Back in 2012, I was inspired by the work of David Zachariah on measuring national rates of profit in a consistent comparative manner using data from the Extended Penn World Tables. These tables were compiled by Adalmir Marquetti who extended data from the Penn World Tables to allow Marxist economists to make more useful estimates of the level and movement in the rate of profit for many countries covering the period from the early 1960s to the point of the Great Recession of 2008-9.
Picking up on this database, I went further than Zachariah who showed rates of profit for individual countries and I compiled a weighted measure of the rate of profit for the top seven capitalist economies (G7) and also the so-called BRIC economies (Brazil, India, Russia and China) in order to compute a ‘world rate of profit’.
The concept of a ‘world rate of profit’ in Marxian terms is open to dispute. But as we approach the 150th anniversary of the publication of the first Volume of Marx’s Capital (a work that will be analysed by top Marxist scholars at a symposium that I have organised in conjunction with Kings College, London), it is important to realise that Marx always looked upon the capitalist mode of production as a world system, even though any concrete analysis had to be based on national economies, in particular, Britain as the leading capitalist economy of Marx’s time.
Most measures of profitability on Marxian categories tend to be confined to the US, the still leading capitalist economy of the 21st century, or on individual capitalist states. In our upcoming book, World in Crisis, G Carchedi and I have brought together studies by young Marxist economists from around the globe to show the movement of rates of profit in many countries in the last 50-100 years. They provide in-depth empirical analyses and confirm the validity of Marx’s law of profitability.
But Marx had a world view of capitalism as one system and over the last 150 years that has proved to be correct as Capital has established itself as the dominant mode of production globally to the almost total exclusion of other earlier modes of production (slavery, absolutism, feudalism etc). So the concept of a world rate of profit becomes more credible – even though national barriers on trade, capital flows and labour remain in place, so distorting the tendency for the equalisation of profit rates across borders into one.
Back in 2012, I went ahead with the concept of a world rate of profit by simply weighting an average rate for the G7 and BRICs. I updated this work in 2015 (Revisiting a world rate of profit June 2015) by using other sources, in particular, the EU’s AMECO database, the ground-breaking work of Esteban Maito who looked at 14 major capitalist economies in working out a world rate; and also the Penn World Tables themselves.
By comparing all four sources, I found that “it is confirmed that the world rate of profit has been in secular decline in the post-war period” but “Marx’s law of the tendency of the rate of profit to fall does not imply that the rate of profit will fall in a straight line over time. Counteracting factors come into play that for a period of time can overcome the tendency.” My results show that this was the case between the mid-1970s or early up to the late 1990s or early 2000s (depending on the measure). The neoliberal period of recovery in profitability did take place, but it came to an end well before the Great Recession. World profitability was falling by the early to mid-2000s on most measures.
Most important, the results showed that “the changes in the rate of profit in the post-war period follow Marx’s law, namely that the secular decline was accompanied by a rise in the organic composition of capital that outstripped any rise in the rate of surplus value achieved by capitalists, at least in the G7 economies. Profitability rose in the neo-liberal period because the counteracting factor of a rising rate of exploitation dominated”.
Now a new paper has been published by Ivan Trofimov of the Kolej Yayasan Saad Business School, Malaysia in the PSL Quarterly Review of June 2017 called Profit rates in developed capitalist countries: a time series investigation. (Trofimov on profit rates). As Trofimov says, his paper “revisits the hypothesis of the secular decline in profit rates (the tendency of profit rates to decline in the long-run) that has been recurrent in classical economics and attempts to validate empirically whether profit rates in developed economies have declined in recent decades”.
Trofimov uses the Extended Penn World Tables as Zachariah and I have done and looks at 21 countries over the 40-year period from the early 1960s. As Zachariah and I also argued, Trofimov points out the value of this data series. “The use of a broader sample and of a sufficiently long series is advantageous; it allows examining secular tendencies in profit rates beyond cyclical fluctuations; it helps us trace structural and policy changes that took place over the recent decades in the developed economies”.
Yes, there is a problem with the Penn data. Given the nature of national accounts (no differentiation between productive and unproductive activities and the inclusion of government sector and residential capital), “such a methodological choice may be problematic, as far as a possible interpretation of empirical results from a Marxist political economy perspective”. But this is compensated for by the coherence and consistency of results. Trofimov also contributes extra value to his study by using “a battery of econometric tests” to support with some degree of significance the direction and movement of various national rates of profit.
What does Trofimov find? Well as he puts it, “visual observation suggests that over the study period (1964 to late 2000s) profit rates were likely to exhibit downward trends in Austria, Canada, Japan, Portugal, Spain, Switzerland and USA. Upward trends were likely in Luxembourg and Norway. In other economies either there was no distinct trend, or trend reversals and random walk behaviour were likely.”
