Falling Rate of Profit

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Discussion

Michael Roberts on the profitability waves after WWII

Michael Roberts is the author of a book on the Long Depression


From an interview by Mark Kilian:

* MK: Many people see the long boom after 1945 as a ‘normal’ situation. But how do we explain the boom?

That is an important part of my book; why there are booms and slumps. The period from 1945 to the mid-60s was an exceptional period; it is called the ‘golden age’ of capitalism. There was quite good growth, more or less full employment, many countries developed a better welfare state, free education even to university level, free health services, state housing programs; better pensions etc.

But that was an exceptional period. Why? What drives growth under capitalism is the ability to make profits. The health of the capitalist economy depends on what happens to the profitability of capital, the rate of profit on every investment made by capitalists. At the end of World War II, as the result of the physical destruction in Europe, of most of the machinery, factories, etc., and a massive amount of labour available at cheap rates, profitability rocketed in Europe for the capitalist combines as they restarted. And they got cheap (even free) credit from the US. In the US there had been a devaluation of old capital, so new capital came up with new technology that was extremely profitable, and there was a huge expansion of labour force. The same applied to Japan. Across the board world capitalism had a high level of profitability for investment.

But in the mid-60s profitability began to fall quite sharply up to the early 1980s. This period is called the profitability crisis. Marx’s theory of crises under capitalism is that, if profitability is the driving force behind growth, it can’t keep on rising. As capitalism expands and accumulates capital, there is a tendency for profitability to fall. This is a key law in the political economy that Marx discerned. And in that process of the falling rate of profit capitalism gets into in trouble and crises develop more frequently.

The ‘golden age’ of the 1950s and 1960s gave way to crises. I was young then and I remember that this time was a period of big struggles by the labour movement as profitability fell and capitalism tried to drive the workers down. Workers fought because they had a lot of gains that they did not want to give up and trade unions were relatively strong. Eventually the unions were crushed in the recessions of the early 1980s and the labour movement was shackled and defeated in many battles. Capitalism then tried to raise profitability through cuts in public spending, privatizations, the exploitation of the labour force, removing all the protections of the labour force, globalisation etc. This neoliberal period was the last 20 years of the 20th century.

So the ‘golden age’, was a special period when profitability was very high because of a world war, then followed by a large decline in profitability, and then up to the end of the century big efforts of capitalism – with some success – to increase profit rates again.


MK: So what you’re actually saying is that the crisis of the mid-60s validated Marx’s theory of the falling rate of profit and then neoliberalism mobilized some of the counteracting tendencies that Marx also described, in order to restore profit rates?

That’s a good way to put it. Marx’s law of profitability says that as capitalism expands, there is a tendency of the rate of profit to fall. But there are ways to counteract that, for a time. Under a capitalist society value comes only from the exploitation of labour, people who work under the control of capitalist owners so that they can sell the commodities on the market, and they can make a profit. They will use more machinery and plant, and new technology to keep the down the cost of labour, but in so doing they reduce the amount of profit per investment. Profit, and value in general, according to Marx comes only from people working, it does not come from machines. Machines produce no value unless you put them to work. That requires human labour unless you have a society with only robots – but that’s another story.

So there is a contradiction between raising productivity of labour through more investment in technology and sustaining profitability. This can be overcome for a while by exploiting workers harder, for longer hours, making them work more intensely, introducing new technology, expanding trade, trying to occupy poorer countries, and use their resources – there are various ways in which the counteraction can take place. These counteracting factors operated strongly during the 1980s and 1990s, to reverse the very low rate of profit that capitalism had reached.

Profitability did recover, but not anywhere near to the level of the ‘golden age’. From the late 1990s the Marxist law of profitability began to operate again, and despite all attempts of the capitalists, it began to slip back in the major economies. That created the conditions for further crises and slumps of the 21st century. The capitalists tried to avoid that by a huge credit boom, by pumping loads of credit, inventing new ways to speculate in the financial markets and keeping profits up for a section of the capitalists. But underlying profitability did not recover. You can speculate on stock markets but you don’t create anything. You just try to pinch money off others, so to speak, and create an apparent improvement.

