Capital Accumulation,Profitability,and Crisis

1. Introduction

The profit rate has become one of the foundations of Marxian economics since the third volume of Das Capital was published. It is used by many Marxist economists to analyze capitalist crises and their underlying causes along with the long-term trajectory of capital accumulation.

In this paper, I employ the profit rate to address the issue of structural changes in class relationships and the process of capital accumulation that occurred under neoliberalism compared to previous post-WWII periods. I also examine the possible roles these changes played in the crisis of 2007-2009. Contrary to many conservative or liberal mainstream economists, I argue that neither the post-2007 financial crisis nor even the deflation of the housing bubble that gave rise to the crisis, can be considered the “cause” of the subsequent real economic crisis. These were “triggers” for the economic downturn but not the underlying cause. The key issue is why the financial crisis did not produce a standard business cycle downturn but rather became a structural crisis, “the Great Recession.”

To answer this question and hence explain how the current state of the economy arose, it is necessary to employ both types of profit rate analyses, cyclical and secular. The former will indicate how the downturn of the Great Recession business cycle began, which has many similarities to all business cycle downturns in the post-WWII period and also has some important characteristics related to it being a neoliberal business cycle. The secular analysis will allow me to investigate why the crisis turned into the Great Recession instead of a normal cyclical downturn. This latter involves a long-term class perspective necessary to show that institutional changes, and in particular changing class relationships and changes in the process of capital accumulation along with the financialization of the economy beginning in the 1970s and accelerating from the early 1980s onward, progressively created the specific form of neoliberalism whose structure by the mid-2000s made the crisis only a question of what would trigger it and when.

The paper is organized as follows. Sections 2 and 3 discuss respectively the cyclical and secular behavior of the profit rate within the frame of various Marxian crisis theories. These sections closely follow Weisskopf’s framework from his 1979 seminal paper for both the cyclical and secular considerations. In section 2 I first analyze the behavior of the profit rate in the crucial late expansion phase of each of ten post-WWII U.S. business cycles to explain different possible causal mechanisms for its dynamics. This is crucial for our understanding of cyclical downturns. ¹ Second I discuss how the nature of the profit rate’s behavior in the late expansion phases of post-1980 neoliberal business cycles differs from what Weisskopf found for the first three post-WWII decades. In section 3, I then turn to the analysis of the behavior of the profit rate in the entire neoliberal period to explain how it differed from the previous two post-WWII periods in terms of the factors contributing to its dynamics. This section establishes the underlying causes of the profit rate recovery under neoliberalism in the changing class relationships, while also showing that capital accumulation continued to slow down for most of the period despite a recovery in the profit rate.

Section 4 then discusses the neoliberal transformation of capitalism, and the structural changes that were the cause of the Great Recession and the continuation of long-lasting anemic growth and capital accumulation. The key to the approach taken here is the changed relationship between capital accumulation and the profit rate under neoliberalism, when the economy experienced deepened exploitation of labor (to improve the rate of profit) and financialization. The paper argues that to understand the key relation of the rate of profit to accumulation under neoliberalism, in which financial relations are universally agreed to be more important than in pre-neoliberal capitalism, it is necessary to use a profit rate measure augmented by financial relations. In this section I carefully present an appropriate financially augmented rate of profit, and then apply it to the value-generating sector of the economy, nonfarm nonfinancial corporate business (henceforth NFCB). ² With this measure of the profit rate one can see clearly the profit rate roots of the current crisis of capital accumulation, which is not clear if one does not consider the effects of neoliberalism’s financialization on the profit rate. Section 5 concludes.

2. Cyclical Behavior of the Profit Rate ³

Weisskopf (1978, 1979) analyzed the secular and cyclical dynamics of rates of profit in a theoretical frame of various Marxian crisis theories. Weisskopf described three alternative theories: (i) the problem of a profit squeeze caused by the factors affecting the distribution of income between labor and capital; (ii) the problem of the realization of the full value of the commodities produced, known mainly as the under-consumption or over-investment variants of Marxian crisis theory; and (iii) the problem of the increasing organic composition of capital driven by accumulation and technical change. ⁴

Weisskopf operationalized these three theoretical concepts in the profit rate equation as follows:

r = Π / K = ( Π / Y ) ( Y / Y * ) ( Y * / K )

where r is the rate of profit, Π is the net before-tax profit, K is the net capital stock, and Y and Y* are the net output and net potential output, respectively.

In this equation, the first, second, and third components, namely the profit share (Π/Y), capacity utilization (Y /Y*), and capacity-capital ratio (Y*/K), are linked to the profit squeeze, the realization failure, and the rising organic composition of capital variants of Marxian crisis theory, respectively.

