IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/98235.html
   My bibliography  Save this paper

The rate of profit as a random variable

Author

Listed:
  • Julian Wells, Julian

Abstract

This thesis is a systematic attempt to investigate two conjectures about the distribution of company rates of profit: that it should be log-normal (Gibrat 1931), and that it should be gamma distributed (Farjoun and Machover 1983). A large set of company accounts data is analysed, and partial support found for Gibrat and for a generalised version of Farjoun and Machover. The analysis includes a demonstration of different empirical distributions for different profit rate measures, a demonstration of power law tails in all measures of the profit rate, and a demonstration of size effects (differences in tail weights) in financial ratios. Annual variation in the overall skewness and kurtosis of profit rate distributions is shown to be dominated by variation in the power law tails. L-moments, a recent innovation in robust methods to deal with extreme values, are used in conjunction with a size-weighted sampling scheme to identify possible models for distributions of the profit rate at the capital level. Farjoun and Machover derive their hypothesis from a particular conception of the process of capitalist competition. A rival conception, that of Glick (1985), is tested using company accounts data and shown to be vulnerable to criticism concerning the scope of its data set, the test statistic employed, and its choice of profit rate measure. More fundamentally, it is also dependent on doubtful premises about the within-industry distribution of profit rates, as L-moment analysis demonstrates.

