Glyn, Does Aggregate Profitability Really Matter?

Cambridge Journal of Economics 1997, 21, 593-619
CRITICAL SURVEY
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Does aggregate profitability really matter?

Andrew Glyn*
The impact of profitability on capital accumulation, neglected in conventional

accounts, is confirmed by a cross-sectional analysis of the post-war experience of
manufacturing in OECD economies which is consistent with a body of time-series
and firm-level studies. The effect of capital accumulation on growth is reviewed,
suggesting a somewhat stronger impact than growth accounting assumed.
Profitability recovered in most, but not all, OECD economies in the 1980s and the
recovery was strongest where unemployment rose most and where labour cost
competitiveness improved. The response of manufacturing investment was very
patchy, however, and a number of influences which may have weakened the link to
achieved profitability are discussed.
1. Introduction
The overall level of profitability was accorded a central role by the classical economists in
their account of the functioning of the capitalist system. While they differed in their
theories of what determined the profit rate, Smith, Ricardo and Marx agreed that it was
the fundamental determinant of the rate of growth of the capital stock, which in turn
shaped the growth rate of the economy.
In neoclassical economics, by contrast, profitability is virtually written out of the plot, at
least in the pared-down versions of the theory which best reveal its essential
characteristics. Aggregate savings is presumed independent of the functional distribution
of income between wages and profits, and savings are smoothly transformed into
investment via an appropriate interest rate, quite independently of the going profit rate.
Manuscript received 12 June 1995;finalversion received 6 November 1996

* University of Oxford. Thanks to Perry Anderson, Bob Brenner, Wendy Carlin, Bob Rowthorn and Bob
Sutcliffe for helpful comments and to three anonymous referees for extensive suggestions for improvements.
© Cambridge Political Economy Society 1997

594 A. Glyn
But even if profitability did affect the share (or rate) of investment, this has no effect on the
long-run rate of growth. Higher investment leads temporarily to faster growth of the
capital stock and thus to a higher capital/labour ratio and level of productivity. But the
initial impact of investment on output growth is small and in the long run diminishing
returns to investment mean that the additional savings are all absorbed in maintaining this
higher level of capital per worker; so the growth of the capital stock and output return to
their original rates. On this view the rate of profit is simply a reflection of how scarce
capital is in relation to the labour force, without any independent significance for the
growth rate.
The purpose of this survey is to re-examine the role of profitability in the light of recent
work on the determinants of investment (section 2) and on the impact of investment on
growth (section 3). Attention is restricted to these long-run trends, leaving aside the

distinct issue of the shorter-run impact of profitability changes on unemployment as
reflected in the literature on 'wage gaps' or 'too high real wages' (see Bruno and Sachs,
1985 and Bean, 1994, for example). A rehabilitation for the long-run importance of
profitability seems to be indicated and section 4 documents and analyses the recovery of
profitability in the 1980s, with additional data provided and sources described in the
Appendix. Section 5 examines the response of capital accumulation to this recovery in
profitability.
2. The impact of profits on investment

It has been commonplace in discussions of investment to pit neoclassical emphasis on
relative factor prices against Keynesian stress on aggregate demand. Thus a recent survey
of attempts to model the determinants of investment econometrically (Chirinko, 1993)
reported that: 'output (or sales) is the dominant influence on investment spending with
the user cost variables [relative costs of using labour and capital, including interest costs—
AG] having a modest effect' (p. 1881). No mention was made of any role for profitability
in explaining investment trends, even though the closely related liquidity variables
'generally have proven very significant' (p. 1902). There is, however, a strong alternative
tradition exemplified by Kalecki (1971) which focuses on profits and emphasises that
achieved profitability can influence investment via its impact on both expectations and on
ease of financing.
Before examining whether available data for the OECD economies are consistent with
an important role for profitability, the choice of profitability indicator is important. The
most obvious measure, the rate of return on capital, actually involves some conceptual
difficulties, especially if it is to be included in models also including capacity utilisation
(Marglin and Bhaduri, 1990). Moreover, the comparability of profit rates across countries
can be compromised by differences in conventions for measuring capital stock which do
not closely reflect actual differences in asset lives. The latter problem is particularly
worrying for comparisons of profitability and capital stock growth, since errors in
measuring the capital stock would tend to be reflected in both indicators and would thus
lead to (upward) biases in estimates of their relationship.' While time-series analysis
suggests choice of profitability indicator may make little difference (Bhaskar and Glyn,
1995), it seems safer to explore cross-country relations using the gross profit share
1
This problem may be less serious for the net rate of return on net capital employed since mis-
measurement of the capital stock will be partially offset by mis-measurement of capital consumption.
However, data for the net rate of return are available for relatively fewer countries.
Does aggregate profitability really matter? 595
(operating surplus gross of capital consumption, less an imputed wage for the self-
employed as a percentage of gross value added) and this measure is available for most
countries. The most meaningful comparisons are for manufacturing, which has readily
available data and where self-employment, which muddies the measurement of profits, is
relatively unimportant.
Authors in the neoclassical tradition, perhaps with Cobb-Douglas as a benchmark,
have often downplayed the extent of profitability variations; for example, Mankiw et al.
claimed that 'the available evidence indicates that capital's share is roughly constant
across countries' (1992, p. 431). If this were really true then profitability could never play
much role in the shifting rhythm of accumulation. Table 1 presents the series for
manufacturing gross profit shares for 15 OECD countries; to reduce short-term cyclical
variability, data are presented for successivefive-yearaverages beginning in 1960 (sources

are described in the Appendix and annual data given in Appendix Table A6). A glance at
the data shows that most observations fall in the range 20-35%. This span of variation
could hardly be described as small. Nor are differences between countries especially
persistent. A cross-country regression of the average profit share for the most recent
decade (1984-93) on the corresponding share two decades earlier (1964-73) leaves more
than half the later variability of profit shares unaccounted for by the earlier pattern. This
confirms what is evident from Table 1;fluctuationsin profit shares over time are neither
tiny nor uniform. The standard deviation of profit shares is sharply reduced after 1973,
suggesting that there is some degree of convergence in profitability. But this is simply
because Japan's profit share no longer constitutes such an outlier (as the conditions
facilitating exceptionally high profitability there were eroded—Armstrong et al, 1991). If
Japan is excluded the standard deviation of gross profit shares across countries is slightly
higher after 1973 than before.1 All in all, there have been large enough differences in
profitability for it to play a potentially significant role in differences in capital
accumulation over time and between countries.
Figure 1 presents the relationship between the gross profit share in manufacturing and
capital accumulation (the growth rate of the gross capital stock) for 12 OECD countries
and covering two time-periods (1960-73 and 1973-92). The figure certainly suggests a
high degree of correlation, confirmed by the simple regressions reported in Table 2 below.
Equation (1) suggests that a 3% higher profit share is associated with around 1% faster
growth of the capital stock.2 As often happens in these OECD cross sections, Japan is an
outlier, especially in the golden age, with very high profitability and accumulation. If it
could be convincingly argued that both high profitability and accumulation were
reflecting some other country-specific factor, then the inclusion of Japan would
exaggerate the true impact of profits. But even if Japan is omitted (equation 2) the
coefficient is still significant. Looking at the changes in accumulation and profit shares
1
The series of the profit rate (Table 3) has a similar coefficient of variation for 1989-93 as for 1969-73
once Japan is omitted, so that no strong trend towards convergence is apparent, although dispersion appears
rather larger in the early 1960s.
2
The fact that the correlation between profitability and capital accumulation applies to the profit share is
significant. In neoclassical theory the benchmark case of an elasticity of substitution between capital and
labour of one makes the (net) profit share a constant, irrespective of the relative abundance of capital and
labour. If rapid growth of the capital stock reflected capital scarcity (and a low capital-output ratio) then
capital consumption would be less, and the gross profit share would be lower where accumulation was faster.
As Rowthorn (1996) has insisted, the evidence points overwhelmingly to an elasticity of substitution around
0.6. This would imply that the scarcer capital was, the higher would be the net profit share. But it would take
fairly extreme assumptions to generate a strong positive relationship between the gross profit share and capital
stock growth within the neoclassical model (Carlin, 1987).
Table 1. Manufacturing gross profit shares (%)
1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93 1994
Australia 30-7 31-2 29-9 23-6 26-2 31-5 31-4 33-5

