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April 07, 2010


Luis Enrique

Yes, I think you're spot on with the idea that income inequality is to do with powerful workers negotiating a share of higher profits.

If you set aside the cyclical dimension (where fiscal policy plays a role) you suggest two reason why returns on capital might be rising - expansion of the global labour force, and anti-union legislation. I'm sure you're right, although I don't fully follow the story and wonder if there are other things going on. Where are these super profitable industries? If they are in, say, finance, media, law etc., it's not obvious to me how the factors you name are at work there. Would, say, giving unions more power and putting up barriers against trade really eat into profits in these types of business?

[I've got some lingering doubts about the data - especially the denominator: whether the accounting really captures what investment looks like in service economies]

Dave O

Well, you're the economist, Chris. Does this mean Harman-style crude TRPF analysis officially stands debunked?

Chris Williams

Hold up, I thought that the rate of return on capital, as measured by the kinds of returns an index tracker investment would get, was a lot higher 1950-1980 than 1980-2010. Was I wrong about that? And if not, how is it not a proxy for the rate of profit?

Chris Williams


The National Statistics office says "Profitability is defined as the net rate of return on capital employed. That is, it is the value of profits (allowing for depreciation) divided by the value of fixed assets (allowing for depreciation) and inventories."

This is not how some prominent Marxists would define profits and which - in the US - has led to different results.


Kevin Carson

If you left only their own money in the equation, and subtracted both state subsidies and the monopoly rents that result from state protections against competition, you'd probably still get a falling DROP. Most of the mushrooming profits of the past three decades result from state monopoly capitalism on a scale that Marx never imagined.


I thought that the Marxian analysis of profit included the social surplus as a whole, requiring an evaluation of data that differed from the official statisticians was of measuring rates of profit?


I'd emphasize a point well-made in that Kliman paper - that there's a big difference between observed profits and the incremental profit rate, the rate which acts as a spur to new investment. The very fact that capital spending has been low for years in the UK (and west generally?) suggests the latter is low.
Also, I'm not sure that quibbles about the measurement of profits - though well-founded theoretically - are a central issue. The fact is that in the 1970s there was an existential crisis for non-financial capitalism in a way that there is not today. This tells us that non-financial profitability is higher now than then.
I'm not sure how far this undermines Chris Harman's views. He might be right to say that profits have increased because the rate of exploitation has increased (esp in Chindia), and probably is right to say that there's a realization crisis, in the sense that high profits aren't inducing spending.


I guess this proved enough that you can run the economy of a country

Luis Enrique

ah - that was what puzzled me: if returns on invested capital are high, returns on bonds are low and cash balances high, why aren't we seeing an investment boom?

so ... we are observing a high average return on capital but a low marginal return?

Luis Enrique

What can explain a situation with high average returns on capital and low marginal returns?

One answer is high barriers to entry, but it's not obvious to me why there are high barriers to entry in the non-financial sector. Why can't competing firms enter, cut prices and erode profits? Perhaps the non-financial firms responsible for the high profits are support services firms & consultancies gorging on public purse via PFIs and similar? I can understand if there are barriers to entry there. I really would like to know more about the identities of the non-financial sector firms responsible for these bumper profits.

tory boys never grow up

One point that is interesting here is how the actual returns on capital are well below the 25% pre tax (c20% post tax) rate that is often set as a target in much of the investment community (and is much higher in most hedge funds). Quite clearly if investors set a higher target that what is achievable then this pushes investment to the higher end of the scale in terms of risk - which really explains a lot of what has happened. I am not sure that there has yet been an outbreak of rational thinking in the investment community however.

bill j

Kliman's position is pretty incoherent. His graphs do show a sharp rise in the rate of profit up to 2007 when the series ends. He discounts this though as it was the peak of the boom. And explains the crisis not by the rise of profits recently observed, but by its stagnation nearly 10 years before.
BTW based on his own figures, given the decline in the value of fixed capital stock over the last two years, but relatively strong mass of profits, I reckon his calculations will show a sharp rise in profit rates too, if not last year then definitely this.


Bill j, you make Kliman's point, the current debacle may destroy enough capital to raise profitability in the short term, however not enough for a sustained return over the 'business cycle', which is what is being measured, though of course time will tell.


Very interesting point and well made

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