The Impact of Financialization on the Rate of Profit

ABSTRACT

This work investigates some channels through which financialization may impact the normal rate of profit by making use of the ‘integrated wage-commodity sector’ methodology. We analyse the effect of technical innovations in the financial sector, a higher financial sector’s share of profits and GDP, rising household indebtedness and socio-political factors that reduce workers’ bargaining power. We find that during the financialization era, the first factor did not impact normal profitability since it mostly regarded instruments such as derivatives. The second should in principle not affect the normal rate of profit although it may impact aggregate income shares. The third, as far as its effect on aggregate demand is concerned, does not have an impact on the normal rate of profit. The fourth turns out to be the main factor that drives the normal rate of profit upwards through its impact on functional income distribution.

KEYWORDS:

• Financialization
• financial crisis
• rate of profit
• Marxian economics
• income distribution

JEL CODES:

• E11
• E44
• F65
• G1
• P12

Acknowledgements

I wish to thank Paolo Trabucchi, Riccardo Pariboni, Saverio Maria Fratini, Christian Gehrke, Antonella Palumbo, Marwil Dàvila, Carlo D’Ippoliti, Antonella Stirati, Ariel Dvoskin, Germán David Feldman, Manuel D’Ambrosio and two anonymous referees for their useful suggestions and discussions. I would also like to thank the Graduate School in Economics at Roma Tre University and the Centro di Ricerche e Documentazione ‘Piero Sraffa’. I also received input from participants in the 16th Annual STOREP Conference in Siena, 27–29 June 2019. Federica Cappelli helped me throughout. Any errors are solely my own. All the work that went into this essay is entirely dedicated to the memory of Canio Tedesco with whom I shared many invaluable discussions on psychology, Marxian economics, and philosophy.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 We calculated it as net domestic product minus compensations of employees (corrected for self-employed figures), all divided by the net capital stock at current prices. The average values for each decade are: 20.7 per cent (1960–1969), 18.0 per cent (1970–1979), 15.7 per cent (1980–1989), 17.5 per cent (1990–1999), 17 per cent (2000–2009), 17.4 per cent (2010–2018). Data and definitions are taken from Duménil and Lévy (2016).

2 We define the normal rate of profit the one yielded by newly installed capital goods, earned by employing the dominant available technique, for a normal level of capacity utilization (Garegnani 1992). The realized rate of profit (Figure 1) is on the contrary affected by short-run capacity utilization fluctuations, the presence of ‘quasi-rents’ on old vintages, prices deviating from normal values, and so forth. We need to abstract ourselves from all these elements.

3 The framework developed in these contributions has also provided a base for applied works (Hein et al. 2017; Hein et al. 2018).

4 For other contributions in this line of thought, see Dvoskin and Feldman (2020).

5 Panico (1980) singled out a contradiction between Marx’s conclusion that there is no ‘natural’ average rate of interest and the fact that the rate of interest, the rate of profits and the real wage rate are connected in a long-run equilibrium. Pivetti (1987) pinpointed the difficulty in conceiving the existence of the profits of enterprises component above the rate of interest in a long-run equilibrium if the former, as Marx did, is conceived as residual.

6 The nominal rate of interest is exogenously given by monetary authorities. The real wage, inversely related to the normal rate of profit, is the residual variable.

7 Obviously, the financial sector is likely to enjoy a monopolistic-oligopolistic position, thereby earning extra-profits and a higher-than-normal rate of profit. However, this does not modify the reasoning much since we are interested in the normal rate of profit (see the discussion in Section 4.2).

8 In Part IV of Vol. III of Marx’s Capital there is a discussion of how the financial services industry has a role in the formation of the costs of production and the levels of distributive variables, while Part V describes how the pressures of the banking industry affect monetary legislation (Panico 1980, 1988).

9 In light of the recent US experience, we can also include in those products financial services such as loans to households which have become indispensable to afford university studies and health care.

10 There are two main differences between the two concepts. First, Marx’s formulation was derived with reference to the whole economy whereas Garegnani’s only concerned the sub-sector devoted to the integrated production of the wage-commodity. Second, Garegnani employed the ‘labour commanded’ instead of the ‘labour embodied’ standard for the calculations (see Garegnani 2018).

11 The wage rate does not appear in equation 7 because, following equation 4, the numéraire is the product $w\cdot p_w\cdot {\lambda }_w$. Moreover, the labour coefficients are amounts of wages expressed in terms of labour commanded.

12 See Stirati and Paternesi Meloni (2018) for empirical evidence on real wages growth determinants.

13 For a more detailed analysis of these aspects, see Kapeller and Schütz (2015), Pariboni (2016).

14 Panico, Pinto, and Anyul (2012), Panico and Pinto (2018) show that a growth rate of the loans to workers which is higher than the growth rate of total wages increases the profit share and diminishes the wage share.

15 Nonetheless, we note again that the comparison between theory and data is not straightforward. In fact, while in the IWCS we used the physical basket of goods given to workers, in the data we find the real wage as an amount of value.