Month: June 2016

A central thesis of Marx is that the rate of profit is the major influence on the level of investment.  In Capital Vol. 1, throughout the chapters on the accumulation of capital it is implicit that it is competition which is driving accumulation.  The profitability achieved by a firm is the decisive test of its competitive success or failure.  Profits provide the key source of capital to finance increases in investment and accumulation.

However Marx does not see profits as determining investment in a process of mechanical causation.  He recognises that decisions about the allocation of capital take place in real time, and are made by capitalists who are making choices about their investment strategies while facing an uncertain future.  It is essential in political economy to acknowledge this moment of agency, otherwise we elide the dimension of risk in capitalist calculation and outcomes.

But of course, Marx is not an methodological individualist.  The investment decisions which capitalists take are subject to the selective processes implemented by the law of value.  This term summarises all the ways in which the competitive failure or success of companies are determined by how economically and efficiently they make use of the labour and means of production at their disposal.  And also by the balance of supply and demand in the markets in which they buy and sell.

Thus the choices of individual capitalists are subject to the discipines of technological and market competition. For example Marx documents in detail how the spread of steel spindles in textile production lowered costs of production. He sardonically notes that the capitalist does not have to use spindles made of steel just because his competitors do. But the price he gets for the product will be determined by steel spindle technology, if that has come into general use.

If the capitalist has a foible for using golden spindles instead of steel ones, the only value which counts for anything in the value of the yarn produced remains that which would be required to produce a steel spindle, because no more is necessary under the given social conditions [i.e. current technology]. (Capital Vol. 1, p. 295).

How much to invest and in what? These decisions are made in a situation of uncertainty. The laws of competition are coercive, but they are not automatic and entirely predictable.

Marx did not see a simple linear relationship of cause and effect between profit and accumulation.  Note, for example, his comment on a book by the Rev Richard Jones whom Marx considered to be less stupid than the other prominent parson economists of the period, Malthus and Chalmers.  ‘Jones is right to stress that despite the falling rate of profit, the “inducements and faculties to accumulate” increase’ (Capital Vol. 3, p. 375).  Here Marx quotes and endorses the comment by Jones that:

A low rate of profit is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England … a high rate of profit by a lower rate of accumulation, relatively to the numbers of the people. Examples: Poland, Russia, India etc.

Marx emphasises that capitalists are conflicted about whether to reinvest their profits in the expansion of production, or use them to finance speculative ventures. Here again Marx stresses the moment of agency: ‘the individual capitalist … has the choice between lending his capitalist out as interest-bearing capital or valorising it himself as productive capital’ (Capital Vol. 3, p. 501, Penguin edition).

Profits can be used in luxury consumption, or to play the financial markets.

the progress of capital production not only creates a world of delights; it lays open, in the form of speculation and the credit system, a thousand sources of sudden enrichment (Capital vol. 1, p. 741).

The investment versus capitalist consumption dilemma was an important theme in the literature of political economy.  In the early phase of classical political economy, capitalists were urged to reinvest as much as possible.  In Marx’s concise summary, the message of Malthus and his contemporaries was as follows:

Accumulate, accumulate! That is Moses and the prophets … therefore save, save, i.e. reconvert the greatest possible portion of surplus-value or surplus product into capital! Accumulation for the sake of accumulation, production for the sake of production was the formula in which classical economics expressed the historical mission of the bourgeoisie in the period of its domination (p.742).

Marx notes, for example, that Thomas Malthus, recognised ‘the awful conflict between the desire for enjoyment and the desire for self-enrichment’.  Marx agrees with this: he notes that surplus value is divided into two parts: (1) revenue – used to meet the consumption needs of capitalists and their families, (2) capital – for accumulation by reinvestment.  (Capital Vol. 1 738-746).  The capitalist, says Marx, experiences all the agonies of a Faustian conflict between the passion for accumulation and the desire for enjoyment (p. 741).  (See Goethe’s Faust, lines 1112-3 – ‘Two souls, alas, do dwell within my breast; each seeks to sever from the other’. Faust is torn between the pleasures of the world and his longing to devote his life to the accumulation of knowledge and spiritual or magical power.)

Malthus’s solution to this dilemma was to advocate a division of social labour. He urged the capitalist class to live modestly and leave extravagant spending to other social groups – the landed aristocracy, the holders of sinecures, and the clergy.

