Hi Jim,
I am sorry for my delay in responding to your last message of Monday, Jan. 14. A sick son, an overdue paper deadline, and classes starting next week have kept me otherwise occupied. I just have time for a few brief comments. We seem to agree on the following points (please correct me if I am wrong): 1. The rate of profit declined significantly from the mid-1960s to the 1970s, and this declining profitability was the main cause of the "stagflation" of recent decades. 2. If the rate of profit is examined from 1980 to 2002 (estimated), then there is little or no upward trend in the rate of profit over this period (and even a slight decline in the share of profit). The years 1980 and 2002 are appropriate end points for the estimation of the trend, because they are at the same point in the business cycle - the bottom of a recession. You have other arguments, using other end points and other selected years, that the rate of profit has increased since 1980. But you acknowledge that all these different measures show only a small increase, and that the rate of profit today remains significantly below its earlier postwar highs. 3. The current recession was caused by a sharp decline in investment spending, beginning in late 1990. 4. The current recession could be made worse because of a subsequent decline in consumer spending. The main point of disagreement seems to be - whether or not the decline of investment spending that caused the recession was itself caused by the decline in the rate of profit since 1997. I argue yes and you argue no. You argue that business investment decisions are not determined by short-run cyclical fluctuations in the rate of profit, but are instead determined by the long-run trend in the rate of profit, and also by the capacity utilization rate. However, it has been widely discussed in the business press that investment collapsed in 2001 as a result of "rapidly deteriorating profitability". As we have discussed, the rate of profit turned down in 1997, and has continued to decline ever since, and finally took its toll on investment spending in late 2000. This is how business executives themselves have explained their reductions of investment spending. The investment cutback was probably also influenced by the long-run decline in the rate of profit since the mid-1960s. But the primary precipitating factor seems to have been the sharp decline in the rate of profit since 1997. The capacity utilization rate declined as a RESULT of the recession, it is not a cause of the recession. In the months ahead, the low capacity utilization rate will certainly have a negative effect on investment spending, and thus will make a recovery from the recession more difficult. But the low capacity utilization rate did not cause the initial decline in investment spending which caused the recession. Jim, I still don't understand what you think caused the decline in investment spending that caused the recession. The other crucial question is: what is necessary for a sustainable recovery from the current recession? I argue that a sustainable recovery requires an increase in investment spending, which in turn requires an increase in the rate of profit. One of the main ways to increase the rate of profit is to cut wages. This conflict between profit and wages is an unavoidable fact of life in capitalism, and it is intensified in recessions. However, cutting wages will also reduce consumption in the short-run, and thus will make the recession worse. This is especially worrisome at the present time, because of the unprecedented levels of debt of all kinds - business debt and household debt and US debt to foreigners. These high levels of debt make the economy vulnerable to a more serious downturn. Therefore, the current dilemma seems to be: that which is necessary to solve the fundamental problem of insufficient profitability (cutting wages) will make the current recession worse (by reducing consumer spending), and, because of the high levels of debt, runs the risk of a very bad recession. Jim (and others), do you agree or disagree with the above? Thanks again for the discussion. Fred
