all sectors and the cost of fixed and circulating assets in the capitalist sector.  That means the fixed and circulating capital in the non-capitalist sector are not counted in the denominator for calculating the ROP.  But wages are.   Profit as a category applies to the capitalist sector of the economy.  Wages as a category applies to the non-capitalist sector too.   The value measured in the non-capitalist sector has been transferred from the capitalist sector through taxation, sales of non-capitalist production to the capitalist sector and through the raising of debt.

There are many ways of measuring the ROP a la Marx, to use the phrase of Dumenil and Levy.  Take constant capital.  This is measured by the fixed assets of capitalist production plus raw materials used in the production process (circulating capital).  In measuring the rate of profit, we must therefore exclude the residential assets (homes) of households and the assets of government and other non-profit activities.

Also, a capitalist economy can be divided between a productive and unproductive sector.  The productive sector (goods producing, transport and communications) creates all the value, including  surplus value.  The unproductive sector (commercial trading, real estate, financial services) appropriates some of that value.

You could just look at the business sector of the capitalist economy for all parts of Marx’s ROP formula and exclude the wages of public sector workers.  You could narrow it further and exclude the wages of unproductive workers within the productive sector (supervisors, marketing staff etc).  You can measure constant capital in current costs or in historic costs.   And you can measure profit before or after tax.

In my view, the simplest is the best.  My graphic for the US economy follows a simple formula.  S = net national product (that’s GDP less depreciation) less v (employee compensation); c = net fixed assets (either on an historic or current cost basis); and v = employee compensation ie wages plus benefits.  My measure of value is for the whole economy and not just for the corporate sector (which would exclude employee costs or the product appropriated by government from the private sector through taxation).  It also includes the value and profits appropriated by the financial sector, even though it is not productive in the Marxist sense.  My measure of constant capital is for the capitalist sector only and so excludes household investment in homes and government investment.

And here is the interesting bit.  It does not seem to matter how you measure the Marxist ROP – at least when revealing its secular decline in the US.  All measures show that for the US economy, the largest capitalist economy with 25% of annual world GDP and twice as large as the next largest capitalist economy, there has been a secular trend downwards in the ROP for any period in which we have data.  And this is correlated with a trend upwards in the organic composition of capital, suggesting that Marx’s most important law of motion of capitalism, namely the tendency of the rate of profit to fall as the organic composition capital rises, is confirmed by the evidence.   As Dumenil and Levy reach the conclusion after their measurement that, “the profit rate in 2000 is still only half of its value in 1948. Finally, we show that the decline of the productivity of capital was the main factor of the fall of the profit rate, though the decline of the share of profits also contributed to this evolution.”

Also, most of those who have provided measures of the rate of profit a la Marx, have found that the ROP peaked in 1997 after the rise from the trough of 1982 and was not surpassed even in the boom of 2002-07.  Simon Mohun spells out his thesis in a recent paper “that US capitalism is characterised by long secular periods of falling profitability and long secular periods of rising profitability and crises are associated with major turning points”.  Mohun’s turning points seem to be a 1946 trough in profitability, a 1965 peak, a 1982 trough and a 1997 peak – similar to mine (see my post, The cycle of profitability and next recession, 18 December 2010).

Li Minqi, Fenq Xiao and Andong Zulooked at the movement of the profit rate and related variables in the UK, the US, Japan, and the Euro-zone.  According to them, since the mid-19th century there have been  four  long  waves  in  the  movement  of  the  average  profit  rate  and  rate  of accumulation.   They find a peak at 1997 in the ROP for the US.  David M Kotz uses an after-tax rate of profit measure of the nonfinancial corporate business sector as a percentage of net worth.  Kotz finds that the US ROP rose rapidly to 1997.  Then it peaked and fell sharply thereafter.  Anwar Shaikh, using another measure of ROP as profits of enterprise, which excludes rent, interest and taxes, finds that the US ROP peaked in 1997.  George Economakis, Alexis Anastasiadis and Maria Markakimeasure the Marxist rate of profit by the net product less employee compensation divided by net fixed capital of US non-financial corporates, which is very close to my broader measure.  They find that the ROP rose from 10.6% in 1946 to a peak of 19% in 1966, falling back to 9.6% in 1983 and then rising to a peak of 18.2 % in 1997 before dropping back again remaining under the peak of 1997 thereafter.  They also find that adding the financial sector into the equation makes no difference to the turning points or trend of the ROP.  And Erdogan Bakir and Al Campbell find that US after-tax profit rate peaked in 1997 at about 7.5% before falling back and the next peak in 2006 was still below that of 1997.  So all these studies not only confirm the secular decline in the US ROP since 1946 but also agree that there was a cyclical movement in the ROP, with turning points of a peak in 1965-6, a trough at 1982 and then a peak in 1997, not surpassed since.

