Tendency of The Rate of Profit To Fall - Empirical Evidence

Empirical Evidence

Most economic historians agree that, at the beginning of the major economic depressions or recessions in the history of capitalism (measured by a drop in output), there was typically a downslide in the observed average returns on capital invested in industries, reducing the incentive to invest, and consequently raising unemployment. Some writers, such as Ernest Mandel, have indeed linked long-term fluctuations in average profitability and interest rates to the Kondratiev waves. There is also some statistical evidence that, as a broad historical trend, average profitability in industry has fallen through the 20th century (see, for instance, Robert Brenner and the research of Dumenil and Levy for the period after World War II).

However, there are two basic problems in interpreting the observable evidence available.

• Firstly, correlation does not imply causation. Just because a fall in profitability is observed, this does not prove any particular causal theory about why it has fallen; at most, it can empirically corroborate a theory ("it fits with the known facts"). Any such theory remains an interpretation, which may be more or less plausible in the light of the facts.

• Secondly, the statistical evidence (beyond anecdotal evidence from business reports) is itself problematic, because the measures of average profitability available are not neutral, but themselves rely on many assumptions. They are in a sense "stylized facts". It is well known to statisticians that it is almost impossible to accurately measure the value of capital stock, and insofar as profit totals are derived from gross product measures, they may include or exclude profit components at variance from tax data or company reports; profits may also be overstated or understated using various accounting "tricks". This is particularly true in the age of multinationals, which often make profits appear here and disappear there to avoid or evade tax (for example, in tax havens). An additional complication is that if corporate officers pay themselves enormous salaries, this is accounted for as a salary "cost" and not as an element of gross profit. All Marxist analyses up till now have simply assumed that Marx's value product is equal to "net value added" in national accounts. The official valuation principles, computations, and definitions used to obtain a measure of value-added have never been challenged; at most a few small adjustments have been made to the official aggregates.

Therefore, the debate among economists about the TPRF and its significance remains interminable. At best, Marxian economics has convincingly argued that profitability is the synthetic, overall indicator of the "economic health" of the capitalist system, and that economic crises are system-immanent, i.e., capitalism is inherently crisis prone because of its institutional structure and the way it functions. Thus, capitalist development occurs through inevitable booms and busts. This conclusion is the exact opposite to that of neo-classical economics, according to which markets, if left alone, will spontaneously move towards equilibrium and economic harmony. But as regards the exact causes of specific economic crises, the debate continues. Of course, it is not necessarily the case that every economic crisis must have the same basic causes.