[OPE-L:4869] Re: RRI and the Rate of Profit

Duncan K. Foley (dkf2@columbia.edu)
Fri, 25 Apr 1997 12:42:56 -0700 (PDT)

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On Andrew's OPE-L:4853:

>With respect to the ongoing discussion of "bias" in technical change, I'd like
>first to reiterate that, regarding macro data, Frank Thompson's calculations
>for the U.S. show a basically trendless relation between GDP and "capital,"
>for almost all measures of capital.

Could you give us the citation on this? The word "trendless" is somewhat
tricky in this context. For example, over the period 1869-1991 there is no
"trend" in the output-capital ratio for the U.S. economy, say, in Dumenil
and Levy's data. On the other hand, there is a very strong pattern of a
falling output-capital ratio in the 1869-1919 period and again in
1949-1991, interrupted by a big shift upward in the output-capital ratio in

>With respect to micro relations, William H. Peterson ("Capital-intensive
>industry," in _The McGraw-Hill Encyclopedia of Economics_, 2d ed., 1994, pp.
>123-25) writes:
>"Whatever the industry, almost all technological advances tend to lead to the
>substitution of more efficient capital equipment for less efficient capital
>equipment. But in a larger sense, these substitutions amount to factor
>substitution -- the replacement of labor by capital with a decline in unit
>labor costs usually resulting. This phenomenon is especially the case in
>decreasing-cost industries. Such industries as well as their customers are the
>beneficiaries of economies resulting from large-scale production.
>Manufacturing in general is a decreasing-cost industry, depending on the
>degree of capital intensity.
>"Given high intensity, volume is the key to decreasing costs, as in the
>automobile industry. Assembly-line production, automatic multiple boring of
>engine blocks, giant body-stamping equipment, and the like all demand
>intensive, almost full-time use for the heavy capital investments to pay off.
>When the investments do pay off, unit costs tend to fall."
>The pattern Peterson notes would be classified, using the au courant
>terminology, as capital-saving and (even more) labor-saving.

I agree about the "labor-saving" part, but I don't see why the "replacement
of labor by capital" would be classified as "capital-saving".

>His discussion of economies of scale leads me to wonder whether those who
>relate the falling profit rate to a rise in the "capital/output" ratio may
>have the causation reversed. Given economies of scale, if output falls --
>due, say, to a slump brought on by a falling rate of profit -- we should
>expect, ceteris paribus, that the "capital/output" ratio will rise *as a
>consequence*. It seems to me that the appropriate way to control for this is,
>when measuring the productivity of "capital," to adjust the "capital" figures
>for capacity utilization, to get a measure of employed "capital," as Solow's
>famous study does.

I accept this point about the macro-methodology. Dumenil and Levy make an
explicit attempt to correct for capacity utilization, and there are some
other ways to approach it, for example, by using business cycle peak years.
The movements on a 50 year time scale are quite striking in the data,
however, and it's hard for me to believe that capacity utilization
corrections will completely change the pattern.


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu