Everyone hates GDP: GDP “growth” and the falling rate of profit

Figure 1: The falling rate of profit in the US, 1947-1977; graph by author; data from Moseley 1991.

Justin Aukema

April 2023


“GDP growth” is both a curse and a talisman. It seems to be everyone’s favorite kicking horse, from both bourgeois economists to the "degrowth" Left.

“Viva GDP growth” say the economists. But at the same time, like Peter denying Jesus, they simultaneously say: “I do not know him!” The WEF, UN, and EU for example all love to preach about how GDP is not everything nor is a good measure of what “really” matters in life, the immaterial stuff. And the phenomenon is not new. Remember the idea of Gross National Happiness? Yes, what really matters cannot be measured with GDP, say the sly economists. And so, the right hand curses the left.

Meanwhile degrowth socialists have become intoxicated on a similar illusion of their own making. “Growth” is the problem they say. It’s destroying people and the planet. Surely, it must be stopped. But what is growth? When you ask them, their answers are all over the place. They most readily produce graphs of GDP. Of course, their data shows the aggregate product and not the actual growth rates since this would contradict their flimsy arguments. Yet more duplicitously they at the same time attempt to cover their tracks. “Degrowth” is not just about GDP growth says their lead spokesman, Jason Hickel. Rather, it is “about reducing throughput,” he says. But he also explains, “Of course, it is important to accept that reducing throughput is likely to lead to a reduction in the rate of GDP growth, or even a decline in GDP itself, and we have to be prepared to manage that outcome in a safe and just way. This is what degrowth sets out to do” (Hickel, 2021, p. 1106). So, it is not about GDP, but it also is about GDP. Make sense? I didn’t think so, either.

The basic problem with both groups is that they fail to truly understand what they mean by “growth” and how the capitalist economy really works.

The issue can be clarified with the following three points which I will elaborate in this essay:

        (1) The purpose of capitalist economy is not “growth.”

        (2) Even when measured by GDP standards the economy is not “growing.”

        (3) The rate of profit shows a long-term tendency to fall and not to “grow.”

I have already attempted to partly clarify (1) in previous essays so I will only briefly dwell on it here. The focus in what follows will be points (2) and (3).

Aggregate vs rate

Before beginning on the main analysis, let us recap point (1). As I have written elsewhere, the purpose of capitalism is not “growth” but rather (surplus) value creation. This can be done without increasing output at all, for instance, in a situation in which output remains the same but wages fall. This is the essential gist.

Next, let’s look at point (2). The economy is not growing even by GDP standards. First, there are two ways to look at GDP graphs. One is the aggregate or total amount of the value of the product adjusted for inflation, i.e. real GDP. The other is the GDP “growth” rate which measures (GDP2-GDP1/GDP1), and which results in a percentile. Now, let’s take the US and Japan as examples. The two graphs for each country appear to show conflicting data. The aggregate increases or remains “high” while the growth rates in both cases have been steadily declining since the 1970s/80s. Japan’s growth rates have been particularly low, hovering around zero or even below for many years.

What’s the difference between aggregate and growth rate and why is it important? Basically, one is an indicator of growth and the other is not. Consider the following hypothetical table. I have taken arbitrary amounts of an indeterminate product for this example and used purposely small numberers, although these could also be estimated in quantities of hundreds of thousands or millions and so on. The point is to show, namely, that while the overall volume of produce can appear to increase, the rate at which it does so successively gets smaller so that it is quantifiably measured as an overall decrease.

Is this just splitting hairs? After all, if the overall aggregate still grows, even at a slower pace, isn’t this still growth? Well, for various reasons, no, it isn’t. The biggest reason is that this kind of “growth” doesn’t factor in rising demand and consumption from factors including population growth at all. For instance, if demand for the above product increased 0.5% each year, then the actual volume of produce would have to be 5 the first year, and then 7.5, 11.25, and 16.87 the following years. In other words, there would soon be a mismatch between the real demand and the actual amount being produced. Furthermore, if this was for some kind of staple food product, then we would have to assume one of either two options: (1) that some are going without or that (2) the amount that each person receives shrinks. In either case, on an individual level the result is that each person receives quantifiably less than previous years and thus is the opposite of growth (dare we say, it is degrowth). Put simply therefore if the rate of population increase exceeds the rate of increase of necessities produced there will be less for each person, regardless of if the overall amount of both categories increases. This is why it is a disingenuous argument simply to point to rising aggregate GDP without taking factors such as population growth.

It also bears repeating therefore that the growth rates not only of advanced capitalist countries but also the global growth rate itself has been declining since the 1970s. This fact therefore must be carefully considered alongside some of the factors mentioned above such as the rate of population growth and growing global demand.

But what is “GDP” anyway?

GDP refers to the total value of goods and services “produced” each year. But this is in fact highly misleading because much of the “value” included in GDP is not actual material goods but rather immaterial, fictitious capital from finance and commodity circulation. In other words, it is not new (surplus) value which can only be created in the realm of production. Thus it is highly disingenuous when the degrowth Left points to GDP to claim that we are producing and consuming “too much.”