Take today. The US stock market has reached an all-time high (in nominal terms). At yet we look at the state of growth and production in the major economies and that’s really slowing down. Profits are stagnating and yet the stock market is booming. That shows the division between what Marx called ‘fictitious capital’ and what is really going on in the capitalist process. That division reached an extreme in 2007, a gap between stock market prices, house prices, speculation in financial markets and what was actually happening with the profitability of capital. Then came the crash.

This is the process that I try to describe in the book. The book tries to provide some indicators for readers to look at. Some economists focus on the financialisation: the increase in that sector relative to the productive sectors. A popular argument is that the financial sector and the banks should be regulated or curtailed. But that’s not enough, that’s a bit like trying to control a tiger in a cage with only a piece of paper. There is no surety that the banks will behave with regulation. Only recently, the US financial regulators investigated the activities of HSBC, the big UK bank, which laundered money for Mexican drug cartels for years. They made billions of pounds out of this. It was discovered, but the authorities were told not to intervene and not to fine HSBC because it might bring the banking system down. That shows that regulating the banks is totally useless. It changes nothing, so they will continue in the same way." (https://thenextrecession.wordpress.com/2016/08/02/the-long-depression-an-interview/)

Statistics

Check the following source:

* Article: The historical transience of capital. The downward trend in the rate of profit since XIX century. By Esteban Ezequiel Maito.

URL = https://thenextrecession.files.wordpress.com/2014/04/maito-esteban-the-historical-transience-of-capital-the-downward-tren-in-the-rate-of-profit-since-xix-century.pdf

"This paper presents estimates of the rate of profit on fourteen countries in the long run. The performance shows a clear downward trend, although there are periods of partial recovery in both core and peripheral countries. The behavior of the profit rate confirms the predictions made by Marx, about the historical trend of the mode of production. Finally, an estimate of the global rate of profit for the last six decades is done, also highlighting the particular role of China in systemic profitability."


Interview

"Andrew Kliman is a professor of economics at Pace University and the author, most recently, of The Failure of Capitalist Production: Underlying Causes of the Great Recession. In discussion with Jonathan Maunder he argues that the economic crisis results from the fundamental logic of capitalism and cannot be solved by pro-growth reform measures. Only a more radical response is adequate to the task.


In your book 'The Failure of Capitalist Production' you argue that Karl Marx's theory of the tendency of the rate of profit to fall, which he outlines in volume 3 of 'Capital', is crucial in understanding the current economic crisis. Could you explain this theory for people who may not be familiar with it and why you think it is relevant to the current crisis?

To avoid jargon, I’ll explain Marx’s theory in a somewhat atypical way. Capitalist companies adopt labor-saving technologies that boost productivity. Because the productivity increases lower the cost of producing the companies’ products, the products’ prices also tend to fall, partly because competition between companies drives down the prices and partly because they find it advantageous to cut their prices in order to sell more stuff when their costs of production fall. But the price cutting tends to lower the companies’ average rate of profit.

More precisely, if there’s no change in the relation between profit and wages, and no change in the relation between physical output and the physical capital that is invested––both of which are quite reasonable assumptions––then the rate of profit will fall if prices tend to decline as productivity increases. I say “tend to decline” because nowadays, unlike when Marx wrote, prices typically rise even in the face of rising productivity. But that actually doesn’t matter. As long as prices rise more slowly than they would if productivity didn’t increase, the rate of profit will still fall under these conditions.

Marx argues that the fall in the rate of profit, if and when it materializes, leads to a slowdown in productive investment and economic growth. He also argues that it leads indirectly to financial crises. Companies and investors engage in all manner of speculative activities and shady deals, as they try rather desperately to keep their rates of profit from falling despite the fall in the economy-wide average rate. This risky behavior, along with debt problems stemming from slow economic growth, eventually lead to a debt crisis, a situation in which a large volume of debt can’t be paid back. And this often triggers an economic downturn.