Belgium 27-3 24-4 26-8 320 33-6 31-8 ('93) f
Canada 31-8 32-3 29-2 29-2 28-2 33-3 31-0 28-1 ('92)
Denmark 21-9 20-5 18-9 22-3 26-3 28-4 35-6
Finland 36-7 32-4 35-2 32-3 35-6 38-0 37-9 45-5
France 26-3 27-8 27-9 24-7 21-7 27-3 33,1 32-1 ('91)
Germany 31-6 31-6 29-3 25-6 21-6 24-2 22-0 18
Italy 35-7 34-9 30-6 28-9 31-6 34-9 31-9 33-6
Japan 48-2 47-8 45-3 34-9 341 35-7 34-9 27-5
Netherlands 23-2 21-8 30-9 33-9 33-6
Norway 23-8 230 26-4 25-0 25-9 27-9 29-2 28-6 ('91)
New Zealand 36-8 31-3 30-6 36-4 38-5 41-2 ('92)
Sweden 26-8 24-1 21-6 17-6 200 28-7 25-3 33-8
UK 26-3 24-9 23-2 18-2 18-4 22-8 20-9 24-4

USA 251 27-3 24-0 24-6 23-4 26-6 28-5 28-1 ('93)
OECD Unweighted 29-9 28-6 25-3 25-7 29-8 29-5

OECD Weighted 31-5 28-9 26-2 25-2 28-6 291
Europe Unweighted 27-6 26-8 23-9 24-6 28-8 28-6

Europe Weighted 305 281 25-3 26-2 30-4 29-8
Standard deviation 6-7 6-4 5-2 5-4 4-6 4-8

Std dev. exc. Japan 4-2 4-2 4-5 5-0 4-5 4-7
Nous: Gross operating surplus less imputed average wage for self-employed as percentage of gross value added. Europe and OECD unweighted are simple averages of
countries with data throughout. Weighted averages use 1980 GDP at PPPs. Finalfive-yearaverage sometimes ends before 1993 (see data forfinalyears).
Sources: See Data Appendix.
Table 2. Manufacturing capital stock growth and gross profit shares
Dependent variable: Coefficient on profit

growth rate of AT Constant share(tstat) R2 N
(1) 1960-92 -5-40 0-340 (5-8)* 0-583 24

(2) (exc. Japan) -0-50 0159 (2-4)** 0179 22
(3) change 1973-92 -1-77 0-443 (5-7)* 0-744 12
less 1960-73
Note: * Indicates significance at the 1% level; ** 5% level.
15
Japan*

55 10
S
a.
2
v. :.
0
10 20 30 40 50
Gross Profit Share (%)
Fig. 1. Capital stock growth and profit share: manufacturing, 12 countries, 1960-73 and 1973-92.
after 1973 is a harsher test, as all country-specific influences are swept out. The constant
term in this equation (3) suggests a fall in the growth rate of the manufacturing capital
stock of 1 -8% per year, even for a country where profitability did not change. But the same
equation gives remarkably strong results for the impact of profitability; the extent of
slowdown in capital stock growth after 1973 was very significantly affected by the degree
of profitability decline in the country concerned.
These cross-section results will be probed further against the 1980s experience of
profits and investment (section 5). But the implication that profits have been an important
influence on investment is buttressed by a number of time-series studies of OECD
investment trends. The results of 11 of them which have tested indicators of profitability
(such as the profit share of value added or profit rate on capital employed) are summarised
in Appendix Table Al. When investment is regressed on profitability alone (or with only a
lagged dependent variable added), profitability is almost always significant. This suggests
that at least profitability is an indicator of conditions favourable to investment.
A stronger test is whether profitability retains its significance when included with other
plausible influences on investment spending, notably measures of demand (such as the
level of capacity utilisation or changes in sales volume) and of capital costs (such as real
interest rates) or the relative costs of capital and labour. Results here are more mixed and
this is hardly surprising given the collinearity between profitability and demand. The
coefficient for profitability is almost always positive, but not always significant. Germany
is the only country where a substantial number of studies always find profitability
598 A. Glyn
significant, but conversely the UK is the only country where insignificant effects for
profitability outweigh significant ones. Other variables are not uniformly significant
either, and, in particular, indicators of demand do not score noticeably better than
profitability once both are included (Bhaskar and Glyn, 1995). Hopes that measures of
the stock-market valuation of companies (Tobin's q) would be a better predictor of
investment than achieved profitability, in that it incorporates additional information on
future prospects, have been rather decisively confounded (Blanchard, Rhee and
Summers, 1993).
Clearly, the investment process is very difficult to model statistically, but the evidence is
consistent with profitability playing an important role along with other variables. More
specifically, it appears that profitability played a substantial part in the slowing-down of the
growth rate of the capital stock after 1973. Bhaskar and Glyn's study of investment trends

(1995) suggested that declining profitability accounted for a major part of the investment
slowdown in manufacturing sectors of the most dynamic of the major OECD economies
(Germany and Japan) and also depressed investment in the USA; on the estimates
reported there the decline in profitability was more important than the slowdown in output
growth in accounting for the slowdown in the growth rate of the capital stock.
Profitability may affect investment via its effect on the expected returns from
investment and thus the extent to which, under conditions of uncertainty,firmswill incur
sunk costs to expand or modernise capacity. Alternatively, or additionally, profitability
influences the level of retained earnings which may be die preferred form of investment
financing. Over the period 1970-89, retained profits financed 69% of gross real
investment in Japan, 81 % in Germany, 91 % in the USA and 97% in the UK (Corbett and
Jenkinson, 1996). While these proportionsfluctuateover time, the fact that between two-
thirds and the entirety of real investment finance is internally generated gives plausibility
to afinancingrole for profitability in determining investment levels. Confirmation comes
from a number of studies analysing investment at the company level. Fazzari et al. (1988)
for the USA, Hoshi et al. (1991) for Japan and Bond and Meghir (1994) for the UK all
find that cash flow or profitability is a stronger influence on investment for those firms
which other evidence (low dividends or having no close institutional relationship with a
bank in the Japanese case) suggests are constrained in terms of access to finance.
Schianterelli's review of this literature concluded that for a 'substantial subset of firms'
investment decisions are 'quite sensitive to the availability of internal funds' (1996 p. 85).
This does not mean that the only effect of profitability is via internal finance; rather, it
confirms that any expectational effect of profitability on investment is boosted by the
financing effect.
Investment in R&D and training is increasingly emphasised in discussions of growth.
Indeed, since these expenditures actually reduce profits as recorded in the accounts, it
may be that they are even more responsive than physical investment to shifts in
profitability as companies cut them to bolster depressed profits. But the evidence
surveyed above, drawing on aggregate time-series and country cross-sections together
with the firm-level panels, certainly supports there being a significant impact of
profitability on fixed investment.
3. The effect of investment on growth

The starting-point for the analysis of the impact of investment on growth is conventional
neoclassical 'growth accounting' derived from Solow's famous (1957) model. All
technical progress is regarded as exogenous, that is carrying on at a rate independent of
variables such as investment (so that, for example, this year's machines are 3% more
productive than last year's machines, regardless of how many are being installed).
Because all factors are paid their marginal products, it can easily be shown that the impact
of an increase in one of the factors on output is given simply by the share of output
accruing to that factor as income (thus, if the profit share is 0-33 then so is the elasticity of
output with respect to capital and a 1 % growth of the capital stock increases output by
0-33%). With a typical capital-output ratio of around 2 (Wolff, 1991, Table 4), a 1%
point rise in the investment share of GDP would raise the growth rate of the capital stock
by 0-5%; the growth rate of GDP would therefore be raised by 0-16%. Moreover, this is
only a short-term effect; the rise in the capital-output ratio (by 0-34% in the first year as
the growth of the capital stock exceeds the growth of output by that much) would

