Posted by: Doug Henwood | June 26, 2012

Profitability: high, and maybe past its peak?

As every Marxist schoolchild knows, the profits “call the tune” for the capitalist economy, as Michael Roberts put it recently. He writes:

Despite the very high mass of profit that has been generated since the economic recovery began, the rate of profit stopped rising in 2011.  That’s a sign that the US capitalist economy will not achieve any significant sustainable growth over the next year so so.  The rate remains below the peak of 1997.  But the rate is clearly higher than in was in the late 1970s and early 1980s at its trough.  That can be explained by one counteracting factor, namely the record high rate of surplus value in recent years.  But it also suggests that there is still a long way down to go for US capitalism before it reaches the bottom of the current down phase.

That is not how I see it. I see a rather high rate of profit that has maybe begun to roll over—but only after a remarkable recovery from the Great Recession’s lows. Despite that, however, U.S. corporations are not investing much domestically, producing a gusher of what financial theorists call free cash flow.

Everyone who plays this game does it by different rules. Many esteemed Marxist profit-watchers adjust the official stats in numerous ways, such as trying to eliminate “nonproductive” activity. While I understand the interest in jiggering the numbers, no known capitalist can see or feel the adjusted rate of profit. What they (and their shareholders) care about is the actual rate of profit, reported in cash money, relative to the amount of capital that had to be invested to gain the return.

Under the rules I’ve written for myself, I measure the rate of profit by dividing the profits of nonfinancial corporations (before- and after-tax, from the national income accounts; it’s in table 1.14 here) by the value of the tangible capital stock (from the Fed’s flow of funds accounts, available here—just hit “download”). Here’s a graph of the results:

This is the long-term story I’d tell: after a peak in 1966 (coincidentally the year of the first serious credit crisis since the 1930s), the rate of profit declined hard through the miserable 1970s into a trough during the deep 1981–82 recession. But the class war from above, led by Volcker, Reagan, and the Shareholder Rebellion, succeeded in breaking labor, cutting costs, and speeding up everything. With that came a long upsurge in the profit rate, rising to a peak in 1997. This rise was the fundamental reason behind the great bull market in stocks of the 1980s and 1990s. (The market kept rising after the profit peak, but then came crashing to earth.) Profitability recovered rather quickly, coming close to the 1997 highs in 2005, then turned south. Note that in both cases, 1997 and 2005, the profit rate peaked well ahead of the economy—three and two years, respectively. (Note too that the tax code became more corporate-friendly: the 1997 and 2005 peaks after taxes were much closer to 1966 levels than the pretax measure.) And the 1966 peak was well ahead of the troubles of the 1970s.

While many lefties pronounce neoliberalism a failure, on this measure it looks like it accomplished just what it set out to accomplish: raise the profit rate back to its glory days. The subsequent peaks were a little short of 1966, before everything collapsed into inflation and diminished expectations, but not by much. To say that the rate of profit stopped rising in 2011—which is quite plausible, is to underplay the sharp recovery from 2009′s depths. And given the propensity of the profit rate to lead by several years, it’s quite possible that this crappy recovery could stumble on into 2014.

Strikingly, though you might think that with profits this high, corporate America would be investing with both hands in pursuit of more. But it isn’t. Here’s a graph of corporate cash flow (profits plus depreciation allowance) and capital expenditures:

Despite the strong recovery in cash flow, to record-breaking levels, firms are investing at levels typically seen at cyclical lows, not highs. Some cash flow is going abroad, in the form of direct investment, but still you’d think returns like these would encourage investment. Instead, they’ve been shipping out gobs to shareholder. Here’s a graph of what I call shareholder transfers (dividends plus stock buybacks plus proceeds of mergers and acquisitions) over time:

Though not at the preposterously elevated levels of the late 1990s and mid-2000s, transfers are at the high end of their historical range. Instead of serving the textbook role of raising capital for productive investment, the stock market has become a conduit for shoveling money out of the “real” sector and into the pockets of shareholders, who besides buying other securities, pay themselves nice bonuses they transform into Jaguars and houses in Southampton. Is this a decadent phase of American capitalism, where its owners choose to liquidate rather than accumulate?

