Too much profit, not too little?

Most years I attend the London conference of the Historical Materialism journal.  This brings together academics and others to present papers and discuss issues from a generally Marxist viewpoint.  This year I presented a paper on whether rising inequality causes crises under capitalism (Does inequality causes crises).  My session was well attended and the audience included many of the small band of Marxist economist s around at the moment.

The gist of what I said was this.  Rising inequality of income and wealth in the major economies has become a popular thesis among both mainstream and heterodox economists.  The thesis is founded on the arguments that wages as a share of GDP have been falling in the major economies. This creates a gap between demand and supply, or a tendency to underconsumption.  That gap was filled by an explosion of debt, particularly household debt.  It is also encouraged financial institutions to engage in riskier financial investments that exposed them to eventual disaster.  The credit boom fuelled a housing bubble but eventually that burst and the house of cards came tumbling down.  QED?

My paper attempted to refute this theory of crisis with the following simple points.

1) Private consumption has not been weak or did not collapse, causing a demand gap – on the contrary in most economies and particularly in the US, consumption to GDP during the so-called neo-liberal period rose to record highs.

2) The major international slumps of 1974-5 and 1980-2 cannot be laid at the door of rising inequality because it did not rise at the time.  Indeed, most Marxist economists at least agree that the 1970s slump was the result of a squeeze on profits not a squeeze on wages.  The rising inequality thesis cannot apply as a general theory of crises.

3) Actually, the share of labour income in national income when non-work income is included (net social benefits) did not fall in the neo-liberal period.  Labour income share kept pace with consumption share and debt was not needed to fill a ‘demand gap’.

4) A fall in consumption does not take place before slumps, so the house of cards did not collapse because of a fall in consumer demand.  It is a fall in investment that provokes a slump and during a slump, it is investment not consumption that falls the most.

Investment in slumps

5) There are many studies that show no connection between rising inequality and credit or banking and general crises under capitalism.

6)  There are better causal connections and correlations between profitability and investment and economic growth than between inequality, consumption and growth.  Profits call the tune.

For a fuller account of these arguments, see my HM paper.

There did not seem too much opposition to my thesis, although there were questions on my data.  The discussion at the session came from an accompanying paper by Jim Kincaid, formerly economics lecturer at Leeds and other universities.  Jim’s paper, which was apparently just an excerpt from an upcoming article in the HM journal, aimed to analyse why investment has been faltering in modern economies, particularly since the end of the Great Recession.  Above all, he wished to question or refute the theory that Marx’s law of the tendency of the rate of profit to fall is the underlying cause of crises, as advocated by myself, Carchedi, Kliman and several others.

Jim Kincaid said he supported the position of Dumenil and Levy that each major slump or ‘structural crisis’ in the history of modern capitalism has had a different cause.  The 19th century Great Depression was the result of falling profitability; but the Great Depression of the 1930s was not, and was caused by rising inequality and ‘crazy investment’.  The 1970s slump was the result of falling profitability but the Great Recession was again caused by rising inequality and ‘crazy financial investment’.  These arguments of D-L have been dealt with in this blog before and are also taken up in my paper on inequality presented.

Interestingly, Professor Riccardo Bellofiore, who also presented a different paper in the session on translating Marx’s concepts, commented in passing that he reckons Marx’s law of profitability has been dead in the water since the late 19th century depression because since then the ‘counteracting factors’ have overcome the law ‘permanently’.  This is a strange conclusion given all the recent evidence cited in this blog for a secular fall in profitability globally since Marx’s time. Next year, G Carchedi and I will publish a book, a collection of papers from scholars around the world that will confirm Marx’s law of profitability with empirical evidence.

But what was the essence of Kincaid’s critique of those ‘monocausal’ advocates of Marx’s law of falling profitability as the cause of crises under capitalism? To quote Kincaid’s abstract:  “I argue: (1) empirically, the thesis of falling rates of profit in the major economies is based on an uncritical use of not always reliable government data; (2) Harvey and other sceptics are correct to stress that central to the present crisis is the inability of the global system to absorb large quantities of surplus money capital derived from high rates of surplus-value extraction (profits included)”.

Kincaid argues that it was not a falling rate of profit, or too little profit that caused the Great Recession and subsequent weak recovery, but too much.  Capitalist firms have built up huge cash reserves from profits that they are not investing productively.  So the problem is one of how to ‘absorb’ these surpluses, not how to get enough profit.  This also shows, according to Kincaid, that the causal sequence for crises, namely falling profits to falling investment to falling income and employment is nonsense because we have rising profits and falling investment.

Thus we have from Kincaid a thesis of surplus absorption that echoes not only that of David Harvey he refers to but also the view of Paul Sweezy and Paul Baran of the Monthly Review ‘school’ that monopoly capitalism has sunk into stagnation because it cannot dispense with ever-increasing surpluses of profit.  The fallacies in this view have been dealt with by many authors.

But what about the issue of cash mountains in major non-financial companies?   Close readers of my blog will know that I have dealt with this issue in several previous posts.