successively reduce the impact of the higher investment share on the growth rate of the
capital stock, so that the increments to the growth rate would also fall off. Output would
converge to a new higher level; on conventional assumptions, the long-run elasticity of
output per worker with respect to the investment ratio would be about 0-5 (Mankiw et al.,
1992) so that an increase in the investment share of 1% of GDP (say from 20% to 21%,
i.e., a 5% increase) would increase the level of output in the very long term by 2-5%. If all
of this occurred in a 30-year period, it would imply an addition of 0-08% per year to the
average growth rate of GDP.1
In this model everything hangs on whether the elasticity of output with respect to the
capital stock is really around 0-33, or is very much larger, as has been suggested by recent
theories of growth. The other extreme from the original Solow assumption would take the
elasticity as one, which implies that there are constant returns to capital accumulation and
any addition to the capital stock leads to a proportionate increase in output. In this case,
the 1 % rise in the investment share considered in the previous paragraph would lead to
both the capital stock and output growing by 0-5% and this impact on the growth rate
would last indefinitely and not peter out as in the case of diminishing returns. This is the
origin of the term 'endogenous growth', since the long-term growth rate depends on the
share of investment, that is on a bundle of expenditures which do not face diminishing
returns, rather than just on 'exogenous technical progress' plus labour force growth. In
this example, the initial effect on the growth rate is three times as great as with an elasticity
of 0-33, and after 30 years the increment to output (15%) would be six times as great. Any
elasticity of less than one implies that the impact on growth does eventually fade away,
but the higher the elasticity the greater the initial and cumulative effects of capital
accumulation on output.
Investment may have greater effects than assumed in the Solow model, for various
reasons. Firstly, individual enterprises may face increasing returns to scale so that the
share of profits understates the impact on output of increasing the capital stock. These
may be of a traditional sort (larger plants yield lower production costs for technical
reasons) or connected with the learning effects associated with expansion: 'the experience
of installing and using capital teaches workers and organisations about how to use modern
1
This description of the neoclassical process applies strictly to the case where technical progress is
'disembodied' (so that it can be incorporated into the production process without any investment, for
example by a superior organisation of production) as well as exogenous. But exactly the same story applies to
the much more plausible case where (most) technical progress is 'embodied', that is new capital is required to
take advantage of it. In this case higher investment leads to a higher output level through reducing the average
age of the capital stock: but because the higher investment does not increase the rate at which new machines
are more productive (technical progress is still exogenous) it does not affect the long-term growth rate.
600 A. Glyn
technologies efficiently' (de Long and Summers, 1992, p. 161). Very similar ideas are
expressed by Scott (1992): 'instead of assuming that ordinary investment consists of
reduplication, and so does not advance knowledge, one can make the opposite assumption
that no ordinary investment consists purely of reduplication. Consequently every
investment forms part of the step-by-step process through which the advance of
knowledge takes place' (p. 34). Secondly, such productivity gains extend beyond the firm
concerned as rivals 'copy operating procedures from path-breaking rivals' (de Long and
Summers, 1992, p. 161) or because at the level of the economy as a whole 'technological
innovation and physical capital are such strong complements that an increase in the rate
of growth of physical capital necessarily leads to an increase in the rate of technological
change' (Romer, 1990, p. 338). Such effects external to the investing firm imply that die
social return from investment exceeds the private return to the enterprise. The general

idea of technological change being endogenous is diat more investment implies, through
one route or anodier, better investment. Thus die higher the level of investment, die
greater die degree to which diis year's vintage of new machines is more productive than
last year's. While some effect of diis sort seems plausible, it does not follow diat additional
investment induces enough technological change completely to offset diminishing returns
(and generate endogenous growth); even so, it would still increase die impact of
investment on output as compared to the traditional neoclassical approach.
In parallel with the debate about the quantitative impact of investment on growth, a
wide variety of views have been advanced on which expenditures should be particularly
emphasised as growth inducing. Early versions of the 'new growdi dieory' were founded
around eidier fixed capital (Romer, 1987) or human capital amassed by educational
expenditure (Lucas, 1988). Subsequent refinements focused on machinery expenditures
as die harbinger of technical and organisational change (as against fixed investment in
buildings—de Long and Summers, 1992) or on die deployment of human capital
specifically on research and development activities (Romer, 1990). Scott (1992) by
contrast preferred 'a wide definition which includes both the ordinary sorts of fixed
investment (machinery, vehicles, buildings and other constructions) and investment in
inventories, but also some expenditures which are not included in the usual national
account definitions, such as R&D expenditures, and some amounts of managerial,
financing and selling or purchasing activities . . . as well there is die large category of
human investment, which includes education and training expenses and die cost of
moving workers from job to job' (p. 35). Since fixed investment is die only section of
broad investment whose relationship to profitability has been much analysed at die
aggregate level (see section 1), the rest of this section focuses on die quantitative impact of
fixed investment on growdi.
The first set of estimates of the elasticity of output widi respect to fixed capital derives
from studies examining die catch-up of productivity levels (to diat of die USA) and dieir
convergence (both between OECD economies and more broadly). In such equations die
investment share of GDP is included as one determinant (together with growdi of die
labour force) of die eventual steady state for die economy.1 Growth depends on die gap
between die steady-state path for die economy and its initial position (measured by base-
year labour productivity). On die simplest neoclassical interpretation countries have
identical technologies and so the only reason for differing productivity growdi is differing
1
Dowrick and Nguyen, 1989; Barro and Sala-i-Marrin, 1992; Mankiw et al., 1992; Crafts, 1992; Islam,
1995; van der Klundert and van Shaikh, 1996; Nonneman and Vanhardt, 1996 are examples of this
approach.
10 r
- JAPAN 1 •
6 -
.'V...
1 •
1 •• * • •
2 I1* ^ * #
1
0 2 4 6 8 10 12

Capital Stock per Worker (% pa change)
1 indicates 1960 73, Englander and Gurney 1994b
Fig. 2. Labour productivity and capital per worker: business sector, 18 countries, 1960-73, 1973-90.
growth rates of capital per worker. These occur as a result of varying starting positions for
capital intensity (so base-year productivity stands as proxy for the initial capital-output
ratio), and differences in investment ratios and labour force growth (which between them
generate the steady-state capital labour ratio). Mankiw et al. (1992) is a leading example
of this approach and suggests an elasticity for fixed capital around the conventional level,
especially when an indicator of human capital accumulation through schooling is added.
Use of the investment share instead of capital stock growth seems likely to lead to
estimates which are biased downwards, however, as other included variables can only
imperfectly control for influences on the capital-output ratio.'
The second set of studies relates productivity growth across countries to the growth of
capital per worker. Whether based on Maddison's data for the past century, or data for a
larger group of countries since the 1960s, these tend to find an elasticity of output with
respect to the capital stock of around 0-7, that is double the conventional neoclassical
estimate.2 Figure 2 plots data for growth of labour productivity and capital per worker for
most OECD countries for periods before and after 1973. That there is quite a high degree
of association is obvious and pooling the data for the whole period confirms the estimate
of an elasticity of around 0-7.
It must be accepted, however, that such a straightforward approach can easily
exaggerate the impact of capital accumulation. In the first place, when estimated from a
simple cross section the elasticity will be biased upwards if country-specific effects on
productivity growth are correlated with capital stock growth. Suppose, for example, the
institutional structures and historical experience of Japan in the post-Second World War
1
The extent to which the 'catch-up' term actually operates via investment is far from clear. While catch-up
and investment share are generally significant in growth equations, when the two terms are also interacted
neither remains significant, especially when Japan is in the sample (Dowrick and Nguyen, 1989). According
to van der Klundert and van Shaikh (1996), the gap between other OECD economies and the USA
diminished by around 2% per year before 1973, but not at all thereafter when capital stock growth was much
lower.
2
Undbeck, 1983; Romer, 1987; Englander and Mittelstadt, 1988; Glyn et al., 1990; and Wolff, 1991 all
fall into this category. Englander and Gurney (1994A) put the elasticity estimated in this simple way a bit
lower.
602 A. Glyn
period generated both an exceptionally high rate of accumulation and innovations in the
organisation of assembly-line production. Since there is no measure of the latter included
in a simple regression, the coefficient of capital stock growth will pick up its effects and be
biased upwards. If factors such as trade liberalisation contributed exceptionally to rapid
productivity growth in the Golden Age, then this effect would also be picked up by any
variable which was particularly high in that period, such as capital stock growth. If
countries with low income per head both accumulate faster (because of low capital-
output ratios) and also tend to 'catch up' quite independently of capital growth (by
incorporating better organisation of production), the impact of the latter effect will also be
included in the estimated impact of capital growth. Englander and Gurney (1994A) and
Oulton and Young (1996), by successively incorporating country effects, period effects
and other variables such as initial income per head into their regressions (for productivity
growth and productivity levels respectively), show successive reductions in the estimated