Profit may call the tune, but it doesn’t necessarily guide the choreographer.

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  1. Interesting blog post. (sorry if i have posted twice trouble logging in)

    One question, what do you think the spending on luxuries will do for the economy? I did some reading recently on Marxism and productive and unproductive labour and spending,

    While there were many things open to debate, most of the accounts were clear that spending on luxuries undermined accumulation either being exchanged against revenue rather than capital, and/or doing nothing to cheapen either labour or technology – although the recipient of the money paid for the goods would invest etc. A sort of counter-countervailing tendency.

    So if ever greater amounts of surplus are being consumed on luxuries then the next time I see a capitalist buying a house in Southampton (in the UK you wouldn\’t actually buy a house in the same named place as a sign of wealth), should I toast them for speeding the decline of their social system?

    BTW I tend to agree with you on the rate of profit, Marx said the capitalists couldn\’t explain the decline not that they didn\’t recognise it falling.

  2. I can’t help but think there is an ongoing PR effort by Big Oil, Banks, Insurance, Medical, and any of the Big Recipients of Tarp to say “OK–maybe the Festival must end…(!)” (with an eye askance on Europe) after a 2 year run of headlines declaring the Highest Profits in the Financial History of the U.S….You’ve practically got the Socialist International canvassing outside supermarkets thinking it’s time for U.S. Middle Class Refugees to briefly listen to the Preachments of the Mentors of Sense-Makers like Bernie Sanders–or Michael Moore–or Robert Reich….and these embattled Occupy-Vets are getting another Meteor Shower from the Supreme Court as we stultify ourselves on the Numbness-Producing Testimony of CEO’s dis-avowing any guilt in the Hearings….How MUCH MORE PROFIT TAKING without even a “TRICKLE” (sic) of breakage dripping in our direction will it be before somebody up there in the “Buzzard’s Nest” chokes it out…..?

  3. [...] Doug Henwood has a post on Left Business Observer news blog which disagrees with Michael Roberts’ Profit calls the [...]

  4. 1. People who look at the Kalecki profits equation are arguing that profits are likely to fall again if government spending is cut, as seems likely (e.g., and somewhat unexpectedly, the GMO money management firm:

    2. Shareholder transfers of non-financial corporations is probably not the majority of the post-capitalist looting. Much of the wealth transfer happened within the financial system, for one thing. I realize the Z.1 report does not, for some reason, include the same info for financials as it does for non-financial corporations; I do recall reading somewhere about how financials took up a much greater percentage of corporate profits over the years. Also, while not the case recently, the creation of private debt, and therefore reallocation of purchasing power, overwhelms corporate profits in the years before the 2008 crisis (eyeballing it it looks like private debt grew by 20% of GDP in 2006).

  5. I’m having trouble getting around the much mocked Say’s Law here, unless one defines increased investment as an expansion of credit or the money supply.

    Money goes somewhere, even while sitting in the bank (i.e. not invested) it is put into money market funds which largely buy bonds. If it’s going to stockholders they are buying stuff which may be wasteful and decadent, but is going into circulation, increasing demand for products which require manufacture. The money is not being buried in someone’s back yard like gold in ancient India.

    To increase investment beyond this level of hard money circulation it seems there must be an increase in credit and fractional reserve lending, i.e. some sort of “animal spirits”.

  6. “Money goes somewhere, even while sitting in the bank (i.e. not invested) it is put into money market funds which largely buy bonds.”

    Is this true? I thought unlent reserved had skyrocketed? I profess ignorance on this issue.

  7. Myabe the fact business isn’t investing shows that your underlying analysis – of high profit rates until recently – is incorrect and that Roberts has a better understood what is happening.

