Falling profits, rather than increasing financial investment, have led to lower rates of capital accumulation by US companies.
The rate of capital accumulation in the United States has declined dramatically over the past few decades. Literatures on financialization and shareholder value argue that the cause is a diversion of profits from productive investment to financial markets and investments. Shannon williams and Andrew Kliman show that such arguments are not supported by the data and that the fall in the rate of profit of American companies explains the fall in the rate of capital accumulation.
Over the past decades, the rate of capital accumulation by corporations (net investment in fixed capital) has declined, resulting in slower economic growth. At the same time, companies have increased their financial investment relative to their productive investment and have paid larger sums to the financial markets in the form of interest, dividends and share buybacks. Appealing to these phenomena, economists and sociologists heterodox of the traditions of financialization and shareholder value suggest that profit has been hijacked from productive investment to financial uses.
However, we contend that such a diversion did not take place; the increase in purchases and financial payments did not come at the expense of productive investment. Neoliberalism and financialization have not resulted in a decline in the share of profits invested productively. The fall in the rate of capital accumulation is therefore rather due to a relative fall in the profit available for investment, that is, to a fall in the rate of profit of American companies.
The importance of borrowing
The growing involvement of firms in financial markets has not been a diversion of profits from production to finance, as increases in financial acquisitions and payments have been primarily financed by additional loan. If profits were the only source of funds for financial and productive investments, an increase in the former would lead to a fall in the latter. But since borrowed funds are also available, financial investment can (and has increased) as a proportion of total investment without decreasing the share of profits invested productively.
The following facts should be noted:
- As a source of funding for the financial expenditures of non-financial corporations, profit was significantly greater between 1947 and 1967, before the rise of financialization, than during the four decades that followed.
- To cover their new acquisitions of financial assets, companies did not need to dip into profits. The new acquisitions were in fact entirely paid for by loans.
- The increase in the share of profits paid in the form of dividends has not reduced the share devoted to productive investment.
- There was a strong association between borrowing and business investment, and one dollar of additional borrowing led, on average, to about one dollar of additional investment.
Trends in productive investment
To assess whether profit has been diverted from production, Figure 1 examines the share of profit that has been invested in production and considers four different definitions of profit. In the first 21 years of neoliberalism in the United States (1981-2001), the four investment shares in profits were at least as large as the pre-neoliberal investment shares. Although the investment share declined after the early 1980s, this happened because it had become abnormally and not sustainably high – over 100% of after-tax profit – and it returned to low levels. normal, not inferior. Between 1986 and 2001, the four investment shares were at least as high as those of the period 1949-1971.
Figure 1 – Investment Shares in Profits, U.S. Corporations
No teas percentages of the 1949-1971 average; net investment as a percentage of profits two years earlier.
A sharp decline in investment and a large, albeit temporary, peak in profitability occurred after 2001. As a result, three of the investment shares for the whole of the neoliberal period, including the period after 2001, are below the averages for the entire neoliberal period. Period 1949-1980. However, this fact cannot be attributed to neoliberalism, since the investment share was not less than the pre-neoliberal share during the first 21 years of neoliberalism. He then fell sharply (see Table 1).
Table 1 – Shares of investment in earnings, US corporations (net investment as a percentage of earnings two years earlier)
1 PI = property income; NOS = net operating surplus; BTP = profit before tax; ATP = profit after tax
The fall in the share of investment after 2001 seems to have been a temporary response to events such as the bursting of the dot-com stock market bubble that started at the end of 2000, the sharp drop in the rate of profit between 1997 and 2001 and the terrorist attacks of September 11, 2001. As shown in Figure 2, the share of investment rebounded sharply after 2004.
Figure 2 – Net Investment and Profit After Tax, U.S. Corporations
Note: Percentage differences from 1997 levels.
Moreover, once we adjust for changes in the depreciation rate (by measuring investment and profit including depreciation), the average share of investment in profit is much higher during the neoliberal period. , even including the years after 2001, in the period preceding it, as shown in Table 2. Thus, the fall in investment shares over the entire period 1981-2007, compared to their 1949-80 averages, is attributable to an increasing rate of depreciation, and not to neoliberalism and / or financialization.
Table 2 – Share of gross investment in gross margin, US companies (gross investment as a percentage of gross margin two years ago)
1 GPI = gross property income; GOS = gross operating surplus; GBTP = gross profit before tax; GATP = gross profit after tax
The decline in the rate of accumulation
Since the rate of accumulation is, by definition, the product of the investment share of profit and the rate of profit, the percentage change in the rate of accumulation is approximately equal to the sum of the percentage changes on the part of investment and rate of profit. Using this relation, we find that:
- Between 1979 and 2001, about 55% of the fall in the rate of accumulation was attributable to the fall in the rate of profit, the rest to the fall in the share of investment.
- Between 1948 and 2007, the 41% drop in the accumulation rate is explained by the 43% drop in the after-tax profit rate, which was only offset by the 3% increase in the share of the investment (see figure 3). In the long term, therefore, it is the fall in the corporate profit rate, and not the diversion of profits from investment, which explains the all decrease in their rate of accumulation.
Figure 3 – Accumulation rate of American corporations, after-tax rate of profit and share of investment in after-tax profit
Note: percentage differences from 1948 values
Falling profits led to the disaccumulation trend
Some authors have recently argued that the diversion of profits from production is a major underlying cause of the recent financial crisis and the Great Recession. In addition to freeing up funds for speculation, such embezzlement would have depressed investment and economic growth, which in turn increased the burden of household and government debt. This argument suggests that macroeconomic policies that reverse the diversion of profits from production are of crucial importance in preventing a recurrence of the recent crisis (DumÃ©nil and LÃ©vy 2011, p. 301). However, our results suggest that since such policies are a solution to a non-existent problem, they are unlikely to be effective. Since a long-term collapse in profitability, not a diversion, is what led to the disaccumulation trend, it is unlikely that the trend could be reversed in the absence of a sustained rebound. profitability.
This article is based on the paper “Why “financialization” has not depressed American productive investment “, in the Cambridge Journal of Economics 2014, where readers can find full references to the work, data sources, and procedures of others.
Image credit featured: Matt Katzenberger (Flickr, CC-BY-NC-SA-2.0)
Please read our feedback policy before commenting.
Note: This article gives the author’s point of view, not the position of the USApp – American Politics and Policy, or the London School of Economics.
Shortened URL for this article: http://bit.ly/1yaQAnO
About the authors
Shannon Williams – University of Tennessee
Shannon Williams is a doctoral candidate in the Department of Sociology at the University of Tennessee. His research interests include political economy and globalization.
Andrew Kliman – Pace University
Andrew Kliman is Professor of Economics at Pace University and author of Reclaiming Marx’s “Capital”: A Refutation of the Myth of Inconsistency (2007) and The Failure of Capitalist Production: Underlying Causes of the Great Recession (2012).