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Mejorado (2014): Profitability and the Great Recession
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Profitability and the Great Recession
The Role of Accumulation Trends in the Financial Crisis
Ort: Verl.:
From the mid-1980s, investors in the US increasingly directed capital towards the financial sector at the expense of non-financial sectors, lured by the perception of higher profits. This flow of capital inflated asset prices, creating the stock market and housing bubbles which burst when the imbalance between stagnant incomes and rising debts triggered the banking meltdown. Profitability and the Great Recession analyses these trends in profitability and capital accumulation, which the authors identify as the root cause of the financial crisis, in the context of the US and other major OECD countries. Drawing on insights from Adam Smith, David Ricardo, John Stuart Mill and Karl Marx, the authors interpret the relationship between capital accumulation and profitability trends through the conceptual lens of classical political economy. The book provides extensive empirical evidence of declining rates of US non-financial corporate accumulations from the mid-1960s and profitability trends in that sector falling from post-war highs. In contrast to this, it is shown that there was a vigorous rise of profitability in the financial sector from a 1982 trough to the early part of the twenty-first century, which led to the bloating of that sector. The authors conclude that the long-term falling accumulation trend in the non-financial corporate sector, highlighted by the bankruptcy of major automobile corporations, stands out as the underlying force that transformed the financial crisis into a fully-fledged Great Recession. This book will be of interest to students and researchers in the areas of economics, political economy, business and finance. (Verlag)

1 Introduction
The path to the Great Recession 1
Profitability: the missing link in Stiglitz's view of structural change 3
Stiglitz's valuable analysis: outside the mainstream, but notfar off 5
Competition, mechanization, and profitability 7
Bifurcation offinance and nonfinancial corporate sectors 8
Excesses, bubbles, and the financial crash 13
Through the lens of political economy 14

2 Kaldor's "stylized facts": real or merely convenient?
Introduction 18
From capital deepening to balanced growth paths 19
The Corfu Round Table Conference 20
Kaldor's model of capital accumulation 22
Kaldor's alternative to neoclassicalmethodology 23
Kaldor's critique of neoclassical views on technical progress 25
Kaldor's own technical progress function 25
The primacy of Investment over savings 28
Further reflections on Kaldor's "stylizedfacts" 29
Countering the Kaldorian constancies 33
Summary of main controversial points 35

3 Innovations as competitive weapons
Beyondperfect competition 37
Free competition in Smith and Schumpeter 39
Innovational cycles 44
Innovating strategies of capitalistfirms 46
Offensive vs. defensive innovations 47 xvi Contents
Free competition in Freeman and Metcalfe 48
Evolution of competitive objectives 50
Celebrating the Innovation machine 53
Profitability in Baumol''s "armsrace" 56
The enduring legacy ofperfect competition 57
Technical progress and oligopolistic competition 58

4 Mechanization and price/quality competition
Two kinds of competition? 61
Adam Smith on mechanization 61
Principles of scientific management 63
The advance of automation 64
Process innovations and unit labor costs 65
Economies ofscale 67
Kaldor's "paradox" and quality competition 68
The decline in British industrial competitiveness 72
High and low roads to competitiveness 74
The enduring legacy of Kaldor's "paradox" 75
Global competition and lower unit costs 76
The dual structure of global manufacturing 77
Quality ladders in global competitiveness 79
Thefalse price/quality dilemma 81

5 Capital intensity and profitability: dissenting views
Barrere's heterodox stance 83
Barrere's model of technical choice 83
Alternative profit-maximizing choices 85
The model's simplifying assumptions 86
Expanding revenues 87
Meek and Richardson 's objections 88
An alternative strategyfor lowest-cost firms 90
Operating leverage and competitive advantage 91
Price-cutting in competitive wars 92
Eltis on technical progress and profitability: Britain 's case 93
The struggle for market shares 96
Flaws in Barrere 's and Eltis' models 96
Eltis and Kaldor on Britain 's industrial decline 98
Manufacturing profit rates in Germany, Japan, the UK, and US 102

