Profit rate dynamics in US manufacturing

ABSTRACT

The attributes and dynamics of the profit rate distribution provide indispensable information on how the economy works. Edith Penrose, in The theory of the growth of the firm¸ took agency, managerial capabilities, heterogeneity and open-endedness as characteristic of the economy. Schumpeter had a similar view. Neoclassical theory, in contrast, envisages convergence to a standard rate of return, invoking inter-industry capital flows and diminishing returns as the main mechanism. I analysed the data on US manufacturing, 1987–2015. There was evidence of convergence, attributable to loss of supra-normal profits in two industries. The features of the distribution confirm Penrose’s view. Neoclassical theory fares poorly: the data do not support ‘a standard rate of return’, and no plausible macro shock exists that could have produced the observed dispersion. The symmetry of the observed distribution indicates that neither market power nor intangible assets play major roles in determining the shape of the profit rate distribution; risk, however, is relevant if reformulated. Intersectoral capital flows were weak, and there was no evidence of diminishing returns. Penrose’s conception of heterogeneous managerial capacity refers to a concept of economic power distinct from market power, corresponding to differential ex ante strength; differential profit outcomes represent ex post strength.

KEYWORDS:

• Penrose
• rate of return on capital
• profit rate
• convergence
• capital flows
• diminishing returns
• market power
• intangible assets
• managerial capacity
• entrepreneurial profit
• economic power

JEL CLASSIFICATION:

• D22
• L10

Acknowledgements

I would like to thank Ciaran Driver, Andrew Kliman, Tony Thirlwall, Julian Wells, and especially Ron Smith for helpful advice and comments. No funding was received for this work.

Disclosure statement

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

Notes

1. I am grateful to an anonymous reviewer for suggesting that this should be included.

2. The crude oil price rose from $25/barrel in 2002 to over $100/barrel before and after the 2007-09 crisis. This was due to increasing demand from China and other Asian countries, the invasion of Iraq, and possibly speculation in futures markets (Williams n.d.).

Additional information

Funding

The author(s) reported there is no funding associated with the work featured in this article.