In the empirical analysis on the profit rate and its component variables below, I divide the entire post-WWII period into three distinct periods to delineate the important changes that occurred with the onset and consolidation of neoliberalism. The first “Keynesian compromise” period roughly runs from 1950 to 1970 and covers business cycles I-IV. The second “transitional” period includes the 1970s, covering business cycles V-VI. The third “neoliberal” period roughly started in the early 1980s and covers business cycles VII-X.

There are ten business cycles from trough to trough for the period 1949-2009. I determined the cyclical peaks in net real output and in the rate of profit for the NFCB within each one of these ten business cycles. Tables A1 to A3 in the appendix summarize the key points in the dating of business cycles along with their values. The data summarized in these tables reveal that the cyclical peak in the rate of profit precedes the cyclical peak in net real output in nine out of the ten cycles. In the very short cycle VII, which lasted for only two years, both peaks occur in the third quarter of 1981. Thus, the profit rate leads the level of net real output within each cycle but one since the late 1940s, suggesting the importance of the profit rate as a leading indicator for a cyclical downturn. For this reason, using Weisskopf’s periodization, I disaggregated each cycle into three distinct phases. Phase A is the early expansion phase. It starts at the trough in net real output, continues with increase in the net real output and the rate of profit, and ends with the peak in the rate of profit. Phase B is the late expansion phase. In this phase, the rate of profit starts to decline from its peak while the net real output keeps rising and reaches its peak. Phase C is the contraction phase. It starts with the decline in net real output from its peak, continues with the decline in net real output and the profit rate, and ends at the next trough in the net real output.

Hence I investigate the causes of cyclical contraction in phase B, where the initial decline in the rate of profit starts while net real output is still increasing, albeit at a slower rate. Weisskopf (1979) argues that this is compatible with all variants of Marxist crisis theory because, in all of them, investment expenditure declines in response to the falling rate of profit, which eventually causes net real output to decline.

Table 1 summarizes growth rates of the profit rate and its component variables during the late expansion phase of each cycle. ⁵

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Table 1.

Rates of Growth of Before-tax Profit Rate and Its Components: Late Expansion in Each Cycle (%).

	Cycles
	I	II	III	IV	V	VI	VIII	IX	X
r	−5.8	−9.6	−5.1	−5.5	−11.4	−8.0	−3.4	−5.8	−10.3
Π/Y	−5.2	−5.5	−4.6	−4.1	−6.9	−6.7	−2.5	−5.9	−6.3
Y/Y*	0.1	−1.7	−0.7	−1.7	−4.8	−0.2	−1.8	0.2	−2.3
Y*/K	−0.7	−2.3	0.3	0.3	0.2	−1.2	1.0	−0.1	−1.7

My findings in Table 1 confirm Weisskopf’s result that it is primarily the decline in the profit share in all cycles, with a secondary contribution from the decline in capacity utilization (except cycles I and IX), that leads to the decline in the profit rate in the crucial late expansion phase of every post-WWII cycle. ⁶

Whatever causes a decline in the profit share must cause a corresponding increase in the wage share since 1=W/Y+ Π/Y in equation (1). Therefore, it was important for me to decompose the wage share into economically meaningful categories to unravel the factors behind the profit share decline in the late expansion. Wage share is decomposed as follows:

( W / Y ) = ( P w / P y ) ( w ) ( y / L ) − 1

where W is total compensation, L is total labor hours, y is real net output, w is the hourly real wage, and P_y and P_w are the implicit price deflators for output and wage goods, respectively.

The findings in Table 2 show that there is a significant change in the character of the business cycles beginning in the early 1970s. In the Keynesian compromise period, a healthy growth rate of the real wage above real productivity growth caused the profit share to decline. In the first cycle of the transition period (V), real wage growth was negative but real productivity declined even faster. Therefore the real wage-productivity gap continued to be the cause of the profit share decline in the early 1970s, though it could no longer be considered an example of the usual concept of a profit squeeze from “excessive wage growth” since real wages were falling. In the second cycle of the transition period (VI) and first two cycles of neoliberalism ⁷ (VIII and IX), however, the real wage-productivity gap nearly closed. Now it is predominantly the shift in the price ratio unfavorable to capitalists in the NFCB that causes the profit share to decline. In the last cycle of neoliberalism, cycle X, the price ratio continues to be the primary factor causing the decline in the profit share, accounting for 55 percent of the growth rate of the wage share while the real wage-productivity gap assumes the remaining 45 percent.

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Table 2.

Rates of Growth of Wage Share and Its Components: Late Expansion in Each Cycle (%).