Suggested Citation

  • Julian Wells, Julian, 2007. "The rate of profit as a random variable," MPRA Paper 98235, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:98235
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/98235/1/MPRA_paper_98235.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Edward N. Wolff, 1986. "The Productivity Slowdown and the Fall in the U.S. Rate of Profit, 1947-76," Review of Radical Political Economics, Union for Radical Political Economics, vol. 18(1-2), pages 87-109, March.
    2. Edward N. Wolff & David Dollar, 1992. "Profit and Wage Convergence and Capital Accumulation Among Industrialised Countries, 1963–83," Palgrave Macmillan Books, in: Profits, Deficits and Instability, chapter 7, pages 103-138, Palgrave Macmillan.
    3. Wolff, Edward N, 1979. "The Rate of Surplus Value, the Organic Composition, and the General Rate of Profit in the U.S. Economy, 1947-67," American Economic Review, American Economic Association, vol. 69(3), pages 329-341, June.
    4. Wright, Ian, 2005. "The social architecture of capitalism," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 346(3), pages 589-620.
    5. Steven R. Fritsche & Michael T. Dugan, 1997. "A Simulation-Based Investigation of Errors in Accounting-Based Surrogates for Internal Rate of Return," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 781-802.
    6. Neri Salvadori (ed.), 2006. "Economic Growth and Distribution," Books, Edward Elgar Publishing, number 3798.
    7. Paul Cockshott & Allin Cottrell, 1998. "Does Marx Need to Transform?," Palgrave Macmillan Books, in: Riccardo Bellofiore (ed.), Marxian Economics: A Reappraisal, chapter 6, pages 70-85, Palgrave Macmillan.
    8. Alan Freeman & Andrew Kliman & Julian Wells (ed.), 2004. "The New Value Controversy and the Foundations of Economics," Books, Edward Elgar Publishing, number 2274.
    9. Alan Freeman & Guglielmo Carchedi (ed.), 1996. "Marx and Non-equilibrium Economics," Books, Edward Elgar Publishing, number 737.
    10. George J. Stigler, 1963. "Front matter, "Capital and Rates of Return in Manufacturing Industries" including Preface," NBER Chapters, in: Capital and Rates of Return in Manufacturing Industries, pages -21--9, National Bureau of Economic Research, Inc.
    11. Glick, Mark & Ehrbar, Hans, 1990. "Long-run Equilibrium in the Empirical Study of Monopoly and Competition," Economic Inquiry, Western Economic Association International, vol. 28(1), pages 151-162, January.
    12. repec:bla:econom:v:71:y:2004:i:281:p:299-318 is not listed on IDEAS
    13. Theodore P. Lianos & Vassilis Droucopoulos, 1993. "Convergence and Hierarchy of Industrial Profit Rates: The Case of Greek Manufacturing," Review of Radical Political Economics, Union for Radical Political Economics, vol. 25(2), pages 67-80, June.
    14. Andrew J. Kliman, 2002. "The law of value and laws of statistics: sectoral values and prices in the US economy, 1977--97," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 26(3), pages 299-311, May.
    15. Weisskopf, Thomas E, 1979. "Marxian Crisis Theory and the Rate of Profit in the Postwar U.S. Economy," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 3(4), pages 341-378, December.
    16. W. Paul Cockshott & Allin Cottrell, 2005. "Robust correlations between prices and labour values: a comment," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 29(2), pages 309-316, March.
    17. Hirose, Hideo, 1995. "Maximum likelihood parameter estimation in the three-parameter gamma distribution," Computational Statistics & Data Analysis, Elsevier, vol. 20(4), pages 343-354, October.
    18. Martin, Stephen, 1984. "The Misuse of Accounting Rates of Return: Comment," American Economic Review, American Economic Association, vol. 74(3), pages 501-506, June.
    19. Creedy, John & Martin, Vance L, 1994. "A Model of the Distribution of Prices," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(1), pages 67-76, February.
    20. Robert Axtell, 2005. "The Complexity of Exchange," Economic Journal, Royal Economic Society, vol. 115(504), pages 193-210, June.
    21. Higson, C. & Holly, S. & Kattuman, P., 2002. "The cross-sectional dynamics of the US business cycle: 1950-1999," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1539-1555, August.
    22. Bryer, R. A., 2000. "The history of accounting and the transition to capitalism in England. Part two: evidence," Accounting, Organizations and Society, Elsevier, vol. 25(4-5), pages 327-381, May.
    23. James B. McDonald, 2008. "Some Generalized Functions for the Size Distribution of Income," Economic Studies in Inequality, Social Exclusion, and Well-Being, in: Duangkamon Chotikapanich (ed.), Modeling Income Distributions and Lorenz Curves, chapter 3, pages 37-55, Springer.
    24. Steven R. Fritsche & Michael T. Dugan, 1997. "A Simulation‐Based Investigation of Errors in Accounting‐Based Surrogates for Internal Rate of Return," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 781-802, July.
