Academic journal article Journal of Australian Political Economy

Marxist Economics: On Freeman's New Approach to Calculating the Rate of Profit

Academic journal article Journal of Australian Political Economy

Marxist Economics: On Freeman's New Approach to Calculating the Rate of Profit

Article excerpt

In a recent article, Freeman (2012) proposes a new approach to the calculation of the Marxian average rate of profit (ARP), namely that marketable financial securities, as well as fixed assets, should be included in the denominator of the ARP to ensure that the latter reflects the dramatic increase in the volume and variety of financial instruments in recent decades. By including such securities in the denominator, he also tries to demonstrate that 'there is a consistent long-run fall in the UK and US rate of profit which, contrary to the figures widely used by Marxists, have both fallen almost monotonically since 1968' (2012: 167).

Taking account of the financialisation phenomenon as part of the recent history of global capitalism is certainly of critical importance for contemporary Marxist economics. Many studies indicate at least a partial recovery in profit rates in many advanced capitalist countries since the 1980s, particularly the U.S, despite lack-lustre growth rates (Harman 2010). To acknowledge such a recovery does not require abandoning Marx's law of the tendency of the rate of profit to fall (LTRPF).

All the same, the contradiction between improved profitability and relatively stagnant economic conditions demands a satisfactory explanation from the perspective of critical political economy. Many researchers have tried to explain it with reference to the phenomenon of financialisation, in different and sometimes mutually conflicting ways. Some regard financialisation as at least one of the keys to the recovery of the average profit rate (Albo, Gindin and Panitch 2010; Husson 2009; Moseley 2011); some emphasize that it has had a negative impact on investment in the 'real' economy (Dumenil and Levy 2011; Orhangazi 2008); and still others highlight that a lack of profitable opportunity for productive investment has boosted investment in financial markets (Smith and Butovsky 2012; Kliman 2012; Foster and Magdoff 2009).

While sharing aspects of this latter analytical approach, Freeman goes further by treating financialisation as a significant cause of a continuing, 'monotonic' decline in the profit rate in both the US and the UK. In this sense, his approach raises important issues not only with regard to empirical studies of the profit rate, but also with regard to how financialisation should be conceptualized in the analysis of contemporary capitalism.

Certainly, some specifically 'financial' indicators, such as the return on total assets (ROA) and the return on equity (ROE), whose denominators consist of both fixed and financial assets, have legitimate uses in the analysis of capitalist corporate behavior. In financial analysis, the ROA is calculated by dividing net income by total assets. Total assets include not only property, plant, equipment, and inventories, but also cash, accounts, investment securities, and long-term loans to other corporations. As the financialisation process has progressed, some non-financial corporations have also made significant investments in financial securities, such as investment securities and long-term consumer loans. In looking at these issues, the use of the ROA and the ROE is helpful in understanding some aspects of corporate behavior, even though these measures are conceptually different from such fundamental Marxian ratios as the rate of profit and the rate of surplus value.

Nevertheless, Freeman's specific proposals are problematic at a number of levels. The biggest problem is that he effectively obliterates the classical Marxist distinction between 'real capital' (encompassing both industrial and commercial capital) and 'interest-bearing capital'. While the former participates in the formation of a 'general' or 'average' rate of profit through the production, realization and redistribution of surplus value, the latter depends on the rate of interest as a principal means of capturing a specific share of social surplus value. Furthermore, Freeman's negation of the distinction between real and interest-bearing forms of capital leads directly to two other significant problems. …

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