Again, there are two more studies not reported in my paper that confirm this pattern in the US ROP.  Alan Freeman reports in Capital & Class, 34(1), 2010 (Marxism without Marx) that the US ROP was in secular decline from 1946 and the peak in the ROP in 1997 has not been surpassed (his data go only to 2008).  Freeman uses almost exactly the same categories of data that I have used to measure the ROP.  Freeman also concludes that accumulation (a rising organic composition of capital) accounted for 82% of the variation in the ROP and the share of profits in output (the rate of surplus value contributed little.  In the July 2010 edition of Science and Society, Paul Cockshott and David Zachariah reach a similar conclusion on the movement of the US ROP>  Interestingly, in another study (Determinants of the average profit rate and the trajectory of capitalist economics, Bulletin of Political Economy, 2009) , Zachariah uses more or less the same categories as Freeman and I did and reaches the same results for the US.  He then applies his categories to other major capitalist countries with interesting results, not dissimilar to the results I came up with my book, The Great Recession, for the UK and Japan.  More on that on another occasion.

There are three recent measures that disagree with the majority.  Guglielmo Carchedi shows that the US ROP has a secular decline and has cyclical changes too.  But for him, the ROP did not peak until 2006 at the onset of the Great Recession.  But Carchedi looks only at the productive, goods producing sector.  This is because he wants to show that a rising organic composition of capital leads to a falling ROP, unless counteracting influences intervene.  This works well to show the secular decline in ROP, but not for the cyclical movements of the ROP.

Michel Husson finds that the US ROP did not peak in 1997 but went higher afterwards.  He correctly includes the unproductive sector and financial sector in his measurement of the ROP, as I do.  But Husson applies a very odd way of measuring the US rate of profit.  He uses the net operating surplus of the private sector and then deducts rental income.  Yet rental income is clearly part of overall surplus value.  If he added back rental income to his measure of surplus value, then his measure of ROP would have peaked in 1997 too (I did this calculation with his data).

Andrew Kliman has several measures of US ROP.  He includes the financial sector in his measures.  But his favoured one of ‘property income’ measured against the historic cost of net fixed assets has shown no cyclical turning points but just a ‘persistent’ fall in the ROP.  Kliman argues that the rise in ROP since 1982 as shown by others is because they measure the ROP against current costs and not historic costs, as Marx would.  But both Carchedi’s and my measure use historic costs and they both still show a rise in ROP after 1982.

So the body of evidence from a range of sources on measuring the US ROP since 1946 shows that there has been a secular fall in profitability since 1946, but that it has been interspersed with a cycle of up and down phases.  There is mostly agreement that the first up phase was from 1946 to 1965, the next down phase was from 1965 to 1982 and then there was an up phase from 1982 to 1997 followed by a down phase afterwards.  So there is a cycle of profitability, as well as a secular decline.

I rest my case – for now.

The profit cycle and economic recession

11 thoughts on “Measuring the rate of profit and profit cycles

  1. Interesting. I shall have to chew on this a bit more. Thanks for your work. Just to clarify, by ‘unproductive labour’, are you referring to those jobs which produce goods and services which aren’t sold for profit? If so, I can see more clearly the connection between eliminating those jobs as a way of dealing with the ROP issue i.e. the ‘austerity’ issues being forced on the working class in order to save the system. But of course, the reason why these areas of ‘unproductive labour’ were employed in the first place was to placate the working class and keep them from thinking in terms of overthrowing the wages system of slavery. So, there is a definitely a political risk involved for our ruling capitalist class in using austerity as a way of dealing with problems concerning the ROP.

