The Rate of Profit, 1929-2007 (R.I.P.)

by Jehu

clipart-r-i-p-1

Okay, so this is totally speculative so you don’t have to take it seriously.

Of course, no one takes anything I write seriously, so no change, right?

Great, let’s continue.

I have been looking at the data Andrew Kliman’s relies on to make his argument that Marx’s Law of the Tendency of the Rate of Profit to Fall at least contributed to the 2008 financial crisis.

For those who don’t know, Kliman was nice enough to show us much of his work on this subject. You still can find and download the original material here.

I do have a lot of questions about his conclusions, although I have long tended to agree with his argument. My questions have only increased once I began to dig into his data — and, I should add, it may not so much apply to his work as it does to my own approach.

However, if my approach is valid, Kliman’s conclusions are deeply flawed.

My questions begin with this chart:

The above chart is a visual representation of Kliman data on one measure of the rate of profit from 1947 to 2007. The measure in question is profit before taxes as a percentage of historical-cost fixed assets plus inventory of corporations.

For comparison, I also include the same measure based on current-cost fixed assets, because it was something of a controversy between Kliman, on the one hand, and the authors, Dumenil and Levy, on the other hand, which dataset was appropriate to Marx’s approach.

I don’t want to get into that controversy, because it is irrelevant to my point here, although I assume Kliman is right.

What I do want to note is the basic consistency between the two measures of the rate of profit over the period covered. While the two measures differ in magnitude of the rate of profit, they both show a clear upward sloping trend to the rate of profit after 2001. Kliman, who, no doubt, saw this upward sloping tendency himself, decided to massage the numbers in order to get his chart to look more like he thought it should look.

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Enter the MELT-adjusted profit rate (green line):

Kliman - ROP1

When Kliman adjusts his data according to some variant of the spurious “Monetary Expression of Labor Time” theory (which, contra-Marx, claims to measure the values of commodities behind the veil of their money prices), he produces a new measure for the rate of profit that is even lower than the current-cost measure and … uh … um … — shit! — still slopes upward from 2001 into the teeth of the 2008 financial crisis.

Thus, Kliman proves Marx wrong to the satisfaction of all of Marx’s detractors!

Oh, dear! Clutches pearls, swoons. (Roughly translated: “Wtf?”)

So, I thought to myself, I thought, “Jehu, you’re not really going to leave the fate of Marx’s labor theory up to the clumsy fumblings of this Kliman guy, are you?”

And I answered myself, “No.”

And fam said, “Are you talking to yourself about those dumb Marxists again, Jehu?”

Chagrined, I stopped muttering to myself and began to think about the problem posed by the failure of Kliman’s “Failure” to provide empirical verification for Marx’s Law of the Tendency of the Rate of Profit to Fall.

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Now, it seems to me the problem not only hinges on the rate of profit, but also the mass of profit.

Let me explain:

Ten percent of 1000 troy ounces of gold and ten percent of 100 troy ounces are both ten percent; yet the first ten percent equals 100 ounces of gold, while the second ten percent equals 10 ounces of gold.

Got that?

Suppose a capitalist in — say — 1929 invests a nominal capital of $20,670 having a value of 1000 ounces of gold  and realized 100 ounces of gold in surplus value as profit on this investment. The rate of profit on the capital, in value terms, on this investment would be ten percent?

Some time later — let’s say in 1976 — the capitalist makes another nominal investment of capital of $20,670, but this time the invested capital has a value of only 155 ounces of gold — and realized the equivalent of 15.5 ounces of gold in surplus value. The rate of profit in terms of value on this investment is still ten percent, right?

Now, are we to say the ten percent rate of profit in 1976 is the same as the ten percent rate of profit in 1929 when the same investment of money capital yields a surplus value that is only 15.5% as large?

