the persistent fall in profitability underlying the current crisis

6 11 2009

by Andrew Kliman

I have just released a new study of the rates of profit of U.S. corporations, 1929-2007, with emphasis on the period since the early 1980s. It’s entitled “The Persistent Fall in Profitability Underlying the Current Crisis: New Temporalist Evidence.

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You can obtain the text, and an accompanying spreadsheet file containing data and graphs, by clicking on the link.

Please note that the study is kind of long — 27,000 words, 106 double-spaced pages. If you just want the main conclusions, here they are:

Conclusions

This paper’s principal findings are

1. U.S. corporations’ rate of profit began to fall about a decade after the end of World War II and the falling trend has persisted until the present time. Some measures of the rate of profit leveled off or increased very slightly after the early 1980s, while others have continued to decline. None indicates that a genuine, sustainable rebound in profitability took place.

2. Claims to the contrary are based on cherry-picking of the data and on the use of current-cost “rates of profit” that are not rates of profit in any normal sense.

3. The persistence of the fall in the rate of profit is not eliminated when rates of profit are adjusted for inflation in the general price level or in the monetary expression of labor-time.

4. Because the rate of profit has not rebounded, there has not been a growing divergence between the rate of profit and the rate of capital accumulation. The rate of accumulation has tracked the rate of profit quite closely, and the former has fallen in response to the fall in the latter.

5. Distributional changes account for little of the fall in the rate of profit because, apart from a one-time fall in the profit share of income in the late 1960s, there has been no sustained distributional change. Once that brief period is set aside, almost the entire fall in the rate of profit is traceable to a rise in the value composition of capital rather than to a fall in the rate of surplus-value.

6. The dominant cause of the fall in the rate of profit, by far, was the tendency of the rate of profit to fall toward a lower incremental rate of profit determined by the growth rate of employment and the share of profit that is reinvested. Changes in the profit share of income, and in the relationship between nominal prices and the real value of commodities as determined by labor-time, had a very minor influence.

7. Since 1982, the ratio of surplus-value to advanced capital seems to have fallen in relationship to the rates of profit derived from official government data, because of a marked increase in depreciation due to obsolescence (moral depreciation) resulting from increased employment of computer technology.

These results strikingly disconfirm the claim, which is based on the contention that the rate of profit has rebounded during the last quarter-century, that the present economic crisis is rooted in nothing deeper than financial-sector phenomena (such as irresponsibility and deregulation that produced unsustainable asset-price bubbles) that are essentially unrelated to and separable from movements in profitability. They therefore fail to lend support to the now-fashionable belief that greater state control over the financial sector will suffice to prevent the recurrence of similar crises in the future.

My findings also indicate that Marx’s law of the tendential fall in the rate of profit fits the facts remarkably well. The substantial explanatory power of this law can be seen especially in the fact that the principal source of the fall in the observed nominal rate of profit was the pronounced tendency for the rate of profit to fall toward a lower incremental rate of profit that is regulated by the factors that the law singles out (the growth rate of employment and the rate of surplus-value that is reinvested).

It is time to reclaim this law and the value theory in which it is grounded. Yet they cannot be reclaimed as long as the myth that they have been proven to be internally inconsistent is allowed to persist. The record needs to be set straight, and the “Marxian economics” tradition ––which has given us “consistent” but spurious current-cost rates of profit that head ever upward while the economy goes down the tubes and, as a direct result, Marxian theories of the current economic crisis that take surface financial-sector phenomena to be essential causes of the economic crisis––needs to be repudiated.

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14 responses

10 11 2009
James Heartfield

Kliman’s error is to assume that an empirical fall in the rate of profit alone confirms Marx’s theory of the tendential fall in the rate of profit. But Marx anticipates a fall in the rate of profit consequent on a relative increase in what he calls ‘constant capital’ (roughly outlay on machinery, plant and raw materials) to ‘variable capital’ (… Read Moreoutlay on wages). Though the empirical law of profit has indeed fallen, the empirical ratio of constant to variable capital has not risen, but remained static, or (in the case of Britain) fallen. In short, profits are falling, but not for the reasons that Marx anticipated in Volume 3 of Capital

10 11 2009
c0mmunard

Hi James, thanks for the comment. Please could you point to data on changes in the OCC internationally? e.g. an article which goes over it?

10 11 2009
James Heartfield

ILO figures are best on labour force, those on ‘constant capital’ are more dispersed.

This is my article on the question http://platypus1917.org/2008/12/01/living-marxism/

10 11 2009
Andrew Kliman

James Heartfield either has not read my paper, or has not understood it, or has decided to misrepresent it.