	Cycles
	I	II	III	IV	V	VI	VIII	IX	X
W/Y	2.5	2.4	2.0	1.7	2.6	2.4	0.9	2.1	2.6
Pw/Py	1.1	−1.3	0.7	0.6	0.8	1.2	1.4	1.6	1.5
w	3.0	4.1	3.1	2.5	−0.6	0.7	−1.2	3.5	1.8
y/L	1.6	0.4	1.8	1.4	−2.3	−0.5	−0.8	3.0	0.6

3. Secular Behavior of the Profit Rate

Here I use the same framework as in section 2 to analyze the secular behavior of the profit rate and its component variables. I do so over the full period, between subsequent cycles and within each of the three post-WWII periods mentioned above, namely the pre-1970 Keynesian compromise period (cycles I-IV), the transitional period of the 1970s (cycles V-VI), and the post-1980 neoliberal period (cycles VII-X). My aim here is to present a comparative analysis of the behavior of the profit rate and its component variables in order to examine if the neoliberal period shows any significant variation compared to the other two post-WWII periods and the full period.

Table 3 summarizes the growth rates in related variables over the full period and within post-WWII periods. ⁸ Over the full period from 1949Q4 to 2009Q2, the profit rate declined at an average annual rate of 0.36 percent. Profit share and capacity-capital ratio accounted for 67 and 33 percent of this decline in the profit rate (adjusted for capacity utilization), respectively.

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Table 3.

Rates of Growth of Before-tax Profit Rate and Its Components: Post-WWII Periods (%).

	Full period	Cycles I-IV	Cycles V-VI	Cycles VII-X
r	−0.36	0.52	−3.09	0.48
Π/Y	−0.29	−0.31	−1.17	0.17
Y/Y*	0.07	0.81	−0.23	0.25
Y*/K	−0.14	0.01	−1.69	0.05

The three post-WWII sub-periods, however, show dramatically different results. In the Keynesian compromise period, despite the decline in the profit share by 0.31 percent annually, the profit rate increased at an average annual rate of 0.52 percent. Capacity utilization accounted for the entire increase in the profit rate during this period. In the transition period, the profit rate declined swiftly at an average annual rate of 3.09 percent. Capacity-capital ratio and profit share accounted for 55 and 38 percent of the decline in the profit rate, respectively. The profit rate recovered in the neoliberal period, increasing at an annual rate of 0.48 percent. Unlike the decline in the profit share in the previous two periods, the profit share in the neoliberal period increased, accounting for 35 percent of the increase in the profit rate. The main contribution to the growth rate of the profit rate during the neoliberal period, however, came from the increase in capacity utilization, contributing 54 percent to the growth of the profit rate.

Another way to look at the data for the consideration of long-term growth trends is cycle-to-cycle growth rates, ⁹ displayed in Table 4. A sustained decline in the profit rate over the cycles before the 1980s (except case III-IV) was reversed with the onset of the neoliberal period. Three important changes occurred. First, profit share started to increase and recorded positive growth in all three neoliberal cases. Second, the decline in capacity utilization was reversed. Capacity utilization contributed positively to the growth of the profit rate in the first two cases before it marginally declined in the last case. Third, decline in the capacity-capital ratio was reversed and it contributed somewhat significantly to the growth of the profit rate in the first two cases before it declined somewhat in the last case. Despite the increase in the profit share, the marginal decline in the profit rate in the last case was accounted for entirely by this decline in this capacity-capital ratio.

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Table 4.

Rates of Growth of Before-tax Profit Rate and Its Components: Between Cycles (%).

	Cycles
	I-II	II-III	III-IV	IV-V	V-VI	VI-VII	VII-VIII	VIII-IX	IX-X
r	−1.8	−1.8	3.2	−3.1	−2.9	−4.0	2.7	1.2	−0.5
Π/Y	−1.7	−0.7	0.7	−2.1	0.0	−1.6	0.7	0.6	0.5
Y/Y*	0.9	−0.6	1.8	−0.8	−0.8	−1.7	1.1	0.2	−0.2
Y*/K	−1.0	−0.5	0.7	−0.3	−2.1	−0.7	0.9	0.4	−0.8

As in the case of cyclical decline of the profit rate in the late expansion, the profit squeeze variant of Marxian crisis theory appears to provide the best explanation for the secular decline in the profit rate over the full period. Profit share declined substantially during the Keynesian compromise and transition periods before recovering in the neoliberal period. In order to determine what explains the change in the profit share, I will look at the components of the wage share (equation (2) above). ¹⁰

Table 5 provides figures on growth rates of the wage share and its component variables over the full period and within each of three post-WWII periods. The increase in the wage share over the full period was accounted for almost equally by increases in the price ratio and real hourly wage. In the Keynesian compromise period, the real wage increased at an impressive rate of 2.41 percent annually, slightly less than the growth rate of productivity. The real wage during this period thus was the dominant factor contributing to the increase in the wage share. In the transition period, real wage growth slowed substantially relative to productivity growth. An unfavorable price shift for capitalists in NFCB became the dominant factor giving rise to the positive annual growth rate in the wage share during the transition period. The increase in the wage share was reversed in the neoliberal period for two reasons. First, the slowdown in the growth rate of the real wage continued in the neoliberal period despite the considerable increase in productivity growth. Second, the continued unfavorable price shift in the neoliberal period did not entirely offset this remarkable decline in the real wage-productivity gap.