  8. Hi Doug
    Thanks for referring to my recent post. I like your analysis and I don’t think that we really disagree. Your data confirm exactly what I have said in my blog that profitability peaked in 1997 to end the neoliberal era and, although profitability recovered after the Great Recession, it is still below that 1997 peak. My argument is that it will be downhill from here towards lows not seen since 2001 or the early 1980s (at least on the measure you use).

    I also have highlighted the huge buildup in cash by US corporations and their failure to invest it, instead passing it onto shareholders or abroad. I reckon that is happening because, although domestic profitablity has recovered, it is not back to neoliberal heights, and will be heading down from here. And as you say, even in the neoliberal era, profits went mainly into the financial sector and not into the ‘real’ economy, showing the increasingly ‘rentier’ nature of US (and UK, by the way) capitalism.

    Michael Roberts

  9. Your evidence of high transfers to shareholders rather begs the question what happens to that cash? Is this all being eaten up by luxury consumption? Also, what explanation would you give for the low rates of investment, if it is not the classical Marxist explanation of falling profits?

  10. As you’ll see, Roberts doesn’t disagree with me really. And I don’t say how you can argue with the fact that profits have been high. They have been.

  11. I don’t see how you can argue that profits are falling when, in fact, they’ve been rising.

    Nonfinancial corps have been accumulating financial assets. In 2000, tangible assets were about 93% of GDP, and financial, about 86%. In the first quarter of this year, tangibles were 99% of GDP and so were financial. The gain in tangible assets was 6 points – but 13 points in financial.

  12. Are not present austerity policies, savaging of the social safety net, and further weakening labor power likely to be successful in the long run. At present however, with demand down partly due to these policies and the financial situation in Europe and the U.S. uncertain capital is following a risk off strategy. For this reason a lot of capital is sitting uninvested.
    Liberal economists such as Krugman see the austerity policies as counter productive since they reduce growth and increase debt.. While he has a point the other part of the story is that labor is continually being weakened. The reserve army of the unemployed is growing by leaps and bounds. While some growth mechanisms may be introduced austerity measures will no doubt strengthen capital’s power over labor and increase the rate of surplus value extraction. Or as the neo-liberal theologians would put it, make sinners such as Greece, Spain, Italy etc. more competitive.

  13. I don’t see Doug’s data contradicting the stagnation thesis of the MR crew (Foster and Magdoff specifically).

    The neoliberal arsenal (wage repression, privatization, offshoring, etc) working in tandem with the use of asset-price bubbles and more generally the explosion of the FIRE sector and private debt (Braudel’s rentier capitalism anyone?) have counteracted Ye Olde Tendency for Thee Rate o’ Profit to Decline but at the expense of the masses (to use a quaint term) and clearly not in a fashion that has thwarted crisis. That’s my take.

    So I’m curious whether Doug or Michael substantially disagree with the MR analysis. Whatever the case, thanks for all the number crunching that forms the basis of the conversation.

    Andrew Loewen

  14. Wealth appears as commodities in societies under the rule of Capital. Commodities have to be sold before realising themselves as profits. Sales depend on the markets/people having the universal equivalent for commodities in their pockets. No cash, no sale, which is why 15 million children die of starvation every year on planet Earth under the rule of Capital. I know that real wages in the USA have been flat or worse for decades. I would bet that there has been a similar story with real wages on a world wide scale. With average real productivity increases of 1.5%, commodities become cheaper, still with real wages stagnant, the markets for these commodities dry up to some extent. So, the capitalists with cash in hand don’t invest in hiring more workers to produce more goods and services because commodities are only produced when a sale can be made.

    Obviously, the real is no longer rational. Shorter work time, legalised and enforced by the political State, would restrict the supply of workers in labour market and raise the price the labour power. However, barely anyone on the left and of course, nobody on the right is barracking for an increase in the real wage and leisure time. And so it goes….

  15. Andrew
    As I understanrd it, the MR stagnation thesis is just that – based not on the cause of the crisis NOT being due to a fall in the rate of profit but DUE to an increasing surplus that cannot be realised and leading to stagnation. This is close to an underconsumption view of crisis.