And “visual inspection of this figure also suggests two distinct patterns for profit rates in most economies – decline until the mid or late 1970s, followed by partial or complete reversal.” In other words, Trofimov confirms what most studies of individual national accounts have found for the movement in the ‘Marxian’ rate of profit in the US and many other leading capitalist economies.
However, Trofimov points out that visual evidence (looking at a graph) can be misleading about whether a rise or fall in the rate of profit has taken place over time. And when he applies a range of statistical tests, he concluded that “there is no firm evidence supporting the hypothesis of secular decline in economy-wide profit rates in all developed economies. Instead, a diverse pattern of movements in the profit rates has been identified, including upward or downward deterministic trends, staggered declines, random walk, or stability and reversion to the mean.”
That sounds bad news for the generally accepted view that the profitability of capital in most major economies was lower in 2009 than in 1964. Yet Trofimov does say that “statistically significant positive trend coefficients were, however, only present for Greece (at 10% significance level), the Netherlands and Norway (at a 5% level). A negative trend was observed in 10 cases (Australia, Austria, Canada, Denmark, France, Japan, Portugal, Spain, Switzerland, and the USA). A statistically significant negative trend coefficient was present for Canada, Portugal, Switzerland and the USA (at a 5% significance level).”
Thus nearly all the major economies had lower profitability in 2009 compared to 1964 and the only ones that did not were smaller economies like Luxembourg or Norway or Greece. The tiny tax haven financial centre of Luxembourg is not hard to consider as an exception to Marx’s law and, as Trofimov says, for Greece and Norway, “In the first case this could be attributed to the rapid transformation of the economy in the 1960-1980s from a relatively low level; in the second case, the increase in economy-wide profit could have been boosted by the growth of the oil sector.”
Actually, I find the result for Greece puzzling. Works done by Greek Marxist economists do not find this overall rise in Greek profitability over the whole period and Trofimov’s own graph for Greece does not visually show that. In our upcoming World in Crisis book, Maniatis and Passas find the Greek rate of profit was lower in the early 21st century than in the 1960s, even though there was strong rise in the 1980s.
Of course, their measure uses different categories than Trofimov. And, as Trofimov explains, “There is no perfect correspondence between national accounts and Marxian variables (e.g. constant and variable capital, and surplus value).”
Nevertheless, in the case of the US, comparing the results from the Extended Penn tables and those from the US national accounts (work done by me previously), there seems to be a close correspondence. There is the well-established profitability crisis from the mid-1960s to the early 1980s; then a period of recovery in the neo-liberal period up to 1997 and then a new period of profitability decline culminating in the Great Recession.
While the US may be the most important capitalist economy, what was the trend across all the major economies? Is Trofimov correct to conclude that “overall, the behavior of profit rates has proven to be rather diverse, therefore it is unlikely that “universal profit rates’ laws” hold, or that only one hypothesis is correct.”?
Well, I went back to the Extended Penn Tables and redid my weighted average rate of profit for the G7 economies. Trofimov’s definition of the rate of profit from the tables is:
Y-Nw-D/K; where Y is the chain index of real GDP in 2005 purchasing power parity (PPP), K is the net fixed standardised capital stock in 2005 PPP, D is the estimated depreciation from K, w is the average real wage in 2005 PPP, and N is the number of employed workers.
I followed the same formula except that in the denominator I added in variable capital (Nw) to match Marx’s formula exactly, s/c+v. Was this correct? It remains a matter of debate (see here Measuring variable capital and turnover for the rate of profit).
After weighting the data by GDP, I came up with a rate of profit for the G7 from 1964-2009 as follows (my data and workings are available on request).
Now I took liberties with the data for Germany which were not available before 1984, given the division of Germany into west and east up to 1989. But my assumptions for the data for the period 1964-84 were realistic, in my view.
What my results show is that the G7 rate of profit fell secularly from 1964 to 2007 – as in all other studies; the fall mainly took place in the 1970s – as in the US; there was a recovery of modest proportions during the neo-liberal period from the early 1980s which peaked in the late 1990s – again as in the US. The subsequent recovery after the recession of 2001 gave way eventually to a steep fall in the Great Recession of 2008-9. These results confirm my original results of 2012 and 2015.
In order to get closer to a ‘world rate of profit’, the emerging economies must be added to the G7 result. I shall show that in a future post. And don’t forget the work of Esteban Maito (http://gesd.free.fr/maito14.pdf).
Clearly further research is necessary to get closer to a ‘Marxian’ rate of profit, as Trofimov points out, “These issues call for the need to construct “Marxian national accounts” prior to the analysis of profit rates in the Marxian formulation. First of all, given that a large part of economic activity in developed economies is unproductive according to the Marxist formulation, the overall level of profit rate is likely to be overestimated. Secondly, unproductive activities, typically embodied in the services, tended to rise over the past decades, meaning that estimated falls in profit rates might become more drastic, and certain estimated increases might become less substantial.”
Yes, the next task is to develop a world rate of profit measure based on productive capital – over to Hercules.