elasticity, bringing it back into the range 0-3-0-45 for the advanced countries.1 Both
studies suggest, moreover, that the elasticity may have fallen since the 1970s as compared
to the Golden Age. It would be a nice irony if the onset of such 'increasingly diminishing
returns' coincided with the development of endogenous growth theory.
In summary, the evidence surveyed here does not seem consistent with the idea that the
elasticity of productivity with respect to capital accumulation is very much above the
conventional 0-3;2 but even a figure of 0-45, which seems to emerge as a very plausible
estimate for the advanced countries from the meticulous investigation by Oulton and
Young (1996), does give an impact of capital accumulation one half as big again as that
assumed in the growth-accounting exercises of Maddison (1992). One further proviso
should also be noted before accepting that neoclassical theory has by and large warded off
the challenge. It is taken for granted in the great majority of studies that the elasticity of
output with respect to capital can be read off from the elasticity of labour productivity
with respect to capital per worker. This is correct if the growth of employment is
independent of capital accumulation. But if capital stock growth increases employment
by reducing reserves of underutilised labour then there is a further impact on growth (and
one that in the current circumstances may be more highly valued than productivity
growth). This is not just a theoretical possibility. Rowthorn (1995) found a significant
impact on employment growth in OECD countries, especially from capital stock growth
in manufacturing, and this was confirmed in disaggregated analysis by Erdem and Glyn
(1996). Such an effect means that the elasticity of output with respect to capital growth
would be underestimated by the estimates derived from labour productivity equations. A
provisional conclusion is that capital may well have a somewhat larger impact on output
than was traditionally assumed, especially when extensive growth is possible as capital
accumulation mobilises reserves of labour. Thus if profitability has a substantial impact
on investment, it has a substantial effect on growth in the medium term, or at least had a
substantial effect.
1
If the data shown in Figure 2 are estimated as a pooled cross section, the elasticity is 0.73; if the regression
is repeated, looking at the change in productivity growth over 1973-90 as compared to 1960-73, the
coefficient drops to 0.55 as a result of taking out the time-specific and country-specific effects which obviously
are correlated with the growth of the capital-labour ratio.
2
Extreme scepticism about the effect of investment has been expressed by Blomstsrom et al. (1996). On
the basis of causality tests they conclude (p. 273): 'there is no evidence that capital formation precedes
growth'. If this were taken literally, it implies capital goods are useless; presumably the causality tests are
picking up cyclical patterns (where it is well known that investment follows output) rather than underlying
growth relationships.
4. Profitability in the 1980s
The decline in profitability in the OECD countries which started around the mid-1960s
has been extensively documented and analysed (see Glyn et al., 1990; Armstrong et al.,
1991; Weisskopf, 1991). The purpose of this section is to report on more recent trends.
Has the period of capitalist stabilisation in the 1980s (Glyn, 1995) brought a decisive
profit recovery to complement the 'defeat of inflation' and the decline of industrial
conflict?
It is clear from thefive-yearaverages for the gross profit share in Table 1 that there has
been an important recovery in profitability since the early 1980s. In nine countries in the
table (including USA, France, Australia, Sweden and Belgium) the gross profit share was
more than 5 points higher in the period 1989-93 than 10 or 15 years earlier. This recovery
is highlighted in Figure 3 which plots the rebound in the gross profit share up to the most

recent year available against the slump in profitability between 1968 (a peak for profits
and a symbolic year for the onset of capital's troubles) and 1981 (the trough for profits).
For the majority of countries the recovery in the gross profit share more or less cancelled
out the earlier decline.
There are, however, important qualifications to this picture of profitability restored.
Firstly, in Germany and Japan there was very little recovery of profitability over the 1980s
as a whole and in both countries the gross profit share in 1989-93 was well below the level
of the mid-1960s. By 1994 (the last year for which there are data) the German profit share
was one-third below the European average (having been above the average until the
1980s). In the Japanese case, profits were no longer higher than in the generality of OECD
countries. Given their pivotal role in the world economy, the persistence of reduced
profits in Germany and Japan is significant.
The second qualification is that the gross profit share is a partial indicator. It captures
the balance between labour productivity and real (product) wage costs, but the overall
rate of return depends also on capital costs. Table 3 sets out the rather less comprehensive
series for the profit rate on capital employed. The net rate is shown where available, since
it is probably the best measure of the rate of return (Armstrong et al, 1991; annual data
are given in Appendix Table A. 7). In France, Italy and some smaller countries the
recovery restored the manufacturing rate of profit by the later 1980s or early 1990s to
20 r
Swed*
Den*
8
Fin*
5 10
UK/Aus « B e • Nor*
I
en USA*
I K*
Can*
Gar*
Jap*
-10
-20 -15 -10 -5 0 5
Change in Profit Share 1968-81 (%)
Fig. 3. Profit squeeze and recovery: manufacturing, 14 countries.

Table 3. Manufacturing profit rates (%, net unless specified)
1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93 1994
Australia
Belgium (gross)
18-6 18-6
113
11-8
9-9
121
10-7
14-8
13-3
13-4
15-4
15-8
150 ('90) fo
Canada 181 20-1 16-0 14-8 12-9 20-3 14-8 1 0 1 ('92)
Finland 15 6 116 14-4 110 13-1 13-3 10-4 15-7
France 12-6 13-9 14-6 10-7 7-4 111 15-3 13-6 ('91)
Germany 22-7 18-7 16-9 12-6 8-6 11-8 9-2 3-5
Italy 10-4 101 9-7 7-8 11-8 13-6 12-2 9-2 ('92
Japan (gross) 35-7 35-4 33-2 18-7 16-5 16-5 15-3 130 ('92)
Norway 60 5-9 8-4 7-7 6-6 8-6 7-6 7-3 ('91)

Sweden (gross) 114 9-8 7-5 71 11-2 91 10-1 ('93)
UK 12-7 10-9 8-9 4-2 31 6-5 5-7 7-8
USA 280 32-7 21-3 17-4 12-1 14-6 15-6 14-9 ('93)
OECD Unweighted 17-2 15-6 11-3 101 13-0 11-7

OECD Weighted 25-5 19-8 14-4 11-3 13-8 13-7
Europe Unweighted 11-8 11-8 8-8 8-3 10-9 9-9

Europe Weighted 13-7 12-8 9-2 7-9 10-9 10-5
Standard deviation 8-9 6-9 4-2 3-7 3-6 3-3

Std dev. exc. Japan 7-2 4-3 3-7- 3-2 3-6 3-3
Coefficient of variation 0-519 0-440 0-373 0-362 0-277 0-284
exc. Japan 0-466 0-307 0-349 0-338 0-284 0-289
Notes: Net operating surplus less imputed average wage for self-employed as percentage of net capital stock. For Belgium, Japan and Sweden series are for operating
surplus gross of capital consumption and gross capital stock. Europe and OECD unweighted are simple averages of countries with data throughout. Weighted averages
use 1980 GDP at PPPs. Finalfive-yearaverage sometimes ends before 1993 (see data forfinalyears).
Golden Age levels. But in the USA, Germany, Japan and the UK manufacturing profit
rates were still around half the levels of the early and mid-1960s. Since profits net of
capital consumption are typically two-thirds of the gross measure, the former inevitably
fluctuate proportionately more. But, in addition, capital-output ratios (K1Y) also tended
to rise (reported in Appendix Table A. 2). Interpretation of these series is very tricky; the
fixed assumptions about asset lives will exaggerate the capital stock if premature scrapping
of heavy industries is not captured in the data and three countries (including Japan) only
have data for the gross capital stock, which always grows faster than net when growth
slows down. But the rise in capital-output ratio, taken at face value, pulls down the trend
in the profit rate (P/K) relative to the profit share (P/Y). This works both directly (PIK =
P/Y.Y/K) and indirectly through increasing capital consumption, and thus further
depressing net profits (compare the net profit shares in Appendix Table A.3 with the gross
shares in Table 1). In the USA the lower net profit rate in the early 1990s as compared to

