Determinants of profitability in the economy of the Republic of Cyprus based on a classical Marxist approach

ABSTRACT

This paper was designed to explore the factors influencing profitability within the business sector using a methodological framework rooted in Marx’s concept of the profit rate. By addressing the complexities of profitability changes, this study investigated the factors that drive profitability within the business sector of the Republic of Cyprus for the years 2006–2022, including: a period of severe structural crisis and change (2013–2014), a period of recovery (2015–2022) based on the outcomes of the crisis, and a period (2006–2012) against which shifts can be contrasted. The findings of this empirical study suggest that a substantial portion of the increase in profitability since 2015 is due to the reduction in the value of the labour power during the crisis years (2013–2014) and following the COVID-19 pandemic period (2021–2022).

KEYWORDS:

• Profit rate
• labour productivity
• capital productivity
• wages
• Republic of Cyprus

JEL CLASSIFICATION:

• B40
• B51
• E11
• E30

Disclosure statement

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

Data availability statement

The data that support the findings of this study are available from Eurostat but restrictions apply to the availability of these data, which were used under licence for the current study. Data are, however, available from the authors upon reasonable request and with permission of Eurostat.

Notes

1. Uninsured deposits of over €100,000 were haircut in two troubled banks during this timeframe.

2. We do not exclude unproductive labour not producing directly surplus value still increasing indirectly profitability and speeding up the circulation of capital (Duménil and Lévy 2011a).

3. We take only fixed capital into account since statistical data are not available for commodity and money capital. This can be justified only under the assumption that the ratio of fixed on circulating capital remained approximately constant during the time span under examination.

4. Wages include shadow wages of the self-employed under the assumption that the average labour income of the self-employed equals the average wage.

5. Wages include shadow wages of the self-employed under the assumption that the self-employed earn the same average wage as the employees.

6. Capacity utilisation assumes significance for the analysis of profitability in the short run, which is the case in this paper.

7. Analysis of data going back to 1995 shows that the rate of return was quite constant during years 1995 to 2011.

8. ‘The relative value of labour power is Marx’s term for the share of the total value product of labour which workers get to keep in the form of wages’, Philip Harvey in «Marx’s Theory of the Value of Labor Power: An Assessment», Social Research Vol. 50, No. 2 (Summer 1983), pp. 305–344, The Johns Hopkins University Press.

9. Lines BB’, ΓΓ’, ΔΔ’ in Figure 4 are free hand drawn lines to facilitate the understanding of the figure.

10. Full capacity utilisation is proxied in this paper by Potential Output available in Ameco database of national accounts. Consequently, capacity utilisation rate is proxied by the gap between gross product and potential output.

11. Before that, a significant under-utilisation of productive capacity, a consequence of structural crisis during years 2012–2015, contributed to a decline in the rate of return. As a result of these fluctuations, when the time span 2010–2022 is considered, changes in the capacity utilisation rate had a rather neutral effect on profits. They had though a positive effect during 2015–2022.