Let me now reiterate some of the points made in those posts (the data have not been updated given the time, but will not have changed much).  It is true that cash reserves in US companies have reached record levels, at just under $2trn – see graph below.  (All figures come from the US Federal Reserve’s flow of funds data.)  The rise in cash looks dramatic.  But also note that this cash story did not really start until the mid-1990s. In the glorious days of the 1950s and 1960s when profitability was much higher, there was no cash build-up.

Liquid assets

But the graph is misleading.  It is just measuring  liquid assets (cash and those assets that can be quickly converted into cash).  Companies were also expanding all their financial assets (stocks, bonds, insurance etc).  When we compare the ratio of liquid assets to total financial assets, we see a different story.

Liquid assets to total

And according to Credit Suisse’s latest figures, US corporate cash to total assets (financial and tangible) has risen but still way below the 1950s and 1960s.

Follow the cash

US companies reduced their liquidity ratios in the Golden Age of the 1950s and 1960 to invest more or buy stocks.  That stopped in the neoliberal period but there was still no big rise in cash reserves compared to other financial holdings.  And that includes the apparent recent burst in cash.  The ratio of liquid assets to total financial assets is about the same as it was in the early 1980s.  That tells us that corporate profits may have been diverted from real investment into financial assets, but not particularly into cash.

Comparing corporate cash holdings to investment in the real economy, we find that there has been a rise in the ratio of cash to investment.  But that ratio is still below where it was at the beginning of the 1950s.

cash to investment

And remember within these aggregate averages lies the reality that just a few mega companies hold most of the cash while thousands of small and medium enterprises (SMEs) hold little cash and much more debt.  Indeed, a minority are re4ally ‘zombie’firms just raising enough profit to service their debt.

Why does that cash to investment ratio rise after the 1980s?  Well, it is not because of a fast rise in cash holdings but because the growth of investment in the real economy slowed in the neoliberal period.  The average growth in cash reserves from the 1980s to now has been 7.8% a year, which is actually slower than the growth rate of all financial assets at 8.6% a year.  But business investment has increased at only 5.3% a year in the same period, so the ratio of cash to investment has risen.

growth in assets

Interestingly, if we compare the growth rates since the start of the Great Recession in 2008, we find that corporate cash has risen at a much slower pace (because there ain’t so much cash around!) at 3.9% yoy.  That’s slightly faster than the rise in total financial assets at 3.3% yoy.  But investment has risen at just 1.5% a year.  So consequently, the ratio of investment to cash has slumped from an average of two-thirds since the 1980s to just 40% now.

It does seem that there has been build-up of cash relative to short-term debt, particularly in the credit boom of 2000s.  This suggests that corporations were borrowing more and needed to increase their cash buffers as a safety measure.

cash to ST debt

So companies are not really ‘awash with cash’ any more than they were 30 years ago.  What has happened is that US corporations have used more and more of their profits to invest in financial assets rather than in productive investment.  Their cash ratios are pretty much unchanged, suggesting that there is not a ‘wall of money’ out there waiting to be invested in the real economy.

In a recent paper in the Journal of Finance (2009), Why firms have so much cash, the authors found that there was “a dramatic increase from 1980 through 2006 in the average cash ratio for U.S. firms.”  But interestingly, cash hoarding was not taking place among firms who paid high dividends to their shareholders.  On the contrary.  The authors argue that the “main reasons for the increase in the cash ratio are that inventories have fallen, cash flow risk for firms has increased, capital expenditures have fallen, and R&D expenditures have increased.”  In order to compete, companies increasingly must invest in new and untried technology rather than just increase investment in existing equipment.  That’s riskier:  So companies must build up cash reserves as a sinking fund to cover likely losses on research and development. Rising cash is more a sign of perceived riskier investments than a sign of corporate health.

In a recent paper, Ben Broadbent from the Bank of England noted that UK companies were now setting very high hurdles for profitability before they would invest as they perceived that new investment was too risky.  Broadbent put it: “Prior to the crisis finance directors would approve new investments that looked likely to pay for themselves (not including depreciation) over a period of six years – equivalent to an expected net rate of return of around 9%. Now, it seems, the payback period has shortened to around four years, a required net rate of return of 14%.”  And remember that the current net rate of return on UK capital is well below that figure at about 11%.

Broadbent continued: “Even if the crisis originated in the banking system there is now a higher hurdle for risky investment –  a rise in the perceived probability of an extremely bad economic outcome….In reality, many investments  involve sunk costs. Big FDI projects, in-firm training, R&D, the adoption of new technologies, even simple managerial reorganisations – these are all things that can improve productivity but have risky returns and cannot be easily reversed after the event.”

So it seems that companies have become convinced that the returns on productive investment are too low relative to the risk of making a loss.  This is particularly the case for investment in new technology or research and development which requires considerable upfront funding for no certainty of eventual success.

And here is the rub.  Just at this time when Jim Kincaid raises the issue of huge cash reserves and suggests that the cause of crises is due the difficulty of ‘absorbing’ profits, US corporate earnings are falling and profit growth has ground to a halt.  Cash reserves are set to fall.  The latest tally by Thomson Reuters of earnings by the S&P 500 in the US finds that earnings are on course to fall 1.3 per cent on the back of revenues down 3.6 per cent. In Europe, Stoxx 600 companies are on course to report a drop of 8.2 per cent in revenues compared with a year ago and earnings falls of 4.3 per cent year on year.  And, as I have shown on numerous occasions, corporate profits in the major economies are now hardly growing at all.