the mid-1960s was mainly due to higher capital costs per unit of output. Increased capital
costs also played a major role in depressing the profit rate in Japan (but not in Germany).
A weighted average of manufacturing profit rates for the OECD confirms some recovery
since the early 1980s, but suggests that the average for the early 1990s was not much more
than half the level of the mid-1960s.
Clearly, the recovery of OECD rates of profit in the 1980s was far from complete. But a
striking feature of the capital-output data is that upward trends were much less frequent
after the early 1980s. The USA, where a strong upward trend was halted, and the UK,
where it was apparently reversed, are the most obvious examples; the only G7 country
where the upward trend in the capital-output ratio seemed to continue was Japan, where
the recession of the early 1990s was exceptionally severe and where the rise may be
exaggerated by use of the gross capital stock. The precise mix of factors behind the most
recent trends in the output-capital ratio—capacity utilisation, relative prices of capital
goods and value added, and the real output-capital ratio (see Weisskopf 1991; Glyn et al.,
1991)—remains to be analysed in detail. But the fundamental point here is that the
reversal of the profit squeeze in many countries was reinforced by a halting of the upward
trend in capital-output ratios which had put additional pressure on the rate of return.
Thus the increases in the profit share did indicate a real improvement in the trend of
profitability.
The forces at work behind the increase in profit shares in the 1980s are illustrated by a
simple decomposition that isolates the contributions of accelerations in productivity
growth or declines in the growth of real wages. Comparisons of real wage and productivity
growth are insufficient to show the evolution of the profit or wage share because workers
do not buy exclusively manufactured commodities; thus the growth of consumer prices,
which generally rise faster than prices of manufactured goods prices, has to be brought
into account. Table 4 shows, for an unweighted average of 14 OECD countries, that the
crucial difference for profitability between the 1980s and 1973-79 lay in the slower
growth of real wages. Indeed, a further decline in average productivity growth put further
pressure on profitability. Thus the cut of two-thirds in real wage growth (hourly
compensation) more than accounts for the 1-6% per year reversal in the trend of the wage
share from increase to decrease.1
What light does this decomposition shed on the causes of the general recovery in profit
1
Such a decomposition inevitably ignores interactions between the variables. For example, a slow growth
of real wages, if it reduces demand growth, may also reduce productivity growth through Okun or Verdoorn
effects.
606 A. Glyn
Table 4. Cost factors affecting manufacturing wage shares 1973-89
Average annual % changes 1973-79 1979-89
(1) Labour productivity (hourly) 3-7 31

(2) Consumer prices/manufacturing prices 10 1-2
(3) 'Real incomes'= (1) - (2) 2-7 1-8
(4) Real wages (hourly) 3-5 11
(5) Wage share (4) - (3) 0-8 -0-8
Note: Unweighted average of 14 OECD countries. Productivity and wages are measured
for all these in employment.
Sources: Calculated from O E C D National Accounts, Historical Statistics.

shares? Analysis of profitability changes have tended to emphasise either product market
competition forcing down prices in relation to costs (which can be broadly traced back to
Adam Smith via Kalecki), or labour market pressures—labour shortage, higher costs of
wages goods or class conflict—forcing up wages in relation to output prices (with Marxian
and Ricardian variants).
A number of studies have attempted to test the impact of wage pressure and
competitiveness on profitability. Measures of international competitiveness (relative costs
or import penetration) are often significant, but only always significant in the case of
Germany.1 Weisskopf (1985) also included the unemployment rate and found significant
positive coefficients in six out of eight countries (France and Italy being the exceptions);
an impact for unemployment in Germany (prior to 1973) was also reported by Carlin
(1987). So studies for individual countries, which cover the period of profit decline,
provide at least some confirmation of the role of international competition and workers'
bargaining power in the determination of profitability. Can these factors account for the
recovery of profitability in the 1980s?
The fact that it was predominantly real wage growth which slowed might be taken to
demonstrate that it was labour market pressures which lay behind the improvement in die
profit share. But this is not necessarily the case. An easing of product market competition,
which allows employers to raise prices and restore profit margins, also reduces real wages.
Changes in the intensity of competition may reflect changes in the industrial structure
within countries or in international competition. In discussions of the profit squeeze most
attention has been paid to international competition. Imports of manufactures increased
their share of the domestic markets of OECD countries at a similar rate in the 1980s to
that of the 1970s (Martins, 1993), which does not suggest that international competition
was slackening. Particular attention has been paid to low-wage imports from the South
(Wood, 1994); but these appear to have increased their shares of practically every
Northern market at a faster rate (in absolute terms) in the 1980s than the 1970s (Saeger,
1996). Further, the rapid growth of direct investment between OECD countries in the
1980s probably intensified competition as well. It is hard to see how international
competition could be responsible for the recovery in profit shares in the 1980s.
Nevertheless, there is strong evidence that the relative degree of profit increase in the
1980s was closely related to changes in the international competitiveness of the manu-
facturing sector in question. Taking the change in the gross profit share from 1974-78 to
1
Chan-Lee and Sutch, 1984; Weisskopf, 1985, 1988; Funke, 1986, 1987; and Carlin, 1987.
Table 5. Manufacturing profit share regressions
Change in Coefficient on change Coefficient on change

gross profit Coefficient on in average % in Southern
share 1974-78 % change in unemployment manufactured imports
to 1989-93 RULC rate (% GDP) 1975-90 N R2
(1) -0169 (3-6)* 15 0-459

(2) 0-824(1-8) 15 0149
(3) -0159 (3-8)* 0-694 (2-2)** 15 0-582
(4 1-501 (0-7) 15 -0036
(5) -0165 (3-5)* 0-640 (2-0)** -1-269(0-8) 15 0-577
Notes: * indicates significance at 1% level; ** at 5% level.

t values in brackets.

1989-93, there is a strong inverse correlation with the change in manufacturing relative
unit labour costs (RULC) over the same period. The regression reported in Table 5
indicates that every 1% improvement in cost competitiveness brings an increase in the
profit share of 0-17 percentage points.1
It is important not to claim too much for this result. If the 'law of one price' held, then
there would have to be a one-for-one relationship between RULC and the wage share.
Thus the significance of the relationship is really a measure of the importance of
international competition in restraining the degree to which domestic costs can be marked
up in higher prices. Moreover, changes in RULC virtually cancel out for the OECD as a
whole (a few NICs are included). Thus RULC can never explain the overall shift in trend
from profitability decline in the 1970s to recovery in the 1980s and, as argued above,
international competition seems to have been intensifying rather than the reverse. It
seems that the labour market is a more plausible arena for explaining the general change in
the profitability trend in the 1980s, as well as contributing to differences in the strength of
that trend between countries.
The simplest story would be that rising unemployment reduced workers' bargaining
power and allowed profitability to recover in the 1980s as wage demands moderated in
relation to inflation. The extent to which the 1980s saw a shift to mass unemployment can
be measured by the average unemployment rate over the period 1980-93 less that
obtaining in the 'full employment' period of 1968-73 (when unemployment was quite
high in Italy and North America). This measure is nearly significantly correlated with the
degree of profit recovery (Table 5, equation 2). This is quite impressive since there may
also be a reverse, and negative, correlation between unemployment and profitability as
profit squeeze generates 'classical unemployment', with workers rationalised out of
marginal plants and jobs (see Erdem and Glyn, 1996 for confirmation of this).
When the change in unemployment and the change in cost competitiveness are
included together in the regression, both are significant at the 5% level and together
account for over half the variation in the degree of profitability recovery (equation 3). The
coefficient on unemployment implies that every per cent increase in joblessness increases
the profit share by 0-7%. The increase in import penetration from the South (over the
period 1975-90) is wrongly signed when included on its own (equation 4) and, while it
' This seems a very robust result for a pooled analysis of annual changes in wage share, for 12
manufacturing industries in 14 countries for the period 1970-92 yielded a very similar coefficient.
608 A. Glyn
hais the expected sign when included with unemployment and RULC (equation 5), it was
quite insignificant (as was a variable measuring the change in total import penetration
including that from other OECD economies).
The coefficients from equation (3) can be used to account for the divergent behaviour
of profitability between countries in the 1980s. For example, in Germany the profit share
was nearly 4 percentage points lower in the early 1990s than in the mid-1970s, whereas in
Belgium it was 9 points higher. The coefficients from equation (3) suggest that around 9
percentage points of the difference reflected the divergent trends in cost competitiveness
and 2 points the bigger rise in unemployment in Belgium.
Much of the discussion about unemployment trends in the 1980s has centred on die
role of the institutions of bargaining (degree of centralisation or coordination) in
determining wage outcomes (see Calmfors and Driffill, 1988), and on the policy frame-
works under which unemployed workers may become detached from the labour market,

drop out from die reserve army of the unemployed and cease to act as a restraint on wages
(see Layard etai, 1991). Thus unemployment may have a very different impact on wage
bargaining, and by implication on profitability, depending on die institutional and policy
setting (see the analysis in Henley and Tsakalotos, 1991). It is obviously a very crude
measure of the change in the balance of power between capital and labour. Nevertheless,
the fairly robust correlation between rising unemployment and restored manufacturing
profitability confirms diat differences in die unemployment rate across countries do
indicate the pressures exerted in die labour market by the reserve army of labour. These
evidendy have die impact on die profit share described by die classical economists.
5. Investment in the 1980s and profit recovery

