Where no output is produced, one sector's gain is another's loss

The profits of financial (nonproductive) corporate business are smaller than those of nonfinancial (productive) corporate business. At the end of 1951, the profits of finance were only 10% of nonfinancial profits. Until the mid-80s they were generally less than 20%. Financial profits ran about 30% of nonfinancial in the 1990s, between high peaks. And since 2010, between 30 and 40 percent. Financial business profits are less than nonfinancial business profits. But financial profits have been gaining on nonfinancial profits. 

To look at that gain I show financial profits (red) and nonfinancial profits (blue) as percent of GDP. I index both ratios to show them equal in the first quarter of 1952:

Graph #1: Financial (red) and Nonfinancial (blue) profits, relative to GDP
with both ratios indexed near the start for purposes of comparison.

The lines start out equal in 1952. But consider the early years, up to the late 1970s: Financial profits show a general uptrend. Nonfinancial profits show a mild downtrend. 

Indexing makes the graph exaggerate what I will say now, but what I say is still true: If the financial share of corporate profits held fast at the 1952 level, the financial profits above that level would instead have been the profits of nonfinancial corporations, or would have added to labor's share of income, or would have worked out as just plain lower prices, as financial costs fell as a share of productive sector costs. Any of these options would have been better than the way things actually turned out.

 

Nonfinancial profits on the graph show a mild downtrend. It looks mild to me. But when I google profit crisis of the 1970s the featured snippet says: 

In the 1970s, US capitalism suffered a legitimacy crisis as the economy was mired in high inflation, unemployment, and slower growth. The rate of profit had been decreasing since the late 1960s and by the mid-1970s Wall Street was in poor shape.

Clicking the link turned up "The Revenge of the Capitalist Class" by Thomas Volscho. Google's snippet came from the Abstract. Here's the next sentence:

Capitalists politically mobilized in the 1970s to restore the rate of profit and to restore power to economic elites...

In Financialization as symptom, Chris Dillow says:

"My generation of leftists ... was shaped by a crisis of non-financial capitalism – that of the 70s and early 80s... [L]et’s start with the crisis of the 70s. Profits were then being squeezed by wage militancy. Thatcher’s response to this was to weaken labour’s bargaining power by (inadvertently!) creating mass unemployment..."

He's right, except for the "wage militancy" part -- but that was Thatcher's error, not Dillow's. The actual cause of the profit crisis was the growth of financial cost, which increased the cost of the average transaction, increased financial profits, pushed the cost of living up, pushed nonfinancial business costs up, and pushed nonfinancial profits down. Dillow also says:

Financialization is the result of a shift away from low-profit activities in the real [nonfinancial] economy.

Early on, rising financial costs drove nonfinancial profits down until people noticed the problem. But their policy changes encouraged financialization and drove financial cost even higher. The graph shows it.

Bill Mitchell writes:

Rowthorn says that the mid-1970s crisis – which marked the end of the Keynesian period and the start of the neo-liberal period – was associated with a rising inflation but also an on-going profit squeeze due to declining productivity and increasing external competition for market share. The profit squeeze led to firms reducing their rate of investment (which reduced aggregate demand growth) which combined with harsh contractions in monetary and fiscal policy created the stagflation that bedeviled the world in the second half of the 1970s.

Since that time the world has been bedeviled by the solutions that were put into place.