Marx's Falling Rate of Profit

[RichardAWilson]

http://www.isj.org.uk/?id=340

I don't know if the data supports the conclusions. First of all, Marx's falling rate of profit theory would have to be tested against global data. However, since such data isn't available, it's hard to verify the theory.

This has been one area of Marxian Theory that so-called "mainstream" economists have been analyzing and there are a number of different conclusions. Some of those economists agree with Marx that profit rates are falling over time. Others believe Marx's theory on the matter is restricted to cyclical trends.

[Ocean Seal]

http://www.isj.org.uk/?id=340

I don't know if the data supports the conclusions. First of all, Marx's falling rate of profit theory would have to be tested against global data. However, since such data isn't available, it's hard to verify the theory.

This has been one area of Marxian Theory that so-called "mainstream" economists have been analyzing and there are a number of different conclusions. Some of those economists agree with Marx that profit rates are falling over time. Others believe Marx's theory on the matter is restricted to cyclical trends.
Living standards have been on the decline since the 60's in the third world.
Real wages have been on the decline since the 80's in the US.
Real wages have dropped in China recently (the pinnacle of capitalist growth)

If its a cycle, its a hella long one and there is no reasoning behind why it would be so, other than unscientific optimism. There is nothing to suggest that its going to get any better under capitalism.

I don't have the data on me and I'm feeling a little lazy but perhaps another member could post this.

[RichardAWilson]

I happen to believe Marx was right and the theory is more a law. However, like I said, it's hard as hell to prove due to the shortage of information.

[RichardAWilson]

In America, non-financial profits haven't been growing in line with GDP. This would seem to indicate Marx's Theory is, on the surface, quite valid. However, this trend would need to be compared against such "core profits" in the developing world.

http://www.businessweek.com/the_thread/economicsunbound/archives/Section1All_xls228_12782_image001.gif

[RichardAWilson]

Furthermore, measuring core profits in terms of after-taxed profits is misleading because the effective corporate tax rate has fallen since 1987. That means real corporate earnings have fallen even more in relation to GDP.

[Judicator]

In America, non-financial profits haven't been growing in line with GDP. This would seem to indicate Marx's Theory is, on the surface, quite valid. However, this trend would need to be compared against such "core profits" in the developing world.

Does Marx make a distinction between financial corporate profits and nonfinancial corporate profits? Capital is capital, isn't it?



Living standards have been on the decline since the 60's in the third world.
Real wages have been on the decline since the 80's in the US.
Real wages have dropped in China recently (the pinnacle of capitalist growth)

If its a cycle, its a hella long one and there is no reasoning behind why it would be so, other than unscientific optimism. There is nothing to suggest that its going to get any better under capitalism.

Should we be worried if wages are flat when world GDP has had massive gains in the last 40 years, amplifying our ability to reallocate wealth?

Also do you have a source on the claim about the third world? When talking about living standards in the third world since the 1960s, are you including countries that were third world in the 1960s but have since developed significantly (Asian tigers, etc)? If you exclude them, then almost by construction living standards will go down, since you've excluded everywhere living standards went up.

[RichardAWilson]

No, profits aren't profits and capital isn't capital in such plain terms.

Marx and others did provide a categorization for parasitical capital (finance).

http://www.marxists.org/archive/marx/works/1894-c3/index.htm

This Volume has an entire section dedicated to financial capital.

As such, when analyzing Marx's Theory regarding the Falling Rate of Profit:

Earnings have to be measured with the exclusion of (parasitical) financial profits.

[Dean]

http://www.isj.org.uk/?id=340

I don't know if the data supports the conclusions. First of all, Marx's falling rate of profit theory would have to be tested against global data. However, since such data isn't available, it's hard to verify the theory.

This has been one area of Marxian Theory that so-called "mainstream" economists have been analyzing and there are a number of different conclusions. Some of those economists agree with Marx that profit rates are falling over time. Others believe Marx's theory on the matter is restricted to cyclical trends.

Well there is another concept relevant here that hasn't been mentioned - the growth of fictitious capital, that is capital not strictly mediated through the production process. This creates profits without production, and it is a big part of what has led to the recent crisis (in addition to the homogenization of the credit market via securitization, which is the sharing of bad loans among many different investors).

I'm not a scholar on Marx, but most of what people reference in the tendency of the rate of profit to fall is related to production capital itself. The article you link to specifically defines Marx's concept this way, too. But Marx did talk about finance capital and fictitious capital as well. I'm just not well read on those topics in his theories... perhaps S. Artesian could pop in here and shed some light on that one.

