The rate of profit (again!)

At the risk of boring my subscribers, I’ve got to return to the issue of the rate of profit as the most important indicator and cause of capitalist crisis.  I do so because one of the readers of this blog (see Cameron’s comment, 25 August 2011) brought to my attention a recent paper on new measurements of the US rate of profit a la Marx.  The paper is by Deepankar Basu and Ramaa Vasudevan (hereafter, B and V) from two American universities ( see What these two Marxist scholars do is look at every conceivable way of measuring the rate of profit to try and reach some conclusions from the empirical evidence about whether Marx’s law of profitability can best explain capitalist crises, including the Great Recession of 2008-9.   This approach is very much to my heart and as readers of my book and blog know, I have done some work in this area.

There’s lots of interesting points in B and V’s paper.  But the most important is that they find that in virtually any way you measure it, the rate of profit a la Marx shows the same result for the US economy.  The rate of profit declined from the mid-1969s to a trough in 1982, then rose to a peak in the late 1990s.   This is exactly what my work has also shown – see my recent paper, (  By the way, the only measure that did not confirm this cycle of profit was one based on historic costs of fixed assets for the whole economy rather than replacement costs.  This measure has been espoused as the only correct one by Andrew Kliman (see his paper, The persistent fall in profitability underlying the current crisis, October 2009).  But I’ll leave that debate to another time (although I have dealt with it in some of my recent papers).

However, B and V do not reach the same interpretation of the data that I do.  B and V conclude that the data show “the current crisis was not preceded by a long period of declining profitability as was in evidence in the structural crisis of the 1970s; the fall in the rate of profit during the current crisis coincides with a short-run downward movement associated with fluctuations in the rate of profit at business cycle frequencies.”    Apparently, we must make a distinction between the 1970s with its ‘structural’ decline in profitability and the generally lower rate of profit after 1997 which is just part of the short-run  ‘business cycle’.   I am not sure that I accept that there is any theoretical distinction to be made in Marx’s law of profitability between ‘structural crises’ or the ‘cycles of profitability’ that I have defined.   For me, the rate of profit in the US was in an upphase from 1946-65; a downphase from 1965-82 (a structural crisis, according to B and V); an upphase between 1982-97 (the neoliberal era according to many); and now a downphase from 1997 (merely a ‘business cycle frequencies’ , according to B and V).

The terrific graphics provided by B and V would allow my interpretation just as much, if not more, than B and V’s.  The widest measure of the rate of profit a la Marx is to take the overall net value produced in an economy less the income going to wage earners and divide that by the net stock of fixed assets owned by capitalist businesses.  This measure is the one I have favoured.  Both B and V’s results match mine exactly.  They show a peak in US profitability in 1997 that is not surpassed by any subsequent peak (2005) to a low in the Great Recession.  I interpret this as evidence that the US capitalist economy was and is suffering a downphase in profitability that began in 1997, interspersed with smaller cyclical ups and downs  (due to “business cycle frequencies”).

The Great Recession can thus be seen as a result of the downward pressure on profitability since 1997.  This is the underlying or ultimate cause, but not the immediate trigger or proximate cause, which was the credit crunch and the financial crash.  Once the boosting effects of of the credit and property boom of 2002 onwards were exhausted in 2006, the recession was inevitable (as I forecast back in 2006 in my book).  Indeed, as B and V say, “profitability has so far been for about a decade propped up the regressive redistribution of income away from the working class while the ruling class aided by the housing bubble and financialisation, pursued a successful campaign of enrichment. ”  But these ‘neoliberal’ policies could not resist forever the “downward pull on profitability” that B and V recognise since 2000.

B and V have also decomposed the drivers of the movement in the US rate of profit in the post-war period.  They looked at the productivity of labour against wages (in effect, the rate of surplus value).  They looked at capital productivity, which is the ratio of capital intensity (similar to Marx’s key variable, the organic composition of capital) relative to labour productivity.   They found that between 1966 and 1983, when the rate of profit fell, capital productivity fell too,  because capital intensity (the organic composition of capital) grew faster than labour productivity.   Between 1982-2000, when the rate of profit rose, capital productivity rose because capital intensity did not rise sufficiently to overcome the rise in labour productivity (indeed capital intensity declined).  However, from 2000 onwards, capital intensity grew extremely fast, suggesting that the cheapening effects of the new technology of the 1990s were now insufficient to act as a ‘countervailing factor’ (to use Marx’s term).  So Marx’s law of the tendency of the rate of profit to fall, based primarily on rising capital intensity over time, now began to be realised in an actual fall in the rate of profit.

This evidence confirms my own measure of the movement in the organic composition of capital relative to the US rate of profit (OCC = organic composition of capital, red line; and R = rate of profit for whole economy in replacement or current cost terms (CC) – purple line).

The hi-tech revolution in the 1990s cheapened the costs of fixed assets (constant capital) and globalisation kept wage costs down as capitalist businesses relocated to cheaper locations abroad (boosting the rate of surplus value).   These trends were less effective after 1997 and a rising organic composition of capital began to overcome these countervailing factors.  This seems to me exactly following Marx’s law.

