THE FIELD OF CAPITAL MOBILITY AND THE GRAVITATION OF PROFIT RATES (USA 1948-1997)

THE FIELD OF CAPITAL MOBILITY AND THE GRAVITATION OF PROFIT RATES This study is devoted to the empirical investigation of the gravitation of profit rates among industries around a single value in the US since World War II. The framework of analysis is that developed by classical economists and Marx, and used in many contemporary studies. The gravitation of profit rates around a single value results from the mobility of capital seeking a maximum profit rate. A preliminary concern is to determine the field in which this mobility of capital is likely to occur. A segment of the economy is excluded because of its deficient capitalist nature. After this exclusion, it appears that the profit rates of industries do tend to gravitate around a common value. An important finding of this study is that this gravitation is not observable within a subset of industries, such as Transportation or Public utilities, which utilize very large amounts of fixed capital in comparison to employment or output. + MODEM-CNRS, Université de Paris X-Nanterre, 200, av. de la République, 92000 Nanterre, France. Email: gerard.dumenil@u-paris10.fr. ++ CEPREMAP-ENS, 48, bd Jourdan, 75014 Paris, France. Email: dominique.levy@cepremap.ens. fr. Introduction At the center of the analysis of competition by classical economists and Marx is the notion that the profit rates of various industries tend to gravitate around a common value. The mechanism that ensures this gravitation is described in a similar fashion in the works of Smith, Ricardo, and Marx. More capital is invested where profit rates are larger, and these larger investments expand supply, lower prices, and tend to equalize profit rates. The corresponding prices are denoted as prices of production. Because of constant perturbations (such as demand shocks, technical change, etc.), actual prices actually tend to "gravitate" around such prices. The "movement" of capital among industries is known as the mobility of capital. Much work has been devoted to the three major aspects of this analysis: (1) the mathematical properties of prices of production, (2) the dynamics of this process, and (3) the empirical verification of the thesis in contemporary capitalism: 1. The properties of prices of production have been thoroughly discussed since the beginning of the controversy on the so-called transformation problem and the work of Piero Sraffa. 2. The classical-Marxian theory of competition and the formation of prices of production have been formalized in the last two decades, including our own work. Marxist economists have frequently questioned the relevance of the classical-Marxian analysis of competition vis-à-vis contemporary capitalism in relation to the development of monopolies and oligopolies. It is possible to show that prices of production are compatible with assumptions similar to those of monopolistic competition. It is also useful to recall that Marx stated clearly that the gravitation of profit rates among industries is obtained despite the continuing differences among enterprises, and the relevance of this important insight can be demonstrated. 3. This paper is entirely devoted to the third issue: the empirical relevance of the classicalMarxian thesis of gravitation. The field of analysis is the nonfinancial US economy since World War II, over 50 years (1948-2000). The results obtained confirm the existence of such a gravitation process, with two important caveats, which are the original aspect of the present investigation. A first issue is the definition of the proper field of capital mobility, and therefore, of the potential scope of gravitation. The economy can be divided in numerous sectors and industries, but the classical-Marxian mechanism does not apply to all of these components: 1. It is obvious, for example, that sectors such as Government or Real estate will not be part of this process. The capital of Government is not invested by the state with the goal of seeking maximum profitability; to a very large extent, the capital of Real estate (housings or residential capital, and nonresidential capital) is owned by households, and held for personal use not as an investment. 2. The same is true of industries, that we denote as Individual business, where production is mostly performed by self-employed persons, such as, for example, medical doctors, where capital investment only supplements the main activity. The second proviso represents one of the major findings of the present study. The empirical investigation reveals that some sectors, which display all the necessary capitalist features, are actually not part of gravitation. These industries possess a common character: They use very large amounts of capital compared to their output. For this reason we denote them as Highly capital intensive industries. Why these industries do not obtain the average profit rate on their capital? Is a basic economic mechanism at issue or are capital stocks overestimated? This remains to be determined. A priori, the financial sector of the economy should also take part in the same gravitation process as other industries. The computation of the profit rate for Finance poses, however, quite specific problems. The sector itself is difficult to delineate, and a particular definition of profit rates must be adopted. For this reason, this important segment of the economy is not considered in this study. Gravitation is observed for five industries denoted as the Nonfinancial core capitalist sector (NF-Core): Durable goods (manufacturing), Nondurable goods (manufacturing), Wholesale trade, Retail trade, and a subset of services that we call Capitalist services. Technology is very heterogeneous among these industries, some being rather capital intensive and others not; some industries hold large amounts of inventories, others do not; some pay large indirect business taxes, others do not. Prices take account of these structural differences. Conversely, the profit rates of Highly capital intensive industries (Mining, Communications, and Transportation and public utilities) do not gravitate with others. Overall, the investigation in this paper concludes in favor of the empirical relevance of the classical-Marxian analysis of gravitation, though limited to a fraction of the economy. This limitation combines a priori elements--coherent with the theory itself--and a posteriori exceptions which refer to a common property, highly capital intensive features. The segment of the economy in which gravitation is observed accounts for 46.9% of the net product of the total economy, and 81.5% of the net product of the nonfinancial private economy, denoted as NFBusiness. This study divides into four parts. Part 1 defines the general framework of analysis, the definition of the profit rate and the discussion of the segment of the economy in which the gravitation of profit rates around a common value should, and can actually be, investigated. Part 2 is entirely devoted to the practical delimitation of this expected field of capital mobility. Part 3 presents the results: the industries in which gravitation is observed, and the Highly capital intensive industries, where it is not. Two more technical problems are discussed in part 4 opening the field for new research. An appendix provides technical information. 1 General framework of analysis Section 1 is devoted to the definition of profit rates to be considered in the analysis of gravitation. Section 2 discusses the contours of the field of capital mobility (Which industries provide a priori comparable alternative opportunities for investment to capitalists, allowing for the gravitation of profit rate? ). It also defines what can be actually done on account of data limitation. 1.1 Which profit rates? The measurement of profit rates is difficult in several respects. Should variables be measured in values, in the sense of Marx's labor theory of value, or in prices? The answer to this question is clear: Price measures must be adopted. This does not mean that the labor theory of value has no explanatory power, but only that it does not explain everything. What is at issue here is the behavior of economic agents, notably the decision to invest of capitalists, and the consequences of profitability levels. These mechanisms refer to variables measured in price terms. The basic contention is that firms and capitalists are not directly affected by variables expressed in values. There is no "true" definition of the profit rate independently of the topic under consideration. The analysis of gravitation requires a narrow definition of profits. Firms pay taxes, and profits must be computed net of indirect business taxes. This is important when profit rates of specific industries are at issue, since, in the US, the rates of taxation are not uniform. Profit taxes can also be deducted, but this deduction has less impact. Whether interest should be subtracted is unclear. Individual firms may go into debt for specific reasons. This should not impact the formation of prices of production and, from this viewpoint, profits should be considered prior to the payment of interest. When industries are studied instead of individual firms, there is also an important structural aspect to the pattern of indebtedness: Some industries go into debt more than others. This suggests that profits should be considered after payment of interest. Concerning capital, it is certainly necessary to include inventories, i.e., to consider tangible assets, the sum of fixed capital and inventories. The total capital in a firm includes financial assets (cash, securities such as bonds and shares, trade credits, etc.), but the firm also owes money to other agents. Because of this reciprocal aspect of monetary and financial relationships, the addition of financial assets to fixed capital and inventories, i.e., the total balance sheet, does not yield an appropriate assessment of the amount of capital invested in a firm or industry.