He claims that “Kliman’s error is to assume that an empirical fall in the rate of profit alone confirms Marx’s theory of the tendential fall in the rate of profit.”

NOWHERE do I assume that or anything remotely like that.

Heartfield goes on to talk about the relationship between constant and variable capital–presumably in *nominal* terms. My paper looks at that relationship, but I *explicitly* caution that my test of Marx’s law of the tendential fall in the rate of profit is not based on it. On pp. 71-73 of “The Persistent Fall …,” I write:

“The results of this section are consistent with Marx‘s law of the tendential fall in the rate of profit. The law says that labor-saving technical progress under capitalism causes the technical and organic compositions of capital to increase, that the value composition of capital consequently tends to increase as well, and that this in turn tends to lower the rate of profit. …

“Although the results are consistent with Marx‘s law, I would not wish to claim that they confirm the law. A single country, not the world‘s total social capital, has been analyzed here, and the proxies to Marx‘s variables that have been employed are very far from ideal.

… “Another important discrepancy is that my proxy variables are in nominal terms, …. the law cannot properly be tested by means of an analysis that deals only with movements in the nominal rate and its components. As a test of the law, and especially as an explanation of the observed movements in the rate of profit in the U.S. corporate sector, the decomposition analysis that will be reported in the next part of this paper is much superior, …. Thus, to repeat, the above results are consistent with Marx‘s law, but I do not claim that they confirm it.”

Let me also note that the “Conclusion” of the study (above) explains why I conclude that Marx’s law fits the facts remarkably well. It has NOTHING to do with the bare fact that the rate of profit fell, and NOTHING to do with the nominal relationship of constant to variable capital (i.e., the value composition of capital). On the contrary, I write:

“The substantial explanatory power of [Marx's] law can be seen especially in the fact that the principal source of the fall in the observed nominal rate of profit was the pronounced tendency for the rate of profit to fall toward a lower incremental rate of profit that is regulated by the factors that the law singles out (the growth rate of employment and the rate of surplus-value that is reinvested).”

In short, Heartfield’s comment is a serious misrepresentation.

11 11 2009
Andrew Kliman

Above, I wrote,

“James Heartfield either has not read my paper, or has not understood it, or has decided to misrepresent it.

… “In short, Heartfield’s comment is a serious misrepresentation.”

Unfortunately, I clicked the “submit” button before noticing that “misrepresent” appears in both sentences. So let me make clear that I am not claiming that Heartfield “*decided* to misrepresent” the paper. The misrepresentation may be an unintentional one caused by failure to read the paper before commenting on it, or failure to understand it before commenting on it.

11 11 2009
James Heartfield

Andrew is right to say that I was responding to the article posted here, and not his paper. Perhaps it was too aggressive to open ‘Andrew Kliman’s error…’

But looking to the argument rather than the person, it still seems to me that you cannot argue that ‘Marx’s law of the tendential fall in the rate of profit fits the facts remarkably well’ without meaning that Marx’s account of the rising organic composition of capital fits the facts remarkably well. (Unless of course you mean that Marx’s law of the tendential fall in the rate of profit is not so connected to the rising organic composition of capital.)

Andrew says in his article that ‘The rate of accumulation has tracked the rate of profit quite closely, and the former has fallen in response to the fall in the latter’, suggesting that he does see profits falling as a consequence of overaccumulation. But I cannot see how that can be squared with the growth in the US – and world – workforce which has at least kept pace with investment in what Marx called ‘Constant Capital’, and appears in fact to have outpaced it.

11 11 2009
Andrew Kliman

I accept James Heartfield’s clarification and misgivings about what he wrote orginally.

He now writes, “Andrew says in his article that ‘The rate of accumulation has tracked the rate of profit quite closely, and the former has fallen in response to the fall in the latter’, suggesting that he does see profits falling as a consequence of overaccumulation.”

I think it suggests instead that overaccumulation (a too-high rate of accumulation) is a consequence of falling profitability. And that’s what I argue in part VI of “Persistent Fall.” If the point is that constant capital grew faster than profit, I do suggest that (and say it, and provide the data to show it).

He also writes, “it still seems to me that you cannot argue that ‘Marx’s law of the tendential fall in the rate of profit fits the facts remarkably well’ without meaning that Marx’s account of the rising organic composition of capital fits the facts remarkably well. (Unless of course you mean that Marx’s law of the tendential fall in the rate of profit is not so connected to the rising organic composition of capital.)”