But, after the 1832 July Revolution in France, and faced with a rising tide of industrial and social unrest in England, political economy altered course and began to celebrate not the acquisitive drive to accumulate of the entrepreneurial class – but rather the nobility and high moral mission of the capitalists.

As classical political economy degenerated into mere ideology, Marx notes for example how Nassau Senior begins to praise the self-sacrifice of the capitalist who, by his abstinence from consuming all of the surplus-value and surplus product, sacrifices his own consumption in order to provide workers with the machines and raw materials which they need for employment and wages. In Marx’s summary:

The capitalist robs himself whenever he ‘lends (!) the instrument of production to the worker’, in other words, whenever he valorises their value as capital by incorporating labour-power into them instead of eating them up, steam-engines, cotton, railways, manure horses and all (Capital Vol. 1, p. 745).

Surely, Marx continues, the simple dictates of humanity would enjoin the release of ‘that peculiar saint, that knight of the woeful countenance, the abstaining capitalist from his temptation and his martyrdom’ (p.746). (The knight of course is Don Quixotte – allusions to Cervantes’ novel are frequent in Marx’s writings).  And here Marx notes a new and happy development which has brought relief to one particular group of self-sacrificing capitalists.

The slave owners of Georgia U.S.A. have recently been delivered by the abolition of slavery from the painful dilemma over whether they should squander the surplus product extracted by means of the whip from their Negro slaves entirely in champagne, or whether they should reconvert part of it into more Negroes and more land’ (Capital Vol. 1,  p.745).

Consume or invest.  The capitalist dilemma remains as prevalent today as in Marx’s period.  The evidence is overwhelming that in recent years, in the high-income economies, consumption by the owners and controllers of capital has been winning out over accumulation.  As investment has lagged, an increasing proportion of the rise in the mass of profit since 2000 has been handed out to shareholders in dividends and share buy-backs, or used to pay large increases in executive salaries.

In the major advanced economies a large gap has now opened between profits and investment. Figure 1 shows the pattern for the United States and it is worth close study.

The data are from the Federal Bank of St Louis and derived from the US National Accounts. It may seem strange that investment, as shown here, is so much higher than profits. E.g. in 1993 when the data starts, profits are 4 per cent of GDP (left hand scale) but investment is more than 11 per cent of GDP (right hand scale).  But the figures are for net profits (after depreciation and taxation); but investment is gross (i.e. includes depreciation). Also, I use GDP here as if it were the same as gross domestic income.  Thus the comparison made here between profits and investment can only be approximate – but instructive nevertheless.

Figure 1.   Profits and Investment as a Percentage of United States GDP, 1993-2013.

Until the early 2000s the mass of profits and associated investment levels were closely correlated – just as Marxists would expect.  They were rising neatly in tandem in the mid-1990s.  Then there was a fall in profits in 1997, but a drop in investment duly followed a couple of years later.

However in the early 2000s, the pattern began to change.  The surge in profits in the recovery from the dotcom downturn was certainly followed two years later by a rise in investment – but one which was comparatively subdued.  The proportion of profits not reinvested was beginning to rise.  When profits crashed in the crisis of 2007, again investment tumbled two years later.  But notice, first, the remarkable fact that, though the crisis of 2007 was far more severe than the dotcom crisis of 2000, and devastated the US financial system – nevertheless the impact on the profits of the non-financial sector in the US was much less than would have been expected.

From a previous peak of 6.5 per cent of GDP in 2006, profits in the non-financial sector fell only by 2.5 per cent of GDP to 4 per cent in the 2008 downturn.  Compare that with the deeper fall to 3.5 per cent of GDP in the downturn of 2000.  What everyone rightly refers to as the deepest economic crisis since 1929 had actually a relatively limited impact on the profitability of the US industrial sector.

In addition, the recovery in the mass of profits after 2007 was speedy and dramatic.  By 2010 the proportion of profits in GDP was back to the peak figures reached in 1997 and 2006.  This rise then continued on to a new peak of over 7 per cent of GDP in 2014 – in many estimates, the highest level reached since 1945.  Profits remained at about that level through 2015.  There are signs that a fall is beginning in 2016 – but 1st quarter earnings of US non-financial companies were still not much less than an annualised 7 per cent of  GDP.

However the profits surge after 2007 was followed two years later by only a limited recovery in investment.  By 2013 it was still less than 12.5 per cent of GDP – compare a peak of 14.7  per cent in 2000, and 13.5 per cent in 2007.  A very large disconnect between profits and investment had developed.