    25. Sheri M. Markose, 2005. "Computability and Evolutionary Complexity: Markets as Complex Adaptive Systems (CAS)," Economic Journal, Royal Economic Society, vol. 115(504), pages 159-192, June.
    26. Salem, A B Z & Mount, T D, 1974. "A Convenient Descriptive Model of Income Distribution: The Gamma Density," Econometrica, Econometric Society, vol. 42(6), pages 1115-1127, November.
    27. Bryer, R. A., 2000. "The history of accounting and the transition to capitalism in England. Part one: theory," Accounting, Organizations and Society, Elsevier, vol. 25(2), pages 131-162, February.
    28. M. J. Webber & D. L. Rigby, 1986. "The Rate of Profit in Canadian Manufacturing, 1950-1981," Review of Radical Political Economics, Union for Radical Political Economics, vol. 18(1-2), pages 33-55, March.
    29. Dimitri B. Papadimitriou, 1992. "Profits, Deficits and Instability," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-11786-4, October.
    30. Glick, Mark & Ehrbar, Hans, 1988. "Profit rate equalization in the U.S. and Europe: An econometric investigation," European Journal of Political Economy, Elsevier, vol. 4(1), pages 179-201.
    31. M. C. Jones & M. J. Faddy, 2003. "A skew extension of the t‐distribution, with applications," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 65(1), pages 159-174, February.
    32. George J. Stigler, 1963. "Capital and Rates of Return in Manufacturing Industries," NBER Books, National Bureau of Economic Research, Inc, number stig63-1.
    33. Bryer, R. A., 1993. "The late nineteenth-century revolution in financial reporting: Accounting for the rise of investor or managerial capitalism?," Accounting, Organizations and Society, Elsevier, vol. 18(7-8), pages 649-690.
    34. Bert Mosselmans, 2005. "Adolphe Quetelet, the average man and the development of economic methodology," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 12(4), pages 565-582.
    35. George J. Stigler, 1963. "Errata Statement for "Capital and Rates of Return in Manufacturing Industries"," NBER Chapters, in: Capital and Rates of Return in Manufacturing Industries, pages 2-8, National Bureau of Economic Research, Inc.
    36. Stanley, Michael H. R. & Buldyrev, Sergey V. & Havlin, Shlomo & Mantegna, Rosario N. & Salinger, Michael A. & Eugene Stanley, H., 1995. "Zipf plots and the size distribution of firms," Economics Letters, Elsevier, vol. 49(4), pages 453-457, October.
    37. George J. Stigler, 1963. "Introduction to "Capital and Rates of Return in Manufacturing Industries"," NBER Chapters, in: Capital and Rates of Return in Manufacturing Industries, pages 3-10, National Bureau of Economic Research, Inc.
    38. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
    39. Salamon, Gerald L, 1985. "Accounting Rates of Return," American Economic Review, American Economic Association, vol. 75(3), pages 495-504, June.
    40. Dieter Braun, 2006. "Nonequilibrium Thermodynamics of Wealth Condensation," Papers physics/0601191, arXiv.org.
    41. Braun, Dieter, 2006. "Nonequilibrium thermodynamics of wealth condensation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 369(2), pages 714-722.
    42. Ravenscraft, David J, 1983. "Structure-Profit Relationships at the Line of Business and Industry Level," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 22-31, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paulo L. dos Santos & Jangho Yang, 2019. "The persistent and informative distribution of returns on capital," Economics and Business Letters, Oviedo University Press, vol. 8(3), pages 156-165.
    2. Greenblatt, R.E., 2014. "A dual theory of price and value in a meso-scale economic model with stochastic profit rate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 416(C), pages 518-531.
    3. Juan Pablo Mateo, 2017. "The profit rate and asset-price inflation in the Spanish economy," Working Papers 1721, New School for Social Research, Department of Economics.
    4. Mateo Tomé, Juan Pablo & Nieto Fernández, Maximiliano Francisco, 2021. "Profit rates and assets-price inflation in the Spanish economy," Revista Galega de Economía, University of Santiago de Compostela. Faculty of Economics and Business., vol. 30(4), pages 1-21.
    5. Alain Alcouffe & Julian Wells, 2009. "Marx, maths, and MEGA 2," Post-Print hal-01571169, HAL.
    6. Freeman, Alan, 2016. "The Whole of the Storm: Money, debt and crisis in the current Long Depression," MPRA Paper 84394, University Library of Munich, Germany.
    7. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-27.
    8. Greenblatt, R.E., 2013. "Rates of profit as correlated sums of random variables," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(20), pages 5006-5018.
    9. Williams, Michael A. & Baek, Grace & Park, Leslie Y. & Zhao, Wei, 2016. "Global evidence on the distribution of economic profit rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 356-363.
    10. Adalmir Antonio Marquetti & Catari Vilela Chaves & Leonardo Costa Ribeiro & Eduardo da Motta e Albuquerque, 2021. "Rate of Profit in the United States and in China (2007–2014): A Look at Two Trajectories and Strategic Sectors," Review of Radical Political Economics, Union for Radical Political Economics, vol. 53(1), pages 116-142, March.