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Table 5.

Rates of Growth of Wage Share and Its Components: Post-WWII Periods (%).

	Full period	Cycles I-IV	Cycles V-VI	Cycles VII-X
W/Y	0.11	0.13	0.40	−0.07
Pw/Py	1.03	0.45	1.20	1.19
w	0.99	2.41	0.61	0.77
y/L	1.90	2.72	1.41	2.03

Table 6 provides the figures on the cycle-to-cycle growth rates in the wage share and its component variables. It reinforces my findings above. In each case in the neoliberal period, the wage share declined. This decline was the result of a remarkable decline in the real wage-productivity gap despite the substantial ongoing increase in the price ratio. This decline in the real wage-productivity gap was achieved mainly by slowing real wage growth, as productivity growth was not particularly strong in the neoliberal period compared to the Keynesian compromise period.

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Table 6.

Rates of Growth of Wage Share and Its Components: Between Cycles (%).

	Cycles
	I-II	II-III	III-IV	IV-V	V-VI	VI-VII	VII-VIII	VIII-IX	IX-X
W/Y	0.8	0.3	−0.3	0.9	0.0	0.6	−0.3	−0.2	−0.2
Pw/Py	0.8	−0.1	0.6	0.7	1.2	2.2	0.8	1.4	0.9
w	3.1	2.8	1.8	2.1	0.6	−1.4	0.9	−0.1	1.5
y/L	3.0	2.3	2.7	1.9	1.8	0.2	1.9	1.5	2.7

3.1. An overview: NFCB versus labor, top management, and financial sector, and the deterioration of terms of trade

The neoliberal period restructured key class relationships between and within classes. First and foremost, beginning with the transition period and intensifying under neoliberalism, capital strengthened its position vis-à-vis labor as my discussion of the profit rate and its component variables showed. Using the ratio of productivity to real wage as an indicator for the strength of capital relative to labor, this ratio increased from 0.9 in the period 1947-1979 to 1.06 in the 1980s, 1.21 in the 1990s, and 1.37 in the 2000s, indicating a dramatic shift in the balance of power in favor of capital.

Second, there was a dramatic increase in the price ratio (P_w/P_y) under the transition and neoliberal periods. This was the cause of the increase in the wage share under the transition period and its relatively slow decline under neoliberalism, since the real wage-productivity gap declined strongly in these two periods. What causes the price ratio to increase thus becomes important in understanding the behavior of the profit rate for the past four decades. Unfortunately, I am not aware of any carefully conducted research on the underlying causes of the increase in the price ratio during this period. However, Weisskopf (1981) offers an explanation as to the treatment of this price ratio which can be delved into here. Following Weisskopf (1981), the terms-of-trade in NFCB can be written as the ratio of price index for output to price index for income, ¹¹ P_y/P_z, where P_y is the price index for output produced and P_z is the price index for income (the cost of commodities purchased out of total income). P_z differs from P_y to the extent that prices of imported goods behave differently from prices of exported goods and/or income is used to purchase goods produced abroad. A decline in P_y/P_z indicates that the “economy’s product is worth less relative to the goods and services purchased with the economy’s income” (Weisskopf 1981: 178). Thus it is mainly the changes in the terms of trade that causes P_y/P_z to change. ¹² I can now write the original price ratio whose rate of change is important to explain as follows.

( P w / P y ) = ( P w / P z ) ( P z / P y ) = ( P w / P z ) ( P y / P z ) − 1

where (P_w/P_z) is the ratio of price index for wage goods (the cost of commodities purchased out of wages) to price index for income and (P_y/P_z) is the ratio of price index for output to price index for income, which is the indicator for the terms of trade in NFCB.

In my empirical analysis, I found almost perfect simple positive correlation between P_w/P_y and P_z/P_y (i.e. the inverse of the terms of trade). These two price ratios also had very similar index values. In other words, it is the deterioration in the terms of trade that causes P_w/P_y to increase. I also compared the terms of trade in NFCB calculated above (P_y/P_z) to economy-wide terms of trade (the ratio of export price index to import price index). There was a very high simple correlation of 0.87. It thus appears that it is mainly the deterioration in the terms of trade that led to an increase in the wage share under the transition period and a relatively slow decline in the wage share under neoliberalism.

