Cherry Picking Peaks and Troughs

Why Marxist Economists Dismiss Marx’s Law of the Tendential Fall in the Rate of Profit

By Andrew Kliman, Author of Reclaiming Marx’s “Capital“: A refutation of the myth of inconsistency.

As I noted in a post last month, some prominent Marxist economists-including Fred Moseley and Gérard Duménil-have recently asserted that the rate of profit in the U.S. has recovered from the fall it underwent through 1982.  Therefore, they contend, Marx’s law of the tendential fall in the rate of profit is of little value, if any, when trying to explain the roots of the current economic crisis.  Instead, they attribute the crisis to financial-sector phenomena -which they portray as largely unrelated to and separable from movements in profitability.

Indeed, Moseley and Duménil both contend not only that the rate of profit has recovered, but also that the recovery is “almost complete.”  Earlier this year, Moseley (2009, pp. 300-01) wrote: “the rate of profit is now approaching the previous peaks achieved in the 1960s … The last several years especially, since the recession of 2001, has seen a very strong recovery of profits ….  I conclude that there has been a very substantial and probably almost complete recovery of the rate of profit in the U.S.”

Estimates by Gérard Duménil and Dominique Lévy (2005) indicate that the rate of profit of the overall business sector in the U.S. has not recovered so substantially.  Yet with regard to the corporate sector, their view echoes Moseley’s; as of 1997, the rate of profit of the “Corporate sector … recovered to its level of the late 1950s. … Considering the evolution of the profit rate since World War II, the recovery of the profit rate appears nearly complete within the entire Corporate sector” (Duménil and Lévy 2005, p. 9, p. 11, emphases omitted).

But why do Moseley and Duménil say this?  One reason, as I noted in my post  of last month, is that when they discuss the tendency of the rate of profit, they’re discussing the tendency of the physical“rate of profit,” which isn’t a rate of profit in any real sense.

Yet there’s another reason as well:  both of them fail to distinguish between cyclical variations in profitability and longer-term (secular) trends in profitability.  It is obvious that, in order to ascertain the trend, one needs to set aside or control for cyclical effects.  Otherwise, one might take a completelytrendless data series (such as the sine wave depicted see Figure 1) and conclude that it exhibits a rising trend simply by cherry-picking a trough point (A) and comparing it to later peak point (B).  Or one might say with equal validity (i.e., none) that the series exhibits a falling trend, simply by cherry-picking a peak point (B) and comparing it to a later trough point (C).

Figure 1.

But this is exactly what Moseley and Duménil-Lévy do. Let’s look at how they discuss the estimates of the rate of profit that they’ve computed:

When he asserts that the rate of profit has almost completely recovered from its prior fall, Moseley is comparing his rate of profit during the trough or near-trough years from the mid-1970s through the early 1980s with the rate during the peak period of 2004-2007 or 2005-2007-even though it is clear to him that an unsustainable asset-price bubble was underway during the latter period (Moseley 2009, esp. section 5).  Had he compared the troughs in his data, Moseley would have reported a rise in the rate of profit from 10% in 1980 to 14% in 2001, rather than the rise of twice that amount (to 17%-19%) that induced him to refer to an “almost complete recovery” of the rate of profit.  And he would have reported no recovery in trough rates of profit from 1987 through 2001, the most recent trough year.

Similarly, Duménil and Lévy (2005) chose to analyze movements in profitability only through 1997.  They made this choice, for reasons they do not explain, even though their paper actually presents data through 2000, and even though a few more years of data, including data for the trough year of 2001, were available when they published their paper.  But 1997 was a peak profit-rate year.  Thus when they state that the corporate sector’s rate of profit fell sharply through 1982 and then underwent a “recovery [… that] appears nearly complete,” Duménil and Lévy are comparing a trough to a peak.

Why do Moseley and Duménil- Lévy choose to cherry-pick their data in this manner?  I do not know.  I can only speculate that they “see” the increases in profitability, but not the subsequent declines, as significant, and that this stems from a “pre-analytical vision” of Capital Resurgent (Duménil and Lévy 2004), in which a neoliberal, free-market counter-revolution gave rise to a new, sustainable boom on the backs of the working class.  This vision has helped many on the Left find an “objective basis” for both the hopelessness and feelings of impotence they have experienced and for the resignation to the status quo, or mildly reformist alternatives to it, that they have taken to advocating.   The data themselves do not tell such a clear-cut story.


Duménil, Gérard and Dominique Lévy, 2005, “The Profit Rate: Where and How Much Did it Fall? Did It Recover? (USA 1948-1997).”  Available at .