    You can take that view but I don’t think it is correct or has the same explanatory power of Marx’s law of profitability as the cause of recurrrent crises. Have a look at my arguments on these matters on my blog. In particular,

    Michael Roberts

  16. Thanks Michael. Look fwd to reading. The seeming endlessness of TRPF debates, which at their most ecclesiastical spit the word “underconsumptionist” like it’s venom, reminds me of Fredric Jameson’s quip (roughly): “I regard the tendency for the rate of profit to fall as an essentially metaphysical question.” I guess where I differ from hardline TRPF barristers is in thinking that the tendency can be counteracted through various means, at least temporarily (though I agree with you that massive systemic shakeout – destruction of capital – is periodically necessary to restore profitability, as in the late 19th century and again in the 30 and 40s). Here I find that David McNally offers a compellingly nuanced assessment of profitability in the neoliberal era, which more or less jibes with Doug’s analysis (actually citing Doug if I recall).


  17. Transvalue
    I agree. I think my analysis is nuanced in the same way as you pose it and and does David McNally. Again I have posts on this too!

  18. Yes, I should say I’m a regular reader and great admirer of your blog, Michael (haven’t read your book though I confess). Just today I’ve already shared around your most recent post on Spain and Merkel. Your writing is lucid and clear w/o sacrificing insight and nuance. Thanks for it.


  19. Henwood wrote: “no known capitalist can see or feel the adjusted rate of profit. What they (and their shareholders) care about is the actual rate of profit, reported in cash money, relative to the amount of capital that had to be invested to gain the return.”

    Absolutely right, but the amount of capital that had to be invested to gain the return is ABSOLUTELY NOT what Henwood is measuring the profit against. He’s measuring it against the REVALUED stock of assets. (Doesn’t he know that?)

    As a result, the story he tells doesn’t hold water.

    The government’s series for the net stock of fixed assets valued at historical (original) cost is a much better measure of the amount of capital that had to be invested to gain the return. It’s what I use. And I find that there was no sustained recovery in the rate of profit from the trough of the early 1980s. When profit is defined inclusive of the portions that pay interest and sales taxes, U.S. corporations’ rate of profit continued to trend downward from the 12980s onward.

  20. In response to McNally’s reply to his review of McNally’s book, Joseph Choonara provides a detailed and informative critique here:

  21. I refused to get involved in any of these value theoretic games. They’re a total waste of time. Enjoy your day.

  22. Any series of numbers that “proves” that there was no recovery of corporate profitability from the early 1980s over the next 25-30 years is worthless.

  23. Ha ha. Well Doug, Marxists must have their own (Marxian) fetishes! (Which is to say I agree, for the little it’s worth. And the disrespectful tone and lack of courtesy often exhibited by hardline value theorists — not to mention any names! — combined w/ an exaggerated sense of their own persecution in the world reminds me of nothing more than 9/11 Truthers and conspiracy theorists.)

  24. Doug, if there is a difference between what you mean by “rate of profit” and what other people like Kliman and the TSSI adherents mean, can we have some explanation from you about your differences and why here? I’m not an economist but I think that measuring capital stock by historic costs is a more convincing measure because I thought that when capitalists sink $ into fixed assets they consider what they originally paid for them in relation to what they’re getting back (and what condition their means of production/constant capital is in) to evaluate the health of their venture. So too would an economy-wide temperature check be based on. This seems obvious because they don’t have a time machine to change their initial investment, so maybe you could shed some light on this question. These disputes don’t seem like games to me; on the contrary if one method shows an return of a healthy rate of profit and another shows a declining or stagnant rop, wouldn’t that have some serious political implications? I also don’t think this is an empirical debate over a “series of numbers”, but a theoretical disagreement between Marxists that is worth hashing out.

    Love your Pacifica show btw, especially the music breaks. Gang of Four, Ladytron, Penderecki, Beethoven, etc…pretty great stuff. Perhaps with the new PD, WBAI will reinstate Behind the News and Moorish Orthodox Radio Crusade to the New York airwaves. There’s going to be a listener board meeting on Wednesday at Alwan Center in downtown Manhattan. I’ll be there and I encourage others to attend.


    transvalue, coyness doesn’t make your ad hominem attacks any less lame.

    “I guess where I differ from hardline TRPF barristers is in thinking that the tendency can be counteracted through various means, at least temporarily (though I agree with you that massive systemic shakeout – destruction of capital – is periodically necessary to restore profitability, as in the late 19th century and again in the 30 and 40s).”

    Uh, so did Marx, and one of his ‘fetishists,’ Andrew Kliman.

    “We have thus seen in a general way that the same influences which produce a tendency in the general rate of profit to fall, also call forth counter-effects, which hamper, retard, and partly paralyse this fall. The latter do not do away with the law, but impair its effect. Otherwise, it would not be the fall of the general rate of profit, but rather its relative slowness, that would be incomprehensible. Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.” Capital v.III, chap 14

    Please tell me what in your opinion distinguishes a “hardline” value theorist from just a run-of-the-mill one?

  25. I refuse to play this value game. Sorry.

    Glad you like the music, though!

  26. Doug, in all due respect, I think you irresponsibly refuse to “play” (support your claims) because you must know that what you call “the rate of profit” is not one in a very meaningful sense, and certainly not what businesses and investors seek to maximize. You hitched your wagon to the story that neoliberalism “accomplished just what it set out to accomplish,” and won’t engage in discussion that questions the theoretical and empirical basis for this claim.

    I’d like to thank Kliman for pointing me to that Choonara article eviscerating McNally’s response, and for also taking the time to clearly lay out and support his own arguments (what a concept!), one being that US corporations rop did not recover in a sustained manner after the early 1980s.

    I think this brief excerpt from The Failure of Capitalist Production nicely lays out the implications of this “game”:

    “Because the relationship between current-cost and historical-cost rates of profit has been quite unstable, judgements as to whether profitability has or has not recovered since the early 1980s depend largely upon which of the two rates is discussed. And claims that financial-sector problems and the process of financialization were the only underlying sources of the latest crisis and slump, because profitability rebounded after the early 1980s, can be correct only if the current-cost rate of profit is a valid measure of profitability. Replacement-cost versus historical-cost measurement is thus a matter of considerable empirical significance. A choice must be made.”

    Henwood made his choice, but refuses to explain himself. I guess he feels like he’s unaccountable to people who are struggling for a better world and are looking for explanations about what has been going on economically.

  27. I’d agree with Doug on this, basically. I’d just make the following three points:

    1) When Marx was talking about the rate of profit, he was talking about a value relationship between production capital and surplus value in a simplified theoretical model of the dynamics of capitalist competition. But this is not the same as the actual “internal rate of return”. No business calculates its profit in the way that Marx does for the purpose of his theory of how the capitalist system evolves.
    2) Marxists have invariably based their profit rate calculations on value-added statistics and official estimates of fixed capital. But most of them haven’t got a clue about how value-added is actually computed in national accounts. In reality, real gross profit and the gross profit included in value-added diverge, for numerous reasons. Probably the only thing that can be achieved with this type of calculation is a very rough indication of whether the longterm trend is up or down. Most scientific econometrists agree that longterm time series for price data are unreliable, because of the number of qualitative changes occurring over the years, which affect consistent measurement. Again, at best you can suppose they give a rough indication of whether the longterm trend is up or down. As regards fixed capital, all professional statisticians I have talked to regard its value as notoriously difficult to estimate accurately, because already at base data all kinds of different valuations are being used. In summary, value added and fixed capital measures are theoretical constructs providing only a vague indication of magnitudes.
    3) Marxists act as though production capital is the only capital that exists, but in reality, private sector capital tied up in means of production actively used to produce products and services is only the minor part of the total social capital in the United States. This can be verified quite easily from BEA and budget data and FoF data. This means that there exists a very large stock of capital assets (physical and financial assets) which is not involved in production, but which is also being bought and sold for profit. Once you factor in this hybrid structure of capital accumulation, quite a different picture of what the total economy looks like results. The “fundamental Marxist theorem” is simply wrong, for numerous reasons. Hitherto this has been completely ignored in Marxist analysis, although I have been pointing it out for ten years or more in various forums.