Well, for one thing, we haven’t accounted for the difference in the amount of money capital required to produced a given mass of surplus value. In 1929, a capitalist had to invest a nominal capital of $20,670 to realize the equivalent of 100 troy ounces of gold in surplus value. In 1976, that same capitalist has to invest $133,770 — almost seven times the amount of money capital — to realize the equivalent of 100 troy ounces of gold in surplus value.

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Of course, the capitalist sees none of this diminishing mass of surplus value.

No one does.

The capitalist simply invest a certain amount of money capital, $20,670, and expects a return of ten percent, $2,067. It never occurs to the capitalist that, in 1929, the value of the investment amounts to the equivalent of 1000 troy ounces of gold, but in 1976 the value of this same the investment amounts to the equivalent of only 155 troy ounces of gold.

Nor does it occur to the capitalist that in the first case, the surplus value realized is equivalent to the value of 100 troy ounces of gold, while in the second case, the surplus value realized is equivalent to the value of a measly 15.5 troy ounces of gold.

The capitalist in both cases has realized ten percent profit on the invested capital and is satisfied with the result. And, yes, some years the rate of profit is well over twenty percent, while in other years it is below ten percent, but you have to take the lean with the fat, right?

Despite the decline in the mass of surplus value it would appear that our capitalist can go on enjoying a ten percent rate of profit forever! That is, apart from an occasional financial crash or three.

But is there something else at work?

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To answer the question of whether there is something else at work here, we must first fix a small problem.

Up to now, I have been using two very different and uncorrelated expressions of value. The first are the physical units of exchange value, gold. The second are the inconvertible dollars that the capitalist employs to make investments. At one point these two were linked so that a definite quantity of gold served as the standard of prices denominated in a definite quantity of dollars, but no longer.

Our first task, then, is to link these two expressions of the value of commodities together the way they were linked before society decided we didn’t need commodity money to express the value of commodities in circulation any more — for whatever reason.

And, “No”, I am not taking exception to that decision. I’m not a gold-bug or some shit. Just hang on. This is just a “what-if”, as in “What if the gold standard didn’t go away. Wtf, would have happened to capitalism?”

Just because some guy writes a piece of fiction about Hitler winning World War II, it doesn’t mean he is a Nazi, does it?

Oh, … uh, okay … well, never mind.

Well, this doesn’t mean that.

Got it?

All it means is that we are going to establish a baseline for dollar-denominated prices that is tied to a definite quantity of gold, one troy ounce. We are going to use the index the same way bourgeois economists use any so-called inflation measure to convert nominal dollar-denominated prices into constant dollar prices using some base year.

In our case, we will be using 1929 as our index year.

The great thing about 1929 is that we don’t even have to establish an imaginary price standard for that year, because there already was a price standard for that year, the gold standard:

20.67 dollars = one troy ounce of gold.

So, using this price standard as our index, we can now convert the prices of successive years using the following formula:

The dollar-denominated price of the commodity divided by the so-called average price of gold in that year, multiplied by the index year price standard.

To use my example above:

In 1929, an investment of $20,670, yields $2,067 in surplus value or the equivalent of 100 troy ounces of gold at the prevailing standard of prices:

$2,067 ÷ $20.67 = 100 troy ounces of gold

100 troy ounces of gold × $20.67 = $2,067

In 1976, the same investment of $20,670, yields $2,067 in surplus value or the equivalent of 15.5 troy ounces of gold at the prevailing average so-called market “price” of gold:

$2,067 ÷ $133.77 = 15.45 troy ounces of gold

15.45 troy ounces of gold × $20.67 = $319.39

Although in both cases an investment of $20,670 results in a ten percent profit of $2,067 denominated in dollar terms, between 1929 and 1976, the mass of surplus value in my hypothetical example has clearly contracted severely, at least by my untested calculation, a whopping 84.5%.

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Are my calculations valid?

Before you decide, let me show two other charts.

The charts won’t make your decision any easier.

The first chart is corporate profits before taxes between 1929 and 1979:

Kliman - ROP7 - PBT

The above chart shows two measures of profit before taxes between 1929 and 1979.