Figure 1 shows the wage share and its component variables. Note the dramatic decline in the ratio of real wage to productivity and the equally dramatic increase in the ratio of the wage good price to output price.

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Figure 1.

Wage Share and its Components.

Third, the number and cost of managerial employees increased substantially during the neoliberal period (Gordon 1996; Dumenil and Levy 2007). Figure 2 depicts the wage shares of the top 5 percent and the bottom 95 percent of wage earners along with the total wage share in the NFCB. ¹³ The wage share of the top 5 percent increased from 11.2 percent in the period of 1947-1979 to 14.1 percent in the 1980s, 16.2 percent in the 1990s, and 17.5 percent in the 2000s. It can be argued that this dramatic change in the organizational structure of the firms under neoliberalism redistributed some of the surplus extracted from labor back to top managers. ¹⁴

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Figure 2.

Wage Shares for All, Top 5% of Wage Earners and Bottom 95% of Wage Earners.

Fourth, neoliberalism has also changed the relationship between financial and nonfinancial sectors. As Figure 3 shows, the share of profit that was transferred to the interest earning financial sector in the form of interest payments, and to shareholders in the form of dividend payments, substantially increased under neoliberalism. ¹⁵

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Figure 3.

Share of Net Interest and Net Dividend Payments in Profit.

Fifth, Table 3 above showed that the profit rate under the entire neoliberal period recovered substantially and the primary cause of this recovery was the increase in capacity utilization with a secondary, but still significant, contribution from the increase in the profit share. However, neither the increase in capacity utilization nor the profit rate recovery changed the course of capital accumulation in any significant way under neoliberalism. As Figure 4 shows, the period of neoliberalism, except during the second half of the 1990s, has been one of slow capital accumulation rather than fast accumulation, despite the strong growth in demand reflected in the growth rate of capacity utilization. It was primarily the asset-bubble-induced consumption (i.e. higher household debt) ¹⁶ that caused strong growth in demand since real wage growth substantially slowed down during this period.

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Figure 4.

The Rate of Capital Accumulation.

In short, super-exploitation of labor through stagnant real wage growth and higher household debt gave rise to the neoliberal period’s profit rate recovery despite the unfavorable price shifts caused by the deteriorating terms of trade. Capitalists in the NFCB directly, and top management and the financial sector indirectly through the transfer of surplus extracted from labor, are the beneficiaries of this exploitation. However, despite the strong growth in demand and the relatively strong recovery in the profit rate, the pace of capital accumulation continued to slow down for most of the neoliberal period. ¹⁷ Explaining this puzzle is central to understanding the neoliberal structural transformation that gave rise to the structural crisis of 2007-2009. I turn to this question in the following section.

4. Capital Accumulation, Financialization, and the Profit Rate

My analysis above showed that the before-tax profit rate recovered in the neoliberal period from the low levels it reached in the second half of the 1970s. Its recovery was, however, only partial. Its average value in the neoliberal period was barely above the minimum profit rate that was achieved during the Keynesian compromise period. The after-tax profit rate recovered more substantially under neoliberalism as the tax policy of this period shifted in favor of capital.

Figure 5 compares these two measures of the profit rate with the rate of capital accumulation in the NFCB. The profit rate has always been understood to be a central determinant of the rate of capital accumulation. It is clear from Figure 5, however, that there has been increased divergence between these two measures of the profit rate and the rate of capital accumulation under neoliberalism. ¹⁸

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Figure 5.

Before-tax Profit Rate (Lagged), After-tax Profit Rate (Lagged), and the Rate of Capital Accumulation.

On the one hand the pattern of capital accumulation is partially influenced by the part of the profit that is transferred into the financial circuit as financial payout (Bakir and Campbell 2010: 325). On the other hand the nonfinancial sector generates funds from their financial activities in the form of interest, capital gains, and dividends, which can potentially be used for capital accumulation. Moreover, potential funds, real or financial, can be used for the purpose of accumulation of financial assets rather than real assets. So a more complete analysis of capital accumulation in NFCB requires us to take into account its financial activities.

To this end, following Dumenil and Levy (2004) and the detailed description of the procedure in Bakir and Campbell (2013), I introduce below the augmented profit rate taking into account the financial activities of NFCB. I then consider if this is a better indicator of the pattern of capital accumulation than the non-augmented profit rate.