If die relationship between profitability and investment still held tightly in die 1980s, dien
manufacturing accumulation should have recovered on average, and in some countries
very strongly. Table 6 shows a very patchy picture. In Belgium, where profits recovered
strongly, diere was indeed a sharp rise in accumulation. But in die USA, Australia and
Sweden manufacturing accumulation remained weak and in die UK and Norway slid
further down. By contrast, die growdi of die capital stock increased substantially at die
end of die period in Japan despite very little rise in manufacturing profits diere.
These patterns can be pinned down more precisely by combining die data for die profit
share and capital stock growdi (Tables 1 and 6) into a panel. The regression in Table 7
estimates die relationship between die two variables, including period dummies (70s
covering 1974-83 and 80s covering 1984-93) to allow for die general decline in capital
stock growdi after 1973, and two interaction terms (PROFSH70s and PROFSH80s) to
allow for shifts in die impact of profitability on accumulation after 1973.1 The results
suggest diat die impact of profitability on accumulation roughly halved after 1973 as die
(negative) coefficients on die two interacted terms are about half die size of die coefficient
of die profit share on its own. So manufacturing capital stock growth was not only weaker
after 1973 (if only period dummies are included diey show 6-0% per year growdi prior to
1973, 3-2% per year in die 70s and 2-8% per year in die 80s) but it was less closely tied to
achieved profitability.
1
Country dummies are also included (omitting the USA). In a regression with only period and country
dummies (not reported) the coefficient for Japan is over twice as big as when profits are included as well,
showing that differences in profitability seem to account for more than half the higher accumulation in Japan
than in the USA.
Table 6. Manufacturing capital stock growth (average annual % changes)
1960-64 1963-68 1968-73 1973-78 1979-83 1983-88 1988-93
Australia 4-9 2-3 2-6 1-6 2-5

Belgium 6-0 5-5 31 1-5 2-6 4-8
Canada 41 5-8 4-2 3-7 3-6 3-2 40
Finland 51 5-1 5-7 4-2 2-9 30 1-8
France 6-1 5-6 6-4 3-4 20 20 2-2

Germany 7-9 60 5-5 2-0 1-4 1-2 21
Italy 8-4 4-7 4-9 51 3-8 2-5 2-7
Japan 16-5 12-8 13-7 5-8 5-2 5-9 7-7

Norway 50 3-8 5-2 2-6 4-2 1-5
Sweden 4-7 4-4 3-8 1-6 1-8 1-9
UK 3-9 3-8 3-3 2-3 1-7 1-4 0-9
USA 2-7 51 4-0 41 3-5 20 2-5
Note: Finalfive-yearperiod ends in 1991,1992 or 1993; gross stock except Norway (net).
Source: See Data Appendix.
Table 7. Profits and investment, 1960-93
Dep. variable:five-yeargrowth of
manufacturing capital stock (% pa)
PROFSH 0-328 (6-7)*

PROFSH70s -0189 (3-5)*
PROFSH80s -0141 (2-4)**
70s 3-66 (2-4)**
80s 1-24(0-7)
Constant -4-01 (2-8)*
Significant country dummies Japan 2-38 (2-6)** N
Finland-1-69 (2-2)**
N 78
R2 0-830
Notes: * indicates significance at 1% level; ** at 5% level.

t values in brackets.
If the equation is re-estimated only on the periods before 1984, 'predictions' can be
made of subsequent capital stock growth. The results highlight the apparently erratic
behaviour of manufacturing capital accumulation in the 1980s. Thus, of the 3-3% per
year acceleration of accumulation in Belgium between 1979-83 and 1989-93, 1-8% per
year is 'explained' by the rise in Belgian profitability, but virtually none of the increase in
capital stock growth in Japan is predicted, since profitability was nearly stable there. The
modest upswing in accumulation in Germany is not predicted, since profitability
stagnated. In the USA the recovery in profitability 'should have' led to an acceleration of
capital stock growth of 1-3% per year: actually the accumulation rate fell by almost this
much. The further slide in UK accumulation also occurred when rising profitability
should have stimulated some recovery. Thus while a significant cross-country relation still
held between average profitability and accumulation during the 1980s and early 1990s
(relatively high-profitability Japan accumulating at a faster rate than low-profitability
610 A. Glyn
UK), there was no relationship whatsoever between changes in profitability within
countries and changes in their accumulation rates (the coefficient on such an equation in
first differences was entirely insignificant and negative during this period).
A number of factors may have contributed to the weakness in manufacturing
accumulation after 1973, though it is hard to weigh their influence. Firstly, there has been
a switch in die pattern of demand away from manufacturing. Before 1973, real output in
manufacturing grew systematically faster dian in services (around 1 % per year faster in
the EU, less in the USA and more in Japan). After 1973, only Japan maintained faster
growth of manufacturing (with die differential much reduced), while in die EU and die
USA services grew 1 % per year or more faster. The pattern of accumulation anticipated
diis shift in die pattern of demand (and may have contributed to it inasmuch as lower
manufacturing investment reduced die productivity growdi advantage and dius relative
price decline of manufacturing). In most countries (including Japan and Germany) die

services capital stock was already growing faster dian diat in manufacturing at die end of
die Golden Age (Appendix Table A.4 ) and did not fall to nearly such low rates as
manufacturing in die 1970s and early 1980s. The limited profit series for die corporate or
business sector as a whole presented in Appendix Table A. 5 are consistent widi diis shift
towards services; profit rates apparently tended to be a little higher in manufacturing in
die 1960s than in die rest of die economy, fell somewhat more diereafter, and remained
somewhat lower in die 1980s and early 1990s.1 The investment boom of die 1980s was
concentrated in services in most countries (spectacularly so in die UK—see Glyn, 1992).
By die period 1988-92, services capital stock was growing 1-2% per year faster dian
manufacturing. In broad terms, a relative weakening of capital stock growdi in manu-
facturing is hardly surprising.
Secondly, manufacturing profits may have become more uncertain, so diat a given level
of profits (or increase) is felt to be a less reliable guide to future prospects. Such uncertainty
could be generated by die particular severity of manufacturing recessions, by die gyrations
in real exchange rates which have a strong influence on manufacturing profitability, by
growing competition in domestic markets from exports or from foreign direct investment
from odier OECD countries, by die emergence of Soudiern exporters in more manu-
facturing markets or by less predictable technical change. We can measure whedier such
influences have in fact made aggregate profits more variable. Since variability in absolute
profitability seems most relevant, Table 8 shows die standard deviation of die gross profit
share for successive ten-year periods for die G3 countries, die UK and simple averages of
standard deviations for nine European and 14 OECD countries. In die USA (and Canada)
diere was no trend across die decades in die variability of profitability and in Japan profits
fluctuated less after die Golden Age. But in Europe diere was a sharp rise in profits
variability after 1973 which was subsequendy only partially reversed.
Despite weak econometric support, a diird factor often cited as depressing investment
in die 1980s was high real interest rates, averaging around 5% as compared widi 1-2%
before 1973 (Rowdiorn, 1995). In diis case, however, diere seems no reason why manu-
facturing should have been particularly affected.
This section has identified a number of respects in which conditions for manufacturing
investment were worse during die 1980s—relative slow growdi of demand and probably
1
Sectoral comparisons are tricky, being dependent on appropriate assumptions about asset lives and
(where corporate data are not available) on adjustments for self-employment. Japan's profit rate data are net
for the corporate sector but gross for manufacturing which, given the levels involved, biases the comparison
against manufacturing.
Table 8. Profit variability in manufacturing
Standard deviations of gross profit shares (%) 1964-73 1974-83 1984-93
USA 1-9 1-7 1-6

