[OPE] No rise is s/v? Kliman's empirical work on the falling rate of profit

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Thu Oct 22 2009 - 15:05:41 EDT

I suppose left academics have a rather ambivalent attitude to official
statistics - they are often critical of how those statistics are categorized
and computed, yet they need the data in order to be able to do their
research, and certainly for the purpose of planned economy statistical
information is indispensable. Dr Andrew Kliman is I think quite aware of the
limitations of using official statistics to test Marxian hypotheses. But you
cannot very well avoid having to use the statistical material available,
since you don't have much else to reveal the macro trends.

Insofar as you accept, in so doing, the concept of value-added (the German
"Mehrwert" literally translates as value added) and the available physical
capital stock data, then it can be shown that however we calculate the
average rate of profit, the longer term direction of the trend will be much
the same, although the definition of "unproductive labour" admittedly makes
a big difference to the result, since if you regard "unproductive"
labour-compensation as part of the distributed gross profit volume, then if
the so-called "unproductive" component increases, the measured fall in the
rate of profit is less than it would be otherwise. Dr Kliman is quite
justified in considering only the corporate sector, since the categories and
concepts Marx uses refer specifically to capitalist production (the private
sector), and not to all economic activity subsumed under the heading

I performed very similar research to what Dr Kliman is doing now, a quarter
of a century ago, though I was interested in much more than the average rate
of profit of industries. But I reached a scientific conclusion after
computing various graphs which is different from the Marxist academics - the
concept of value-added itself, and the concept of production used in the
production account, should be critically examined. At the time, I abandoned
my studies, in part because I could not obtain the results I sought from the
available data.

I have just agreed, on the invitation of a professor, to write an academic
paper on the concept of GDP in the light of the report of the Stiglitz
Commision, in which I aim to show among other things some of the problems
with the concept of value added itself, as well as indicating some
alternatives. To my knowledge this hasn't been done before, at least not in
the way I intend to do it. Many people will say such a pursuit is boring and
useless, but I think it has has a scientific and moral relevance, given that
the GFC (global financial crisis) has plunged millions of people into
poverty and unemployment, and that economic policies constantly refer to
statistical measures which cannot provide adequate indicators of the true

As I have mentioned many times on OPE-L, a recurrent myth about GDP is that
it denotes the value of the "whole economy". This is simply not true, Simon
Kuznets knew that very well - he was actually among the first to argue for
measures of the value of household labor - and in fact in order to be able
to obtain the Keynesian identity of total factor income, total expenditure
on gross product, and total sale value of gross product, various
transactions of institutional units must be conceptually excluded from the
calculation to obtain the reconciliation. This means that foundationally, at
the conceptual level, the gross value added already diverges from the real
incomes and expenditures of the transactors included in the accounting
system. This is also already obvious, if you compare the GDP flows with the
income & outlay account, and it has a certain impact on profitability
statistics, since a fraction of profit is excluded and certain imputations
are included to obtain a gross operating surplus measure.

To belabour the point yet another time, as I showed on OPE-L before on 25
October 2005, for 2002 the US IRS computed a net total pre-tax corporate
income of $1,053 billion, but actually BEA bases its profit volume
calculation on a tax-assessed IRS "Total receipts less total deductions"
figure of $550.5 billion, and arrives at a measure of "Total profits before
taxes" of $768.4 billion (see
http://archives.econ.utah.edu/archives/ope-l/2005m10/msg00281.htm ). We can
therefore show quite easily, that the profit volume shown in national
accounts diverges strongly from the true profit volume of corporations, the
main reason being that national accounts adopt a specific definition of the
profit volume which concerns profits thought to be directly related to
production activities.

But rather than critically probing this issue, the "Marxists" typically take
the national accounts measures of net output more or less at face value, and
then try to perform sophisticated adjustments on those. Yet if you accept
the values for the concepts as given in national accounts as your basis,
then the sophisticated adjustments will not actually alter the general trend
very much. Dr Kliman can be very proud of his innovative adjustments of
official data, but to my way of thinking he misses the real problem by a
mile. Just simple arithmetic and a comparison of different data sources can
show there is more profit in the system than the BEA measure suggests. As I
intend to show in my paper among other things, the more income is generated
from the transfer of ownership of already existing assets, the more that GDP
factor income will diverge from true national income receipts.

More intelligent analysts have become aware of the limitations of national
income measures, and indeed as I mentioned on OPE-L on 17 October 2007 (
http://archives.econ.utah.edu/archives/ope-l/2007m10/msg00084.htm ), Mr
William R White, BIS Economic Adviser and Head of its Monetary and Economic
Department, emphasized in 2006 the need for "integrated stock and flow
accounts", and for better surveys of household assets and liabilities. His
observations are very intelligent. He stated among other things:

"...we should try to establish greater consistency between bodies (and
sectors) reporting financial statistics (such as the issuance of debt
securities and FDI) and non-financial statistics (such as consumption and
gross fixed capital formation) to facilitate analysis of how the former
impinge on the latter. (...) In the area of valuation, it must be noted that
the statistics currently collected on the prices of both residential and
non-residential structures are still inadequate in many ways. Moreover, in
many countries, historical data is almost non-existent. When one considers
the role played by such prices in economic cycles, the absence of such data
is almost shocking." (William R White, "Measured wealth, real wealth and the
illusion of saving", keynote speech at the
Irving Fisher Committee Conference on "Measuring the financial position of
the household sector", Basel, 30-31 August 2006)

The GDP concept was never designed to measure "the whole economy" or indeed
to measure total national income, rather it was intended to provide only a
measure of the value of the net new output (the net new wealth) created in
production and of the factor incomes and business expenditures directly
associated with that. Similarly, the national accounts concept of capital
formation only refers to net fixed capital investment, the increase in the
value of inventories held, plus (net) lending to foreign countries, during
an accounting period.

GDP admittedly includes an imputation of the "imputed rental value of
owner-occupied housing" but this imputation (the "capital services" of a
home to its occupier) is a neoclassical fiction, since in reality this flow
of income does not exist at all; at most you can say that the owner-occupier
can obtain a capital gain from his home, but that is something else then the
(hypothetical) amount which he would get if he rented out his home. Since
the capital assets held external to production (including financial assets)
are nowadays larger than the capital assets directly tied up in production,
as I have previously shown on OPE-L, using US budget data (see my post of 6
December 2008
http://archives.econ.utah.edu/archives/ope-l/2008m12/msg00061.htm and
subsequent posts in this thread), then an obsessive focus on GDP measures -
which, I might add, are revised several times after their first release - is
in truth rather myopic. We can do better than that in our social analysis, I

As I mention in the paper I am preparing on GDP, the way that the European
Central Bank has addressed this issue, is by establishing the Household
Finance and Consumption Network (HFCN) in December 2006, which will
coordinate the Eurosystem Household Finance and Consumption Survey (HFCS).
What is specifically new about this survey, is the attempt to measure, for
the first time in an integrated way, household assets and liabilities,
meaning what people actually own, and what their debts/borrowings are
(somewhat similar to the Fed's measures of "net worth" in household finance
surveys, and some national wealth surveys in various European countries).
The UNSNA "Use of income" account admittedly does provide conceptually for
measures of how disposable household income is divided between consumption
expenditure and saving, but it does not connect such information with
household assets and liabilities. The "Other Changes in Assets" account
likewise does not include a treatment of household assets and liabilities.
Even so, such accounts have in reality rarely been separately compiled
according to a UNSNA standard.


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