US corp profits

Yes, large firms in the capitalist sector of the major economies have been hoarding more cash rather than investing over the last 20 years or so.  But they are not investing so much because profitability is perceived as being too low to justify investment in riskier hi-tech and R&D projects, and because there are better and safer returns to be had in buying shares, taking dividends or even just holding cash. Also many companies are still burdened by high debt even if the cost of servicing it remains low.

The point is that the mass of profits is not the same as profitability and in most major economies, profitability (as measured against the stock of capital invested) has not returned to levels seen before Great Recession.  And the high leveraging of debt by corporations before the crisis started is acting as a disincentive to invest and/or borrow more to invest, even for companies with sizeable amounts of cash.  Corporations have used their cash to pay down debt, buy back their shares and boost share prices, or increase dividends and continue to pay large bonuses (in the financial sector) rather than invest in productive equipment, structures or innovations.

I conclude that the cash reserves of major companies is not an indication that the cause of crises is due to inability to absorb ‘surplus profit’ but due to an unwillingness to invest when profitability remains low and debt is relatively high.  That is the cause of this Long Depression.  Marx’s law holds. Too much profit, or too little?  Too little.  Too much cash or too much debt?  Too much debt.

23 Responses to “Too much profit, not too little?”

  1. michael burke Says:

    Very nice blog. Strong data, good arguments.


  2. SimonH Says:

    Have you read Paul Mason’s book yet Michael? I’m on my second way through, it touches on many interesting topics including long waves and economic calculation. I’ve never seen you comment on Economic Calculation btw I’d be interested by your take.

  3. Boffy Says:

    “A fall in consumption does not take place before slumps, so the house of cards did not collapse because of a fall in consumer demand.”

    Correct. As Marx sets out in Chapter 15, it is usually just before a crisis breaks out that consumption is at its highest. That is because high levels of profits lead to more workers being taken on, and higher wages, which has two effects.

    First: the higher wages cause a squeeze on profits. Secondly, the higher level of consumption causes the price elasticity of demand to rise, so input cost rises cannot be fully passed on, which causes a further squeeze on profit margins, as described in Chapter 6. This is why crises of overproduction are more likely as a result of such boom periods, resulting from high profits, and over exuberance.

    “It is a fall in investment that provokes a slump and during a slump, it is investment not consumption that falls the most.”

    But its necessary to distinguish between a crisis of overproduction and a slump. Marx’s cycle goes – prosperity, boom, crisis, stagnation.

    If we take the analysis of crisis, then as Marx sets it out in Chapter 15, and in other places for example, in Chapter 6, and in Theories of Surplus Value, it is not a reduction in investment that leads to the crisis, but the opposite. It is over investment, which leads to rising wages, a squeeze on margins and so on, and production expanding ahead of the ability of the market to keep up, not because the market itself contracts – underconsumption, but because it does not expand, and cannot expand at the same pace as production.

    That is symbolised in Marx’s classic comment in relation to the elasticity of demand that just because the price of knives falls so that 6 can now be bought for the previous price of one, it is no reason why I will then buy 6! As well as his other comments in Theories of Surplus Value, that I may indeed be induced to buy the 6, or more of some other commodity, but only at an even lower market price, below the price of production, and possibly below the cost of production. As well as his comments about the inability of the producers of one type of commodity finding a market from the producers of another, due to varying rates of productivity growth between the two.

    In fact, in Chapter 15, Marx makes the point that in the first instances of a crisis of overproduction, the response of some producers may be to try to invest even more so as to capture a larger market share to bolster their mass of profits. He makes the same point by quoting Richard Jones, in that respect.

    If we are considering a slump, however, which comes under Marx’s definition of stagnation, rather than crisis, we are considering a completely different animal, a different stage of Marx’s cycle. A slump or such stagnation is marked not by a crisis of overproduction, but by a long period of slow growth in production.

    In fact, what more specifically marks such periods, rather than low levels of investment, is the fact that the investment that occurs is intensive. In other words, it is an investment in new types of labour-saving technology to replace existing technologies, and whose purpose is to reduce the existing high labour costs, and create a relative surplus population.

    Indeed, its the fact that this type of investment replaces existing technologies and fixed capital rather than adding to the existing capital stock, and the fact that it replaces labour, which contributes to the stagnation during the period. But, as Marx sets out in Chapter 15, it is precisely this fact, which creates the conditions for the new boom, because it results in lower wages, which raises the rate of surplus value, and it causes a significant moral depreciation of the existing fixed capital stock.

    Because the rate of profit for Marx is calculated on the basis of the current reproduction cost of that fixed and circulating constant capital, this of itself causes the rate of profit to rise.

  4. Boffy Says:


    I’m a bit confused by this line of argument. Surely, the point is that one aspect of the rise in company savings, at the expense of productive investment, is precisely the extent to which they have engaged in financial speculation, using cash reserves, and current realised profits to buy shares, bonds and property.

    Moreover, not only have those huge profit flows gone into these cash stockpiles, and inflation of financial assets, but they have also gone into direct capital transfers to shareholders, who along with sovereign wealth funds, have built up their own private cash hoards, and other financial wealth.

    So, its not the change of cash to financial assets that is significant here, but the total rise in the mass of cash, and other financial assets held by companies.

  5. Boffy Says:

    “What has happened is that US corporations have used more and more of their profits to invest in financial assets rather than in productive investment. Their cash ratios are pretty much unchanged, suggesting that there is not a ‘wall of money’ out there waiting to be invested in the real economy.”

    Except, a) those financial assets can be sold to raise potential money-capital to be metamorphosed into productive-capital, and b) that process of buying those financial assets has caused a hyper inflation of the prices of that fictitious capital, so that companies can then sell new shares and bonds at much higher offer prices than would otherwise have been the case, so that the cost, thereby of raising new capital is significantly reduced.

    • Boffy Says:

      There is also the point made by the Bank of England recently about the amount of liquidity currently being hoarded by UK households, literally under the bed, because they have no incentive to put it in the bank, or to risk in the buying of over inflated assets, paying low yields.

  6. Larry Mutter Says:

    Is it possible all these factors are interrelated

  7. GrahamB Says:

    “Actually, the share of labour income in national income when non-work income is included (net social benefits) did not fall in the neo-liberal period.”

    That’s a long period (even if you accept it), and are you claiming it also applies to the years after the Great Recession?

    I think Kincaid is basically right on the causes of the 2008-09 crisis, a global profits glut and the financial outlet. But afterwards is a different period – neo liberalism II if you like. Not a ‘classic’ period of unit cost reduction through investment/productivity but via direct cost cutting, considerably aided by the political gains of the ruling class over the longer previous period of neo-liberalism. Hence the relatively weak recovery that, as you say, has peaked in the US with the talk of an ‘earnings recession’. Wages are incredibly important – but not in the underconsumption way – to put some pressure on capitalists, and we’ve seen little of it since the crisis. Then the barrier to investment set in board meetings will fall, because it will have to.

    I know it’s a no-no but I do think ‘confidence’ is a factor as there is a heap of complications at the moment, from a slowing China to the EZ. But the treading-water period we seem to be in cannot last forever.

    • Boffy Says:


      I agree. The “labour income” category, is in any case suspect for several reasons. Firstly its a figure for the amount laid out during the year for wages, not the amount advanced as variable capital, so if there is a large rise in the rate of turnover of capital, the former will rise substantially compared to the latter, so that the annual rate of profit is understated. Secondly, a large part of “wages” today comprises the social wage, so a figure for wages does not take into consideration, the reduction in the quantity and quality of education, healthcare, pensions and so on paid to workers. Thirdly, we know that in the US, for example, workers are working, approximately two weeks more per year, equivalent, than they were thirty years ago, and most of that change came during the earlier period.

      I don’t know why “confidence” is treated as a no-no, because Marx certainly considered it important. He talks in his description of the interest rate and business cycle, for example, about the period after a crisis when new investment is out of the question because capital is “paralysed” by such a lack of confidence.

      The data above on the extent to which firms have engaged in financial engineering and speculation, seems to me the decisive issue. As I said above, I don’t understand Michael’s argument about the ratio of cash to other financial assets, because surely the argument is that from the late 1980 onwards, the rate of profit rose sharply, the mass of profits began to rise, and this caused lower market rates of interest, as this mass of profits hit the money markets – some of it from the rents obtained, for example the flood of money from oil rich states into the petro-dollar markets.

      As interest rates fell, and Thatcher and reagan encouraged deregulation, the prices of fictitious capital soared, creating speculative bubbles in stock, bond and property markets. On the back of that private household debt soared, as households made up for stagnant wages – and in the US and UK that also took the form of new workers taking up jobs in lower status, low paying jobs that replaced the former higher paying industrial jobs.

      From 1987 when the first bubbles popped, states and central banks back stopped it, by printing money and intervening in those markets to reflate those asset prices making a one way-bet. There was an interesting interview with David Tepper about that, as to how he said it made it almost impossible for people like him to lose money.

      So, its obvious that almost no matter how high the rate of profit, the representatives of the owners of fictitious capital, on company boards, will see the way to advance shareholder value is by such speculation themselves rather than productive investment, so they buy back their own shares, or the bonds and shares of other companies. So, of course, the mountain of cash accrued from a rising rate and mass of profit declines relative to this increasing mass of fictitious capital held on the balance sheet of companies.

      Its exactly the same situation as Marx and Engels describe during a similar period of long wave boom (though, of course they do not describe it as a long wave at that time) after 1843. Then too there was massive profits to be had, and yet low interest rates resulting from that massive flow of profits encouraged speculation in railway shares, whose value soared, encouraging yet further speculation, and so the owners of firms, even deprived their businesses of working-capital, so as to engage in such speculation.

      Engels writes,

      “In 1843 the Opium War had opened China to English commerce. The new market gave a new impetus to the further expansion of an expanding industry, particularly the cotton industry… But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.”

      We have seen a similar thing recently in China, where the stock market bubble encouraged small producers to disregard using their money for productive investment in their farms, in order to make quick capital gains in the stock market, only to then be ruined.

      Its the situation Marx describes of the owners of fictitious capital and their representatives in the banks and governments destroying real capital and wealth, solely to preserve paper wealth. But, in the end the objective laws of capital will out, because those paper values cannot rise indefinitely without real productive investment to create profits, so no matter how much central banks print money tokens those bubbles will burst.

      • Boffy Says:

        There is another aspect of this, of course. Since 1980, the Dow Jones has risen by around 1800%. To put it another way, on average because of this bubble, a company only has to issue one new share to obtain the same amount of money-capital as in 1980 would have required it to issue 18. That indeed is the other side to the fall in the yield on those shares, and the same thing applies to bonds.

        So, there is a potential wall of money out there available to be used as money-capital, to metamorphose into productive-capital, once it becomes apparent that no more quick huge capital gains from speculation are available. Indeed, the issuing of new shares and bonds, to raise the money-capital required for such productive investment, will be one means by which the prices of the fictitious capital will be massively reduced. A look at the fact that Saudi Arabia and Norway have recently become borrowers in capital markets, by issuing new sovereign bonds, rather than being massive lenders into those markets, is an indication of the change in the conjuncture.

      • sartesian Says:

        Boffy: “We have seen a similar thing recently in China, where the stock market bubble encouraged small producers to disregard using their money for productive investment in their farms, in order to make quick capital gains in the stock market, only to then be ruined.”

        Really? Small producers not investing in farms but in the stock exchange? Would that be the 45% of the population living in rural areas? How many of those agricultural small producers invested in the stock market? I’ll bet the number is a very, very tiny fraction of those in the market.

        Agricultural relations in China are such that the “small agricultural producer” works a plot with an area of less than two acres. Individual investment in such plots is not what drives agricultural “productivity.”

        Moreover, It is not the earlier collapse of the stock markets behind the rural upheavals and distress in China, but the consolidation of lands, based on government “sales” or leasing of lands to “special partnerships,” removing land from the “working ownership” of the direct producers is what’s going on in China– not the investment in the stock market by small producers.

        I’ll bet “small producers,” rural and urban (i.e. small manufacturers working with thin profit margins, and particularly sensitive to changes in currency valuations) aren’t significantly engaged in the stock exchanges– that the “breadth” of the market, as opposed to the concentrated power of financial institutions, is provided by urban professionals etc.


    • Boffy Says:

      What I always find somewhat amusing, is also that those catastrophists who are always looking for the immediate onset of “the next recession”, and who criticise those of us, who disagree with that view for being too optimistic, at the same time are always at pains to deny past recessions or else to downplay them, in order to thereby make current conditions appear relatively worse.

      So, we have the actual period of crisis that began in the mid 1970’s, and continued into the late 1980’s, only to be followed by a period of stagnation, downplayed, and the actual vicious attacks on workers living standards during that period, that resulted in the Miners Strikes and so on, the Air Traffic Controllers disputes in the US, being downplayed, so that it can be argued that those of us who lived through that period and those strikes, and saw the decimation of workers living standards and communities, must have been dreaming it all, because you see, the share of labour income during that period of intensive struggle did not fall at all!

  8. Edgar Says:

    I always preferred the CPA take on this crisis:

    • michael roberts Says:

      Yes, I quite like the analysis except that I think rising inequality is the result of the fall in the profit rate in the productive sectors and the shift to the financial sector, not vice versa.

    • Boffy Says:

      I noticed this obvious deficiency in their article, straight away. They say,

      “If the proportion of unproductive labour in the economy rises faster than that of productive labour then the rate of profit in the economy will tend to fall as costs increase but profit does not.”

      In fact, in analysing merchant capital, and the role of labour in that sector, Marx makes the obvious point that, what capital is actually concerned with is not the theoretically produced surplus value, but only the actually realised profit.

      The reason that merchant capital arises as the commodity-capital of industrial capital, separated off as independent capitals, is precisely because it is able due to specialisation and the division of labour to reduce the costs of realising those profits, to increase the rate of turnover of capital and so on.

      So, the increase in the number of these “unproductive” commercial workers its true does not produce any surplus value, but Marx describes it DOES produce more realised profit, and consequently a higher rate of profit.

      “Merchant’s capital, therefore, does not create either value or surplus-value, at least not directly. In so far as it contributes to shortening the time of circulation, it may help indirectly to increase the surplus-value produced by the industrial capitalists. In so far as it helps to expand the market and effects the division of labour between capitals, hence enabling capital to operate on a larger scale, its function promotes the productivity of industrial capital, and its accumulation. In so far as it shortens circulation time, it raises the ratio of surplus-value to advanced capital, hence the rate of profit. And to the extent that it confines a smaller portion of capital to the sphere of circulation in the form of money-capital, it increases that portion of capital which is engaged directly in production.” (p 279-80)

      And speaking of the increase in the number of such unproductive commercial workers, Marx says that it is, in fact a consequence of a rise in the mass and rate of profit, just as commercial capital itself expands, as a consequence of increased productive activity in the economy in general.

