Andrew Kliman’s (AK) new book (see my post, Andrew Kliman and The Failure of Capitalist Production, 8 December 2011) has provoked a very negative review from Bill Jefferies (BJ). BJ has posted, as a comment to my post on AK’s book, his review. And you can read it here http://www.permanentrevolution.net/entry/3388. Comments have been coming into my blog from both on some of the key issues of debate.
BJ reckons that AK is a “stagnationist” because he claims that the rate of profit in the US has persistently fallen without significant rises since the second world war, when it clearly has risen since the early 1980s. This means, according to BJ, that AK shows that the countervailing tendencies to Marx’s law of profitability ‘as such’ have not operated. The countervailing factors would be: a rising rate of surplus value, the cheapening of constant capital, the expansion into overseas markets for higher profit etc. BJ says that this cannot be right: wages have declined as a share of national income in the US; there was a technological revolution that cheapened the cost of investment hugely; and overseas profit rose, especially when the ex-Communist states collapsed and globalisation led to several emerging capitalist economies (BJ includes China here) became a powerful force. Indeed, BJ appears to argue that rates of profit in most capitalist countries, especially the newly emerging ones, were rising from 1982 onwards in contrast to AK’s claims.
But the “nub of the issue” for BJ is that AK measures profits as “property income” which includes all surplus value created by corporations, namely interest, taxes and transfer payments. BJ reckons that doing so distorts the measure of the rate of profit. He reckons you should exclude all these parts of surplus value that do not accrue to corporations, particularly taxes that end up in government hands are used to boost the ‘social wage’ of workers. If you take out this “government income” then the US corporate profit rate, even using AK’s method of valuing fixed capital, is much less dramatic.
Is BJ right to suggest this? Well, you can measure profit in many ways and each way may be more useful for certain purposes. In his book, AK discusses the merits of different ways (whole economy, business sector only, corporate sector only, non-financial sector only; or all surplus-value, before tax profit only; after-tax profit only etc). AK uses what he call ‘property income’ because he wants to show the class-based nature of the capitalist system and that means including all the surplus value created by the workforce, even if much of it is then redistributed to banks (interest); landlords (rent) or to government (taxes). I agree that this is the best measure of profit to understand the laws of motion of capitalism. Indeed, I have tried to measure profits in the whole economy, and not just the corporate sector as AK does, in order to capture the whole process. But if you want to know how profit drives new productive investment in the economy, a better indicator of profit might be after-tax profit.
The after-tax profit may show a much less dramatic fall in the rate of profit – but it still shows a fall. BJ does not show this in his review, but I worked out the after-tax profitability based on current costs (BJ’s preferred measure) and there is still a trend decline from 1950, although from 1965 at the end of the ‘golden age’ BJ’s after-tax profitability is basically trendless.
After-tax profitability is trendless from 1965 to 2009, but the reason for this is down to how the denominator in the rate of profit is measured. Remember that the rate of profit is measured as the mass of profit divided by the value of the stock of assets (namely the value of plant, machinery and other technology plus stocks of raw materials and other components). You can also add the cost of employees to that denominator if you wish. As any reader of AK’s material knows, he is vehement that, to measure profitability in any meaningful sense, capital stock must be valued in historic terms. That measures what capitalists paid for it before production starts and not what it could pay for at the end of production.
BJ denies this is right and quotes Marx to justify his view that Marx would have valued capital stock at its current cost. BJ argues that “Kliman is wrong to assert that the mass of the fixed capital stock must always be valued at its purchase price .. the effect of depreciation shows that technological progress reduces the value of the fixed capital stock from its purchase price to its current price. If Kliman were correct, capitalist crises would be impossible as the wholesale devaluation of the fixed capital stock could not take place”.
But is BJ right? Using historic costs as the measure of fixed capital does not exclude a devaluation of these costs in a crisis – usually that would happen when capital is liquidated in bankruptcies or even physically in war. At each new period of production, the historic cost of fixed assets would incorporate that cheapening of capital or depreciation just as it does using a current cost measure. What the historic cost measure does is provide a more realistic measure of the value that must be reproduced in any new production period to make a profit. Capitalists measure their profit against what the value of their fixed assets cost when they start production, not on what they might cost to replace them in the future. As AK says in his book (p112), “what makes the current cost rate of profit bogus is ….that it is not a measure of profit as a percentage of past investment”. Using historic costs, after-tax profitability still shows a trend decline after 1965 as well as after 1947.
Now it could be argued that the depreciation of fixed assets (not the value of the stock of assets) during the production period should be measured at current cost. That means the fixed assets are measured in historic costs, but the depreciation is measured at current cost. AK does this measure of profitability in his book, Figure 6.3 on p111. That figure shows that from 1982 there was a rise in the rate of profit to 1997 of 12%. That’s much less than the current cost measure which rose 45%, while AK’s favoured measure (historic cost assets and historic cost depreciation) fell 2% between 1982 and 1997. I ‘cherry pick’ 1997 because any reader of my blog knows well that it is my thesis that the period of 1982 to 1997 (the so-called period of neoliberalism) does show a rise in profitability, however you measure it. And this historic cost measure confirms that.
I also measured the US rate of profit measuring fixed assets in historic costs, but with depreciation in current costs. I find that the rate rose 12.1% from 1947-65, fell 25.8% 1965-82, rose 11.9% 1982-97 and then fell 17.4% 1997-09. The rate of profit was in trend decline 1947 to 2009, or from 1965 if you prefer, but there was a cyclical feature to US profitability.
BJ also argues that the rate of profit measure should include wages (variable capital) in the denominator as Marx did and also inventories in the measure of constant capital – in other words, circulating capital has been excluded by AK unreasonably. AK explains why in his book that he does that – basically data on the turnover of circulating capital are unavailable and/or unreliable. AK does try out a measure including inventories in his book (Figure 5.3). BJ argues that this measure shows again that the rate of profit does not fall so dramatically – but it still falls.
I have done a measure of after-tax profits that includes employee compensation and inventories, in other words, circulating capital. I’ve done it using the current costs measure to fixed assets. In other words, I have used all the categories that BJ wants altered or added from AK’s – and ignored all AK’s caveats about using these categories. It still shows that there was a trend decline in the rate of profit since 1950. Moreover, the rise in the after-tax rate of profit, using BJ’s categories, peaks in 1997 and subsequent peaks do not surpass that year.
Phew! So after all this to and froing with measures of the US rate of profit, what can we conclude? Since 1947 did the rate of profit in the US rise or fall or do nothing? On nearly all measures of the numerator and denominator, whether by AK, myself or all the other attempts by Marxist economists in the last decade, there was trend decline to 2009.
Was there a rise in the rate of profit from 1982 to 2009, suggesting a different era for US capitalism and suggesting that the rate of profit is not a key cause of the recessions of 1990-1, 2001 or the Great Recession? Many say yes, presumably including BJ. AK says no (or at least he says there was not a significant rise). I say there was a significant rise from 1982 to 1997, but since then US profitability has been in a down phase right up to now. Both AK and I conclude that Marx’s law of profitability is the underlying (not proximate) cause of capitalist crises and I think the empirical evidence for the US economy goes a long way to confirm that.
But I’ll come back again to interpretations of the US and other countries’ profitability data in another post.