by Jim Devine
December 27, 2001
1) The phrase “Millennium Crisis” refers to the fact that the sudden slow-down of the U.S. and world economies occurred at the “cusp” between 2000 and 2001. We’ve seen a recession that’s been “officially” dated by the National Bureau of Economic Research as staring in March 2001. Further, the International Monetary Fund and other international forecasters have dramatically down-graded their predictions for the world economy, pointing to largely synchronized recessions of the rich countries. I argue that this recession represents the start of an even larger crisis. It’s affecting almost all of the capitalist world – that is, almost the entire world – but much of it is centered on the United States, the topic of this talk.
2) purpose of the talk: to understand the current economic collapse or recession in historical perspective. I am avoiding the usual journalistic approach that Seth Sandronsky is familiar with – and going back to fundamentals.
3) Following Marx’s tradition, I’m going to examine the rate of profit (ROP), explaining how it fell after 1965 and then rose since 1980 or so.
4) Then I’m going to examine the downside of the rate of profit’s rise since 1980 or so, which help explain the “Millennium crisis” that started a year or so ago.
5) A “crisis” refers to a situation in which even the capitalists aren’t getting what they want as a class, i.e., capitalist accumulation without recession, significant inflation, or anti-capitalist social movements. One aspect of this – recession – is the kind of circumstance the U.S. has been in since late 2000 or early 2001.
1) As Tom Michl points out, the rate of profit is the both a thermometer and a thermostat for capitalist accumulation: it measures the health of capitalism – from the capitalist point of view – and also helps determine the system’s behavior. When the rate of profit is high, that’s a sign of capitalist health – at least for a year or so. Acting like a thermostat, a high profit rate also causes accumulation to speed up. That’s often a good thing for us, since it involves more jobs being provided. Of course, this typically precedes a crisis, when the profit rate falls, accumulation slows, and jobs go away.
2) Alternatively, the rate of profit could be seen as a measure of the amount of “gas” in a capitalist speed-boat. From our perspective, that boat is out of control – because of competition among capitalists and the anarchy of production. Further, it’s often speeding, because of the over-accumulation tendencies explained in my articles listed below (1983, 1994). If it avoids hitting things or running out of gas (causing a crisis), working people do well. After a crisis, the painful slowdown of that boat may represent some opportunities for escape – or for changing the nature of the vehicle – but history has shown again and again that the capitalists can refuel and take off again.
1) I use the government figures for the rate of profit (Larkins and Morris, 2001).
a) because they are most relevant to understanding the behavior of capitalist investment in the U.S. domestic non-financial corporate sector. The government economists calculate its “rate of return” to see what the impact is on business. As far as I can tell, there is no incentive for these economists to lie, especially since these data are not widely disseminated.
b) A small drawback is that my data are for only the non-financial corporate business sector, but that sector mostly pulls the U.S. economy as a whole along.
c) The big drawback is that the data are not for the entire world, in an era when capitalism is operating more and more on a world scale. So we need to remember that our focus is on only the United States.
2) Marx tried to understand the rate of profit (ROP) by breaking it down into the “rate of surplus-value” and the “organic composition of capital.” I’ve found that the following related formula is more revealing:
· so that ROP = (R/Y) divided by (K/Y) = s/k, where
a) s = R/Y is capital’s share of income (Y), or the profit share, similar to Marx’s rate of surplus-value; and
b) k = K/Y (known as the “capital-output ratio”) is a measure of the effects of the Marx’s organic composition of capital (OCC).
3) I also emphasize the trend rather than the cycle of these variables, since the profit rate and the others go through all sorts of wiggles due to the business cycle. Further, in terms of the way in which the ROP affects both the supply of funds for fixed investment and the incentive to engage in such accumulation, it’s most likely not the current profit rate but the trend profit rate that powers the economy. Instead, the trend profit rate indicates the presence or absence of a structural problem, blocking or encouraging accumulation. A low trend profit rate discourages accumulation and demand-side growth.
B. The Data
1) the ROP (chart I) –
a) There was a massive decline of the ROP from 1965 to 1980 or so (at about 3.5 percent per year). This sudden cut-off in the fuel that capitalists crave encouraged the transition from what some call the “golden age” of U.S. capitalism during the 1960s to the “time of troubles” of the 1970s and early 1980s. This in turn encouraged the severe inflation and economic recessions of that era, what’s sometimes called a “structural crisis.”
b) This falling profit rate encouraged a “one-sided class war” against labor and other progressive forces, which set the stage for Reaganism and the concerted effort to restore profitability. To some extent, Reaganism and its successors – including Clintonism – have been successful: there’s been a steady rise in the ROP since then (at about 1.4 percent per year). Though the profit rate rose more slowly per year than it fell in the previous period, the upward trend lasted for more years. This has encouraged prosperity relative to the 1970s, though a lot of the problems of that era remain (in a new form) and new problems have arisen.