      “The capitalist increases the number of these labourers whenever he has more value and profits to realise. The increase of this labour is always a result, never a cause of more surplus-value.” (p 300-301)

      • sartesian Says:

        Boff-o-rino says: “I noticed this obvious deficiency in their article, straight away. They say,

        ‘If the proportion of unproductive labour in the economy rises faster than that of productive labour then the rate of profit in the economy will tend to fall as costs increase but profit does not.'”

        Too bad El Boffo didn’t notice that that is not the CPA’s argument in the article. The article reproduces it from Moseley and then leaves it without any further comment.

        A far greater deficiency is this:

        “However, his work has important implications for understanding the causes of this crisis. It is important to focus on the rate of profit because when profit rates are low in the productive economy investors seek more profitable outlets for investment. In this case, capitalists and other wealthy investors began to invest large amounts of money into financial assets (Harman, 2007a: 132; 2007b; Choonara, 2009). Without the higher costs associated with the production and sale of commodities, financial assets are usually more profitable than investments in physical asset capital.”

        a) not always; Profit rates were lower in the 1980s than in the 1990s; rates of capital investment in fixed assets, in the means of communication and transportation were greater in the 90s than the 80s, yet the volume of dollars assigned to the trading of financial assets in the 90s far exceeds that of the 80s.

        b) if the trading of financial assets doesn’t create value (and I don’t know how anyone can claim they do and at the same time call them “fictitious capital”), then such trading cannot create profit. It can only apportion, distribute portions of the total surplus value aggrandized through capitalist production. Finance, credit, etc. are distributive mechanisms.

        c) “Without the higher costs associated with the production and sale of commodities, financial assets are usually more profitable than investments in physical asset capital.”

        That is an argument that requires empirical verification. You need to show that rates of return in the finance industry are consistently greater than that in the industrial sector, and that there is a negative correlation, or an inverse relation between the two before you make such claims.

  9. Henry Says:

    “the increase in the number of these “unproductive” commercial workers its true does not produce any surplus value, but Marx describes it DOES produce more realised profit, and consequently a higher rate of profit”

    So before these ‘unproductive’ workers turned up capitalists did not realize the same level of profits as before, they were all sat frustrated that goods went unsold and were wishing that if only someone were around to move this stuff to that army of consumers who were equally frustrated that the goods they wanted were stuck on the dockside waiting to be picked up by ‘unproductive’ workers. Though aren’t transport workers productive?

    How does that work exactly?

    Can you please point to the chapter where Marx makes this argument so we can read the detail for ourselves.

    “I think rising inequality is the result of the fall in the profit rate in the productive sectors and the shift to the financial sector, not vice versa.”

    I think it is simply a default feature of capitalism, and that it takes government action or trade union agitation to mitigate its affects. I read a few days ago that for the first time the richest 1% now owned more liquid wealth than the bottom 50% of the worlds population.

    We are also told that climate change will consign another 100 million into poverty and create half a billion more homeless. But on the upside and in keeping with Boffy’s optimism, black Friday will see consumers bag a few bargains.

    • GrahamB Says:

      Capitalists did think about these things, from the department store to the supermarket and shopping mall. Sales is an unproductive function not creating surplus value but nevertheless necessary for realisation. And as Boffy says, the same pressures apply to reduce unit costs (of sale).

      The article linked to above says: “If the proportion of unproductive labour in the economy rises faster than that of productive labour then the rate of profit in the economy will tend to fall as costs increase but profit does not.”

      Don’t know if this is Moseley or the author speaking, but this idea is often put out there as a further factor in a ‘long term secular decline in the rate of profit’. But if depends on how you categorise labour as productive/unproductive. Productive labour in the private sector has broadened when you include services, mental labour and that a portion of ‘office work’ is actually related to production. So the unproductive portion of labour in the private sector may not have increased that much at all. I tend to think it should be restricted to the *direct* transformation of value, M-C and C-M’, such as finance and sales. There is always the game: Name the job – productive or not?

      • sartesian Says:

        It’s Moseley’s argument, and a bad one. It confuses cause, the amplified productivity of labor through the increasing technical component of capital, with an effect– an increase in design, marketing, engineering, accounting, logistics, etc. personnel.

        The bourgeoisie do think about “these things” as much as they think about anything, which is to say they think about it when it hits the bottom line, so when overproduction takes hold, when the rate of profit declines, layoffs, reductions hit these sectors also.

      • Henry Says:

        I suspect sartesian is correct.

        “Sales is an unproductive function not creating surplus value but nevertheless necessary for realisation.”

        Well of course but Boffy’s argument is that it produces more realized profit and a higher rate of profit. I am struggling joining the dots here.

        So how does it work when taking into account competition between different capitals? Are you saying that throughout history consumers have always had lots of spare cash hanging around just waiting for some ‘unproductive’ laborer to extract it from them and that there has been a tendency to reduce this spare cash to zero over time as sales gets more sophisticated? So if we produced a graph that showed the difference between surplus value and realized profit the graph would decline over time?

        Tell me exactly where Marx spells this out please so I can follow the line of argument. It doesn’t seem a Marxist line of reasoning to me but I am willingly to be proved wrong when the relevant passages are put in front of me.

