A few months ago, Duncan and I discussed the effect of
the stratification of fixed capital on the rate of profit.
As I recall, Duncan maintained that with a constant rate
of investment use of the rate of profit as a measure of
profitability was unproblematic. Since then I have been
able to review a bit of the literature on the using the
rate of profit to measure profitability.
1. In their "On the Misuse of Accounting Rates of Return to
Infer Monopoly Profits" (AEA, March 1983), Fisher and
McGowan argue that "Economists (and others) who believe
that analysis of accounting rates of return will tell
them much (if they can overcome the various definitional
problems which separate economists and accountants) are
deluding themselves. (p 91) To be sure their piece
focuses on the difference between accounting depreciation
and economic depreciation at the level of the firm. On
this basis, they develop their critique of the use of the
accounting rate of profit. It's unclear to me why the
same criticism would not be applicable to the macro level.
2. Fisher responded to criticisms of the article in "The Misuse
of Accounting Rates of Return: Reply" (AEA, June 1984). In
that response he also acknowledged his precursors. They include
G.C. Harcourt's "The Accountant in a Golden Age" (Oxford Economic
Papers, March 1965). In that piece (I have a reprinted version of
it.), Harcourt maintains that anyone "...who compares rates of
profit of different industries, or of the same industry in different
countries, and draws inferences from their magnitudes as to the
relative profitability of investments in different uses or countries,
does so at his own peril." (Para 6.2 in the article)
3. Harcourt makes mention of other works in this area which I have
not yet had a chance to review. Among them is Joan Robinson's
piece, "Depreciation." I also have not tracked down the earliest
cited article concerning the matter, "A General Mathematical
Theory of Depreciation" by Harold Hotelling in the Journal of
the American Statistical Association, September 1925, 20,
pp. 340-353.
4. In their "Post Depression Trends in the Economic Rate of
Return" (The Review of Economics and Statistics, LXXII,
406-413), Dumenil and Levy use data to show that while
there are differences between various accounting rates
of return and the economic rate of return, the manner in
which these measures move in U.S. post depression period
are similar. Here, as elsewhere, they use the vintage
technology to measure the economic rate of return. In
their The Economics of the Profit Rate, they include sectors
other than those of manufacturing in the U.S. economy and
note that the economic and accounting rates of return
are lagged by about 10 years. They also point out that
the greatest degree of stratification of fixed capital
occurs prior to and within the Great Depression. The
how's and why's of these phenomena are unexplored.
5. Recognition of the problematic nature of the accounting
rate of profit at the very least forces those measuring
Marx's rate of profit (an accounting rate of profit)
for a given country over time to justify its use on
theoretical grounds. What are the hidden assumptions
involved? For example, are we tacitly assuming balanced
growth without technical change?
6. For those of us seeking to understand Marx's own efforts
in CAPITAL, problems concerning this matter also arise.
For example, given that capitalists use the economic rate
of return to evaluate their investments, what is the
significance of the accounting rate of profit? Marx himself
notes that, on the one hand, a falling rate of profit blunts
the stimulus to invest and, on the other hand, a falling
rate of profit can lead to an insufficient mass of profit
to meet the demands for growth of capital in the next period.
If capitalists are using the economic rate of profit for
investment decisions, then it is difficult to agree with
Marx that a fall in the accounting rate profit blunts the
stimulus to invest. However, it would seem that a fall
in the accounting rate could lead to a shortage in the
mass of profit produced even if the economic rate of profit
is rising.
John