I think this theory is of some help in explaining the 2007-08 financial crisis. It’s of a lot more help in explaining the Great Recession and its aftermath in the U.S., as well as the acute debt crises in several peripheral Eurozone countries and other problems abroad that stem partly from the U.S. downturn. U.S. corporations’ rate of profit suffered a substantial fall, and never recovered in a sustained manner. This led to a persistent slowdown in productive investment––basically, the entire decline in the rate of investment is attributable to the fall in the rate of profit––which in turn led to a marked slowdown in economic growth and mounting debt problems. And the government’s response to all this delayed the outbreak of a major crisis as the cost of further exacerbating the debt problems. To take just one example, the whole rise in U.S. Treasury debt (as a percentage of Gross Domestic Product (GDP)) prior to the crisis is due to a combination of a fall in corporate profits (as a percentage of GDP) and reductions in tax rates on profits that kept the after-tax rate of profit from falling as sharply as did the before-tax rate. So the effects of the fall in the rate of profit were transferred in large part from corporations to the government.

But the real clincher, the thing that convinced me that Marx’s falling-rate-of-profit is needed in order to account for the whole mess, is the fact that it happens to account surprisingly well for why the rate of profit fell. Over the six decades that preceded the financial crisis, there was little long-run change in either the relation between profit and wages or the rate at which money prices rose in relation to commodities’ real values. When you set aside those factors, what’s left is that the rate of profit fell for the reason Marx’s theory singles out: employment grew more slowly than capital was accumulated via investment. The slow growth of employment in relation to capital accumulation accounts for almost all of the fall in the rate of profit over these six decades. That’s remarkable. I never would have thought that the theory would fit the facts so well.


Other writers on the left, such as the Canadian Marxist David McNally, argue that the period since the 1970s has been one of capitalist boom, rather than falling profit rates. How do you respond?

If everything has been so hunky-dory, why is the world economy mired in such a deep and persistent slump? It’s been four and a half years since the Great Recession began in the U.S. and three and a half years since the U.S. government propped up the country’s financial system and quelled the Panic of 2008. A financial crisis can trigger a recession, but if the underlying fundamentals were in good shape, the economy would bounce back rather quickly. In light of the depth and persistence of the slump, we should be very skeptical about claims that the quarter-century or so preceding the financial crisis was a genuine boom period. It would take a lot of strong evidence to shake the initial presumption that these claims are very likely to be wrong. But the evidence simply isn’t there.

If we use the term rate of profit to mean what almost everyone––businesses, investors, Marx––means by it, namely the rate of return on investment, there was no sustained recovery of the rate of profit of U.S. corporations after the recessions of the mid-1970s and early 1980s. If we measure profit as the portion of corporations’ net output that their employees don’t receive, the rate of profit continued to trend downward quite sharply. The data needed to compute the rate of return on investment in other countries aren’t available, but there was a very widespread decline in U.S. multinational corporations’ rate of return on their foreign investment at the same time, which suggests that the global rate of profit probably fell as well. McNally’s claim that the rate of profit rose is based entirely on computations performed by a physicalist economist, Simon Mohun. The problem is that what Mohun and other physicalists mean by rate of profit isn’t a rate of profit in the normal sense––it’s profit as a percentage of what it would cost companies today to replace all of their capital assets––and no one has ever successfully explained why it matters or to what it matters.

But the fall in the rate of profit is far from the only factor. A wide variety of evidence indicates that the economy never fully recovered from the slumps of the 1970s and early 1980s. There’s a glaring contrast between the situation during the quarter-century following World War II, which was a genuine boom phase, and the situation during the quarter-century preceding the latest financial crisis. The rate of investment (capital accumulation) fell and never recovered, debt burdens increased markedly relative to income, growth of GDP, industrial production, employees’ compensation, and public infrastructure investment were all much slower than during the postwar boom, the average duration of unemployment was higher and the problem of workers dropping out of the labor market was more serious, and there were many, many more burst bubbles and banking, debt, and currency crises.

The situation was somewhat obscured by the artificial, temporary expansions and bubbles that were driven by debt financing, and by the fact that there were always pockets of strong growth in the world––Japan, before its bubbles burst around 1990; then the East Asian “Tiger” countries, before the currency crisis of the late 1990s; and most recently, China. But taking the world as a whole, data published by the World Bank indicate that growth of real GDP per person fell drastically, by about one-half, after the postwar boom ended, and never recovered." (http://www.newleftproject.org/index.php/site/article_comments/system_failure_the_falling_rate_of_profit_and_the_economic_crisis)