Reports from the Economic Front

by Martin Hart-Landsberg

Stagnation and Financialization

with one comment

The dominant firms in the U.S. and other major capitalist counties are happily making profits.  They just aren’t interested in investing them in new plant and equipment.  Rather they prefer to use their earnings to acquire other firms, reward their managers and shareholders, or increase their holdings of cash and other financial assets.

The chart below, taken from a Michael Burke blog post in the Irish Left Review, shows trends in both U.S profits (defined by Gross Operating Surplus which is calculated by subtracting the value of intermediate inputs, employee compensation, and taxes on production from earnings) and investment (defined by Gross Fixed Capital Formation).


As you can see the increase in profits (in orange) has swamped the increase in investment (in blue) over the relevant time period; in fact investment in current dollars has actually been falling.

Looking at the ratio between these two variables helps us see even more clearly the growth in firm reluctance to channel profits into investment.  The investment ratio (investment/profits) was 62% in 1971, peaked at 69% in 1979, fell to 61% in 2000 and 56% in 2008, and dropped to an even lower 46% in 2012.

According to Burke, “If US firms investment ratio were simply to return to its level of 1979 the nominal increase in investment compared to 2012 levels would be over US$1.5 trillion, approaching 10% of GDP.”  

The same dynamic is observable in the other main capitalist economies:

In 1995 the investment ratio in the Euro Area was 51.7% and by 2008 it was 53.2%. It fell to 47.1% in 2012. In Britain the investment ratio peaked at 76% in 1975 but by 2008 had fallen to 53%. In 2012 it was just 42.9% (OECD data).

So what are firms doing with their money? As Burke explains:

The uninvested portion of firms’ surplus essentially has only two destinations, either as a return to the holders of capital (both bondholders and shareholders), or is hoarded in the form of financial assets. In the case of the US and other leading capitalist economies both phenomena have been observed. The nominal returns to capital have risen (even while the investment ratio has fallen) and financial assets including cash balances have also risen.

So, with firms seeing no privately profitable productive outlet for their funds, despite great societal needs, their owners appear content to reward themselves and sock away the rest in the financial system.  In many ways this turns out to be a self-reinforcing dynamic.  No wonder things are so bad for so many.

Written by marty

October 27th, 2013 at 7:34 am

One Response to 'Stagnation and Financialization'

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  1. Corporations do not hoard wealth; they create (or steal) it, and then distribute it to their stakeholders. They do not, generally, do this in a volitional way; they respond to incentives and to the larger economic environment.

    If corporate investment is down, look to the areas of economic life which ARE volitional – for example, government policy choices – and inquire what the state is doing that encourages consumption (distribution of profit to individuals) instead of capital formation.


    19 Nov 13 at 11:06 pm

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