The rate of profit since the Second World War

We are going to try to test the theories against ‘the facts'. The facts in this case are the record of economic statistics. Economic statistics are drawn up, for the most part, by honest people. With few exceptions, none are Marxists. They don't think in Marxist categories. For instance we saw earlier how Marx divided the value of a commodity into constant capital, variable and surplus value. Variable capital is outlay on wages, constant capital on all the other costs and surplus value is rent, interest and profit. These categories are needed to work out the rate of profit in Marxist terms, as we find out later.

This division does not concern the capitalist, or the economic statistician. The individual capitalist is more concerned as to whether he recovers his capital at the end of the production period (which is true both of wages and raw materials costs - together called circulating capital) or whether it is tied up as fixed capital (which means it can take years to get his money back). These are the concepts captured in economic statistics. Marx's categories just disappear from the statistical record. They can be quite difficult to recover.

The profit share can be measured as a proportion of national income. National income is a flow of revenues usually measured over a year. For our purposes Gross National Product and Gross Domestic Product can be regarded as the same thing as National Income (though there are some differences).  Deduct the share of wages and other factor income flows from national income as a whole and the profit share is what is left. It can be presented as P/Y, when profit is P and national income is Y.

The rate of profit is more difficult to work out than the share. It is shown as P/K where K is the capital stock. It is necessary to make sure the source of the stock figures for K are compatible with the flow figures for Y, and that they are compiled in the same way.

For Marx the rate of profit is calculated against the entire capital stock, whether used up over a year or not. One way to work out the rate of profit is to multiply the profit share by the output/capital ratio (Y/K). P/Y x Y/K gives you P/K (dividing both denominator and numerator by Y).

The rate of profit has been the heartbeat of capitalism throughout the whole period we are investigating. Generally speaking, periods when the rate of profit has been high have been periods when investment has been high (a rapid rate of capital accumulation), and periods of relatively high employment. All these generalisations refer to the advanced capitalist countries. These are the only countries with consistent and accurate statistics for the whole period. But these, after all, are the heartlands of capitalism that contribute so much to the rhythms of global capital accumulation.

Andrew Glyn and his fellow authors first made their name by analysing the emerging crisis of capitalism in the 1970s in terms of a profits squeeze. To identify this profits squeeze they looked at the rate of profit, but also at the share of profit in the national income.

Let us look first at the evidence from Capitalism since 1945 (Armstrong, Glyn and Harrison). This in turn is based on earlier, pioneering works such as British capitalism, workers and the profits squeeze (Glyn and Sutcliffe). This team of authors were the first to identify the centrality of the profit rate in the evolution of global capitalism since the Second World War.

Armstrong et al. also deal with the profit share (which is easier to measure). There is a difference between the profit rate and the profit share, but one important and obvious reason the profit share might increase or decrease is because the rate of profit has gone up or down - so there is also a connection. Armstrong's central thesis was that the profit share was squeezed by militant workers, and that this was the basic cause of the breakdown of the ‘golden years' after World War II. Our historic critique of their position can be found at The tendency for the rate of profit to fall and post-war capitalism - AG and MB.

On page 8, Armstrong et al. deal with the increase of investment as a result of the War. "In Japan throughout the period 1939-44 private industrial investment ran at around the rate of the mid-thirties. In Germany between 1936 and 1943 the volume of investment in industry grew continuously to an unprecedented level....In the United States investment grew rapidly during the early years of the war. The peak in 1941, however, still represented a lower level than that achieved in 1929, and it then declined and stayed at a rather low level (less than half the 1929 peak) for the remainder of the war. Investment in plant and machinery in the United Kingdom rose by nearly one-half between 1938 and 1940, but then declined to well below half the previous rate for the last three years of the war."

So far, then, investment was recovering from the Great Depression as a result of the open-handed arms spending by the warring states. Rates of profit were extremely high throughout the War in the fascist countries, as the authors point out, because of the repression of the labour movement.

Post-War chaos and devastation at first held the economies back. Despite the ‘advantages' of fascism in Italy, "the low level of capacity utilisation, especially in 1946, substantially increased overheads, such as depreciation. Overall the share of profits in industrial output in 1947 can hardly have been much below that in 1938." (ibid. p.53).

In Japan the profit share rose year on year from 1947-1951 from 8%, to 9%, to 15% to 22%, to 26% (ibid p. 91). In Germany "profits were high" (ibid p. 97). A graph shows industrial production, industrial employment and industrial productivity increasing by leaps and bounds after the War.

The authors sum up the causes of the post-War recovery. "The balance between wages and productivity was extremely favourable to the employers. Profits were comparable to prewar levels even in the countries then under fascism" (p. 105). The revival of the possibility of profitable production was a precondition of the great post-War boom.