The first line (orange) is just a straight presentation of the data provided by Kliman and the BEA. As you can see, the line slopes upward at an ever increasing angle especially after 1969. The second line (blue), calculated using the method I described above, slopes upward but more modestly until 1966. It then begins to tilt downward until falling almost to zero by 1979.

If my calculations are valid, the blue line is saying corporate profits before taxes began flat-lining going into the 1970s crisis period, just as we would expect. The orange line says profits before taxes steadily rose all the way through the 1970s.

Which line do you think likely reflects the profitability of a national capital during the throes of one of the greatest periods of crises in the post-war era?

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The second chart I want to show is the rate of profit calculated on corporate profits before taxes against historical costs fixed assets for the same period:

Kliman - ROP6 - PBTHCFA

The above chart shows two measures of the rate of profit, measured as the profit before taxes against historical cost fixed assets of corporations between 1929 and 1979.

Again, the first line (this time yellow) is just a straight presentation of the data provided by Kliman. As you can see, the line meanders after reaching a high during and immediately after World War 2. After the late 1950s, it sort of drifts aimlessly without establishing any tendency. The second line (orange), calculated using the method I described above, also slopes upward until reaching a high point following the war, but begins to decline more or less modestly until 1966, when it also begins to careen downward until falling almost to zero by 1979.

If my second chart is valid, it suggests the rate of profit almost certainly began going south before the 1970s crisis period, just as we would expect if Marx’s Law of the Tendency of the Rate of Profit to Fall is correct. The other measure of the profit rate contradicts Marx’s law and says the rate of profit likely had no real tendency one way or another prior to the 1970s crisis.

Again, which line would you expect to see for the profit rate going into a period of one of the greatest post-war crises in history?

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Now, I have provided just two pieces of evidence that just looking the rate of profit alone may not be sufficient to establish what is actually going on in the so-called economy. This evidence suggests that the rate of profit actually fell below one percent during the 1970s crisis but this fall was not apparent to us in dollar denominated prices.

Kliman, who has written about this period briefly, has argued that owing to their experience during the Great Depression, the ruling class in the United States avoided allowing the US national capital to go through a full devaluation as it had in the 1930s. As a result the rate of profit never fully recovered:

“I argued that the rate of profit has a persistent tendency to fall but that this tendency is reversed by the destruction of capital (physically and in value terms) that takes place during economic crises and slumps. The destruction of capital restores profitability and lays the foundation for a new boom. However, in contrast to what occurred in the Great Depression and World War II, capital was not sufficiently destroyed during the global economic slumps of the mid-1970s and early 1980s, largely because of demand-management policies meant to prevent a repeat of the Depression. Thus the rate of profit has remained at a level too low to sustain a new boom.”

In fact, as you can see in the first chart accompanying this post, Kliman demonstrated no such thing with his data. Even his MELT-adjusted data hardly holds water in this regard and it cannot be defended on the basis of Marx’s labor theory of value.

However, to my complete shock, when I took Kliman’s data and applied my calculations to it, I produced this astonishing chart:

Kliman - ROP8 - PBTHCFA(CONSTANT)

I sat staring at the chart for some time; just trying to make sense of what I was looking at. The chart seems to suggest that the rate of profit, by one measure at least, fell to nearly zero by 1980 and indeed pretty much never recovered in the forty years since.

Kliman appears to be right that the rate of profit was too low to sustain another boom, but he just couldn’t prove his assertion going about it the way he did. In fact, after the post-war recovery, the rate of profit crashed sometime beginning in the 1960s and bottomed out at the end of the 1970s.

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Again, I don’t know if any of this is valid. I have just been trying to push it as far as I can push it to see how it works.

One big question that comes up is how the so-called US economy has been surviving so long while barely realizing any surplus value at all. I want to consider that in the next post.

In any case, it seems that the key to understanding what is happening is not [just] the rate of profit, but [also] its mass.