i) From capital’s point of view, we still haven’t seen a return to the “golden age” of profitability seen in the 1960s. However, the profit rate’s rise does represent the rational basis for the stock-market surge in the1990s, until it became a speculative bubble at the end of the decade.
ii) From labor’s point of view, the benefits of this “prosperity” have been distributed in an extremely unequal way. For the vast majority of workers and especially for the minority communities, it’s been a “false prosperity” similar to that of the 1920s. The exception was temporary, at the tail-end of the 1990s, when workers started benefiting from the boom.
2) its components may help us to understand what’s behind the changes in the ROP:
a) The share of profits, R/Y, appears in chart II. This ratio fell from the 1960s until the 1980s (at about 1.9 percent per year) and then rose gradually (at about 0.5 percent per year).
i) the decline of the share of profits “explains” about 55% of the profit rate’s 3.5% average decline per year between 1965 and 1980.
It’s not just due to a rise in wages relative to labor productivity. Also important – perhaps more so, according to Bob Brenner – is the rise of competition from other advanced capitalist countries, limiting the profits that U.S.-based capitalist operations can appropriate.
ii) the slow but steady rise of the share of profits explains roughly 38% of the profit rate’s 1.4% increase per year between 1980 and 2000.
Wages have done poorly compared to profits, but the rise in international competition – often from foreign branches of U.S.-based companies or from upstarts such as South Korea – kept the profit share and thus profitability from rising steeply.
Another reason why the profit share didn’t rise as much as many would expect from (carefully) reading the newspaper is that the salaries of top executives are counted as part of compensation (salaries) rather than profits.
Yet another reason is that these numbers ignore the role of changing taxes on profits. For example, Dean Baker (2001: 6, table 3) presents data implying that the tax rate on capital’s income has fallen from above 40% in the 1950s to around 35% in the 1960s and 1970s to about 25% in the 1980s and 1990s. So after-tax profitability rose more quickly than indicated by the graphs above.
b) A rise in the “organic composition of capital” has an effect when it raises K/Y, the amount of fixed capital owned divided by total income. If the share of profits is constant, a rise in the capital-output ratio depresses the rate of profit, as shown in the first part of chart III.
i) About 45% of the profit rate’s decline between 1965 and 1980 is explained by the 1.5 percent annual rise in the capital-output ratio.
ii) The K/Y fell steadily from 1981 on, attaining a level comparable to that of the 1960s. About 62% of the profit rate’s rise between 1980 and 2000 is explained by the 0.8 percent annual fall in the capital-output ratio.
iii) This decrease in K/Y seems linked to the 1980s and 1990s shake-out of U.S. manufacturing (dis-investment from old equipment and plant), investment in more modern fixed capital in new sectors or even modified versions of old sectors (as with the rise of steel mini-mills), and the falling prices of some capital goods (e.g., computers) and important raw materials such as oil.
Using 5th-degree polynomial trends
annual % growth rate
percent “explained” by
rate of profit,
r = R/K
s = R/Y
capital- output ratio,
k = K/Y
profit share, s
capital-output ratio, k
1965 to 1980
1980 to 2000
1) The original story in Marx’s Capital says that a fall in the rate of profit is bad for capital, causing crises. This suggests in turn that a rise would be good for capital. However, my research on the origins of the Great Depression of the 1930s (Devine, 1983 & 1994) suggests that one of the causes of that Depression was that the profit rate rose too steeply in the 1920s. The problem arises from both the rise in the share of profits (s = R/Y) and the fall in the capital-output ratio (k = K/Y).
2) A rise in the share of profits (s) is crucial because it involves a suppression of consumer demand by workers: workers’ spending are the main source of consumer markets while they find it hard to sustain the market when wages are stagnant. But if the profit share is rising, that means that output is rising faster than what workers can spend on (consume).
a) One might argue that the recent rise of this ratio wasn’t steep enough to cause problems of the sort seen in the late 1920s. However, there has been a sustained rise, over almost two decades.
b) More importantly, and making things worse in the 1990s and after, the suppression of consumer demand has been global: the world-wide “race to the bottom” – the downward harmonization of wages relative to labor productivity, spurred by the international mobility of fixed capital investment and by organizations such as the International Monetary Fund – encouraged the presence of an under-consumption undertow.
c) This “undertow” refers to the slow growth of wages and salaries relative to the productiveness of labor, which in turn encourages the slow growth of consumer purchases – the largest percentage of total spending – relative to the economy’s ability to produce. If the other elements of total spending do not change – and there is no factor to encourage consumer spending to grow faster than wages and salaries – then the economy stagnates. This logic applies to either the world economy or the U.S. economy.