4.1. Augmented profit rate and capital accumulation

Dumenil and Levy (2004) defines four types of financial relations affecting the profitability of NFCB. These are:

i) financial cost = interest paid (IP)

ii) financial income = interest received (IR) + dividends received (DR) + holding gains on assets (HG) + foreign earnings retained abroad (FERA)

iii) net worth (NW) = net capital stock (K) – net liabilities (NL)

iii.1) NL = debt – financial assets (FA) where debt = liabilities (L) – foreign direct investment (FDI)

iv) net adjusted financial income (NAFI) = net financial income + devaluation of NL by inflation

iv.1) adjusted financial income = financial income – devaluation of financial assets by inflation

iv.2) adjusted financial cost = financial cost – devaluation of debt by inflation

Table 7 shows some of the key financial indicators defined above. It shows staggering changes occurring under neoliberalism. These changes reveal the mostly likely causes of the slowdown in capital accumulation in the changed financial activities of NFCB.

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Table 7.

Average Values of Six Key Financial Indicators of NFCB: Post-WWII Periods (%).

	Full period	Cycles I-IV	Cycles V-VI	Cycles VII-X	Memo:Cycle X
A. Ratio of Adjusted Financial Income to Profit	11.2	5.9	6.3	16.9	17.2
B. Ratio of Adjusted Financial Cost (Interest Paid) to Profit	7.4	1.3	−7.9	17.5	15.4
C. Ratio of Adjusted Financial Payout (Interest Paid and Dividend Paid) to Profit	29.0	20.0	11.1	42.2	46.8
D. Ratio of Financial Asset to Capital Stock	58.8	37.2	44.3	80.5	108.1
E. Ratio of Debt to Capital Stock	65.0	46.1	59.2	81.4	89.3
F. Ratio of Net Liabilities to Capital Stock	6.2	8.9	14.9	0.9	−18.8

A new profit rate that includes the impact of financial relations, which Dumenil and Levy call the augmented profit rate, is defined as follows:

r a = ( Y − W − T + NAFI ) / NW = ( Π pat + NAFI ) / NW = Π a / NW

where Y and W are defined as before, T is all taxes, NAFI is net adjusted financial income, NW is net worth, Π_pat is the after-tax profit defined as (Y – W – T), and Π_a is the augmented profit defined as (Π_pat + NAFI).

Figure 6 compares the augmented profit rate and the rate of capital accumulation in NFCB. It shows that capital accumulation and the augmented profit rate move very closely and there is no divergence under neoliberalism as there was in Figure 5.

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Figure 6.

Augmented Profit Rate, r_a (lagged), and the Rate of Capital Accumulation.

In short, changes that have occurred in the financial activities of NFCB under neoliberalism require us to consider an alternative measure of profitability in the analysis of capital accumulation. The augmented profit rate (r_a) described above appears to be economically more meaningful than the traditional rates for the analysis of capital accumulation under neoliberalism, as one might a priori guess it would be becaue it includes considerations of the financial relations that are so important in neoliberalism.

4.2. Augmented profit rate and its components

Below, I decompose the augmented profit rate (r_a) to determine the relative contributions of economically meaningful categories to its behavior and, in particular, what makes it behave differently from the standard after-tax rate of profit. I also demonstrate that the augmented profit rate better explains capital accumulation.

r a = Π a / NW = ( r pat ) ( Π a / Π pat ) ( K / NW ) = ( r pat ) ( Π a / Π pat ) ( K / TA ) ( TA / NW )

where r_pat is after-tax profit rate (defined as Π_pat/K), Π_a is augmented profit, Π_pat is after-tax profit, K is net capital stock, TA is total assets, and NW is net worth.

In this decomposition the after-tax profit rate, r_pat, captures the impact on the augmented profit rate of funds generated from production after all the taxes are paid. The ratio of augmented profit to after-tax profit, Π_a/ Π_pat, captures the role of net adjusted financial income generated by the NFCB. The ratio of net capital stock to total assets, K/TA, changes the augmented profit rate in the opposite direction if the NFCB accumulates more financial assets relative to capital stock. Finally, the ratio of total asset to net worth, TA/NW, changes the augmented profit rate in the same direction if NFCB finances its expenditure on assets through more borrowing in financial markets.

Table 8 displays growth rates of the augmented profit rate and its components over the full period and within each post-WWII period. Table 9 displays cycle-to-cycle growth rates in the same variables. Four important observations can be made using tables 8 and 9.

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Table 8.

Rates of Growth of Augmented Profit Rate and Its Components: Post-WWII Periods (%).

	Full period	Cycles I-IV	Cycles V-VI	Cycles VII-X
ra	−0.52	1.86	0.69	−0.93
rpat	0.22	2.09	−2.70	0.45
Πa/ Πpat	−0.39	−0.70	3.09	0.14
K/NW	−0.35	0.46	0.30	−1.52
K/TA	−0.83	−0.32	−0.43	−1.42
TA/NW	0.48	0.78	0.73	−0.10

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Table 9.

Rates of Growth of Augmented Profit Rate and Its Components: Between Cycles (%).