    Econometrically you can show quite easily that even if Marx’s value rate of profit does show a longterm tendency to decline, this does not mean at all that the actual profitability of business needs to decline, or decline to the same extent – once you drop the assumption that the profits which business makes are attributable only to real new output, rather than, say, asset sales.

  28. There’s a nice NBER paper on the estimation of fixed capital stocks in the US It affirms plainly that there are only two ways to measure fixed capital stocks: either by direct survey of the stock of enterprises, or by some variant of the perpetual inventory method (which assumes you have a benchmark stock figure to start the series).

    In the former case, you strike the problem that enterprises themselves value their fixed capital by all kinds of different methods – historic cost, replacement cost, current market value, etc. In the US, what is permissible in this regard for tax purposes moreover differs from state to state.

    In the latter case, even if the fixed capital investment data is fairly accurate and consistent (it often isn’t, because of changing boundary problems, valuation problems etc.), the depreciation and price inflation assumptions made, may not be an accurate picture of the real situation. That problem becomes bigger, the longer your time series are.

    “Economic depreciation” differs from the actual depreciation and the depreciation for tax purposes. It’s a theoretical construct. The problem here is that even if we can mathematically show the logically possible margins of error associated with different kinds of estimation for depreciation write-offs, there usually exists no way to verify the results of the PIM procedure against actual survey data. Again, we end up with a theoretical construct without being able to tell how accurately it reflects the real situation. At most we can rule out some procedures which lead to completely “implausible” results.

    For this reason, I find Kliman’s excessive concern with the issue of “historic cost” versus “replacement cost” rather peculiar. Because, mathematically speaking, the whole depreciation procedure, changes in asset boundary definitions, and revisions of price indexes must have a far greater effect on the quantitative result.

    It is quite apposite to say that in today’s world, national accounts data are “fetishized” – even although the data is based on an enormous number of assumptions, even although it is often far from accurate, and even although it is very often significantly revised over the years, people attribute an enormous significance to even small fluctuations in the aggregates, and try to do very precise calculations with them. In the real world, that is just not warranted. So when I read Michael Roberts saying that the rate of profit has gone up a percent or down a percent, I just have to laugh. You might as well try reading tea-leaves!

    Why is national acounts data fetishized in this way, and given a power and veracity which it inherently cannot offer? I suppose the main reason is that we just don’t have any other comprehensive macro data that we could easily use as an alternative. The fetish reaches new heights when people interpret GDP as a measure of the “whole economy”, even though this is scientifically speaking a fallacy. The other part of the story is, of course, that national accounts data are endlessly misused, by people who have no knowledge of how the data is produced. It is sad that Marxists in their “critique of political economy” fall into the same trap.

  29. [...] from Robert Brenner, see also Henwood.) What the expansion of consumer credit permitted, in other words, was the appearance that [...]

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  32. Agree with your assessment.
    Kliman’s obsession with historical cost is a result of his failure to see capitalist accumulation as a cycle. Capitalists have to replace their fixed capital when it is obsolete or worn out at the current cost they can purchase its replacement at, not the historical cost or purchase price they paid for it.
    This is why depreciation is charged at current cost in the national accounts. Paradoxically as historical costs are lower than current costs, almost always, Kliman’s method overestimates the rate of profit.

  33. Kliman’s “obsession” with historical cost is due to his “obsession” with telling the truth. What “rate of profit” MEANS is “rate of return on investment.” No one appointed Humpty Dumpty Henwood or Humpty Dumpty Jefferies to be the master of words. They are not entitled to use words to mean whatver they choose them to mean. There is nothing wrong with looking at some different measure IF one refrains from misleading people by calling it “the rate of profit.”

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