It is pretty well recognized that corporate profits in recent years have been high:
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| Graph #1: Four Measures of Corporate Profit, relative to GDP |
They're
jiggy, but these measures of profit move pretty much together, and
after the year 2000 profits do go high. Sure, profits have fallen some
since 2012, but in total, corporate profits are still above 10% of GDP,
as the red and blue lines show.
The red is annual data that begins in 1929. The others show quarterly values that begin in 1947.
To summarize what Graph #1 shows: Red and blue represent all of corporate profit. Green represents corporate business profit. The purple line represents nonfinancial corporate business profit.
Nonfinancial business makes and services things.
The space between the blue and green lines represents the profit of corporations that are not businesses. The space between green and purple represents financial corporate business profit.
Financial business makes and services money.
Here's the hierarchy:
corporate profit, which consists of
profit of non-business corporations, and
corporate business profit, which consists of
financial corporate business profit, and
nonfinancial corporate business profit, which consists of
profit arising from nonfinancial activity, and
profit arising from financial activity
As
you may notice, this hierarchy is organized by type of business, not by
type of profit. To my mind, it is important to view profit by type of
profit. Specifically, I want to know the profit arising from the
production of goods and services by nonfinancial corporate business, as
opposed to the profit arising from their financial assets. If that
information is available, I am unaware of it.
However, a good portion of the assets of nonfinancial corporations are financial assets: near a quarter of their assets in the 1950s, near half today.
If we assume that the financial-to-total ratios for profit and for assets follow the same "rising from near a quarter to almost half" pattern, we can estimate the shares of nonfinancial corporate business profit attributable to financial and nonfinancial activity.
Then
we can take the financial profit out of nonfinancial corporate business
profit, and add it to financial corporate business profit. In other
words, we can take the given data, which is categorized by type of business, and re-categorize it by type of profit. A significant and useful improvement.
Including the profit of non-business corporations noted earlier, we end up with three categories of profit. So we can figure the three components of total corporate profit:
- non-business profit,
- financial profit, and
- nonfinancial profit
each of which I show here as a percent of the total:
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| Graph #2: The Components of Corporate Profit, 1951-2020 (Stacked Graph) |
Nonfinancial profit falls from two-thirds to one third of total corporate profit. The profit arising from financial and non-business corporate activity doubles, from one-third to two-thirds of the total. (Click the "Graph #" text to see the graph at FRED.)
Corporate profit may have been high in recent years, but for the nonfinancial corporations that produce the goods and services we regularly consume, profit is low. If unemployment is as a rule too high and economic growth too slow, it is because nonfinancial profit is low.
2 comments:
See? I fell into the same trap, talking about nonfinancial corporations rather than nonfinancial profit in that last paragraph.
The green on the graph shows the nonfinancial profit of nonfinancial corporations. The red shows the financial profit of nonfinancial corporations, along with the profit of financial corporations.
That last paragraph, revised:
Corporate profit may have been high in recent years. But profit arising from the production of goods and services, nonfinancial profit, is low. If unemployment is as a rule too high and economic growth too slow, it is because nonfinancial profit is low.
Unfortunately, low profit is not good for the production of output. Fortunately, nonfinancial corporations have a lot of financial profit, so they can get by. Unfortunately, when financial profit is better than nonfinancial profit, money moves out of production and into finance. That's not good for real economic growth.
It's not good for anyone, except at the microeconomic level. All of us can say: "It's good for *me* but it's not good for *us*." Either we fix this problem or it is no long wait to the situation Rostovtzeff described among the ancients:
"What happened was a slow and gradual change, a shifting of values in the consciousness of men. What seemed to be all-important to a Greek of the classical or Hellenistic period, or to an educated Roman of the time of the Republic and of the Early Empire, was no longer regarded as vital by the majority of men who lived in the late Roman Empire and the Early Middle Ages. They had their own notion of what was important..."
And from there, no long wait to the situation Toynbee described: Civilizations die by suicide.
From JW Mason in “Has Finance Capitalism Destroyed Industrial Capitalism?”
http://jwmason.org/slackwire/has-finance-capitalism-destroyed-industrial-capitalism/
"As Joel Rabinovich convincingly shows, the increased financial holdings of nonfinancial corporations mostly represent goodwill from mergers and stakes in subsidiaries, not financial assets in the usual sense, while the apparent rise in their financial income of in the 1980s is explained by the higher interest on their cash holdings."
Kneejerk: "stakes in subsidiaries" is most certainly part of the increase in financial holdings and is most certainly a problem.
Nonetheless, the Joel Rabinovich paper might be worth investigating -- for its argument and its data sources.
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