	Cycles
	I-II	II-III	III-IV	IV-V	V-VI	VI-VII	VII-VIII	VIII-IX	IX-X
ra	0.2	−2.0	5.0	−2.4	2.9	−6.3	−0.2	0.9	−3.2
rpat	1.7	−1.9	6.0	−5.1	−1.1	−2.3	3.2	1.8	−1.3
Πa/ Πpat	−1.1	−0.7	−1.6	2.5	3.3	−3.9	−2.7	0.4	0.4
K/NW	−0.4	0.6	0.6	0.2	0.7	0.0	−0.6	−1.3	−2.3
K/TA	0.2	−0.1	−0.7	−0.2	−0.2	−0.2	−1.8	−0.9	−1.5
TA/NW	−0.6	0.7	1.3	0.4	0.9	0.2	1.2	−0.3	−0.8

First, both the augmented profit rate (r_a) and the after-tax profit rate (r_pat) roughly moved together in the Keynesian compromise period, indicating that the effects of financial activities in NFCB were quite stable over this period. In the transition period, despite the substantial decline in r_pat, r_a increased. This was mainly due to increasing net adjusted financial income (as expressed in the ratio Π_a/Π_pat), which was made possible by the negative or very low real interest rates of the period. Then, under neoliberalism, a dramatic shift in the behavior of these two rates occurred. The decline in r_pat during the transition period was reversed under neoliberalism while r_a declined substantially. ¹⁹

Second, the rate of growth of the ratio of augmented profits to after-tax profits (Π_a/Π_pat ) continued to increase in the neoliberal period, albeit at much slower rate, but this was not enough to change the course of the declining augmented profit rate (r_a).

Third, the decline in the growth rate of the ratio of capital stock to net worth (K/NW) was the only factor responsible for the decline in the augmented profit rate (r_a) under neoliberalism. Cycle-to-cycle growth rates, however, show some variations. In the case VII-VIII, Π_a/Π_pat declined substantially, accounting for the majority of the decline in r_a. And in the case IX-X, while K/NW was the primary reason for the decline in r_a, the decline in after-tax profit (r_pat) also was a significant part of the decline in r_a.

Fourth, the ratio K/NW has two components, the ratio of capital stock to total assets (K/TA) and the ratio of total asset to net worth (TA/NW). The ratio K/TA in Table 9 suggests that although the rate at which NFCB has accumulated financial assets relative to capital stock increased continually since cycle II, this increase was much stronger under neoliberalism, leading to a decline in available funds and, therefore, a lower augmented profit rate. The ratio TA/NW indicates that NFCB has become more leveraged (measured relative to total assets) from case II-III to case VII-VIII, leading to the financing of assets through more borrowing and, therefore, a higher augmented profit rate. Deleveraging in cases VIII-IX and IX-X meant less available internal funds, real or financial, and therefore a lower augmented profit rate.

A comparison of K/NW with its two components, K/TA and TA/NW, shows that until the late 1970s NFCB became more leveraged to accumulate both financial and tangible assets (slightly in favor of financial assets). As Table 7 shows, the ratio of financial assets to capital stock increased from 37 percent in the Keynesian compromise period to 44 percent in the transition period. Since the 1980s, however, NFCB issued debt primarily to accumulate more financial assets. The rate at which they accumulated financial assets outpaced the rate of growth of debt in the last two cases of the neoliberal period, reducing internal funds for potential capital accumulation. The ratio of financial assets to capital stock increased swiftly to 81 percent under neoliberalism, while the most recent cycle had the staggering ratio of 108 percent (see Table 7).

In short, continuing decline in the augmented profit rate under neoliberalism showed that net funds, real and financial, accruing to the nonfinancial corporate sector and hence available for potential accumulation there, declined sharply, ²⁰ despite the fact that their after-tax profit rate recovered significantly since the early 1980s.

5. Conclusion

My investigation of the changes in capitalism under neoliberalism, in particular structural changes in class relationships and the process of capital accumulation, have yielded the following results.

Formally the U.S. economy is in the expansion phase of the eleventh business cycle in the post-WWII period. The first issue I addressed in this profit rate study of the U.S. economy is the nature of the business cycle downturn that brought us to the beginning of this expansion. I looked for the underlying causes of the cyclical downturn in the crucial late expansion phase of the business cycle, where the initial decline in the profit rate starts but the economy is still growing, albeit at a slower rate. This cyclical downturn resembled all the previous post-WWII downturns in the following sense: it was predominantly the decline in the profit share that caused the initial decline in the profit rate, which in turn, as Weisskopf argues, led to a gradual decline in investment expenditure and, through that, an eventual decline in real output. Nevertheless it also had important aspects that resembled only the neoliberal business cycles and not the previous ones. Unlike pre-1970 cycles in which the healthy growth of real wages relative to productivity was the primary factor causing the wage (profit) share to increase (decline) in the crucial late expansion, it is mainly the unfavorable price shifts for the capitalists in NFCB (i.e. deterioration in the terms of trade) that caused the wage share to increase in the late expansion phase of neoliberal business cycles. ²¹ Analysis of the profit rate in the cyclical context continues to be crucial for our understanding of cyclical downturns.