    1. Mike B
      Unproductive labour is the Marxist sense is not just labour that does not produce a profit eg government work, voluntary work or housework. It also refers to labour in sectors of the capitalist economy that do not create surplus value ie the financial sector or property, commerce, marketing and also ”unproductive’ workers in industry like accountants, PR people, advertising departments who may be necessary to delivering sales in a capitalist compnay but are not necessary for production as such. For the purposes of the rate of profit, we can divide capitalist industry into productive sectors (manufacturing, agriculture, trapnsport and communications) and unproductive sectors (finance, property insurance, retailing etc). The companies in all sectors make a profit but the profit of the unproductive sectors is appropriated from the productive sectors where the value is created. This is key because it means unless profits are generated in the productive sectors, accumulation will not take place and profits cannot be made in the unproductive sectors. Manufacturing can survive under capitalism without banking but not vice versa.

  2. Excellent research/summation.

    Of course, within the range of long wave ROP, short declines and increases occur. 2008/9 saw a dramatic decline in profits, which has reversed significantly though less dramatically since. As for this recent rise in profits, to what degree were those profits attained overseas by US multinational corporations, as opposed to the ROP of domestic and thus smaller US corporations/businesses?

    This question brings up an area of research: to what extend does the determination of the ROP need to incorporate an international perspective/context? Is it not true that looking at US ROP not require such an approach?

    1. Don

      You are right that there smaller movements in profitability within the larger cycles – I deal with this in my book.

      And overseas profitability has certainly helped to keep up the US rate of profit. As you say, that raises the question of the rate of profit beyond just the US and the idea of a world capitalist rate of profit. Marx’s law applies to capitalism as a world economy. But a world rate of profit does not exist because capitalist economies are separated along national or regional lines – so there is no world average, There are profit cycles in other economies although they are different in length and nature. But they are still affected by the movement in the organic composition of capital, it seems. Again I deal with this to some extent in my book.

  3. Michael…your definition of productive and unproductive labour is different from Karl’s. Karl sees productive labour as being that which is employed to produce more in goods and/or services than what its wages come to. Here’s Karl:

    “It itself, as has been said, this distinction between productive and unproductive labour has nothing to do either with the particular speciality of the labour or with the particular use-value in which this special labour is incorporated. In the one case the labour is exchanged with capital, in the other with revenue. In the one case the labour is transformed into capital, and creates a profit for the capitalist; in the other case it is an expenditure, one of the articles in which revenue is consumed. For example, the workman employed by a piano maker is a productive labourer. His labour not only replaces the wages that he consumes, but in the product, the piano, the commodity which the piano maker sells, there is a surplus-value over and above the value of the wages. But assume on the contrary that I buy all the materials required for a piano (or for all it matters the labourer himself may possess them), and that instead of buying the piano in a shop I have it made for me in my house. The workman who makes the piano is now an unproductive labourer, because his labour is exchanged directly against my revenue.”

    A clown or a real estate agent or an advertising employee could be a productive labourer in this sense, as employees in an enterprise in which their labour is purchased for a wage and the good or service which come out of the labour process exceeds those wages in value i.e. they produce surplus value and profit when marketed. Hence, a prostitute will be a productive labourer if she is employed by a madam in a house; but a prostitute working the streets by herself will be an unproductive labourer as she produces no surplus value beyond the price of her sale. In other words, productive and unproductive labour from Karl’s point of view depends on whether a profit is realised from the sale of the surplus value the worker produces in goods and services above the worker’s value in wages. If the worker is merely used for an immediate service, the buyer uses his or her revenue to purchase the use-value which the worker is selling but the result of the exchange realises no product in surplus to sell later for a profit.