I don’t mean the latter. Nor do I *mean* the former, although, as I noted yesterday, the facts are indeed consistent with Marx’s account.

As I show in part VII, section B, of “Persistent Fall,” the almost all of the fall in the nominal rate of profit (property income [= gross value added minus depreciation at historical cost - compensation of employees] as a % of the historical cost of fixed assets) in the U.S. corporate sector is attributable to the rise in the nominal VALUE composition of capital. Except during the 1968-1970 period, changes in the “rate of exploitation” (property income divided by compensation of employees) had very little effect on the rate of profit, because the “rate of exploitation” underwent no long-term change.

However, I don’t think it’s legitimate to conclude, on the basis of these facts *alone*, that the evidence confirms Marx’s law of the tendential fall in the rate of profit. These facts don’t tell us enough about the causal processes that produced the fall in the rate of profit.

There are two main problems. First, the nominal value composition of capital ($c/$v) differs from the organic composition that Marx’s law refers to, because of inflation (in the monetary expression of value) and because of changes in the prices of means of production compared to changes in wages (compensation of employees) per worker-hour. So a rise in the nominal value composition of capital isn’t necessarily the result of a rise in the organic composition referred to in Marx’s law.

Second, a rise in the organic composition is not actually a *cause* of a fall in the rate of profit; it is an *effect* of the actual causal processes (see part II, section D, of “Persistent Fall” for more on this). So I don’t find appeals to movements in the organic composition of capital sufficiently explanatory. (Appeals to movements in the value composition are even less adequate, for the reasons stated above.)

So, when I test Marx’s law (in part VIII), the analysis is conducted directly in terms of the causal processes. Since the processes that Marx’s law points to–inadequate employment growth in relation to the surplus-value that’s reinvested–were the dominant causes of the fall in the rate of profit, by far, I conclude that the law fits the facts remarkably well.

11 11 2009
James Heartfield

Andrew writes ‘a rise in the organic composition is not actually a *cause* of a fall in the rate of profit’ which is an interesting proposition, but it is not Marx’s. Marx says ‘The drop in the rate of profit is … due to … a relative fall of the variable part of the total capital, i.e. its decrease in relation to the constant part’, or in other words the fall in profit is due to a rise in the organic composition of capital (Capital, Vol III, L&W, 217).

Whether a rise in the organic composition of capital is the cause of a fall in the rate of profit is a pointless question, though, since the recent period has not seen a rise in the organic composition of capital. Between 1988 and 2008 US payroll employment grew from 104 million to 138 million, much more than the growth in the natural population. At the same time the rate of business investment remained static at around 13 per cent of output.

12 11 2009
Andrew Kliman

On 11/11 at 20:28:41, James Heartfield wrote, “Andrew writes ‘a rise in the organic composition is not actually a *cause* of a fall in the rate of profit’ which is an interesting proposition, but it is not Marx’s. Marx says ‘The drop in the rate of profit is … due to … a relative fall of the variable part of the total capital, i.e. its decrease in relation to the constant part’” ….

“Due to” doesn’t necessarily mean “caused by.” Even use of the term “cause” doesn’t imply that one actually thinks the thing is a cause. Here’s what I wrote on pp. 19-20 of “Persistent Fall”: “As long as hypostatizations are not thought to be real[ ] entities, it does no harm to say that a theoretical construct rather than a process ’caused’ a phenomenon––for instance that ‘a rise in the technical composition of capital,’ rather than the process of technical innovation, ’caused’ the rate of profit to fall.”

And that’s the issue. Marx’s law of the tendential fall in the rate of profit specifies the actual causal processes. A test of the law should be conducted in terms of them when possible, not in terms of very imperfect proxy “causes” that are actually effects of diverse causal processes.

James’ side of this discussion still seems to suffer from his failure to read my paper before commenting on it. A comparison of 1998 and 2008 has nothing to do with the topic of my paper, the persistent, long-term decline in profitability as an indirect cause of the current crisis. Nowhere does the paper suggest that the decline in profitability was a direct cause of the crisis, nor that the rate of profit fell during the phony bubble-driven expansion earlier in this decade.

In any case, James’ methodology is messed up. When he writes, “payroll employment grew from 104 million to 138 million, much more than the growth in the natural population. At the same time the rate of business investment remained static at around 13 per cent of output,” this tells us NOTHING about whether there has been “a rise in the organic composition of capital.” His inference from these numbers that the OCC hasn’t risen is simply unwarranted.

