I’m always banging on about the close connection between the movement of investment (expenditure on the means of production) and economic growth. In my view, the evidence is overwhelming (The profits-investment nexus) that it is investment that is the main swing factor in booms and slumps, not personal consumption as many Keynesians focus on. And it is also a key factor in the long-term growth of labour productivity.
A new analysis
by the Levy Forecasting Center, an institute that follows closely the
views of Keynes, Kalecki and Hyman Minsky, also confirms this view. The
report comments that “unsurprisingly, net fixed investment is strongly related to growth.”
The slowdown in real GDP growth since the end of the Great Recession
is clearly connected to the slowdown in business investment growth
Business investment in the US has ground to a halt and the age of the
existing means of production has risen as ageing equipment and
technology is not replaced.
As Levy puts it: “In 2009, net investment as a share of the
capital stock fell to its lowest level in the post-World War II era and
the nominal capital stock even declined. Although net investment has
rebounded somewhat in the recovery, its level as a share of the capital
stock remains well below the historical average and it declined slightly
Levy points out that investment growth contributes to labour
productivity growth most directly through capital deepening—the increase
in capital services per hour worked. “That had added nearly 1
percentage point a year to labor productivity growth in the post-war
period to 2010. But since 2010, capital deepening has subtracted from
productivity growth and contributed slightly more to the slowdown from
1948-2010 to 2010-15 than did the slowdown in total factor productivity
growth.” In other words, it was just the slowdown or cutback in
the sheer amount of investment that did the damage, even more than any
slowdown in the use of new techniques.
However, the Levy Institute then fails to explain this investment slowdown. It argues that “this
broad-based investment slowdown is largely associated with the low rate
of output growth both in the United States and globally”. This is
a circular argument. The slowdown in economic growth is due to the
slowdown in business investment, and that in turn is due to the slowdown
This is close to the argument of the Keynes-Kalecki thesis
(espoused by the Levy Institute) that it is investment that creates
profit, not vice versa. This nonsensical view should be countered with
the realistic one that is the movement in profitability and profits that
moves business investment. And as I and others have shown empirically,
this is what happens in a capitalist economy.
For example, Andrew Kliman and Shannon Williams
have shown that the fall in US corporations’ rate of profit (rate of
return on investment in fixed assets) fully accounts for the fall in
their rate of capital accumulation. And they conclude that “Since a
long-term slump in profitability, not diversion, is what led to the
trend towards dis-accumulation, it is unlikely that the trend can be
reversed in the absence of a sustained rebound of profitability”.
Indeed, if we delineate the rate of profit in the non-financial
productive sectors of the economy, we find that profitability has
struggled to rise since the 1980s and so along with it, business
investment growth has slowed. Anwar Shaikh, in his latest book, Capitalism, adjusts
the official data for measuring the US rate of profit and shows that
profitability has stagnated at best since the early 1980s, rising to a
modest peak in 1997 before slipping back to a post-war low by 2008.
Similarly, Australian Marxist economist Peter Jones has shown that if
the ‘fictitious’ components of profitability are removed from the
calculation of the US corporate rate of profit, then the ‘underlying’
rate of profit has never been lower (http://gesd.free.fr/jonesp13.pdf).
Profitability of productive capital consolidated during the 1990s but
then dived to post-war lows just before the Great Recession, with little
The US rate of profit (excluding ‘fictitious profits’) %
The Levy analysis also makes the valid argument that high corporate
debt is impeding new investment. Non-financial corporate sector debt
relative to ‘value-added’ (i.e. sales revenue) is at a historically high
level and this is weighing on capital spending.
US business investment in the first quarter of 2017 had a slight
uptick after falling for four quarters. That followed a return to
positive territory for corporate profits in the second half of 2016
after going negative in early 2016.
Does this mean that investment and economic growth is set to pick up
finally? Not according to Levy. Levy interestingly (in opposition to
its own Kalecki thesis) note that “looking back, the capex decline in 2015-16 and the subsequent rebound lagged the profits decline and recovery.” But Levy reckons that the “corporate profits recovery is likely to stall by mid-year and capital spending will follow with a lag”. If that happens, the US economy will be heading down, not up, by the end of the year.
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