Now, it is possible in theory that growth of the world economy as a whole might be so dynamic (and the supplies of labor-power so limited) that it would pull up wages to catch up with labor productivity, so that this undertow would go away, as I believe happened within the U.S. during the 1950s and 1960s. But this seems unlikely in the near future, in an era of “competitive austerity,” when transnational corporations are rewarding only the lowest-waged countries with new investment and the International Monetary Fund is encouraging many countries to engage in austerity and export promotion. (This has been seen most recently in the IMF-induced disaster in Argentina.)
3) Just as we can see waves, normal buoyancy, and his or her own efforts pulling a swimmer up despite an undertow, the existence of this under-consumption undertow does not rule out the possibility of economic booms such as those of the mid-1990s until mid 2000.
a) In order to have prosperity in this case, accumulation has to grow faster than usual to replace consumer demand. Alternatively, it needs help from (i) increased exports, (ii) government deficits, (iii) increased capitalist luxury spending, or (iv) credit-based spending by workers.
b) So what caused the prosperity of the late 1990s?
i) the increasing stagnation of the rest of the world and the high exchange rate of the dollar destroyed U.S. exports, so that the balance of trade was severely negative and was getting worse until the recession began.
ii) the government did not provide deficits to stimulate the demand for business production. The government budget moved more and more into the surplus region (until the recession began), dragging down the economy.
iii) By process of elimination, we saw prosperity – as usually measured by GDP numbers – in the U.S. because of relatively fast accumulation, increased credit-based spending by workers, and increased capitalist luxury spending.
iv) A lot of the surge in luxury spending occurred because of the late 1990s stock-market bubble, which encouraged stock-holders to spend their paper winnings. A lot of that of accumulation is associated with the high-tech (information and communications) sectors or was encouraged by the upward trend of profitability and the capitalist triumphalism of the late 1990s. The growth of credit-based spending by workers eased in the late 1990s (when the boom finally paid off in terms of higher wages), but still remained an important source of demand.
v) Those factors stimulated the economy, but because of the increase in private-sector (household + corporate) debt, the boom became increasingly unviable. That is, the prosperity was running on borrowed money. Further, the existence of debt left over from the boom encourages waves of bankruptcy and severe cuts in spending as the recession continues.
vi) In addition, both faster capitalist accumulation and a fall in the capital-output ratio means that the existing stock of machinery and the like can be used to produce more and more output. This means that simply to keep business operations at “normal” capacity, we need faster demand growth than before. So the under-consumption undertow becomes increasingly important at the same time that private-sector demand growth became increasingly unlikely due to debt accumulation.
4) All of this meant that something like what has happened since 2000 became increasingly inevitable. That is, the economy became more and more prone to collapse, so that events such as the popping of the high-tech bubble in 2000 – or the post-911 shut-down of the airline system – could stimulate a more general collapse.
5) Further, the accumulation of debt and capacity means that the current recession is likely to deepen for a few years.
6) The instability of the system can be seen in the fact that the economy continued to grow after the (non-trend) profit rate and profit share peaked, in 1997. The profit rate continued to be high relative to the 1980s or the early 1990s, so that accumulation continued. But the end had already begun.
7) This did not mean a serious recession of the sort that we currently see, however. For that to occur, there has to be more than a cyclical decline in the profit rate. Needed were other elements of the era: excessive consumer and corporate debt, the lack of demand-side help from exports or the government, and the general stagnation of the rest of the world.
8) The US has been acting as the “consumer of the last resort” to the rest of the world, counter-acting the world-wide under-consumption undertow. Now it has abandoned that role, sinking the rest of the world’s boats. That has bounced back to hurt the U.S. economy further.
9) Given the low profit rate, excessive private-sector indebtedness, unused capacity, and pessimism about the future, monetary policy has been singularly ineffective. We have yet to see about fiscal policy (government deficits). At this writing, fiscal policy is on hold and unlikely to prevent the deepening recession. The exception would be if the current “war against terrorism” becomes long and expensive.
James G. Devine
Professor of Economics
University Hall (Rm. 4227)
Loyola Marymount University
One LMU Drive, Suite 4200
Los Angeles, CA 90045-2659 USA
office phone: 310/338-2948; FAX: 310/338-1950
Baker, Dean. 2001. “The New Economy Goes Bust: What the Record Shows,” Washington, D.C.: Center for Economic and Policy Research. (See: http://www.cepr.net/new_economy_goes_bust.htm.)
Devine, James. 1983. “Over-Investment, Underconsumption, and the Origins of the Great Depression,” Review of Radical Political Economics, 15(2), Summer: pp. 1-27.