[S.Artesian]

Well there is another concept relevant here that hasn't been mentioned - the growth of fictitious capital, that is capital not strictly mediated through the production process. This creates profits without production, and it is a big part of what has led to the recent crisis (in addition to the homogenization of the credit market via securitization, which is the sharing of bad loans among many different investors).

I'm not a scholar on Marx, but most of what people reference in the tendency of the rate of profit to fall is related to production capital itself. The article you link to specifically defines Marx's concept this way, too. But Marx did talk about finance capital and fictitious capital as well. I'm just not well read on those topics in his theories... perhaps S. Artesian could pop in here and shed some light on that one.


Kliman, Shaikh, Cockshott and others I'm sure have done evaluations of profit rates over the long term in the US, and the UK, economies.

As for fictitious capital.... I am not a big fan of the theory that says "fictitious capital" is essentially how capitalism has sustained itself for the last 40, 30, 20, or even 10 years.

I don't believe that fictitious capital creates profits without production. All these mechanisms, machinations, exchanges of claims/titles/contracts, all the positions truly are a zero-sum game, and represent the attempt to allocate portions of the total socially available profit, and are both the product of and the vector for the "self-devaluation" of capital.

Does fictitious capital exist? Of course. It always has accompanied the development of capitalism, from bogus stock offerings, to real estate scams, to flat out swindles. But capital's dilemma is its own existence which is its nightmare: that necessarily it can only realize the value it extracts, and that value has to be embedded, connected to, use-value.

[Paul Cockshott]

You are right on fictitious capitla, it is not a net source of profit financial engineering is a zero sum game.

[Dean]

You are right on fictitious capitla, it is not a net source of profit financial engineering is a zero sum game.

For the record, I was talking about profit in terms of currency, not value. I'm not familiar with Marx's concept of "profit" (I only know from some of his footnotes what he doesn't think profit is) so if it is tied to real value, than that wasn't what I meant. I "misspoke" to say that the financial instruments weren't related to production, also.

Thanks for the info, S. Artesian, though I was hoping for something more specific to the falling RoP.

[Paul Cockshott]

have just finished a defence of Marx's theory of it, I will try and post a link to it shortly.

[S.Artesian]

You are right on fictitious capitla, it is not a net source of profit financial engineering is a zero sum game.

Well, we agree on something.


For the record, I was talking about profit in terms of currency, not value. I'm not familiar with Marx's concept of "profit" (I only know from some of his footnotes what he doesn't think profit is) so if it is tied to real value, than that wasn't what I meant. I "misspoke" to say that the financial instruments weren't related to production, also.

Thanks for the info, S. Artesian, though I was hoping for something more specific to the falling RoP.

I don't understand what you mean by "profit in terms of currency." There's gaining market share by depreciating one's currency, one of the US's favorite tricks, but again that is redistributing the available profit-- like competition.

Tell me what you have in mind vis-a-vis rate of profit. Cockshott and Kliman have work available in .pdf format on the web that deals with their current/ contemporary evaluations of profit rates.

In the next Insurgent Notes I have a the 2nd part of my work on ground-rents, in which I discuss the US petroleum companies-- relating price movements to a rate of return on investment-- I use the ratio of net operating income to total capital investment as a proxy for the rate of profit.

Do I think the rate of profit acts, or better, is acted upon as Marx describes it in Capital? Yes, pretty much. Do I think fictitious capital, or finance acts as an offsetting, or countervailing tendency? Yes and no. Yes in that it redistributes profit and boosts that rate for some. No in that in general, for the whole of capitalist production, it remains a zero sum game. So that's an apparent "yes" that is an essential "no."

What "finance"-- what the banks do do to protect their loans, their assets, in companies is, when profit begins to stagger and fall, they do make companies spin off assets, attack wage rates, reduce benefits etc. etc. And reducing wage rates, shuttering in and selling off assets, etc. are countervailing tendencies.

[ar734]

In America, non-financial profits haven't been growing in line with GDP. This would seem to indicate Marx's Theory is, on the surface, quite valid. However, this trend would need to be compared against such "core profits" in the developing world.

http://www.businessweek.com/the_thread/economicsunbound/archives/Section1All_xls228_12782_image001.gif

The problem with this chart is that it describes aggregate profit and not the rate of profit. The rate of profit can decline while the total amount of profit climbs.