But B and V do not seem to agree, at least in the explanation of the Great Recession, because the current crisis was not preceded by ‘ a long period of declining profitability’.  Well, it may not be a straight line decline, as it might have been in the 1970s (although there were little ‘business cycle’ upticks then too), but profitability was lower at its peak in 2005 than it was in 1997 and it fell for three years before the crisis.  Indeed, by end 2006, the mass of profit was falling.    Surely this suggests that profitability was relevant to the ensuing recession.    Indeed, as B and V admit: “declining profitability might not have caused the Great Recession but it is certainly an intimation of an impending profitability problem.  Profitability still matters” 

7 thoughts on “The rate of profit (again!)

  1. My view is actually that what physicalists call the “rate of profit” is not a rate of profit in any normal sense of the word. This is not simply a point about measurement. It is an ethical issue, having to do with the responsibility of intellectuals when communicating with the public. When people–who use the term “rate of profit” to mean profit as a percentage of the amount of money that’s been invested (minus depreciation)–are told that the rate of profit rose between this and that time, they are misled into thinking that there was an increase in profit as a percentage of the amount of money that was invested.

    I discussed this in a paper I wrote last year, “Masters of Words.” The title refers to Humpty Dumpty, who regarded himself, not words, as the master, and tried to make words mean what he wanted them to mean, neither more nor less.

    Another problem is that, since

    (a) the rate of profit governs investment behavior, and
    (b) physicalists call their current-cost (replacement-cost) statistic the rate of profit,

    they conclude that

    (c) their statistic governs investment behavior.

    This is a logical error. It’s also not the case empirically. And there’s no economic reason why their statistic should govern investment behavior.

    There are reasons why, in certain contexts, it is appropriate to consider rates of profit adjusted for inflation. The physicalist statistic is alleged to do so, but it does not adjust for inflation properly.

  2. I think it is sad that an otherwise intelligent economist like Michael Roberts follows vulgar economics, and puts an equal sign between “the economy” and “Gross Domestic Product”. GDP is not equal to the whole economy because it is only a measure of gross value added (a.k.a. net output). It is not equal to national income receipts, it is not equal to the total value of transactions, and it is not equal to the total value of assets. As a corollary, the profit component of GDP is not equal to total profit either. The analytical question for a Marxian econometrist is: “is total value added a good proxy for total value created?” and the answer is “no”.

  3. The long-term decline in treasury yields pretty clearly indicates there is a profitability crisis. If there were a better place to park their money, the wealthy would be doing it. But there isn’t.

  4. The comparative profit measures exercise to which Michael Roberts refers was already previously performed by Dumenil, Levy, Glick and Rangel in 1985. The latter team examined a variety of measures of the profit rate. The measures which the US researchers cited by Roberts examined more recently are drawn from one and the same source of base data – the NIPA accounts, constructed on the conceptual basis of the twin concepts of capital formation and value-added – it is quite easy to show statistically that most of the quantitative adjustments made by researchers to the data series cannot change the direction of the trend. But never once have the researchers deigned to research how the total profit volume in the NIPA’s is actually arrived at. (I provide a sketch of the problem here: ) In the USA, the Commerce Dept has demonstrated a strong discrepancy between business results in annual reports and business results declared to the tax department, plus, it has established that a large chunk of profit is not accounted for in the domestic economy because it appears only in tax havens. It is quite easy to show that the combined effect of all these measurement factors is that the total profit volume is significantly understated. Not one Marxist however provides computational adjustments for these factors. BTW Capitalists don’t mind if Michael Roberts tells them that their profit rate is low – that just gives them a good excuse to cut wages and fire workers they apparently “cannot afford” because they don’t get enough income for their investment to pay for them (or, a good excuse to introduce speed-ups or claw-backs). In fact, some capitalists are happy to fire workers even when their profits are rising (cf. the case of Verizon). The Marxist counterposition of “underconsumption” versus “overaccumulation” and “falling profit rate” has nothing much to do with Marx. Simply put, capitalism cannot systemically overcome the contradiction that wage increases cut into profits while wage decreases cut into sales… except by increasing some incomes while reducing some other incomes, and integrating more people into the market (on a world scale, GDP growth is exactly proportional to population growth). The search for the one “correct cause” of capitalist crises is a search for the holy grail. All that Michael Roberts really says here in a long story is that the supply-side cannot supply consumers on the demand side, unless there’s a adequate profit on capital to be made; under competitive conditions, a minimum profit rate is required to stay in business; ergo, the profit rate is decisive. Well it is true that a minimum profit rate is normally required to stay in business, but capitalists may well accept lower profits if there is no other way; some profit is better than no profit at all. An adequate profit also depends on sales, so it is meaningless to put profit margins and sales in separate compartments. Americans used to think of themselves as middle class but now they complain the middle class has shrunk. In reality most of them weren’t middle class anyway.

    1. I have a question for both Jurriaan and Michael:

      I find your analyses to be exceptional! Could you recommend me books that you have enjoyed regarding economics?

      I am planning to buy the trilogy of Marx’s Capital, as well as Michael’s book, Andrew Kliman’s Reclaiming Marx’s Capital and his upcoming book The Failure of Capitalist Production.

      I would like to learn as much as possible so that I can analyse the world and its obvious solution, socialism, as well as possible,

      Thank you.

      1. I would also like to have Andrew’s suggestion, since I forgot that he commented in this very same article!

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