6 Heterodox models of technical change and profitability
Introduction 105
The Foley-Marquetti-Michl efficiency schedule 105
The nexus between profitability and the accumulation rate 107
Neoclassical and Marxian concepts of technical change 109 Contents xvii
Foley on technical change and profitability 110
Constant wage nites 112
Negishi's model of technical change 115
Negishi on monopolistic competition 116
Baumol 's nonaggressive innovations 117
Competition-as-wctr and the cost of winning in Marx 118
Shaikh's theory of competition 120
Shaikh's critiqUe of Okishio's competitive model 122
Shaikh's model of technical change 122
Measuringprofitßb'üity:gross versus net capital stock 123

7 Capital-output ratios in retrospect 128
Introduction 128
Abramovitz and David-' nineteenth-century
US capital-output trends 130
Gallman 's nineteenth-century capital-output trends 130
Carl Snyder on (JS capital—Output trends, 1880-1930 131
The centrality of profits in Snyder's view 134
Capital deepening in nineteenth-century US manufacturing 136
Rising manufactuHng capital-output ratios andprofit rates 137
The historical ebjclence behind capital-output trends 137
Objections to sttuulard estimates of US capital stocks 142
Gordon's revision of US capital stocks, 1870-1996 146
Variable schedules of capital retirements 147

8 Profitability trends after the "golden age" 152
Mainstream debat^s on US profitability trends 152
Okun and Perry 's profit-squeeze hypothesis 153
Nordhaus'falling share of profits 155
Feldstein and Summers ' "inconclusive" results 156
Confirming Norcifrcius'findings 158
New evidence fron Feldstein and Poterba 159
Aschauer's fundamental hypothesis 160
Duca and Poterb/f on trend reversals 161
Uctum and Vianq on accumulation trends 163
The international scope of falling profitability 164
Moseley on Weis'skopf's-1978profitability estimates 166
Robert Brenner '.y kf. Micha las Kaldor's "stylized facts" 167
The alleged bifurcation of accumulation and profitability 171
Moseley's contrusting estimates of profitability trends 174

9 Profit-driven capital accumulation in OECD countries 179
Introduction 179
Nonfinancial corporate shares in US nonresidential Investment 179 xviii Contents
Business sector net operating surplus 180
Financialization and accumulation trends 183
Accumulation trends in major OECD countries 188
Canada 's case for bifurcation 190
lncremental profitability andfixed investment growth 191
Capital accumulation and profitability: the OECD evidence 193
Adjusting for capacity utilization 196
Limitations in OECD data 200
The core argument restated 202

10 Nonfinancial versus financial profitability trends and capacity
utilization 206
Introduction 206
Measuring corporate profitability 209
Alternative profitability measures 211
The financial boom and corporate profit rates 214
The ejfect of falling interest rates 215
Corporate and noncorporate profitability trends 216
Impact of capacity utilization on profitability trends 217
Consistent growth and capacity utilization 219
Measuring capacity utilization 221
Direct measures of capacity utilization 223
Shaikh 's extension of capacity utilization Indexes 224
The cointegration proxy option 225
Trends after adjusting for capacity utilization 227
Summary 229

11 Mill and Minsky on roads to speculation and crisis 230
Introduction 230
Rising shares of gross operating surplus 232
John Stuart Mill: from low profitability to speculation 233
The centrality of profits in Keynes and Marx 235
The first Great Depression 239
Schumpeter on profit rates in the 1920s 240
Overinvestment as the cause of depression 243
Lower profitability and higher instability 247
Post-Keynesian views on financial excesses 248
From financial fragility to the Great Contraction 250
Buildup of debt and the financial crash 252

12 Unemployment trends beyond the great recession 255
Introduction 255
Rising world unemployment after the late 1970s 256
Long-run accumulation trends after the mid- 1960s 258 Contents xix
The natural rate of unemployment 260
Malinvaud on market disequilibrium 262
The persistence of technological unemployment 264
Is labor unemployment irrational orfunctional? 267
Krugman on technological progress and unemployment 268
Capital-output and unemployment trends 270
Labor-saving technology and capital-output trends 275
Summary ofthe main points 275

13 Sources and methods 278

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