The long roots of the present crisis: Keynesians, Austerians, and Marx’s Law

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Figure 1. The ARP has been smoothed into a ten-year rolling average.

Figure 2. The US ARP measure is based on the whole economy.

Profits = net national product (BEA, NIPA table XX) less employee compensation (BEA NIPA table 6.2)

Constant capital = historic cost net fixed private non-residential assets (BEA, NIPA table 4.1)

Variable capital = employee compensation (BEA NIPA table 6.2)

Figure 3. The rate of surplus value =Profit divided by variable capital;
organic composition of capital = constant capital divided by variable capital

Figure 4. Data sources and methods can be found in Roberts M (2012).

Figure 5. Profits are from NIPA tables 6.17A, 6.17B, 6.17C, 6.17D: corporate profits before tax by industry. In the first three tables, utilities are excluded.

Fixed assets. The definition is “equipment, software, and structures, including owner-occupied housing” ( The data considered in this paper comprise agriculture, mining, construction, and manufacturing (but not utilities, see above). Fixed assets are obtained from BEA, Table 3.3ES: Historical-Cost Net Stock of Private Fixed Assets by Industry [Billions of dollars; yearend estimates].

Wages for goods producing industries and are obtained from NIPA Tables 2.2A and 2.2B: wages and salaries disbursements by industry [billions of dollars].

Employment in goods producing industries is obtained from: US Department of Labor, Bureau of Labor Statistics, series ID CES0600000001.

The money ARP is computed by dividing profits of a certain year by constant and variable capital of the preceding year conform the temporal approach. It is computed for the productive sectors. The best approximation to that are the goods producing industries. These are defined as agriculture, mining, utilities, construction and manufacturing. However, utilities are disregarded (see above). N.B. Constant capital includes only fixed and not circulating capital because of difficulties of estimating the latter on the basis of the available statistics. The inclusion of circulating capital would only depress the ARP further. See footnote 4 above.
Figure 6. Data from FRED, Federal Reserve Bank of St Louis
GDP = Real gross domestic product, BEA NIPA $bn chained 2005 GDPC96

Investment = Real private nonresidential fixed investment $bn chained 2006, PNFIC96

Corporate profits = Corporate profits with IV and CC adjustments sa annualised CPROFIT
Figure 7. Developed from Carchedi G (2012).

Figure 8. Data from IMF, BIS and author’s calculations

Figure 9. Data for Greece rom Eurostat Ameco database.

Net capital stock at 2005 prices: total economy (OKND);

National income at current market prices (UVNN);

Price deflator gross domestic product at market prices (PVGD);

Compensation of employees: total economy (UWCD).
Figure 10. Data from UK Office of National Statistics.
Net return on capital. Quarterly rates of return of private non-financial companies (%)
Business investment. Gross fixed capital formation of private non-financial companies, quarterly £bn
Figure 11. from Michelena G (2009) Figure 1, p90.
Figure 12. Data from Extended World Penn Tables

ARP = GDP (column X), employee compensation (N* w) and capital stock (K).   ARP = (X-N*w)/(K+N-w).
Figure 13. Data from ??? P 2002 Figure 3.3
Figure 14. op cit

1 The authors support the view that the only meaningful rate of profit in Marxist terms is one based on measuring constant capital in historic costs. But there are differences among the supporters of this thesis. A. Kliman (2012) measures the rate of profit in historic costs and concludes that there was no significant rise in profitability during the so-called neo-liberal period. M. Roberts (2011) using a different measure of profit but with constant capital based on historic costs, does find such a rise. G. Carchedi (2011b) also finds a rise after 1986 in the average rate of profit for productive sectors. P. Jones (2012, p.7), ‘using a revised measure of historic costs’ also finds that there was a “recovery in the rate of profit following 1983 which was volatile, but significant.”

2 For a detailed analysis of the redistribution inherent in the process of price formation, see Carchedi, 1991.

3 The empirical material in this section concerns the whole of the US economy while section 2 focuses on the corporate sector and section 3 on the productive sector only (for the definition of the productive sector, see Appendix). The consideration of both only the productive sectors and also of the unproductive ones adds strength to our argument because, while the measures of the average rate of profit (ARP) and the shape of the cycle differ moderately according to whether the unproductive sectors are considered or not, the trends, the results, and the conclusions are the same.

