- Email: [email protected]
A reply to Jon Goldstein
Review of Radical Political Economics 34 (2002) 221–222
A reply to Jon Goldstein William Van Lear∗ Department of Economics, Belmont Abby College, Belmont, NC 28012, USA Received 27 August 2000; accepted 16 October 2000
Abstract Marxian business cycle research places great importance on the turn in profit rates and profitability in driving capitalist cycles. My work emphasizes that wage growth and wage stability bring a stabilizing force to capitalism. Goldstein points out that wage growth begins to exceed revenue growth in stage three or four, and, therefore, wages contribute to the decline in business profitability that eventually ends the expansion. © 2002 URPE. All rights reserved. JEL classification: E32 Keywords: Business cycle; Profit squeeze
In a recently published article in the RRPE, I compare various cycle indicators and demonstrate the importance of business profitability in forecasting cycle turning points. After discussion of the practical use of a profitability indicator, some policy implications are addressed.1 Jonathan Goldstein’s reflections on my paper point out a problem in the text. He notes that the paper shows that a mid-expansion decline in profitability is consistent with research, his and others, that profits are squeezed at mid expansion. That is, during stage three and four of the business cycle, the profit rate and business profitability fall, leading eventually to cuts in investment and recession. Though my research demonstrates this on pages 53 to 56, I make the point on page 58 that wages do not squeeze profits until stage seven. Clarification is necessary. My research demonstrates that when wages and profits are indexed, normalized at 100 at the beginning of a cycle, the percentage increase in wages does ∗
Tel.: +1-704-825-6842. E-mail address: [email protected] (W. Van Lear). 1 Van Lear, W. (1999). Profitability in business cycle theory and forecasting. Review of Radical Political Economy, 31, 46–60. 0486-6134/02/$ – see front matter © 2002 URPE. All rights reserved. PII: S 0 4 8 6 - 6 1 3 4 ( 0 2 ) 0 0 1 1 2 - 2
222
W. Van lear / Review of Radical Political Economics 34 (2002) 221–222
not match the percentage increase in profits until stage seven. This match in growth occurs two stages into recession and two stages after profits begin to fall. In a narrowly defined sense, profits are squeezed here to the point where the entire advance in profitability over the cycle is eliminated. What is interesting is that the level of profitability attained in stage seven was sufficient to foster an upturn in economic activity in stage one but is unable to do so in stage seven. This is because business revenues are falling from stage five on, whereas they are increasing in stage one up to stage five. Goldstein is correct to argue that when profitability turns down at mid expansion, that is the onset of a profit squeeze as normally understood. At this point, wage growth is higher than profit growth. My point can be clarified by taking the following position. Labor should not be blamed and held responsible for recessions because wage growth begins to exceed profit growth in stage three. The percentage growth in labor’s income does not reach that of capital’s until after the recession begins, and only then because revenue declines lower profits. Wage growth moderates substantially at stage five, and wage stability acts to maintain demand somewhat during recession. So while the profit rate and profitability commence their fall in stage three, profits continue to grow until the cycle peak, and the subsequent recession should not be viewed as caused by excessive wage growth or too low unemployment. The downturn results from an inability of the economy to sustain revenue growth.
A reply to Jon Goldstein William Van Lear∗ Department of Economics, Belmont Abby College, Belmont, NC 28012, USA Received 27 August 2000; accepted 16 October 2000
Abstract Marxian business cycle research places great importance on the turn in profit rates and profitability in driving capitalist cycles. My work emphasizes that wage growth and wage stability bring a stabilizing force to capitalism. Goldstein points out that wage growth begins to exceed revenue growth in stage three or four, and, therefore, wages contribute to the decline in business profitability that eventually ends the expansion. © 2002 URPE. All rights reserved. JEL classification: E32 Keywords: Business cycle; Profit squeeze
In a recently published article in the RRPE, I compare various cycle indicators and demonstrate the importance of business profitability in forecasting cycle turning points. After discussion of the practical use of a profitability indicator, some policy implications are addressed.1 Jonathan Goldstein’s reflections on my paper point out a problem in the text. He notes that the paper shows that a mid-expansion decline in profitability is consistent with research, his and others, that profits are squeezed at mid expansion. That is, during stage three and four of the business cycle, the profit rate and business profitability fall, leading eventually to cuts in investment and recession. Though my research demonstrates this on pages 53 to 56, I make the point on page 58 that wages do not squeeze profits until stage seven. Clarification is necessary. My research demonstrates that when wages and profits are indexed, normalized at 100 at the beginning of a cycle, the percentage increase in wages does ∗
Tel.: +1-704-825-6842. E-mail address: [email protected] (W. Van Lear). 1 Van Lear, W. (1999). Profitability in business cycle theory and forecasting. Review of Radical Political Economy, 31, 46–60. 0486-6134/02/$ – see front matter © 2002 URPE. All rights reserved. PII: S 0 4 8 6 - 6 1 3 4 ( 0 2 ) 0 0 1 1 2 - 2
222
W. Van lear / Review of Radical Political Economics 34 (2002) 221–222
not match the percentage increase in profits until stage seven. This match in growth occurs two stages into recession and two stages after profits begin to fall. In a narrowly defined sense, profits are squeezed here to the point where the entire advance in profitability over the cycle is eliminated. What is interesting is that the level of profitability attained in stage seven was sufficient to foster an upturn in economic activity in stage one but is unable to do so in stage seven. This is because business revenues are falling from stage five on, whereas they are increasing in stage one up to stage five. Goldstein is correct to argue that when profitability turns down at mid expansion, that is the onset of a profit squeeze as normally understood. At this point, wage growth is higher than profit growth. My point can be clarified by taking the following position. Labor should not be blamed and held responsible for recessions because wage growth begins to exceed profit growth in stage three. The percentage growth in labor’s income does not reach that of capital’s until after the recession begins, and only then because revenue declines lower profits. Wage growth moderates substantially at stage five, and wage stability acts to maintain demand somewhat during recession. So while the profit rate and profitability commence their fall in stage three, profits continue to grow until the cycle peak, and the subsequent recession should not be viewed as caused by excessive wage growth or too low unemployment. The downturn results from an inability of the economy to sustain revenue growth.