        I would also think that with the levels of sophistication around these days realization will no longer be a problem, maybe this is why debt levels were and are rising? The 2007 crisis as one of too much sophistication in sales is a new perspective that I hadn’t thought about before now.

      • Boffy Says:


        In Theories of Surplus Value, Marx spends some time criticising Smith, and others, for engaging in the “game” – name the job and define it as productive or unproductive. As Marx says you cannot define – in capitalist terms, which is what he is interested in – any particular type of labour (and he also shows this applies to consumption) as productive or unproductive, because the correct definition (Smith’s first definition as opposed to his second) of productive- labour is that which produces surplus value.

        Its for that reason that he also says that the wage labour employed by commercial capital, although it is not productive, in terms of the social capital, is productive in relation to the capital that employs it. It does not produce any new surplus value, but in realising already produced surplus value, it does produce surplus value for the capital, which employs it.

        Its quite clear, and set out by Marx in both Capital II, and in Theories of Surplus Value, that on Marx’s definition of productive labour, that the labour employed in service industries that produces new vendible commodities, whether that is education, healthcare, social care, entertainment or whatever is productive labour, and produces surplus value.

        It is also clear that for Marx the labour required for the production of new commodities also includes some labour of a mental rather than physical kind. In examining the labour process, in Capital, Marx makes the point that initially the mental labour and manual labour were combined in the shape of the labourer themselves, but this becomes separated by the division of labour. The labour of the draughtsmen who designs the product is just as productive, therefore, as the engineer, who uses the drawings to create the product. All labour in the office required to actually produce the commodity is then productive of new value.

        But, as Marx describes in Capital II, the value of grain is determined by the labour-time required for its production. However, having been produced, that value will quickly be reduced, unless the grain is properly stored. It will get wet, or eaten by mice, for example. Yet, the labour-time required to produce the grain silo, has nothing to do with the value of grain, which has already been previously determined.

        Marx says that the farmer will have to incur this necessary cost of the silo, because otherwise the cost to them, in terms of the realised value of the grain will be greater. He shows that the same is true in terms of enterprises engaged in risky activities such as shipping, whose insurance premiums are, thereby higher than average.

        In both cases, these additional costs will need to be recouped by those capitals that incur them, even though they add nothing to the value of the commodities they sell. Unless they recoup these costs, they will obtain less than the average rate of profit, so capital would leave these lines of production, supply would decline, and market prices rise until they reached a level where those costs are recouped, and the average rate of profit is thereby obtained.

        The same thing is true, Marx shows, in relation to the profit of commercial capital. A firm of professional draughtsmen may carry out the same functions that an engineering firm’s draughtsmen previously fulfilled. If the labour of the draughtsmen was originally productive, and necessary to the production of the commodity, it was productive of value and of surplus value, and this does not change, now that the function has been separated off to a separate firm.

        But, the labour of buyers and salespeople employed by a firm is not productive of value or surplus value, and cannot become so if it is separated off to a separate firm. What it can do is to reduce the costs of buying and selling, and thereby increase the mass of surplus value realised, and thereby the rate of profit.

        The idea that considered from the standpoint of the total social capital, too much capital is employed as commercial capital, is contrary to Marx’s theory on the average rate of profit, which demonstrates that, because of the law of the tendency for the rate of profit to fall, wherever the rate of profit is higher than the average, capital will enter that sphere, and vice versa. This cannot happen overnight obviously, because of real life frictions, but the idea that such disproportions could last for ten, twenty or more years, is stretching it a bit. And this is particularly so when we are discussing commercial capital, as opposed to industrial capital.

        Marx says,

        “Nevertheless, since the circulation phase of industrial capital is just as much a phase of the reproduction process as production is, the capital operating independently in the process of circulation must yield the average annual profit just as well as capital operating in the various branches of production. Should merchant’s capital yield a higher percentage of average profit than industrial capital, then a portion of the latter would transform itself into merchant’s capital. Should it yield a lower average profit, then the converse would result. A portion of the merchant’s capital would then be transformed into industrial capital. No species of capital changes its purpose, or function, with greater ease than merchant’s capital.” (p 282)

        So, if too much capital were actually employed as commercial capital, the rate of profit in this sphere would fall, as Marx says, and capital would then leave it to engage in productive activity, where the rate of profit was higher.

        For Marx, here the rate of profit for the merchant capital is to be understood in its fully developed form that he has now arrived at in his analysis. That is the general annual rate of profit, calculated on the advanced capital.

        So, Marx demonstrates that if the commercial capital advances £1 million to buy commodities from producers, and the average rate of profit is 10%, then the profit margin will be 10%, if the commercial capital turns over just once during the year. If 1 million commodity units are sold, which cost £1, they will be sold at £1.10. However, if the merchant is able to sell these commodities in 2 months, so that their capital turns over five times during the year, the profit margin will fall from 10% to 2%, even though their annual rate of profit will remain at 10%.