4 All empirical research on the US rate of profit agrees with this statement. See Roberts (2009, 2011), Carchedi (2011a, 2011b, 2012, forthcoming), Kliman (2012), among others. See Roberts, op. cit. for references to other research. Basu and Manolakos (2010) applied econometric analysis to the US economy between 1948-07 and found that there was a secular tendency for the rate of profit to fall with a measurable decline of about 0.3% a year “after controlling for counter-tendencies.” Roberts finds an average decline of 0.4% a year through 2009 using the latest data.

5 The organic composition rose more in the productive sectors (see section 3).

6 See Carchedi (2011b) for the causes of the rise and fall of the Golden Age. See also below for a summary.

7 A similar pattern emerges in the productive sectors. Profitability peaked in 1997 (9.23%) and reached its lowest point in 2009 (4.45%). The organic composition rose from 1.75% in 1977 to 2.4 in 2008. The rate of exploitation fell from 25.38% in 1997 to 16.34% in 2009. Profitability rose from 2002 to 2006. So many analysts argue that the crisis cannot be due to falling profitability. Carchedi (unpublished paper) provides an exhaustive answer. Suffice it to say that the ARP rose because the rate of exploitation rose dramatically from 13.1% in 2003 to 40.2% in 2006. So the cause of the increase in the ARP was greater exploitation. A sustained recovery starts when more surplus value is produced and realized in the productive sectors rather than appropriated in distribution. There was no such recovery between 2003 and 2006, only super exploitation. From 2006, the rate of exploitation starts falling and so does the ARP because of the rise in the organic composition (from 2.1 in 2007 to 2.9 in 2010).

8 Basu and Vasudevan (2011), like a number of other authors, argue that the “current crisis cannot be viewed as a crisis of profitability”. Yet the authors also show that the cost of mechanisation rose six times faster after 2000 than in the previous two decades. So the downward pressure on the rate of profit was resumed despite a rising rate of surplus value or exploitation. Therefore the authors conclude “It was capitalism’s dynamic drive to accumulate and innovate that led to the potential erosion of profitability.”

9 Total US corporate profits reached a low at the end of 2008 of $971bn at the depth of the slump, but then recovered to surpass the previous peak and reach $1953bn by the end of 2011, but profits have declined since to $1921bn by mid-2012.

10 The rate of surplus value rose from 0.47 to 0.57, up to 2005, or 21%, while the organic composition of capital rose from 1.24 to 1.31 or just 6%. After 2005, the organic composition began to rise sharply, while the rate of surplus value tapered off. The rate of profit fell from 2006 onwards, a good year or more before the credit crunch and two years before the recession.

11 Minqi Li (2008)

12 Roberts (2012)

13 J. Smith (2010)

14 Following Marx, by destruction of capital, we mean essentially bankruptcies of firms and unemployment.

15 Michal Kalecki (1942)

16 The measure for the US rate of profit in Figure 2, section 1 is based on the ‘whole economy’ and not just the corporate sectors as in Figure 5. So the figures are based on different categories for the measurement of profit and fixed assets as a result. Figure 2 also starts in 1982, while Figure 5 starts in 1947. So the turning points in profitability differ slightly. Nevertheless, the same trends appear in both measures.

17 See Mitchell (1927), Tinbergen (1939), Haberler (1960), Feldstein and Summers (1997), Bakir and Campbell (2006) Camara (2010). More recently, Tapia Granados (2012), using regression analysis, finds that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44% of all movement in investment, while there is no evidence that investment can explain any movement in profits. Yet the Keynesians ignore this evidence and continue with the mantra that “it is investment that calls the tune”, to use the phrase of Hyman Minsky.

18 We disregard military Keynesianism.

19 This, by the way, undermines conventional economics at its very foundations because it shows the fallacy of equilibrium: demand and supply do not tend towards a price at which they meet. But even if they did meet, the fall in the ARP would upset that equilibrium and even if it were restored, it would be so at a constantly decreasing level of profitability. So there would be a tendency towards crises even if demand and supply met at each point.