The top figures imply a 33% increase in employment. The nominal organic composition will have grown if the nominal value of the advanced capital rose by more than 33%. A constant ratio of investment to output is not evidence that it failed to rise by more than 33%. One reason it isn’t evidence is that output may have increased by more than 33%. And there’s another one as well that I won’t bother to explain.

12 11 2009
James Heartfield

Well, you pretty much lost me when you said that ‘due to’ doesn’t mean ’caused by’ – it does. That is what Marx means, and what he says. Your jiggery-pokery with words does you no credit, since you are clearly arguing a heterodox reading of Marx, let us say a reconstruction of his theory.

12 11 2009
Andrew Kliman

I note that James Heartfield hasn’t responded to my critique of his messed up methodology.

I also note that he hasn’t responded to my point that he seems to be criticizing the conclusions of my study by appealing to data from a time period that is irrelevant to the conclusions.

He also misrepresents (not intentionally, I hope) what I wrote when he characterizes it as “‘due to’ doesn’t mean ’caused by.’” What I wrote was this: “Due to” doesn’t necessarily mean “caused by.”

And I am right about that. The 4th definition of “due” in the Merriam-Webster online dictionary (http://www.merriam-webster.com/dictionary/due) is

“capable of being attributed : ascribable —used with to .”

Movements in Y can be attributable to or ascribable to movements in X without the latter being the actual cause of the former. The 1st definition of “cause” in the Merriam-Webster online dictionary (http://www.merriam-webster.com/dictionary/cause) is

“a : a reason for an action or condition : motive
“b : something that brings about an effect or a result
“c : a person or thing that is the occasion of an action or state; especially : an agent that brings something about
“d : sufficient reason ”

In Marx’s theory, the tendency for the rate of profit to fall is “due to” (in the above sense) the tendency for the technical and organic compositions of capital to rise, but the latter tendency isn’t the “cause” (in the above sense) of the former tendency.

Mathematics works with independent and dependent variables, not “causes” and “effects” in the strict sense of the term. The following is an example of independent and dependent variables given at Math Forum (http://mathforum.org/library/drmath/view/61593.html):

“Let’s say I want to find out how deep in the soil a penny goes as
a function of the height from which I drop it. How would I do that? Well, I’d drop it from different heights, and measure how deep it goes. I can then come up with an equation that relates the height I dropped the penny from, x, with the depth it went into the ground, f(x).”

The depth of the penny is the dependent variable; the height from which it is dropped is the independent variable. But the height from which it is dropped is clearly not the CAUSE of the depth of its descent into the ground. The causes are gravity, the dropping, the decision to drop it, etc.

Nonetheless, if one penny descends 1 inch into the ground while another descends 2 inches, we can properly say that the difference is DUE TO the difference in the heights from which they were dropped.

15 11 2009
Nathan

Andrew, you are a serious scholar; I wouldn’t, however, expect a serious response. Heartfield – with his loyalties remaining to his pundit friends at Spiked Online and in the IoI – is not likely to engage with this level of scholarship.

Much easier to bang on about the defeat of the working class and promote the bourgeoisie as the only (even messianic) force left today — all the while denying said position in encounters with leftists, and sticking up for Furedi and his ilk and their PWC sponsored wine receptions!

15 11 2009
Andrew Kliman

Hi Nathan,

Thanks. Sometimes getting the last word has to serve as a substitute for a serious response.

Unfortunately, I can’t say much about the rest of what you’ve written here. Being in the US, I have only the barest familiarity with Furedi/Spiked Online, and unless PWC is PriceWaterhouseCoopers and lol is laughing out loud, these references are also over my head.

15 11 2009
c0mmunard

Nathan: please try to avoid apolitical ad hominem. Heartfield’s argument was neither ridiculous, wilfully dishonest, nor aggressive. Andrew’s replies were strong (and I have a lot of respect for his work in general, particularly Reclaiming Marx’s Capital, and alot of respect for the frustration he feels at the failure of the simultaneists to reply give proper attention to his arguments).

But the sort of argument Heartfield makes is understandable. It is hardly bad faith not to appreciate the subtleties relating to the definition of ‘due to': I myself would not have been aware of that distinction. I’m sure Andrew does not resent defending his theory, and he’s obviously quite capable of it.

Please keep personal feuds off the site as far as possible; your comment contributes nothing in terms of political content. I don’t know Heartfield, but he is as welcome as anyone else to use this site; indeed I am glad that he chose to begin the debate above. I also think his recent article on State Capitalism in Britain is worth a read (although I disagree with what I take to be Hearfield’s motivations for writing it):

http://libcom.org/library/state-capitalism-britain




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