  4. Mike B
    This is a big issue. Your quote from Marx shows that any labour that is not used capitalistically is not productive in the capitalist sense. But that does not mean that all capitalist sectors of production are productive or all workers in productive sectors are productive. The quote refers to the making of something – a piano – and shows if it is done within the home, the labour is done in exchange for money already appropriated by the capitalist in his capitalist enterprise and is now being consumed on a luxury good rather than reinvested. Thus the luxury goods sectors that rely on capitalists buying the goods could be considered unproductive for the capitalist system as a whole except in the sense of making it worthwhile to be a capitalist by being rich!
    Looking at the economy as a whole, there are many sectors that may be necessary for capitalism in the maintenance of a class-based social order as such (legal system, police, military, government administration); or the maintenance and securing of private property relations (police, security, legal system, banking, accounting, licensing authorities etc.); or operating financial transactions (in banking, financing, commercial trade, financial administration). But these are not productive as the labour involved does not create value or surplus value but receives money or value transferred through exchange with productive sectors. It is a cost to capitalist production. But this is a complex issue as the categories are by no means clear and are even fluid.

  5. First a detail: If Michael Roberts could tell us where he got his statistics from, especially for the first graph, that would be extremely helpful. I’d like to use it, but I’d like to also be able to cite the source (including Michael Roberts, but also beyond that).

    Second: I’ve had a brief exchange with Michael about the tendency for the rate of profit to fall and the tendency towards overproduction. The second simply stems from the fact that workers cannot buy back all that they produce or else there would be nothing left for profit. It is related to the former in that measures the capitalists take to maintain profits (wage cutting) exacerbate the latter. But the dynamics are independent as I see it.

    Michael seems to see the issue of overproduction as a secondary (at best) factor, but that’s where I have serious questions. What was the entire economic policy (Keynesianism) of the Post WW II period based on? What was it trying to accomplish but stem the tendency towards overproduction through government deficit spending?

    How do we explain the onset of the current economic crisis or event he period that led up to it? Wasn’t the massive increase in indebtedness the real basis for the boom of the 90s and 2000s? Isn’t this an expression of the tendency towards overproduction? Wasn’t the collapse of the housing bubble the real, immediate cause of the crisis and didn’t this simply show that the ability to evade the tendency towards overproduction through debt had reached its limits?

    And how about the present? It seems that the US may be headed towards a “double dip” recession. Even if not, the economy is barely staggering along. And why? As the Wall St. Journal explains the problem, “demand” is weak. It has nothing to do with lack of profits; in fact, on the contrary, corporate profits are booming and their cash reserves are at all time highs. Sure, this is because of “low wages” but doesn’t this simply mean that the tendency towards overproduction has been exacerbated?

    I am not saying that the tendency for the rate of profit to fall is a minor factor; I’m just raising whether the other contradiction I’m emphasizing doesn’t deserve more attention.

  6. Productivity increases at about a 1.7% clip a year. Real wages are below what they were in 1964–stick a pin there for combating the tendency of the rate of profit to fall. Of course, productivity increases lower the value of commodities overall; but that’s made up for by gains in market share made by cheaper prices. However, as Michael Roberts points out, these cheaper commodities also play into lower rates of profit and may run into market saturation. John seems to have a good point here with the notion that the product of the producers is too great to be sold back to them. Of course, the wage system itself is what causes, “Insufficient demand”. I think the capitalist economists call it that. So, a lot of wealth is dumped into the War Department’s budget. However, this wealth spent on War Department activities and these are mostly just a revenue drain, not profit producing i.e. Marx’s point about what’s considered ‘productive labour’ under the rule of Capital—except maybe selling jets to monarchs and other dictators in Arabia and elsewhere. Ah Ike’s military/industrial complex at work, saving America from overproduction through constant destruction.

    What a screwy system the wage system is. Time to dump it, methinks. I think the system’s owners are only using about 70% capacity of their capacity to produce wealth now and with 25 million officially unemployed….geesh….might make the capitalist economists give a thought or two to putting the political back into economy.

  7. Michael,
    Have you seen this article?Technology, Distribution and the Rate of Profit in the US Economy:Understanding the Current Crisis

    Click to access BasuVasudevanCrisis0811.pdf

    If you have, what do you think of their methodology and conclusion? They use capital productivity instead of OCC for a strange reason. Also site Dumenil,Levy, and Mohun in support of their argument.


  8. That has nothing to do with Marxism. Marxism says that profit is hours of work divided by the hours of work to rebuild the factory from scratch. Your definition has nothing to do with this.

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