20 This is a simplification. The state appropriates surplus value by e.g. taxing both sectors. The point is that sector I receives more surplus value to invest than that it loses to the state.

21 See Carchedi (2012)

22 See M Roberts (2012)

23 There is no affinity between this conclusion and that of the Austrian school. For the Austrian school the economy, if not tampered with, tends towards equilibrium (rather than towards crises, as in Marx) and government intervention is the cause of crises (rather than being one of the many countertendencies).

24 See Carchedi, 2011 (b). See also the latest IMF World Economic Outlook October 2012, chapter 3, on the reasons for the reduction in US federal debt after 1945. According to the IMF case study, high fiscal surpluses, strong GDP growth and inflation accompanied the reduction in the debt ratio, not Keynesian cuts in interest rates or increased budget deficits (although the IMF tries to suggest the former as the cause).

25 Carchedi, forthcoming

26 We are not arguing here whether Italy or the other weaker countries should retain or leave the euro. Rather, the purpose is to clarify the real advantages/disadvantages of reverting to competitive devaluation.

27 J Stiglitz, Is Keynesian economics dead?, 2002

28 A report by the Centre for Policy Studies (2012) argues that “Estonia proves that a turnaround through swift, sharp austerity is possible for a country provided … it is willing to undertake radical supply-side reform alongside curbing spending …What is needed are an end to “excessive borrowing, unstable welfare states, high debt burdens, unreformed and illiberal labour markets, excessive regulation etc”.

29 In 2010, Krugman seemed to recognise that there could be “debt-driven slumps”.  He wrote a piece with Gauti Eggertsson (2010) that argued an “overhang of debt on the part of some agents who are forced into deleveraging is depressing demand.”  Yet more recently, Krugman appeared to deny the role of public sector debt in crises.  Krugman says it does not matter in a ‘closed economy’ i.e. one where one man’s debt is another’s asset.  It’s only a problem if you owe it to foreigners.

30What follows relies heavily on the thoroughly researched paper by Manzanelli, 2010. Occasional reference will be made also to other studies on the ARP in Argentina. Manzanelli seems to ascribe the rise in the ARP in the post-convertibility period basically (but not exclusively) to the neo-liberal massive transfer of value from labour to capital (op. cit. p. 30, 36, and 48). But his data can be used to support Marx’s thesis that the movement of the ARP (and thus of the economic cycle) is basically determined by the movement of the organic composition of capital. Lower labour costs and higher exploitation weaken the tendential fall.

31 The rate of accumulation is the rate of growth of gross fixed capital stock less residential constructions.

32 A particularly important reaction to the crisis was the occupation of factories by the Argentinean workers. Between 160 and 180 factories had been occupied in 2004, employing about 10,000 workers (Atzeni and Ghigliani, 2007). There is no room here to deal adequately with this question. See Ghigliani, 2002 and 2003.

33 Manzanelli (2012, op. cit. chart 3), argues that the ARP falls tendentially since 1993 and that it rises up to 2010. It seems that for Michelena the long-term slump ended around 1985 and that the 1998-2002 crisis is a short, downwards period within a longer upwards cycle. These are important points that, however, can be overlooked because the question here is whether the Argentinean economy exited the slump due to devaluation and pro-labour redistribution or not and what lesson can be drawn for the weaker euro countries.

34 Nevertheless, to this day, Argentina has been cut off from international lending. At present, it is likely that Argentina will have to default again, on bonds issued in restructuring in 2005 and 2010 (Webber, 2012).

35 Writing from a capitalist perspective, Domingo Cavallo (2011), the former Argentine finance minister, pointed out that the improvement in the trade balance was ‘a piece of luck’, due to the greatly increased price of soya and not the result of competitive devaluation. While skyrocketing export prices have certainly improved the balance of trade, the basic reasons for the recovery are those outlined below.

36 But began falling again to 20.6% in 2009, in the onset of the new global crisis.

37 But after that year it started declining. It fell by 1.9 percentage points from 2007 to 2008 and by a further 5.9 percentage points from 2008 to 2009. After the 2001 default, imports controls and currency restrictions have been imposed, the government has tapped central bank reserves to pay its debt obligations, and inflation has been running at about 25%. These are indicators that the economy is running out of steam.

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