Profit Calls the Tune

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Michael Roberts has another long post on the ‘falling rate of profit’ as the prime cause of the Great Recession. Following Jose A Tapia Granados’ paper entitled Does investment call the tune?  Empirical evidence and endogenous theories of the business cycle he argues that rather than the  Keynes-Kalecki hypothesis that it is a slump investment (due to the spooking of animal spirits) that is the cause of the crisis, he argues that it is the fall in profit, which peaked (he maintains) in 1997 that led to the fall in investment several quarters later. Looking at data for the US economy from 1947 referred to in Tapia paper he says that the direction of profit leads investment, rather than the other way around.  The main point, however, is that the crisis is far from over, as  ‘deleveraging’ is only half-way through.  Given the resistance to it in Europe, for example, with banks ensuring that high levels of debt remain to maintain the value of previous investment while also demanding that the cost of capital remains low we see that certain people are in no hurry to improve the situation any time soon.

Tapia considers the evidence on these conflicting views using the US economy.  He shows that over 251 quarters of US economic activity from 1947, the movement in profits was much more volatile that movement in wages or even investment.  Most important,“corporate profits stop growing, stagnate and then start falling a few quarters before a recession”. Profits then lead investment and employment out of each recession.  In the long expansion of the 1990s, profits started declining long before investment did (profits fell back in 1997 while investment went on growing until 2000, when a crisis ensued).  “In all these cases, profits peaks several quarters before the recession, while investment peaks almost immediately before the recession.” Using regression analysis, Tapia finds 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.  This confirms my own empirical analysis of the Great Recession where I show that profits fell for several quarters before the US economy went into a nose dive (see my book, The Great Recession, chapter 24, written in 2007).

Thus the process of capitalist boom and slump can be summed up in this way.  If the rate of profit is rising, this will lead to faster capitalist accumulation, employment and incomes.  However, that cannot continue as Marx’s law of profitability will apply.   Counteracting factors can reverse the effects of the law as such for a while, for even a decade or more, but eventually the rate of profit will start to fall.  When the rate falls sufficiently to cause a fall in the absolute mass of profit, an economic crisis will follow within a few quarters.  That slump will not end until profitability is sufficiently restored through the destruction of capital values (bankruptcies, banking collapses, closure of plant, laying off of labour, writing off of debt etc).  Then investment will follow.  So it is profits that call the tune.

The current recovery from the Great Recession has been so weak and has festered into a long depression like the 1880s and 1890s because of the huge build up of capital (real and fictitious) previously.  The ‘deleveraging’ of this dead capital will take a long time – indeed the major capitalist economies are only halfway through that process.

UPDATE: Doug Henwood has a post on Left Business Observer news blog which disagrees with Michael Roberts’ Profit calls the tune post. Pardon the large chunk quote:

This is the long-term story I’d tell: after a peak in 1966 (coincidentally the year of the first serious credit crisis since the 1930s), the rate of profit declined hard through the miserable 1970s into a trough during the deep 1981–82 recession. But the class war from above, led by Volcker, Reagan, and the Shareholder Rebellion, succeeded in breaking labor, cutting costs, and speeding up everything. With that came a long upsurge in the profit rate, rising to a peak in 1997. This rise was the fundamental reason behind the great bull market in stocks of the 1980s and 1990s. The market kept rising after the profit peak, but then came crashing to earth. It recovered rather quickly, coming close to the 1997 highs in 2005, then turned south. Note that in both cases, 1997 and 2005, the profit rate peaked well ahead of the economy—three and two years, respectively. (Note too that the tax code became more corporate-friendly: the 1997 and 2005 peaks after taxes were much closer to 1966 levels than the pretax measure.) And the 1966 peak was well ahead of the troubles of the 1970s.

While many lefties pronounce neoliberalism a failure, on this measure it looks like it accomplished just what it set out to accomplish: raise the profit rate back to its glory days. The subsequent peaks were a little short of 1966, before everything collapsed into inflation and diminished expectations, but not by much. To say that the rate of profit stopped rising in 2011—which is quite plausible, is to underplay the sharp recovery from 2009?s depths. And given the propensity of the profit rate to lead by several years, it’s quite possible that this crappy recovery could stumble on into 2014.

Strikingly, though you might think that with profits this high, corporate America would be investing with both hands in pursuit of more. But it isn’t.

But then we’re back to old dichotomy: why is investment not happening? Is it ‘animal spirits’ being too cautious because of the continuing uncertainty in the economy, or is because there is still a whole lot of deleveraging still going on.

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Donagh is the editor of Irish Left Review. Contact Donagh through email:

One Response

  1. David-Joseph Cribbon

    June 27, 2012 3:14 pm


    Author: Donagh Brennan
    Comment: “Closing comments on this thread in case responses will cause “David-Joseph Cribbon” to say anything further.”

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