British capital: productivity and profitability

In the first quarter of 2018, the UK economy slowed almost to a standstill.  It grew by just 0.1% in real terms. This was the lowest growth rate for over five years since a 0.1% contraction in Q4 2012. Household spending rose the least in over three years and business investment shrank the most in nearly three years.

The government and the Bank of England have tried to pass this slowdown off as due to bad weather in early 2018.  But while acknowledging that bad weather had hit construction and parts of the retail sector, the official statistical agency, ONS, said “its overall impact was limited” and there was also an underlying slowdown in the growth of consumer spending.

The UK economy is now growing the slowest of the top G7 capitalist economies, as productivity has slowed to under 1% a year. Indeed, before the 2008-09 economic crisis, Britain’s output per hour worked grew steadily at an annual pace of 2.2% a year. In the decade since 2007, that rate has dropped to 0.2%.  If the previous trends had continued, the UK’s national income would be 20% higher than it is today.

The ONS points out that the UK has the largest “productivity puzzle” – the difference between post-downturn productivity performance and the pre-downturn trend in the G7; this was 15.6% in 2016, around double the average of 8.7% across the rest of the G7.  Indeed, only Italy has experienced a worse productivity performance since 2007 than the UK among the top G7 economies.

What this shows is that the UK capitalist economy is not suffering from bad weather or even the just the ”uncertainty” caused by Brexit, but instead there are deep underlying structural problems.  I have dealt with the reasons for these before. British capitalism has become a ‘rentier” economy, where surplus value increasingly comes from extracting ‘rents’ and financial profits from productive sectors in other parts of the world.

Now there have been some further new studies on the reasons for British capitalism’s poor productivity record.  It seems that poor productivity growth stems not from small local businesses that sell products and services within a small area, but failure lies with the heart of British capital’s big multi-national exporting companies.

A detailed sectoral analysis by the Economic Statistics Centre of Excellence this month that three-fifths of the drop in productivity growth stems from sectors representing only a fifth of output, including finance, utilities, pharmaceuticals, computing and professional services.  The Bank of England did a similar analysis down to the level of individual companies and found that it is the top ones that have become the slackers. The most productive groups are “failing to improve on each other at the same rate as their predecessors did”, according to its research. The best companies still improved their productivity faster than the rest, but productivity growth among the best has sharply fallen and this has hurt the UK’s growth rate.

The graph below shows that the top companies have still improved their productivity more than the small companies but at a slower pace than before the Great Recession and so overall productivity growth has slowed and fallen even further behind other capitalist economies.

Looking at individual companies on a regional basis, a study by the Centre for Cities showed that it is again the most successful companies, normally those with highly skilled employees and exposed to international competition through exports, that drive success across the UK.   “This idea that if only we can make the bottom 20 per cent of businesses more productive . . . is a bit of a red herring,” said Paul Swinney, head of policy and research at the Centre for Cities. “The fundamental problem is that we’ve got a low productivity economy outside the South-East.”

Why is productivity growth so poor in Britain, especially among the key big British multi-nationals?  The answer is clear: reduced business investment.  The latest business investment figure for Q1 2018 showed an absolute fall in investment.  Business investment growth has been on a steady trend down since the end of the Great Recession.

Indeed, total UK investment to GDP has been lower than most comparable capitalist economies and has been declining for the last 30 years.

While most mainstream economic studies accept that the reason for the UK’s poor productivity record, particularly since the end of the Great Recession, is due to low investment in key productive sectors by key large companies, nobody has an explanation for this.

In my view, it is also clear why.  The profitability in the productive sectors of the British economy remains low relative to before the Great Recession and even back to the 1990s.  Profitability reached a peak in 1997.  Since then, overall profits have risen in nominal terms by about 60%.  But despite the credit boom of the early 2000s and the recovery since the Great Recession, profitability (ie profits per the stock of capital invested) remains below that peak.  As a result, British capital has invested in financial assets or hoarded cash in tax havens or invested abroad rather than in the UK.

British capitalism has increasingly become a ‘rentier’ economy that aims to make money from money (finance capital) rather than from investing in new technology to boost the productivity of productive labour.  This trend accelerated under the neo-liberal policies of Thatcher and successive governments and under global competitive pressure on old industrial and manufacturing sectors.  While German capitalism maintained its manufacturing sectors through new technology, investment and exports (and relocation to the east), British capitalism opted for finance and related services over production.

The final straw was the global financial crash and the Great Recession – that led to a severe blow to the financial sector.  Profitability in the non-financial sectors remains below the level before the global financial crash and well below the level of the last 1990s.  While that continues, business investment will fail to recover sufficiently to raise productivity growth back to levels seen prior to the global financial crash.


11 Responses to “British capital: productivity and profitability”

  1. Daniel Rocha Says:

    Have you tried a moving average for your data?

    Here’s an example:

  2. richardfalvey555101905 Says:

    Thanks, Robert. So in summary you’re saying: Lack of productivity = lack of profitability = lack of investment = lack of productivity etc etc.

    The investment that Corbyn’s Labour talks about making is more general and related to for example, infrastructure, not investment in specific businesses in order to improve productivity.

    So while the logistics and communications might improve, this won’t effect productivity in the big multinationals you are talking about will it? Nor will it affect financial services. So, with or without a change in government are you predicting long term decline for British Capitalism?

  3. GrahamB Says:

    The other important chart would be real wage growth in the UK vs other economies since 2008. This has been a major driver of the relatively low investment regime.

    Also, financial services was the biggest contributor to UK productivity growth in the decade before 2008, and of course was hit hard by the great financial crisis, that still casts its shadow. As you say, it was a case of live by the sword for the UK economy.