Throughout what the authors call the ‘golden years', the rate of profit was in gentle decline. This was not a straight-line movement, of course. The rate of profit went down in years of downturn and revived in the upturn. There continued to be a cycle of boom and slump, but it was much more moderate over this period. The rate of profit did revive after each downswing, but did not generally recover its previous peak. So the graph lines for Europe, the United States, Japan and the advanced capitalist countries as a whole show profit rates dipping as we approach 1974, the year of the first generalised post-War crisis of capitalism. Diagrammatically, the movement in the rate of profit resembles the teeth of a saw that tapers downwards.

At bottom, as we show later, the 1974 crisis was not an oil crisis, or an inflation crisis: it was a crisis of profitability. In a diagram on p. 251 Armstrong shows manufacturing profit rates in Europe, Japan and the USA recovering after 1974, but never returning to the levels seen in the ‘golden years'.

We will now pass the torch to Robert Brenner. Brenner wrote an article entitled The economics of global turbulence, which took up the whole issue of New Left Review issue 229, May/June 1998. He effectively updated his analysis in a book, The boom and the bubble, published in 2002. We have criticisms of Brenner's analysis, as we have of Glyn and his colleagues. Our critique of Brenner is at Rate of profit and capitalist crisis. Brenner's writings are undoubtedly the most authoritative on the world economy within the Marxist tradition over the last ten years, as Armstrong, Glyn and Harrison's were for the earlier period. The statistical analysis of both sets of writing is usually unassailable - but see the Appendix.

 In his earlier work Brenner begins, "Between 1970 and 1990, the manufacturing rate of profit for the G-7 economies taken together (the biggest capitalist economies) was on average about 40% lower than between 1950 and 1970...the radical decline in the profit rate has been the basic cause of the parallel, major decline in the growth of investment and with it the growth of output, especially in manufacturing over the same period. The sharp decline in the rate of growth of investment - along with that of output itself is - I shall argue, the primary source of the decline in the rate of growth of productivity, as well as the major determinant of the increase of unemployment. The reductions in the rate of profit and of the growth of productivity are at the root of the sharp slowdown in the growth of real wages." (p. 7-8). This is Brenner's central thesis. And we agree with him. What we need to find out is why this happened.

On page 8 of The boom and the bubble Brenner has a diagram showing the fall in average profits in the 1970-1993 period compared with the golden years of 1950 - 1970. The US sees falls from 24.3% to 14.5%, Germany 23.1% to 10.9%, Japan 40.4% to 20.4% and the G-7 as a whole from 26.2% to 15.7%. Moreover output, net capital stock, gross capital stock, labour productivity and the real wage all follow the trend set by the net profit rate. It is clear that profit determines the whole rhythm of capital accumulation.

How Glyn explains the falling profit rate

Glyn et al. suggested that the profit share was falling because of the rising share of national income that went to wages. Class struggle explained the crisis! For a time their explanation seemed to fit the facts, but the Marxists remained unconvinced. After all, the 1970s was a period of sharply fought class struggle. Here is Brenner's criticism of the profits squeeze thesis. (These points are taken unchanged from our critique of Brenner, Rate of profit and capitalist crisis.)

 First ‘the universality of the long downturn'. "...none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune." (1998 p.22)

Second ‘the simultaneity of the onset and various phases'. "The advanced capitalist economies experienced the onset of the long downturn at the same moment - between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 1974-75, 1979-82 and from 1990-91." (ibid. p.22) How is it possible, Brenner asks, for the different course of the class struggle in different countries to produce these global trends?

Last, ‘the length of the downturn'. "Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach."..."it is almost impossible to believe that the assertion of workers' power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century." (ibid. p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself. Marx said, "To put it mathematically: the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable." (Capital Volume I p. 770)

Marx realized that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

Marx and the tendency for the rate of profit to fall

In Capital Volume III Marx wrote three chapters on The law of the tendential fall in the rate of profit. They are The law in itself (ch. 13), Counteracting factors (ch. 14) and Development of the laws's internal contradictions (ch 15). This law is also referred to in the Grundrisse, where Marx describes it as "in every respect the most important law of modern economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated" (p. 748). We shall argue that Marx was right and that crisis in the post-War capitalist economy can be explained in terms of Marx's theory.