    11. Emmanuel Jurczenko & Bertrand Maillet & Paul Merlin, 2008. "Efficient Frontier for Robust Higher-order Moment Portfolio Selection," Post-Print halshs-00336475, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Salinger, 1990. "The Concentration-Margins Relationship Reconsidered," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 287-335.
    2. Mundt, Philipp & Alfarano, Simone & Milaković, Mishael, 2020. "Exploiting ergodicity in forecasts of corporate profitability," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    3. Ivan D. Trofimov, 2024. "A Time Series Analysis of Corporate Profit Rates in Selected Developed Economies: Asymmetries, Non-linearity and Mean Reversion," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 22(2), pages 303-338, June.
    4. Badr Ismail & Kwan Choi, 1996. "Determinants of time‐series properties of earnings and cash flows," Review of Financial Economics, John Wiley & Sons, vol. 5(2), pages 131-145.
    5. Abdur Chowdhury, 1996. "An empirical test of the structure‐conduct‐performance paradigm in the Asian and Pacific basin countries," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 1(2), pages 233-251.
    6. F. C.v.N. Fourie & A. Smith, 1998. "The Concentration ‐ Profits Stalemate I: Causality and Interpretation Problems," South African Journal of Economics, Economic Society of South Africa, vol. 66(4), pages 265-276, December.
    7. Arribas Ivan & Perez Francisco & Tortosa-Ausina Emili, 2010. "The Determinants of International Financial Integration Revisited: The Role of Networks and Geographic Neutrality," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(1), pages 1-55, December.
    8. Casu, Barbara & Girardone, Claudia, 2010. "Integration and efficiency convergence in EU banking markets," Omega, Elsevier, vol. 38(5), pages 260-267, October.
    9. Ruyun (Ivy) Feng & Michael D. Kimbrough & Sijing Wei, 2022. "The role of information transparency in the product market: an examination of the sustainability of profitability differences," Review of Accounting Studies, Springer, vol. 27(2), pages 668-705, June.
    10. Robert H. Litzenberger & O. Maurice Joy, 1973. "Inter­Industry Profitability Under Uncertainty," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 338-349, September.
    11. repec:eee:labchp:v:1:y:1986:i:c:p:525-602 is not listed on IDEAS
    12. Patricia M. Fairfield & Sundaresh Ramnath & Teri Lombardi Yohn, 2009. "Do Industry‐Level Analyses Improve Forecasts of Financial Performance?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 147-178, March.
    13. Andrea Vaona, 2012. "Further econometric evidence on the gravitation and convergence of industrial rates of return on regulating capital," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(1), pages 113-136.
    14. Philipp Mundt & Simone Alfarano & Mishael Milaković, 2022. "Survival and the Ergodicity of Corporate Profitability," Management Science, INFORMS, vol. 68(5), pages 3726-3734, May.
    15. Neng Jiang & Paul A. Kattuman, 2012. "China’s WTO Accession and Long-Term Profitability of Chinese Firms," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(1), pages 53-73, February.
    16. Safdar, Irfan, 2016. "Industry competition and fundamental analysis," Journal of Accounting Literature, Elsevier, vol. 37(C), pages 36-54.
    17. Yuan Yin & Ken Peasnell & Herbert G. Hunt, 2018. "How do sell-side analysts obtain price-earnings multiples to value firms?," Accounting and Business Research, Taylor & Francis Journals, vol. 48(1), pages 108-135, January.
    18. Monterrey Mayoral, Juan & Sánchez Segura, Amparo, 2017. "Una evaluación empírica de los métodos de predicción de la rentabilidad y su relación con las características corporativas," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 20(1), pages 95-106.
    19. Claudio Loderer & René Stulz & Urs Waelchli, 2017. "Firm Rigidities and the Decline in Growth Opportunities," Management Science, INFORMS, vol. 63(9), pages 3000-3020, September.
    20. Olga Fullana & David Toscano, 2020. "Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market," Sustainability, MDPI, vol. 12(5), pages 1-13, March.
    21. Reint Gropp & Anil K Kashyap, 2010. "A New Metric for Banking Integration in Europe," NBER Chapters, in: Europe and the Euro, pages 219-246, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    rate of profit; L-moments; Farjoun; Machover; Laws of Chaos; Marx; transformation problem;
    All these keywords.

    JEL classification:

    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • B51 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Socialist; Marxian; Sraffian
    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • Y40 - Miscellaneous Categories - - Dissertations - - - Dissertations

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:98235. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.