  4. Alfredo Puig Says:

    Dear friends,

    I´m not sure if it´s the correct place for my question, but just in case. I understand it´s a very basic question on the decline of profit rate. Marx thought that, from a historical point of view, as a consequence of this decline, capitalism would arrive to an end, because of the lack of incentive for new investments.

    Anyway, capitalists make use of profit not only for consumption but, mainly, for new investments and accumulation. So, if profit rate is not enough to keep capitalists investing, wouldn´t it happen the same thing with public investments or -in a self-management system- with the employees of the enterprise?

    Resources for accumulation have their origin in profit rate. But resources for accumulation in a workers´self-managed system or in a public ownership system, wouldn´t have to come also from surplus created by the enterprise?

    So, the decline of the profit rate, in spite of the end of capitalism, wouldn´t have as a consequence the end of the accumulation options, in any kind of means of production ownership system?

    Thank you for the clarification.

  5. ucanbpolitical Says:

    In researching machine learning and its application to industry one thing stands out, its differential application to mass production versus luxury goods production. If we take watches there are two classes, the mass market pioneered by Japan and the handcrafted watches still made predominantly in Switzerland. These handcraft watches can cost anything between £20k and £100k and the continue and will continue to use centuries old hand crafting. The growth in their productivity is nil because of the absence of price pressures. The same applies to expensive sports cars or yachts……whose finishes are handcrafted. As inequality has risen and with it the growth in the luxury goods industries, what Marx defined as Department 2B, so it has contributed to the slowdown in productivity growth for this reason. This is but one of many reasons inequality has contributed to a slowdown in productivity. This does not detract from the issue of profitability discussed in the article by Michael which I endorse.

    • Anti-Capital Says:

      “Mass market” watches were “pioneered” in the United States in the 19th century, particularly by the Ball Corp.

      Is the claim that “luxury” production is now a bigger portion, value wise, than mass market production for automobiles, watches, razors, cellphones? If that’s the claim, a little data might help convince those of us who don’t buy the argument.

      Is the claim that luxury production of watches, automobiles, etc. has a lower technical and organic composition of capital used in production than the “mass production” of automobiles? Again, any data? Any fries to go with that shake?

  6. ucanbpolitical Says:

    Anti-capital. I assumed you understood that when I chose Japan to counterpose to Switzerland, it was because Japan pioneered the mass production of digital watches which have largely replaced mechanical watches. Secondly nowhere did I say that the luxury goods industry was now the biggest. Let us stick to watches which because they are both functional and ornamental are an exemplar for the luxury goods industry. In 2015 Switzerland exported 2.5% of watches equal to 28.1 million units. China on the other hand exported 682.8 million units. But because the average price of a Swiss watch was $797.2 while that of the Chinese watch was only $8.5 the value of Swiss watch exports was $22.4 billion versus only $5.8 billion for China. In total Switzerland produces and sells 95% of all watches costing over $1,000 and 80% of the value of Swiss exports comprises mechanical watches whose production processes have hardly changed. I would estimate that the luxury segment is between 30 -40% of the industry in line with most industries where a degree of ornamentation exists. (

    Of course, no aggregate figures exist for the luxury goods sector in total, but this is of little concern. When Marx divided Department 2 into two parts, it was not on the basis of use values. It was on the basis that in 2A the source of demand was variable capital and in 2B it was revenue (profits, rent and interest.) The same use value can exist in both departments in a quantum way. An expensive watch can be bought as a special occasion gift by a worker using their savings and it can be bought as an occasional gift by the rich for a partner or sibling. I will conclude on this point, whichever industry has a luxury component, with the exception of the period 2009 – 2011, it has shown faster growth that the rest of the industry.

    • Anti-Capital Says:

      None of what you say even touches on the slowdown in the productivity of labor.– the argument about “luxury goods” somehow taking capital away from investment in mass production goods is but in iteration of the old “abstentionist-savings” explanation for capital investment, and like that old saw, it has nothing to do with actual rates of capital investment, actual growth in productivity.

      That’s the point that needs addressing. The increased portion of time going to luxury production is not hampering productivity growth; overproduction, which gets manifested in declining profitability, does.

      You’re statements above might have some relevance if you could show how luxury watch production is related to productivity slowdowns in mass market watch production. You don’t bother to do that. You provide no information on productivity rates in either the mass or luxury sector; or the organic composition in each, but you seem willing to claim that the investment in “handicraft” luxury production is depriving sectors of needed capital for investment.

      Details,comrade, the devil’s in the details. We need to get the details right so we don’t look foolish, for example claiming that that the 2011-12 MOU between Greece and the Troika was designed to bail out German banks when in fact banks all across the EU took a 50% + haircut during the period leading up to, and following, the MOU.

  7. ucanbpolitical Says:

    Of course I do. If the luxury component of watches, whose handcrafting is as prized as it is unchanging, is gaining a larger share of the market in value terms, then it is axiomatic that the median rate of change in productivity is slowed down because the fall in the number of workers and their hours is propped up by what is happening in the luxury end. I have no more to say on this matter.

    • Anti-Capital Says:

      Hats off to you for swallowing the marketing of the “handicrafted” “luxury” watch, but that’s what that is– marketing bait. Actually Swatch makes most of the movements through its ETA subsidiary, and if you think ETA is some artisan guild….well, OK, but it’s not.
      ETA is a pretty high tech operation.

      There is no doubt that the luxury end improved and captured more of the market since 2009 (with some slowdowns and downturns). That’s not in dispute. What is in dispute if that is useful index to and/or is caused by a slowdown in productivity?

      We can go through this same exercise with automobiles, cellphones, etc.

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