Profit rate dynamics in US manufacturing

The attributes and dynamics of the profit rate distribution provide indispensable information on how the economy works. Edith Penrose, in The theory of the growth of the firm¸ took agency, managerial capabilities, heterogeneity and open-endedness as characteristic of the economy. Schumpeter had a similar view. Neoclassical theory, in contrast, envisages convergence to a standard rate of return, invoking inter-industry capital flows and diminishing returns as the main mechanism. I analysed the data on US manufacturing, 1987–2015. There was evidence of convergence, attributable to loss of supra-normal profits in two industries. The features of the distribution confirm Penrose’s view. Neoclassical theory fares poorly: the data do not support ‘a standard rate of return’, and no plausible macro shock exists that could have produced the observed dispersion. The symmetry of the observed distribution indicates that neither market power nor intangible assets play major roles in determining the shape of the profit rate distribution; risk, however, is relevant if reformulated. Intersectoral capital flows were weak, and there was no evidence of diminishing returns. Penrose’s conception of heterogeneous managerial capacity refers to a concept of economic power distinct from market power, corresponding to differential ex ante strength; differential profit outcomes represent ex post strength.