Japan 2-2 1-6 1-8
Germany 20 2-4 2-3
UK 1-3 2-7 2-2
Europe 20 30 2-6
OECD 2-1 2-7 2-3
Note: Calculated from Appendix Table A.6. Europe and OECD are simple averages of
standard deviations for each country.

low profits relative to services, more variable profitability and higher real interest rates.
Perhaps the cumulative effect of these adverse factors accounts for the failure of
manufacturing accumulation to respond strongly and consistently to improved average
profitability.
Conclusions
The evidence on post-war growth patterns in the advanced capitalist countries, surveyed
and analysed in this paper, suggests that the classical emphasis on the role of profitability
was not misplaced. On the one hand, there seemed to be, at least during the Golden Age,
a very tight relationship across countries between profitability and capital accumulation.
On the other, there was probably a rather stronger effect of accumulation on growth than
assumed by neoclassical growth accounting (though not as strong as postulated in some of
the 'new' growth theories). The profit squeeze should be accorded one of the central roles,
and not just a walk-on part, in the drama of post-1973 growth slowdown. Despite
intensifying international competition, the protracted attempts to restore profits during
the 1980s bore fruit in most OECD countries to a degree that was significantly dependent
on the degree of unemployment increase. This suggests that the weakening of the
bargaining position of labour over this period was the key factor. But, in the context of
more variable profits, higher real interest rates, and a decline in demand growth and
relative profitability as compared to services, the relationship between profits and
manufacturing accumulation appears looser and weaker in the 1980s. While profits do
appear to be important in explaining post-war accumulation, they do not, of course, tell
the whole story.
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614 A. Glyn
Appendix
Table A. 1. Significance ofprofitability in investment equations
Profitability only Profitability with other variables

Prof. pos. sig. Prof. pos. insig. Prof. pos. sig. Prof. pos. insig.
USA Business BRS BG BRS, PT, G BG, FP

Manufact. BG BG, Br
Japan Business BG PT, FP, BG
Manufact. BG BG
Germany Business BG B, PT, C, FP, BG
Manufact. BG BG, Br
Italy Business BG BG, PT ,C FP
Manufact. BG Br BG

France Business BG B, PT, C, SM BG, FP
Manufact. BG Br BG Neg.
UK Business BG BG, B, C, FP
Manufact. BG Br BG
Belgium Business B
Manufact. Br, LM
Canada Business FP
Manufact. Br, BG
Sweden Manufact. BG (unpub.) Br, BG (unpub.)
Note: Time periods, definitions of profitability, functional form, measurement of independent variables, and
specification of which are included, vary with the studies.
AM refers to Artus and Muet, 1990.
B refers to Bean, 1989.
Br refers to Bruno, 1986.
BG refers to Bhaskar and Glyn, 1992 (plus unpublished results for Sweden estimated in same way).
BRS refers to Blanchard, Rhee and Summers, 1993.
C refers to Catinat et al., 1987.
FP refers to Ford and Poret, 1990.
G refers to Gordon, 1995.
LM refers to Lambert and Mulkay, 1987.
PT refers to Poret and Torres, 1989.
SM refers to Sneessens and Maillard, 1988.
Table A.2. Manufacturing capital-output ratio (net unless specified)
1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93
Australia 1-35 L-23 1-31 1-40 1-51 1-62

Belgium (gross) [•94 2-48 2-50 2-41 2-36
Canada 1-32 1-21 1-28 1-31 1-38 119 1-37
Finland 1-74 1-91 1-78 210 204 217 2-63

France 1-28 1-24 1-23 1-39 1-53 1-55 1-54
Germany 115 1-30 1-27 1-30 1-32 1-23 1-28
Italy 203 200 1-83 203 1-79 1-80 1-77
Japan (gross) 1-35 1-35 •37 1-88 207 216 2-36

Norway 2-39 2-38 2-17 218 2-45 2-28 2-64
Sweden (gross) 212 2-21 2-39 2-81 2-56 2-81
UK 1-63 1-70 1-82 2-13 2-29 1-93 1-86
USA 0-72 0-70 0-86 103 1-26 1-26 1-29
Note: Ratio of net capital stock at current prices to net value added. Belgium, Japan and Sweden, gross.
Table A. 3. Manufacturing net profit shares (%)
1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93
Australia 251 22-9 15-4 16-9 22-4 21-6

Canada 23-9 24-5 20-4 19-5 17-7 24-1 20-3
Finland 270 22-1 25-6 23-1 26-8 28-9 27-3
France 16-2 17-3 18-0 14-9 113 17-2 23-7

Germany 26-1 24-3 21-5 16-3 114 14-5 11-8
Italy 211 20-3 17-8 15-8 21-2 24-4 21-5
Norway 14-3 140 18-2 16-8 16-3 19-5 200

UK 20-7 18-5 16-2 9-0 7-2 12-6 10-6
USA 20-2 22-8 18-4 17-9 15-2 18-4 20-2
Note: Net operating surplus less imputed average wage for self-employed as percentage of net value
added.
616 A.Glyn
Table A.4. Services capital stock growth (% pa)
1968-73 1973-78 1979-83 1983-88 1988-93
Australia 5-7 4-9 41 4-7 4-6

Belgium 4-6 4-6 4-1 31 3-7
Canada 41 3-9 3-9 4-8 4-8
France 7-6 6-2 4-3 3-6 4-8

Germany 6-7 5-9 6-2 4-6 4-5
Japan 14-9 9-4 7-6 119 9-9
USA 4-7 3-7 4-2 4-7 3-3

UK 4-4 30 2-6 3-8 4-5

Nine: Final five-year period ends in 1991, 1992 or 1993; gross stock
except Norway (net).
Source: See Data Appendix.
Table A. 5. Business net profit rates (%)
1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93 1994
Germany 18-8 15-8 13-5 9-7 8-8 9-5 10-8 9 0 (93)