We are assuming here that the reader has a basic grasp of the process of extraction of surplus value (exploitation), at least in outline, as explained in Capital Volume I and in pamphlets such as Wage labour and capital and Wages, price and profit. Why, in view of its importance, does Marx wait till Volume III (which was not published in his lifetime) to explain this law? The answer lies in Marx's method. Rosdolsky, in The making of Marx's Capital, gives what we believe to be a definitive account of Marx's plan for his work on Capital. In 1865-66 he came up with a four volume project:

• Book I      Production process of capital
• Book II     Circulation process of capital
• Book III   Forms of the process as a whole
• Book IV   The history of theory (This became the three volumes of Theories of surplus value)

(Rosdolsky p. 13)

So before he can explain the tendency for the rate of profit to fall, Marx has to show how the drive by individual capitalists to maximise their own profits leads to the emergence of a general rate of profit. We shall do the same. These issues are to be dealt with in the discussion of capitalist production as a whole.

The formation of a general rate of profit

Marx divides the value of a commodity into constant capital such as plant and raw materials (c), variable capital which is the outlay on wages (v) and surplus value, conventionally divided into rent, interest and profit (s). The capitalist doesn't care about all this stuff about c + v + s. All he knows is that he lays out a sum of money at the start of the production process and ends up with more (this circuit of capital is money - commodity - more money or M - C - M'). So he calculates his total capital  regardless as to whether it is spent on constant or variable capital. (We shall call total capital C in accordance with Marx's usage. Note that we earlier symbolised it as K, as is usual in national income accounting.)

The capitalist works out his rate of profit based on total capital. The individual capitalist is not interested in the origins of surplus value. Indeed in his account books, and in the consciousness of the capitalist class, surplus value disappears as a separate category altogether.

One important observation from this is that the capitalists can sell their commodities below their value and still make a profit. Capitalists are continually trying to undercut one another, concerned as they are with market share and trying to win the war of competition. This still further pushes the origins of surplus value out of vision.

We have to be careful here. When we dealt with the value of a commodity, we resolved it into c + v + s. Now c (constant capital) consisted of two parts: fixed and circulating capital. The capitalist keeps separate records of the two, for they have consequences as to how he spends his precious money. This distinction between fixed and circulating capital (with wages seen as just another part of circulating capital) is another reason why the origins of surplus value are obscured. Circulating constant capital passes its entire value to the final product. An example would be the chocolate sprayed on to a Mars bar. We are mainly talking about raw materials here. It is fairly obvious that the chocolate is constant capital in the sense that it only passes its own value to the chocolate bar. It does not magically add value to the final product.

Then there is fixed constant capital, such as plant and machinery. When we examine the value of a commodity, we realised that a machine may help to produce millions of commodities and does not pass all its value to each one. The value it passes on can be explained by the notion of depreciation. The machine costs £1 million and produces a million commodities and is then worn out. We can assume that it passes value of £1 to each commodity it helps us produce. If the capitalist charges £1 depreciation in calculating the costs of each commodity, and puts £1 aside every time one is sold, he will have enough money to buy a new machine when it wears out. It is quite likely that the ‘straight line' depreciation we have suggested is simplistic. The machine may become out of date before it wears out. Like buying a new car, its resale value may decline sharply as soon as the workers start using it. For now all we need to establish is that it is the depreciation of fixed constant capital that contributes to the value of the commodity.

But it is a different matter when the capitalist comes to think about his profits, which he calculates against his total capital (C). The whole point about the investment in fixed constant capital is that it locks away his money for years. So the rate of profit is calculated on the total capital advanced, whether used up or not.

The rate of profit is therefore s/C - surplus value divided by total capital. We are still assuming that all the surplus value is taken by the manufacturing capitalist at this stage. But remember that rent and interest, incomes which go to other sections of the ruling class, all come from the unpaid labour of the working class.

How is the rate of profit determined within an industry? An industry standard of technology is established by competition among the existing firms. Firms either keep up by producing commodities at the socially necessary labour time prevailing at the time, or they go to the wall. Occasionally laggard firms can maintain a fly-by-night existence if they have access to cheaper labour or some other advantage to compensate for their lack of productivity. But generally you don't have farming with ploughs and oxen competing with farming conducted with combine harvesters. We may regard the achievement of higher productivity by accumulating capital and applying relatively more fixed capital in the form of machinery etc. to the production process as a basic tendency of capitalism.

Though technology and productivity may be standardised within an industry, it is obvious that different industries have very different levels of technology from one another. What is important from the Marxist point of view is that they therefore have very different organic compositions of capital.

The organic composition of capital measures the ratio of constant to variable capital in the production process or the proportion of dead to living labour. It is often presented symbolically as c/v. Now let's look at an apparent problem when we have capitals of different organic compositions in different industries.