        So, the merchant will advance £1 million, buy and sell the 1 million units at a price of £1.02, making 2% profit on each. Having had their capital returned to them, they will advance it again, selling another 1 million units, and so on. At the end of the year, they will have only ever advanced the £1 million of capital (though laid out £5 million in total having advanced it 5 times). They will have made in total £100,000 of profit (5 x £20,000), and this £100,000 of profit, on the £1 million of capital they advanced will, thereby give them the required 10% average profit.

        It is the fact that merchant capital can achieve this higher rate of turnover of capital, Marx says, which is one reason for it become separated off as a separate independent capital, and which raises the average rate of profit for the total social capital thereby.

        Part of the problem also seems to be a confusion in some analyses between the money-dealing capital, which Marx includes under the heading of commercial capital, and money-lending capital, or interest bearing capital, with a consequent confusion in relation to commercial profit and interest.

        A firm like Paypal, or the portion of Apple’s capital involved in ApplePay, and so on, is money-dealing capital. It fulfils the function of making payments, necessary in the circulation of capital and commodities. The activities of banks in that respect, are also the actions of commercial capital. For the reasons Marx sets out, all such activities attract the average rate of profit.

        Paypal or any other commercial capital, whose business is the making of payments, and movement of money is entitled, as capital, to obtain the average rate of profit, no different than Tesco in the sale of commodities.

        But, money lending capital does not make profit, it receives the average rate of interest, and as Michael correctly said in a previous post, for Marx the average rate of interest can never be as high as the average rate of profit. The productive or commercial capitalist buys the use value of capital, as capital (i.e. its ability to self-expand) from the money-lending capitalist, and pays the market price for that use value, i.e. the average rate of interest.

        The fact that money-lending capitalists have used their available funds to engage in speculation to buy fictitious capital in the shape of share or bond certificates, mortgage certificates and so on, in order to obtain large scale speculative capital gains, even though the interest they obtain is simultaneously reduced to a lower rate, is a separate issue to the question of the capital employed as commercial capital, in the form of money dealing capital.

        The latter acts as actual capital entitled to the average rate of profit, the former is not capital at all, but only fictitious capital, entitled only to the average rate of interest.

      • Henry Says:

        “However, having been produced, that value will quickly be reduced, unless the grain is properly stored. It will get wet, or eaten by mice, for example. Yet, the labour-time required to produce the grain silo, has nothing to do with the value of grain, which has already been previously determined.”

        Isn’t this fixed capital which depreciates? Like the building that houses the machines?

  10. Karl Martel Says:

    Reblogged this on Reconstruction communiste Comité Québec and commented:
    Nous avons pensé qu’il était capital pour nos lecteurs de traduire l’analyse d’économie politique marxiste de Michael Roberts pour une considération fort simple, celle de bien comprendre le développement contemporain des rapports de production capitaliste. Vous trouverez donc ci-après une traduction Google du texte de l’auteur.

    «Il y a de meilleurs liens de causalité et les corrélations entre la rentabilité et l’investissement et la croissance économique que l’inégalité entre la consommation et la croissance. Les bénéfices qui donnent le ton.

    Pour un compte rendu plus complet de ces arguments, voir mon article HM.

    Il ne semblait pas trop d’opposition à ma thèse, mais il y avait des questions sur mes données. La discussion à la session est venue d’un document d’accompagnement par Jim Kincaid, anciennement chargé de cours à l’économie de Leeds et d’autres universités. L’article de Jim, qui était apparemment juste un extrait d’un prochain article dans la revue HM, visant à analyser pourquoi l’investissement a été défaillante dans les économies modernes, en particulier depuis la fin de la Grande Récession. Surtout, il voulait interroger ou de réfuter la théorie selon laquelle la loi de Marx de la baisse tendancielle du taux de profit est la cause sous-jacente des crises, comme préconisé par moi-même, Carchedi, Kliman et plusieurs autres.

    Jim Kincaid a déclaré qu’il soutenait la position de Duménil et Lévy que chaque crise majeure ou «crise structurelle» dans l’histoire du capitalisme moderne a eu une cause différente. Le 19ème siècle Grande Dépression a été le résultat de la baisse de la rentabilité; mais la Grande Dépression des années 1930 n’a pas été, et a été causé par la montée des inégalités et «investissement fou». La crise des années 1970 a été le résultat de la baisse de la rentabilité, mais la Grande Récession a de nouveau été causée par la montée des inégalités et «investissement financier fou». Ces arguments de DL ont été traités dans ce blog avant et sont également repris dans mon papier sur l’inégalité présenté.

    Fait intéressant, le professeur Bellofiore, qui a également présenté un document différent dans la session sur la traduction des concepts de Marx, a commenté en passant qu’il estime la loi de Marx de la rentabilité a été mort dans l’eau depuis la fin du 19e dépression siècle parce que depuis lors, les «facteurs contrecarrant ‘ ont surmonté la loi «de manière permanente». Ceci est une étrange conclusion donnée toute la preuve récente citée dans ce blog pour une chute séculaire de la rentabilité à l’échelle mondiale depuis l’époque de Marx. L’année prochaine, G Carchedi et je vais publier un livre, un recueil de documents de chercheurs à travers le monde qui confirmeront la loi de Marx de la rentabilité des preuves empiriques.»


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