Why Does Profitability Fall? Paradoxes of Capital Composition and Labor Productivity

Abstract

In this chapter the determinants of the fall in profitability are analyzed from an in-depth study of the dynamics of capital accumulation, for which the author focuses on the sphere of production technology. The Spanish economy offers an atypical behavior: surprisingly, the ratios of both the composition of capital and labor productivity evolve just the opposite of what any economist would expect, and furthermore, there are features typical of a peripheral economy. The analysis nevertheless reveals the importance of capital productivity underlying the fall in the profit rate. To explain these particularities, the author shows that it is necessary to go further, since only considering the most dynamic sectors associated with the housing boom, it is then possible to explain this paradoxical macroeconomic behavior.

Annex

Expressions of the Profit Rate

As it was already shown in Chap. 2, the profit rate (r) depends on profit (p) and the net non-residential stock of capital (K ), current prices:

$$ r=\frac{p}{K} $$

(7.1)

As p = Y − W (Y: output, W: wages), r can be expressed in terms of the capital ratios. First, taking the profit to wages ratio (e = p/W ) and the profit-share (PS = p/Y ); as well as the capital-wages (φ = K/W) and capital-output (ρ = K/Y ) ratios:

$$ r=\frac{e}{K/W}=\frac{PS}{K/Y} $$

(7.2)

The profit rate depends also on labor productivity (q = Y^∗/L), real wages per worker (w_L = w/L), capital-labor ratio (θ = K^∗/L, where (^∗) is at constant prices), together with price deflators of output (P_y), consumption (P_c) and the capital stock (P_k):

$$ r=\frac{\left(\frac{Y^{\ast }}{L}{P}_y\right)-\left(\frac{w}{L}{P}_c\right)}{\frac{K^{\ast }}{L}} $$

(7.3)

Therefore, profit rate is related to the above-mentioned ratios, if possible discrepancies between price ratios are not considered:

$$ r=\frac{q-{w}_L}{\theta }=\frac{e}{\varphi }=\frac{PS}{\rho } $$

(7.4)

In turn, the capital-wages ratio depends as well on the capital-labor ratio:

$$ \varphi =\theta \frac{P_k}{w_L{P}_c} $$

(7.5)

While the capital-output (or the inverse: the productivity of capital) can be shown in terms of the capital-labor ratio, labor productivity and the price ratio (P_ky = P_k/P_y):

$$ \rho =\frac{\theta }{q}{P}_{ky}\to \Pi =\frac{\frac{q}{\theta }}{P_{ky}} $$

(7.6)

Sectors in Spain

A.:

Agriculture, forestry and fishing

B.:

Mining and quarrying

C.:

Manufacturing

D.:

Electricity, gas, steam and air conditioning supply

E.:

Water supply; sewerage, waste management and remediation activities

F.:

Construction

G.:

Wholesale and retail trade; repair of motor vehicles and motorcycles

H.:

Transportation and storage

I.:

Accommodation and food service activities

J.:

Information and communication

K.:

Financial and insurance activities

L.:

Real estate activities

MN.:

Professional, scientific and technical activities; administrative and support service activities

O.:

Public administration and defense; compulsory social security

P.:

Education

Q.:

Human health activities and social work activities

RSTU.:

Arts, entertainment and recreation, repair of household goods and other services