To keep things as simple as possible we will assume that the rate of exploitation is the same in both industries. We will also assume that all the fixed constant capital is used up over the production period we are studying, one year. There are only two industries in our simplified model:

I c350 + v50 +s50.  Profit rate = 50/400 = 12½%

II c50 + v50 + s50. Profit rate = 50/100 = 50%

So the same rate of surplus value produces a very different rate of profit depending on the different organic composition of capital in different industries. But this contradicts everything we know about the nature of capitalism. Capitalism is production for profit. The rate of profit is the central determinant of capital flows. Marx was well aware of this when he outlined the labour theory of value in Capital Volume I. In Volume III he explained that the consequence of the formation of an economy-wide rate of profit was that surplus value was redistributed between the different industrial sectors. As a result commodities are sold at money prices tending to their prices of production, a modified value.

"The whole difficulty arises from the fact that commodities are not exchanged simply as commodities but as products of capitals, which claim shares in the total mass of surplus value according to their size, equal shares for equal size" (Capital Volume III p. 275)

In our simplified economy, equalisation of the rate of profit, through the flow of capital from the sector with the lower rate of profit to the sector with a higher rate, would produce the following result:

I c350 + v50 + p80 (profit rate = 80/400 = 20%)                             (where p is profit)

II c50 + v50 + p20 (profit rate = 20/100 = 20%)

So in industry I, output of 450 in values has been transformed into 480 in prices of production. In industry II, output of 150 in values has been transformed into 120 in prices of production. Surplus value has been transferred from industry II with a lower organic composition of capital to industry I with a higher organic composition.

One way Marx explains this is by asking us to think of a workplace with two departments, both necessary to produce the commodity. The capitalist who owns them doesn't actually care where the surplus comes from as long as he gets his hands on it.

Marx concludes therefore that commodities are not actually sold at prices corresponding to their values, but tend to their prices of production, a modified value. In the example above, commodities in industry I are sold above their value and commodities in II below their value. But total values are equal to total prices of production and total surplus value is equal to total profit.

Does this contradict the law of value? Marx presents the process as a historical development. "The exchange of commodities at their values, or at approximately these values, thus corresponds to a much lower stage of development than exchange at prices of production, for which a definite degree of capitalist development is needed" (ibid. p. 277). In the same way, when we look at the labour theory of value, we start off with simple commodity production, and then move on to look at wage labour and capital.

The increasing organic composition of capital

The organic composition of capital measures the ratio of living to dead labour in the production process. To remind ourselves, "By the composition of capital we mean...the ratio between its active and passive component, between variable and constant capital." (Capital Volume III p. 244) Marx adds, "The organic composition of capital is the name we give to its value composition, in so far as this is determined by its technical composition and reflects it." (ibid. p. 245).

 We have seen how there is a tendency for a uniform rate of profit to be established throughout the economy, despite the differing organic compositions of capital within different branches of industry. This tendency, like any other tendency under capitalism, emerges precisely through individual capitalists searching for a higher rate of profit than the rest.

We have also seen (in the section on Absolute and relative surplus value) that there is an impulsion on every capitalist to raise the productivity of labour. Though there are other ways he can do this, historically and in practice it has been crucial to put more and more machinery (fixed capital) behind the elbow of each worker in order that they can produce faster and cheaper.

There is therefore a tendency for the organic composition of capital to rise over time in those branches of industry where labour saving equipment can be applied, and therefore in the economy as a whole.

Here is an illustration of the capital intensity of modern capitalist production, taken from a newspaper article (Mark Milner, Guardian April 17^th 2007). The General Motors plant producing Astra cars at Ellesmere Port is to be revamped:

• The plant will employ 2,200 workers
• Productivity is likely to rise by 30%
• The plant will produce 180,000 cars a year
• Investment will be 3.1 billion Euros (round about £2 billion)

So each worker will produce nearly 90 cars a year on average. (Of course no worker produces a car single-handed. It is a team effort.) The machinery behind the elbow of each worker is getting on for £1,000,000!

This is casual and empirical but powerful evidence as to the correctness of Marx's analysis of the dynamics of capitalism - the connection between rising productivity and a higher level of exploitation, the increasing scale of production and the greater mass of dead labour relative to living labour applied in the production process as the system develops.

Marx goes on to specifically link this rising organic composition with the tendency for the rate of profit to fall. "With the progressive decline in the variable capital in relation to the constant capital, this tendency leads to a rising organic composition of the total capital, and the direct result of this is that the rate of surplus value, with the level of exploitation of labour remaining the same or even rising, is expressed in a steadily falling general rate of profit. (We shall show later on why this fall does not present itself in such an absolute form but rather more in the tendency to a progressive fall.) The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour." (ibid. pp. 318-9)

See:

The Marxist theory of Crisis - part 1