USA 25-5 28-7 231 190 16-2 190 19-2 19-7 (93)
UK 117 10-4 8-0 50 6-3 91 8-2 10-5
Japan 230 25-6 28-3 161 16-7 16-9 14-8 10.8
Note: For Germany refers to non-agricultural business; other countries non-financial corporations. Net
operating surplus as percentage of net capital stock (for Germany adjusted for self-employment).
Table A.6. Manufacturing gross profit shares (%)
Australia Belgium Canada Denmark Finland France Germany Italy Japan Nethland Norway NZ Sweden UK USA
1960 31-2 390 26-6 33-8 39-4 47-8 25-2 29-8 28-5 23-8
1961 29-3 39-5 26-0 32-3 38-9 49-8 24-2 27-8 25-6 23-9
1962 31-7 34-8 25-4 30-2 36-2 46-3 21-8 26-2 24-5 24-9
1963 32-7 35-9 26-1 300 31-7 47-3 22-8 24-2 26-1 26-1
1964 30-7 33-9 34-3 27-2 31-8 32-2 49-6 24-9 25-7 26-9 26-7
1965 30-2 34-4 32-0 27-4 31-3 34-9 46-8 25-5 24-8 25-7 28-6
1966 310 32-2 20-6 30-7 28-1 29-9 36-7 46-8 23-2 230 23-7 28-0
1967 31-6 30-2 21-8 30-3 28-6 31-6 35-2 47-6 19-8 23-4 24-3 26-6
1968 32-3 310 23-4 34-8 27-6 33-3 35-7 48-1 21-3 23-8 23-7 26-5
1969 31-8 31-8 22-5 40-5 28-6 32-8 35-4 480 25-2 24-7 23-0 24-3
1970 31-6 29-4 26-2 20-7 37-7 28-2 29-9 321 47-9 280 22-1 22-4 22-0
1971 29-8 26-7 27-7 18-7 32-3 270 28-8 28-1 44-5 24-2 37-8 20-1 23-2 24-4 o
o
1972 29-5 25-7 28-6 20-4 32-1 27-6 27-8 27-6 43-3 26-3 37-8 19-5 23-7 25-0 n
1973 26-7 27-3 31-6 20-1 33-3 280 27-2 29-8 42-6 280 34-7 21-8 23-7 24-2 u>
1974 23-0 27-4 32-2 15-7 38-7 28-8 26-0 32-3 38-9 301 32-7 27-1 17-7 20-9 to
1975 23-8 231 29-3 19-8 30-3 21-7 25-2 24-5 32-8 27-5 311 23-2 141 24-4
1976 23-8 22-8 27-3 20-1 28-6 23-8 26-5 29-2 34-6 24-7 36-1 15-2 156 25-4
1977 230 23-9 27-9 19-5 29-2 23-7 25-2 28-9 33-2 22-7 21-7 27-9 10-7 21-3 26-1
1978 24-4 24-7 291 19-3 34-5 25-2 25-4 29-8 35-0 23-7 20-8 26-9 11-7 22-2 260 n
1979 26-2 27-1 31-6 18-7 37-5 25-9 24-7 30-9 34-4 23-7 29-3 27-4 17-8 18-3 25-3
1980 26-6 25-6 300 21-5 36-7 21-2 20-5 331 34-8 21-3 27-1 26-2 18-7 16-6 21-9 3
1981 24-5 23-1 28-3 21-2 34-4 19-7 20-0 31-9 33-7 • 18-8 23-6 29-7 16-2 15-5 23-3
1982 23-4 28-6 23-0 23-7 33-7 19-9 200 31 5 34-1 20-3 22-9 32-1 21-6 19-5 22-4
1983 29-6 29-5 28-2 26-6 35-9 21-8 22-8 30-4 33-7 24-8 26-6 37-3 25-9 220 240
1984 30-8 291 32-2 28-2 37-3 22-1 23-0 32-9 35-4 29-7 29-4 40-2 28-6 20-9 25-4
1985 31-9 31-4 32-6 27-4 36-5 23-9 24-1 33-6 36-4 30-0 28-3 360 27-1 22-7 24-8
1986 30-8 330 32-4 26-1 35-8 28-2 25-9 351 350 31-3 26-9 36-5 29-6 23-7 25-6 1
1987 32-2 321 33-7 23-6 38-9 290 23-7 35-7 35-3 29-8 26-4 33-3 29-6 22-3 27-8
1988 31-8 34-2 35-5 26-5 41-3 330 24-3 37-0 36-4 34-0 28-5 35-8 28-8 24-2 29-2
1989 32-0 36-8 34-8 26-4 41-7 33-8 24-0 360 36-7 36-1 31-2 38-3 28-5 25-0 29-9
1990 29-9 360 32-3 26-5 370 33-4 24-3 33-4 36-4 361 27-9 36-5 25-3 21-5 28-9
1991 30-3 32-5 28-7 27-6 30-4 32-1 23-6 30-6 36-6 34-7 28-6 38-2 21-4 17-6 28-1
3
1992 31-2 30-9 28-1 290 36-7 20-7 29-7 340 31-5 411 21-4 18-9 27-5 I
1993 33-7 31-8 32-5 43-6 17-2 29-9 30-6 31-3 30-2 21-5 281
1994 33-5 35-6 45-5 180 33-6 27-5 33-6 33-8 24-4

618 A. Glyn

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Data Appendix
The basic data source for Tables 1, 3, A.2, A.3, A.5, A.6, A.7 is the 1996 diskette for OECD
National Accounts of Member Countries Vol II, Table 14. Profit shares for manufacturing (and
German business) are adjusted for self-employment using the data for total employment and
employees (Table 15).
The basic data source for Tables 6 and A.4 is OECD Capital Stocks and Flows, 1967-92 edition,
linked back to 1960 from the 1960-85 edition.
A substantial number of gaps had to be filled for individual countries as described below:
Belgium. Manufacturing profit shares calculated from National Accounts, Table 13; absolute
changes 1970-74 and 1990-93 assumed equal to those in Table 14 for Industry, Transport and
Communication. Manufacturing profit rates calculated from gross manufacturing capital stock at
constant prices revalued by manufacturing investment deflator. Manufacturing capital stock
1992—4 estimated from manufacturing investment (National Accounts, Table 4) and earlier rate of
capital retirements.

Finland. Manufacturing capital stock 1960-61 and 1989-94 estimated from manufacturing
investment (National Accounts, Table 4) and later/earlier rate of capital retirements.
France. Manufacturing profit shares and rates linked before 1977 to Armstrong et al. (1991)
background data. Manufacturing capital stock 1993-4 estimated from manufacturing investment
(National Accounts, Table 4) and earlier rate of capital retirements
Italy. Manufacturing gross profit shares after 1970 calculated from National Accounts, Table 13;
net profit share and rate 1981-92 from Table 14; all profit shares and rates linked back to Armstrong
et al. (1991) background data. Manufacturing capital stock 1991-2 assumed percentage increase
same as for industry; 1970-79 calculated from manufacturing investment (National Accounts,
Table 4) and earlier rate of capital retirements. Pre-1970 linked back to Armstrong et al. (1991)
background data.
Germany. All data refer to West Germany only. Business (non-agricultural) net profit rate calculated
from Volkswirtschaftliche Gesamtrechnungen, Fachserie 18, Reihe S.I5, 1950-91 (Statisches
Bundesampt, 1991), Tables 3.1.9, 2.5.1., 2.6.2 and earlier and subsequent editions.
Japan. Manufacturing gross profit share 1960-65, corporate business net profit rate 1960-69 linked
back to Armstrong et al. (1991) background data.
Netherlands. Manufacturing gross profit share calculated from National Accounts, Table 13 (only
1977-94).
Norway. Manufacturing capital stock 1962-66 assumed same growth rate as industry.
Sweden. Profit shares and rates prior to 1980 linked back from OECD 1989 worksheet for National
Accounts, Table 14. Manufacturing capital stock 1991—4 calculated from manufacturing investment
(National Accounts, Table 4) and earlier rate of capital retirements.
United Kingdom. Manufacturing capital stocks after 1979, and services after 1989 from UK National
Accounts (various issues).
United States. Non-financial corporations net profit rate calculated from Economic Report to the
President, 1996 edition, Table b. 10 and Survey of Current Business, January 1992 for net capital stock
updated from later issues.
The unemployment rate data used in the regressions in Table 4 are from OECD Economic Outlook
(standardised unemployment rates); the RULC data are from OECD Economic Oudook linked back
to IMF International Financial Statistics; the data used on gross imports of Southern manufactures
are from Saeger (1996).

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Cambridge Journal of Economics 1997, 21, 593-619

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Does aggregate profitability really matter?

The impact of profitability on capital accumulation, neglected in conventional

Manuscript received 12 June 1995;finalversion received 6 November 1996

© Cambridge Political Economy Society 1997

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2. The impact of profits on investment

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1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93 1994

Australia 30-7 31-2 29-9 23-6 26-2 31-5 31-4 33-5

UK 26-3 24-9 23-2 18-2 18-4 22-8 20-9 24-4

OECD Unweighted 29-9 28-6 25-3 25-7 29-8 29-5

Europe Unweighted 27-6 26-8 23-9 24-6 28-8 28-6

Standard deviation 6-7 6-4 5-2 5-4 4-6 4-8

Dependent variable: Coefficient on profit

(1) 1960-92 -5-40 0-340 (5-8)* 0-583 24

Note: * Indicates significance at the 1% level; ** 5% level.

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3. The effect of investment on growth

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Change in Profit Share 1968-81 (%)

Fig. 3. Profit squeeze and recovery: manufacturing, 14 countries.

1960-64 1964-68 1969-73 1974-78 1979-83 1984-88 1989-93 1994

Norway 60 5-9 8-4 7-7 6-6 8-6 7-6 7-3 ('91)

OECD Unweighted 17-2 15-6 11-3 101 13-0 11-7

Europe Unweighted 11-8 11-8 8-8 8-3 10-9 9-9

Standard deviation 8-9 6-9 4-2 3-7 3-6 3-3

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Average annual % changes 1973-79 1979-89

(1) Labour productivity (hourly) 3-7 31

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Change in Coefficient on change Coefficient on change

(1) -0169 (3-6)* 15 0-459

Notes: * indicates significance at 1% level; ** at 5% level.

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5. Investment in the 1980s and profit recovery

1960-64 1963-68 1968-73 1973-78 1979-83 1983-88 1988-93

Australia 4-9 2-3 2-6 1-6 2-5

France 6-1 5-6 6-4 3-4 20 20 2-2

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Table 7. Profits and investment, 1960-93

PROFSH 0-328 (6-7)*

Notes: * indicates significance at 1% level; ** at 5% level.

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Standard deviations of gross profit shares (%) 1964-73 1974-83 1984-93

USA 1-9 1-7 1-6

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Profitability only Profitability with other variables

USA Business BRS BG BRS, PT, G BG, FP