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Rate of Profit

Cooking the Books: A ‘Factual Point’

Lord Young is an adviser to David Cameron on ‘enterprise’. In a report presented to the Cabinet in May, he wrote:

‘The rise in the number of businesses in recent years shows that a recession can be an excellent time to start a business. Competitors who fall by the wayside enable well-run firms to expand and increase market share. Factors of production such as premises and labour can be cheaper and higher quality, meaning the return on investment can be greater’ (Observer, 11 May).

The TUC was outraged, but a Downing Street spokesman said that Lord Young was merely stating a ‘factual point’. We have to agree. He was merely describing what happens in a slump.

Growth under capitalism is not in a steady upward line but in fits and starts. The overall trend is upwards but through cycles of boom and slump in which booms create the conditions for the succeeding slump and slumps for the next boom.

Answers to Correspondents


1. In Adam Smith's day 3 per cent, was the usual rate of profit for sound security. To-day L.C.C. stock, second only to Consols, are issued at 3 ½ per cent. In many cases as large rates as ever are made to-day. The Cold Storage Co. paid over 100 per cent., some of the electric power companies have made similar profits, while some of the catering firms pay dividends of 30 to 40 per cent year after year.

The amount of profit apart from the rate, has of course increased enormously with the increased productiveness of labour.

2. Surplus value is the portion of wealth remaining after paying wages, cost of raw material and of machinery used up in the given time. But this as a rule undergoes further deduction for rent for the land, interest, and rates and taxes. The portion of the surplus value that remains is the capitalist's Profit. Profit, therefore, is only a part of surplus value.

Cooking the Books: From Lame Ducks to Zombies

Apologists for capitalism are quite cruel to firms that don’t make a profit or not enough profit. In the 1970s they were called ‘lame ducks’. In the harsher climate of today they are called ‘zombies’. Lame ducks can be left to die, but zombies have to be killed.

“HELP,” read the headline of an article by the Times Business Editor, David Wighton, on 19 September, “ZOMBIES ARE ATTACKING THE RECOVERY” He was discussing a theory put forward by some economists as to why “employment is strong but output is weak and investment sluggish”. According to them, given that “output is still more than 4 per cent down on its peak in 2008”, unemployment ought to be higher than it actually is. That it isn’t, they suggest, is because not enough firms have gone bankrupt when they should have done:

“These corporate zombies are so weighed down with debts to banks and their own pension funds that they are barely alive. But, as in the movies, they are hard to kill.”

Cooking the Books: Profitability

Every quarter the Office for National Statistics (ONS) publishes figures for the ‘profitability’ of UK non-financial companies. The latest are for the third quarter of 2011. They showed that the “net return on capital employed” for all companies was 12.9 percent. For manufacturing it was 5 percent, for services, 15.9 percent and for North Sea oil and gas companies, 60.5 percent.

Over the last ten years the annual average has been around 16 percent for services and 9 percent for manufacturing.

Why the difference between these two sectors? Surely, according to the way that the competitive profit system that is capitalism works, capital should flow out of manufacturing and into services until the rate of profit is the same for both, as Marx explained in the section of Volume III of Capital on the averaging of the rate of profit.

The explanation lies in the fact that the rate of profit used by the ONS is not the same as in Marx.

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