To show more clearly what has happened, in Figure 2 I have recalculated US National Accounts data – setting the 1998 figures for profits and investment at 100 – and comparing the investment figures for each year with the profits total for two years earlier.

Figure 2.  Profits and Lagged Investment in the US, 1998-2013.

Investment began to lag profits in 2001.  The size of the lag remained quite large through to 2009 – and then widened enormously as investment lagged the rise in the mass of profits over the past seven years.

The data above confirm the Marxist proposition that there is a clear connection between profitability and subsequent investment.  In a future post I will review a number of recent empirical studies which show that realised profits are a major causal influence on investment. However, there are other forces and factors which have an influence on investment levels.  It is also the case that the correlation between profits and investment is not fixed, but varies over time – as is evident over the 20 year period we have been looking at.

Too many Marxist economists have had an oversimplified view of the profits-investment connection.  Michael Roberts for example argues that,

There cannot be a closer connection in the capitalist system of production and exchange than that between profits and investment. The rise and fall in profits and profitability drives the rise and fall in investment.

There is an essential truth here, but the point is greatly overstated.  It is not because profits have fallen that investment levels have been lagging since 2001 – and increasingly so.  Apart from the temporary downturn of 2007, profits have been on the rise as a proportion of GDP since 2001, until the stabilisation in 2015, and (so far) a marginal fall in 2016.

Roberts and others will point out that in this post I have been dealing with the mass of profits as compared with the mass of investment.  Their argument is that it is the rate of profit (not the mass) which determines investment.

But the rate of profit also rose in the US in 2009-15.  The large rise in the mass of profit which occurred would only have produced a fall in the rate of profit if the total stock of capital advanced had been increasing even faster.  But it is precisely the lagging level of investment in this period which has made a large enough rise in the stock of capital highly implausible as a matter of simple arithmetic. A slow-down in investment means a lower rate of capital accumulation.

Past profitability is the most influential of the elements which enter into the current investment decisions of companies.  But apart from investment in new productive capacity, there are many other ways in which companies can use available capital to increase future profitability.  To take only one example, companies may choose to use profits to build-up cash reserves in order to increase their firepower in the highly competitive market for corporate control.  Mergers and acquisitions [M&A] have continued to run at high levels in recent years. Companies are spending large proportions of their profits in buying up their competitors and seeking profits through rationalisation to cut costs and limit competition by an increase in their control of markets.

There are increasing calls in the business press for governments in the high-income economies to strengthen anti-monopoly regulation as one means of combating the general stagnation in new investment. As a recent article in the Financial Times put it, the aim of such regulation would be:

to reorient the prioriies of large companies, to force them to expand the hard way by hiring staff, taking new premises, advertising and buying equipment, rather than buying a competitor and doing the opposite in the name of cost-cutting and greater efficiency… Restricting takeovers might also prompt a resurgence for stock-picking, forcing shareholders to search for the real operators and innovators.  Activist investors would have to do more than just champion M&A deal making.

But the present M&A system is highly profitable for the investment banks which set up and implement takeover deals.  They, and the companies directly active in the takeover market in corporate control, are able to deploy their immense political lobbying power to block such regulation.

So far I have looked only at US data.  The profits-investment disconnect, and the consequent accumulation of corporate reserves, has developed in several other major economies in the post-2000 period. Figure 3 below is drawn from a useful study by Gruber and Kamin of what they call the current corporate saving glut.  They show that three other G7 economies share the US pattern of exceptionally high levels of build-up of cash reserves.  Since 2000 the corporate sectors in Japan, the Canada and the United Kingdom have been net lenders to the rest of the economy on a very large scale.  In most years since 2000 by between 2 and 5 per cent of GDP.  Germany has also switched to being a net lender, though later and to a more modest extent.  Only France and Italy still conform to what historically has been the norm – the corporate sector drawing on net capital supplied by other sectors.

It is sometimes argued by Marxist economists that, apart from a general fall in the rate of profits, other diagnoses of the nature of the current crisis are amenable to reformist solutions.  This is not the case. The crisis of accumulation which confronts the system today is profound and intractable. In summary: a severe structural problem of lagging investment in new capacity, despite adequate profitability and the very low cost of capital, given that basic interest rates are near zero in many countries.

Figure 3.  G-7 Countries: Net Lending of Non-Financial Companies