[S.Artesian]

The problem with this chart is that it describes aggregate profit and not the rate of profit. The rate of profit can decline while the total amount of profit climbs.

Quite true, in which case accumulation continues. However there is a close relationship in the longer term between r ates and masses of profit. And I think if we inserted a line for non-financial rates of profit for industry [construction, mining, utilities, manufacturing] in that chart we would see very interesting parallels and points of convergence.

[Paul Cockshott]

have just finished a defence of Marx's theory of it, I will try and post a link to it shortly.

[RichardAWilson]

The aforementioned chart that I cited does show a longer-term decline in the rate of non-financial profits. You’d have to compare that information to the nation’s GDP to show those relative changes.

Marx's Theory on Profit Rates is validated by Japan, the European Union and the United States. The problem is that there isn't much statistical data available for the industrializing economies. (Latin America and Asia)

[ar734]

The aforementioned chart that I cited does show a longer-term decline in the rate of non-financial profits. You’d have to compare that information to the nation’s GDP to show those relative changes.

Marx's Theory on Profit Rates is validated by Japan, the European Union and the United States. The problem is that there isn't much statistical data available for the industrializing economies. (Latin America and Asia)

Do you have a cite on the validation by Japan, EU and U.S.?

[RichardAWilson]

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_bad_decade_fo.html

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-09-028/EN/KS-SF-09-028-EN.PDF

According to Page 7: Profit shares have fallen in most of Western-Europe's advanced economies. Germany is the main exception to the trend. However, this was to be expected as German manufacturers switched production to Eastern Germany where labor costs were closer to Poland than Western Germany.

Another problem with this source is that it doesn't exclude changes in corporate tax rates.

In the few European countries that did record higher profit rates: it was because corporate taxes were reduced and had nothing to do with businesses becoming more profitable.

Had Europe's tax rates remain unchanged, there would have been a serious deterioration in the Mainland's profit rate.

http://www.aei.org/docLib/20021222_raengehass0212.pdf : Corporate Tax Rates Lowered.
http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf : International Comparisons.
http://www.bea.gov/scb/pdf/2011/06%20June/0611_domestic.pdf : More U.S. Data

[Paul Cockshott]

The aforementioned chart that I cited does show a longer-term decline in the rate of non-financial profits. You’d have to compare that information to the nation’s GDP to show those relative changes.

Marx's Theory on Profit Rates is validated by Japan, the European Union and the United States. The problem is that there isn't much statistical data available for the industrializing economies. (Latin America and Asia)

Look at this interactive web page which will give you profit rate plots for any country and compares these with the predicted profit rates that the dynamic marxian equations give for profit rates 3 years ahead.
It was prepared by one of my students and does a nice job of it.
http://compbio.dcs.gla.ac.uk/cgi-bin/profits/home.cgi

[Judicator]

No, profits aren't profits and capital isn't capital in such plain terms.

Marx and others did provide a categorization for parasitical capital (finance).

http://www.marxists.org/archive/marx/works/1894-c3/index.htm

This Volume has an entire section dedicated to financial capital.

As such, when analyzing Marx's Theory regarding the Falling Rate of Profit:

Earnings have to be measured with the exclusion of (parasitical) financial profits.

If you exclude financial profits, don't you have to include the gains excluded as regular corporate profits? Dividends, stock repurchases, and interest payments are paid by corporations to financiers, so are paid out of the "surplus value" firms get from workers.

[RichardAWilson]

Most financial profits are “earned” from milking consumers (the working classes) and public-sector institutions and organizations. As such, there is no creation of surplus value in the traditional sense.

As for earnings channeled from productive businesses to financial institutions (hedge funds, mutual funds, etc.), those profits are recycled - meaning that such profits are accounted for twice:

[Once when the company earns the profit and again when the hedge fund records a profit from the company]

As such, the financial sector can not "create value" in a direct manner. It can, of course, create such value in an indirect manner (by financing the business that creates the profit). However, when we're analyzing Marx's Profit Theory, it'd be irrational to include financial profits.

[RGacky3]

Most financial profits are “earned” from milking consumers (the working classes) and public-sector institutions and organizations. As such, there is no creation of surplus value in the traditional sense.


Exactly, thats why trades are done way more than neccessary.

The Financial industry, unlike production industries are not limited by a physical market, (nike is limited by the number of feet in the world), production industries thus have the problem of diminishing returns, also the financial industry is not a labor/capital industry perse (since its not a production industry) so you would'nt have the problem of constant capital taking up too much of the cost.