Alleged tendancy for the rate of profit to rise
The blog Stumbling and Mumbling has posted a short article on an alleged tendency of the rate of profit to rise , contradicting the Marxian argument about the falling rate of profit.
The results he publishes are not new, Marxian economists including myself were reporting 10 years ago that the rate of profit in the UK and USA had started to rise after falling for most of the previous 30 years.
For instance see here or there .
The interesting question is why this happened, Stumbling and Mumbling identify Thatchers anti-union laws and the opening up of China as factors. Marxian economist would not disagree with this, but the more interesting question is whether one can come up with a more general formulation of Marx’s theory of the rate of profit which deals with both the period 1945-1980 and the period since 1980.
The answer is yes, and it involves going back to what Marx wrote about over accumulation of capital — that the rate of profit falls when capital stocks accumulate faster than the rate of growth of the workforce. It then becomes possible to formulate a Marxian master equation of state for the rate of profit that not only is compatible with both the pre and post 1980 period, but also has real predictive value. This was done most clearly by Zachriah in his paper to the July 2008 Probabalistic Political Economy Conference available here .
One can also apply this theory to predict trends in the rate of profit about 2 to 3 years in advance.
The key point is that one has to look at the relationship between the share of profit that is reinvested and the growth of the working population. Countries like Egypt with a rapid population growth and low reinvestment rate have rising rates of profit, whereas Japan and Switzerland, where the reverse applies have falling rates. You can study this interactively at my website here.
The work of Zachariah showed that there is an equilibrium rate of profit governed by the rate of growth of the population and the share of capital accumulated. If capital accumulation is high and population growth is low, this equilibrium rate is low, and the real rate of profit falls to meet the equilibrium rate.
In the case of the UK, decisive factors have been the slowdown in the share of productive reinvestment in the post 1980 period which shifted up the equilibrium rate alongside this has gone the growth of the labour force made possible by the free movement of labour in the EU.
Over the longer historical period though, the world average rate of profit will be increasingly determined by the demographic transition in which birthrates accross most of the world are falling. This will produce a global slowdown in population growth, with a consequent global reduction in the world equilibrium profit rate.
In commonsense terms, labour will be in short supply relative to capital, which will strengthen the bargaining position of labour and weaken that of capital.
A key point will be when the Chinese working population peaks some-time in the next 15 years. This will shift the balance of social power within China, and in consequence, the threat of jobs being exported to China will diminish. Overall the tendancies that Marx identified, and which came to fruition first in Britain ( de te fabula natur), are now being played out on a world scale, and on a world scale, they will reproduce the rise of Labour that we experienced a century ago.
“Over the longer historical period though, the world average rate of profit will be increasingly determined by the demographic transition in which birthrates across most of the world are falling. This will produce a global slowdown in population growth, with a consequent global reduction in the world equilibrium profit rate.
In commonsense terms, labour will be in short supply relative to capital, which will strengthen the bargaining position of labour and weaken that of capital.
A key point will be when the Chinese working population peaks some-time in the next 15 years. This will shift the balance of social power within China, and in consequence, the threat of jobs being exported to China will diminish. Overall the tendancies that Marx identified, and which came to fruition first in Britain (de te fabula natur), are now being played out on a world scale, and on a world scale, they will reproduce the rise of Labour that we experienced a century ago.”
Is that not also a euphemism for the cuts in social benefits arising from the mass retirement of Baby Boomers, and the lack of growth compensation for this retirement?
The last two paragraphs aren’t political enough. “Very likely” or “most likely” should be added (re. bargaining position and “rise of Labour”). Or are you referring just to trade union movements and not proper worker-class movements?
No it is not a euphemism for the retirement of Baby Boomers. It is a comment about a much broader process which is going on on a larger scale.
Capitalism creates an urban society with a lower birthrate. In its early stages in any country the working population grows rapidly drawing on what KM called a ‘latent reserve army of labour’, basically the rural peasant population. When that is exhausted, the capital labour ration tends to rise lowering the rate of profit.
If there is interest, I can give graphs showing this operating in China now and Japan some 40 years back. Japan now shows us the end point.
I always find graphs help me visualise things wonderfully, so I’d be quite interested in those.
What effect has the one child policy had on the demographic shifts taking place in China? Has it served to squeeze the rate of profit or has China’s massive abundance of reserve labour counteracted this?
I will take a couple of days to get the graphs onto the web, once I have done that I will post another feed. In the meantime if you go to the interactive weblink mentioned in the article you can get graphs drawn on demand of the profit rate for most countries. China is not included because it is a fair bit of work to dig out the data for China.
I think the one parent family policy has been important.
This is a good popularization. More generally one can say that average profitability is determined by the balance of three factors:
1. Growth rate of labour
2. Growth rate of productivity
3. Level of investment ratio
The two first act to raise profitability, while the last factor lowers it. Clearly the significance of the first factor has vanished in the industrialized economies. It turns out that in general the most significant factor is the investment ratio.
This has an important political implication:
Left-leaning social democrats wish to return to expansive welfare policies while retaining a capitalist economy. To sustain such a configuration would require a higher investment ratio that would depress profitability further and reproduce a similar crisis as in the mid-1970s.
Hence there is no longer any escape; even if you want to be a modest reformist you are going to have to address the issues of a socialist economy.