Re: [OPE-L] profits

From: glevy@PRATT.EDU
Date: Fri Feb 11 2005 - 08:35:14 EST

----------------------- Original Message ----------------------------
Subject: [OPE-L] profits
From:    "Jurriaan Bendien" <>
Date:    Fri, February 11, 2005 6:47 am


It's probably true that the profit-share in national income is rising in
the  G7 (an increase in S/V), but one ought to inquire how "national
income" is  defined in the calculation. A much more significant trend is
the increase in  income from property, as against income from labor.

GDP, GNI and personal income measures typically exclude capital gains
(capitalisation on property ownership) as well as some net interest and
profit receipts, in the case of GDP & GNI precisely because those receipts
 fall outside the defined sphere of "production" (i.e. are not regarded
conceptually as "factor income").

As I noted in previous posts, capital gains are very substantial, and
underestimated in tax data, because these data measure only capital gains
actually realised from asset sales, and identified for tax purposes. As
yet  unrealised capital gains (in particular, residential assets), and
capital  transferred to avoid tax, are left out of account.

Moreover if we examine which sectors account for most the the increase in
the total profit volume, they are basically the FIRE sector (finance &
banking, insurance, business & management services, real estate) while the
 industrial profit rates have not increased significantly, given
structural  excess capacity and stagnating consumer demand. Obviously if
profits/wages ratio increases to the advantage of profits while real net
output stays basically the same, final consumption demand will stagnate.

A much more interesting question I think concerns the reinvestment of
realised profits which Kalecki refers to - what proportion is reinvested,
and in what sectors? In this regard, it is worthwhile to look at
non-residential gross fixed capital formation (net additions to
non-residential fixed assets, unadjusted for depreciation). And basically
investment in industrial structures, plant & equipment is also stagnating
or  falling, important exceptions being computer equipment, mining and
electricity generation (see e.g. NIPA tables section 5).

If we look at the composition of the total realised surplus-value, an
increasing component consists of interest receipts, rentier profits and
profit on asset sales. In 2001 US IRS data, if you sum together the
pre-tax  corporate profits of finance & insurance corporations, real
estate/rental/leasing corporations, and so-called "holding companies", you
 can conclude that these corporations appropriated nearly 60% of all
pre-tax  corporate profits declared for IRS purposes.

After 2000, the volume of capital gains was basically halved, and from
2004  economic data show a small lift in real fixed investment. However
this  increase in real fixed investment is not proportional to the
corresponding  profit volumes.

From the beginning of the long recession, workers were told they must be
content with low or zero wage increases and longer hours, so that new
investments would become possible, that would create more jobs. But if we
look at the actual pattern of the reinvestment of realised profit income,
this argument is simply not credible.

It is therefore unsurprising that the rhetoric shifts to the idea that low
 wages are necessary to stay in business, and beat the competition. But
what  is this competition really about? In most economic sectors nowadays,
a few  giant corporations dominate production and markets. If anything,
the  "competition" is for a stagnating mass consumption demand.

Thereby the argument, as true Keynesians would be quick to point out,
culminates in absurdity - because falling disposable labor income reduces
effective demand for industrial output, labor income must fall further, to
 offset this fall.

The basic problem for Keynesian theory though is that you cannot force
private investors to invest where they don't want to invest, nor,
ultimately, prevent them from investing where they do want to invest.
There  is a carrot maybe, but no stick. Total investment is not simply
investment  in inventories and productive fixed assets; it also includes
financial  assets and non-productive fixed assets. If ordinary consumer
demand  stagnates, investment will re-orient to speculation, luxury
durables and  property, military expenditure and foreign placements.

Additionally, Keynesian policy was based on a national framework where
state  intervention aimed to stimulate job-creating investment. But in a
deregulated economy, creating a good "investment climate" is no longer
necessarily compatible with what is good for the national economy; the
international investor looks at comparative costs and financial benefits
internationally. Therefore, the competition to reduce labor-costs also
plays  itself out internationally. The only thing that can slow this
process is  protectionism and increasing the bargaining power of labor.

All the trends visible today were also visible in the run-up to the Great
Depression of the 1930s. But a big difference today is that at least in
the  USA, Europe, Japan and Australasia, the average asset holding per
head of  population is vastly larger, the proportion of income from
property as  against income from labor is vastly larger, and the ability
to obtain credit  is much greater. Simply put, there is far more asset
wealth that can be  distributed and redistributed, and that asset wealth
also attracts a greater  flow of income from the periphery.

Consequently, excess capacity and stagnating fixed investment in
production  have less immediate and severe consequences than they had 80
years ago. Even  so, a sudden fall in the value of strategic financial
assets could cause a  chain reaction of business failures, resulting in
negative real growth and  accelerating unemployment.


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