The arbitrariness of GDP in this regard is easily observed by analyzing the shares of value added by sector for any given year. Take the U.S. for example whose breakdown is as follows:

Figure 2: Graph by author; data from Statistica

What should immediately jump out is that finance currently accounts 21% or approximately 4.8 trillion dollars, the largest amount, of US GDP. Furthermore, this is followed by professional and business services at 13%, and “government” at 12.1%. Manufacturing, one of the few areas which does produce new value through the creation of useable physical commodities only comes in at fourth place with 10.7%.

Moreover, we must consider the distinction between “productive labor” which produces new value and “unproductive labor” which is concerned with the management and circulation of capital. In other words, unproductive labor from the service sectors for instance can still create more money through the process M-C-M which yields them a profit; but this is simply moving capital around and taking a larger slice from a pre-existing surplus value created elsewhere. One of the key differences between standard and Marxist economics is that the former mistakenly believes that value creation also occurs in circulation whereas the latter does not. Thus, since we follow the latter method, we must also subtract value from circulation.

Accordingly, if we simply add together finance, business, social services, trade, information, and food and other services we find that a full 66.3% of US GDP in 2021 comes from the realm of finance and circulation, precisely the fields that create no new value! On top of this, we could also add “government” since government spending itself does not create new value but is rather a known expense coming from taxes, which themselves are typically considered as a form of variable capital and factored into wages. Doing so reveals an even more astounding 78.4% of US GDP which yields no new value! How is it possible therefore that the economy is “growing” and that we are consuming more “stuff”?

In addition, I have just examined a single year in this example. But the evidence against GDP as an indicator of real “growth” are even more damning when examined in historical progression. For example, in the US, manufacturing as a percent of GDP declined by more than half from about 27% to just 12% between 1947 and 2015. And today it comprises just 10.7%. What’s more, similar trends are observed around the world. Global manufacturing has declined not just in advanced capitalist countries but also so-called “developing” powerhouses such as China.

If real growth and value production can only occur in this sector and not in the realm of circulation or finance as I have argued, and as most serious academic research suggests, then we must consider that global growth is declining not only in the relative sense of the growth rate but also in an absolute sense as observed with the decline of the manufacturing sector.

The falling rate of profit

I have just shown why, even by GDP standards, the global (US in one case) economy is not “growing.” Demystifying GDP, what it really is and what real growth looks like, punches major holes in the rosy picture painted by some bourgeois economists or the apocalyptic one held up by the degrowth Left. But in fact most Marxists don’t look at GDP anyway, we look at value creation, which essentially equates to two things: the rate of surplus value and the rate of profit. I have already mentioned how surplus value can rise without increasing output simply by lowering wages or increasing work hours etc. But what about the rate of profit?

Marx argued that the rate of profit, which is surplus value (S) divided by constant capital (C), or in conventional terms, profit (P) divided by stock (K), inevitably tends to fall over the long run. Put simply, this is because as capital increases more is invested into constant capital (machines and tech) and less into variable capital, i.e. labor, the source of surplus value. To stem the falling rate of profit, capitalists will increasingly turn to more extreme measures to boost productivity and the rate of surplus value. But efforts to boost S are ultimately limited by the length of the workday whereas no such limits presumably exist for technological innovations. Thus their efforts will ultimately prove futile.

So, is the rate of profit really falling? As Fred Moseley for instance convincingly demonstrated, yes, it is. Based on a detailed analysis of the postwar US economy, he found that the rate of profit declined between 20-25% between the years 1947 and 1977. This may be surprising for many mainstream economists and degrowthers since this was supposed to be the period of global high growth. But that’s precisely the point. Because the rate of profit falls more exactly during such periods of large capital accumulation. Incidentally, since the onset of the neoliberal period, the capitalist class has used wage cuts and stagnation in a desperate attempt to stem the falling rate of profit. In doing so, they have greatly raised the rate of surplus value (exploitation) even while real growth declines. Nevertheless, the neoliberal counterattack was ultimately unable to improve rates of profit in the long run. Moreover, as some including Michael Roberts have now shown, the rate of profit has been declining on a global scale as well.

The falling rate of profit largely explains the rise of finance especially from the neoliberal period as corporations have turned elsewhere in a desperate attempt to find profits. Meanwhile, the rising exploitation of the working class has resulted in a boom in consumer credit as impoverished citizens must increasingly borrow to make ends meet. This also largely explains the rise in unproductive labor, much of which comes from finance itself. More managers of capital are needed, in other words, to oversee banks’ extended operations. However, as we have seen, fictitious capital cannot stem the falling rate of profit. The only thing it can do in fact is increase the regularity and severity of economic crises. This is why Moseley wrote even back in 1990 that capitalism is now just waiting for the “next recession” (159).