2000s >> 2006 >> no-1218-february-2006

Cooking the Books 1: Calculating the Rate of Profit

Every quarter, the government’s Office for National Statistics (ONS) publishes figures for “corporate profitability”. The latest, those for the third quarter of 2005, were released on 5 January (see www.statistics.gov.uk). They show that the profitability of gas and extraction companies rose from 34.4 percent in the previous quarter to 36.3 percent, while that of service companies stayed more or less the same at 16.6 percent and that of manufacturing companies fell from 7.1 to 6.2 percent. Overall profitability of private non-financial corporations as a whole fell from 13.8 to 13.4 percent.

But what do they mean by profitability? The ONS explains:

“Profitability compares the profits made by companies with the value of the buildings, plant, machinery and vehicles held as capital assets by these companies. Expressed as a ‘rate of return’ on assets held, these can be compared between sectors to judge whether the returns on investment are worthwhile”.

Marx divided capital into two parts: “constant capital” (which was, as above, the value of the buildings, machinery, unprocessed materials, unsold goods, etc), which he designated by the symbol C, and “variable capital” (basically the money-capital required to pay wages), called variable (V) because it was the only part of total capital that varied in the process of production – through the labour of the workers creating a surplus value (S).

For Marx, the rate of profit was calculated as S divided by C + V, expressed as a percentage. The ONS’s profitability is not the same, but is more like S divided by C.

Marx expected, as he explained in the opening chapters of Volume III of  Capital, the rate of profit to tend to be the same in whatever line of business money capital was invested. But, going by the figures released by the ONS, this does not appear to be the case, with profitability in services currently at around 16 percent, higher than in manufacturing where it is around 6-7 percent? The ONS offers an explanation:

“Generally, service sector profitability is higher than that of the manufacturing sector, reflecting the more capital-intense nature of the manufacturing sector”.

This is reasonable enough. In the service sector the proportion of C to V is less than in manufacturing, i.e. a higher proportion of their money capital has to be invested in employing workers than in acquiring plant, equipment, machinery, materials, etc. This being the case, if you are calculating the “rate of return” only as S/C rather than as S/(C + V), i.e. ignoring V, profitability in the service sector will come out higher than in manufacturing. On Marx’s definition, which takes into account V, – for which statistics are not produced – it would tend to be more equal.

What about the extremely high profitability – over 30 per cent – of oil and gas companies? Oil and gas extraction is similar to land used for agriculture where the price of the product is fixed by costs on the least fertile land in use. Those whose costs are lower than on this land reap an extra monopoly profit – or “ground rent” as Marx, following the tradition of Classical Political Economy, called it.

The high profits in the UK oil and gas extraction business are to be explained by the fact that the costs of extraction in the North Sea are much lower than in those oilfields, elsewhere in the world, whose production costs set the price. Their profits, in other words, contain an element – a large element in fact – of “ground rent” rather than profit in the strict sense of a return on capital invested, a fact allowed for by Marx in his analysis of landed property later on in Volume III.

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