______. 1994. “The Causes of the 1929-33 Great Collapse: A Marxian Interpretation,” Research in Political Economy (Paul Zarembka, ed.) vol. 14, 1994: 119-94. (For an annotated version, see: http://bellarmine.lmu.edu/~jdevine/depr/D0.html.)
______. 2000. "Rising Profits and Falling Inflation: An Empirical Study," Review of Radical Political Economics, 32(3): 398-407.
Larkins, Daniel, and Ralph W. Morris. 2001. “Note on Profitability of Domestic Nonfinancial Corporations, 1960-2000.” U.S. Department of Commerce. Bureau of Economic Analysis. Survey of Current Business. September, 19-21. (http://www.bea.doc.gov/bea/ARTICLES/2001/09september/0901ror.pdf)
Moseley, Fred. 1991. The Falling Rate of Profit in the Postwar United States Economy. New York: St. Martin’s.
 Thanks to Tom Michl for his comments on an earlier draft of this talk and to the folks at the Sacramento Marxist School for their excellent questions. Of course, I am to blame for all chronic and acute diseases that afflict the final draft.
 Many Marxian economists such as Fred Moseley (1991) believe that the numerator of this ratio (R) should include the compensation of unproductive employees. However, since I believe that our focus should be on the rate of profit that has a clear effect on capitalist behavior, what Moseley calls the “conventional rate of profit,” I leave this out of R. Some Marxists (not Moseley) argue that the rate of profit should be measured in value terms. As argued elsewhere, when we are dealing with a high level of aggregation, price categories approximate equaling value categories.
 I emphasize the role of fixed capital because it dominates the calculation of other versions of the profit rate and because the problem of capital’s fixity represents a major cyclical and even long-term problem of capitalist accumulation.
 In a simple story, the s = R/Y = R/(W + R), where W is total wages and salaries. This in turn equals s’/(1+s’), where s’ = R/W, the usual measure of the rate of surplus-value. It is easy to verify that ¶s/¶s’ > 0.
 K/Y reflects not only mechanization (as with the OCC) but also mechanization’s usual effect of increasing the ability to produce: if the latter rises slowly compared to the former, K/Y rises. The latter is of course one of Marx’s major “counter-tendencies” to the fall in the rate of profit induced by the rising organic composition of capital. So K/Y measures the balance of tendency and counter-tendency.
Another major counter-tendency was the tendency for labor productivity to rise relative to real wages, so that the rate of surplus-value rises dramatically over time. Because of the normal increase in worker’s needs and thus the real wage rate, I see the dramatic rise of the rate of surplus-value as the exception rather than the rule. That is, rather than seeing the real wage rate as “normally” constant, the stability of the rate of surplus-value (and of R/Y) is seen as the norm.
 The trend – which shows up in the graphs as the solid dark curves – is calculated as a fifth-degree polynomial of a time variable (a + b•t + c•t2+ d•t3+e•t4+f•t5) using statistical regression. (This seemed to be the best type of polynomial trend line for smoothing out cyclical fluctuations. This choice involved intuitive judgment on my part.) The measurement of the trend this way (or similar ways) as a way to correct for cyclical fluctuations implicitly assumes that cyclical influences such as unused industrial capacity stop being important after several years. That means that it assumes away any long-term downward trend in the rate of profit due to inadequate demand (as in some versions of the “Monthly Review” or “Monopoly Capital” theory of secular under-consumption).
 This and similar numbers refer the trend fall or rise in r, s, or k. The actual profit rate fell even more during the period in question.
 In my (2000) paper, I present evidence for the connection between the falling profit rate and the rise of “stagflation,” a combination of high unemployment and high inflation.
 As discussed below, I treat this workers’ gain as a cyclical and thus temporary phenomenon, with the solid trend lines in the graphs representing the main story.
 The “explanation” is simply a matter of applying the tautology that r = s/k rather than being based on a more fundamental political-economic analysis. Because it refers to the trend values, it rules out explanation by cyclical variables such as the rate of capacity utilization. For example, the “explanation” of the trend r by s is the %∆s/%∆r. This ratio was calculated first directly and then indirectly as a residual from the explanation using k (i.e., 1 + %∆k/%∆r). Then those two ratios were averaged.
 The implication is that capitalism could avoid both falling-profit-rate crises (when profitability is “too cold”) and those resulting from rising profit rates (“too hot) by attaining a “just right” profit rate. However, the dynamic of accumulation prevents this profit rate from being attained except temporarily.
 The difference is that in theory the U.S. economy can be helped by exporting more to the rest of the world.
 Some of the rise in workers’ consumption was encouraged by the cyclical rise in wages toward the end of the 1990s.