Moseley, Fred, 2009, “The US Economic Crisis:  Causes and Solutions,” Marxism 21, Vol. 6, No. 1, pp. 296-316.

2 Comments on “Cherry-Picking Peaks and Troughs”

  1. 1kmb said at 9:02 am on May 15th, 2009:Clear analysis. However…My main problem that still remains is that I don’t see a precise model of HOW a drop in profitability leads to economic slowdown and the resulting problems (debt, asset bubbles etc.).
    Now I know that this article is for a wider audience, and this is not a scientific journal, so it would be silly of me to demand a quantitative model here…but, my problem is that I’m unaware of any such quantitative macroeconomic models in Marxian studies. This may very well be my own limitation, since I’m basically a newcomer to the whole field…do they exist?

    So, once again, the question I would ask is: do we know for certain, has it been quantitatively demonstrated, that investment growth and aggregate economic growth is always profitability-led?
    It sure seems logical (in Marxian theory), but is it true for all economies all the time?

    (post-keynesians/Kaleckians talk of stagnationist and exhilarationist economies…the former (if I understood it correctly) are not profitability-led (or not profit-share-led, which is not quite the same, but similar))

    It seems, there are at least certain cases, when they are not: recently I read some studies by PK economists Ö Onaran and E Stockhammer where they analyse (using regression models) the growth patterns of the Turkish economy and find that it is not primarily led by profitability, rather by aggr. demand…this also seems to be true for certain developed European economies.
    So: even if the LTRPF is correct, I’m not sure if pointing out a fall in profitability is enough to explain economic slowdown and the emergence of crisis tendencies.

    Mihaly Koltai (Hungary)

  2. 2Andrew Kliman said at 10:17 pm on May 22nd, 2009:Hi kmb,1. Actually, my argument is not that “a drop in profitability leads to economic slowdown and the resulting problems (debt, asset bubbles etc.).”

    My argument is rather that the drop in profitability has led to rising debt and asset bubbles. It could be that policy has been orienting to restoring profitability directly rather than restoring economic growth. I’m not saying that this is so, I don’t know. The point is just that my argument doesn’t stand or fall on a direct relationship between profitability and growth of GDP and/or investment.

    Also, one facet of my argument is that the increasing indebtedness pumps up economic growth and profitability artificially. So I wouldn’t *necessarily* expect to see a slowdown in economic growth here as a result of the drop in profitability (though average annual per-capita GDP growth in the U.S. was about 25% less in the 1973-2003 period than in the 1950-1973 period).

    An appropriate empirical test would look at what the relationship between movements in the rate of profit and movements in what economic growth *would have been* in the absence of the debt expansion. That’s a very tricky thing to try to get at.

    2. One thing that does seem clear is that changes in profit have caused changes in investment, not vice-versa. Using BEA figures, I computed the correlations between the annual change in before-tax profits and the annual change in gross investment (for all corporations) between 1948 and 2003.

    The correlation between THIS year’s change in investment and THIS year’s change in profits is 0.39.

    The correlation between THIS year’s change in investment and NEXT year’s change in profits is -0.11. So it doesn’t look as though changes in investment spending have caused changes in profit.

    The correlation between THIS year’s change in investment and LAST year’s change in profits is 0.52. So changes in profit do seem to have been a factor causing changes in investment spending.

    3. You ask, “do we know for certain, is it quantitatively proven, that investment growth and aggregate economic growth is profitability-led? It sure seems logical (in Marxian theory), but is it true for all economies all the time?”

    I don’t know how anyone could know what’s true for all economies all the time. I’m certainly making no such claims. I’m trying to explain the phenomena that *have* taken place, not say what *must* take place.

    The reason why the link between profitability and capital accumulation is logical is that, BY DEFINITION,

    (cap. accum. rate) = (share of profit accumulated) x (rate of profit)

    So if the rate of profit falls, then-all else being equal-the rate of capital accumulation will fall. But it’s not possible to say that this must be true at all times in all places, not would I expect it to be true at all times in all places. That’s because, if the rise in the share of profit accumulated is greater, in percentage terms, than the fall in the rate of profit, then the rate of capital accumulation will rise.

    But why should I care whether something is true at all times in all places? It’s not true at all times in all places that if you drop an object, it will tend to fall.

    BTW, nothing above is meant to endorse the notion that economic growth has ever, anywhere, been led by aggregate demand rather than profitability. I don’t know that this is so and, in fact, I don’t even know what it means. If economic growth is growth of GDP, and aggregate demand is GDP (or GDP minus inventory accumulation), then the “fact” that changes in aggregate demand lead to changes in economic growth is either a tautology or extremely close to one.

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