The central concern of this paper is, however, the U.S. economy today, especially the present anemic growth and capital accumulation and the implosion that preceded them. As demonstrated above, these are not simply the result of an asset bubble that burst in the mid-2000s but rather a product of the cumulative effect of the structural changes occurring under neoliberalism. Although business cycle analysis of the profit rate is important in understanding cyclical downturns, this concern can only be addressed through a secular analysis of the profit rate that can unravel the structural factors contributing to its dynamics under neoliberalism. To that end, by employing the profit rate framework I previously used in the analysis of business cycles, I looked at the profit rate’s secular performance in the post-WWII period. In particular, I explored the causes of the changes in its performance under neoliberalism compared to the previous two post-WWII periods.

A first result of this secular analysis demonstrated the partial success of capital in recovering from its profitability crisis of the 1970s, using a standard measure of the profit rate. The important political economy point is that the data show that the partial recovery of the profit rate was based almost entirely on the super-exploitation of labor. While keeping real wages stagnant for most of the period, capital was able to avoid the usual contradiction it faces with hyper-aggression against labor by stimulating consumption demand well beyond levels that could be explained by higher household disposable income and low savings rates. This was done through a series of asset bubbles and the related process of collateralized debt. This is why capacity utilization and the wage squeeze emerged as two important determinants of the profit recovery in NFCB under neoliberalism despite the continued deterioration in its terms of trade. There were three groups who were direct and indirect beneficiaries of the super-exploitation of labor in NFCB during the recovery: capitalists in the NFCB through extraction of surplus, the managerial class through the upward redistribution of wages, and the financiers through the transfers of surplus into the financial circuit and higher household debt.

The second and main result of this secular analysis concerns the present economic malaise of the U.S. economy, particularly its anemic growth and capital accumulation. The profit rate under neoliberalism calculated in the standard way partially recovered due to strong growth in capacity utilization and the remarkable reduction in the real wage-productivity gap, despite the deteriorating terms of trade. Nevertheless, capital accumulation actually slowed down for most of the period except for the second half of the 1990s. But, how could the profit rate have recovered and the rate of accumulation have fallen to its crisis levels? How could they have diverged when they moved largely in tandem in the pre-1980 period?

To investigate this, I introduced an augmented profit rate that took into account the effects of financialization on the rate of profit. The analysis then showed that a dramatic shift in the relation of the standard profit rate and the augmented profit rate occurred under neoliberalism. While the standard profit rate increased under neoliberalism, the augmented profit rate declined substantially despite the increase in net adjusted financial income. In fact, the rate of capital accumulation basically tracked the augmented rate of profit, whereas it diverged from the standard rate of profit. That is, when the financial factors that have become so important under neoliberalism are included in the profit rate, the profit rate once again becomes explanatory for the crisis in the rate of capital accumulation and growth. ²²

Going one step deeper, it was the structural changes of class relations and the related financialization during the neoliberal period that gave rise to the changes in the augmented rate of profit that led to the crisis in accumulation. The factor that was responsible for the decline in the augmented profit rate was the decline in the ratio of capital stock to net worth. There are two explanations of the cause of the decline in the capital stock-net worth ratio in relation to the likely causes of the slowdown in capital accumulation. First, NFCB started to accumulate more financial assets relative to capital stock at unprecedented levels since the 1970s. Second, deleveraging of NFCB was in progress for most of the neoliberal period. Together these forces reduced internal funds for potential capital accumulation. There were other channels as well that contributed to the slowdown in capital accumulation. During neoliberalism, NFCB paid out an increasing share of profits as dividends and was heavily involved in share buybacks, takeovers, and mergers. To the extent that these changes under the new regime of maximizing shareholder value caused managers to prioritize short-term interests of shareholders over long-term capital investment, they contributed to the slowdown in capital accumulation.

In short, the Great Recession of 2007-2009 and the anemic economic performance since then were not anomalies. The economic model adopted under neoliberalism finally ran into the contradictions that were set up by the requirements of this very same economic model. Thus, the true cause of the crisis is the breakdown in the interrelated process of the super-exploitation of labor through suppression of real wage growth and higher debt, financialization, and sluggish capital accumulation. The severity and the character of the next crisis in the United States will be determined by the way this contradiction will be resolved.