Our review of profit rate concepts and their measurement has argued that company accounting data is not merely permissible, but required for measurement of rates of return relevant to our theoretical concerns. Since the literature on profit rate dispersion and distributions addresses a number of rather different theoretical issues we will want to investigate several different measures.
2.3.1 Use of accounting data
As Bryer, Moseley and Freeman all show, what traditional accounting data measures is the marxist notion of the rate of profit – namely, an objective measure relating new value created to the capital advanced to bring this about. This view is supported, from an entirely different perspective, by Simons’ comments on the concept of profit being that of gain. Not only that but, contra Fisher and McGowan, the subjectivist school is at least as flawed as any objective concept (Kaldor). However, the notion that the distinction is not practically important (Duménil and Lévy) is an open question at best, since their findings relate to trends, while accounting and economic profit rate distributions at a given point in time could be very different.
2.3.2 Profit rate concepts
Our conclusion about the possibility of an objective measure of the rate of return, ascertainable from accounting data without reference to notions about expectation, is a very general one. It does not help us to select among alternative objective measures.
However, since Farjoun and Machover and Glick represent alternative approaches to the transformation problem we should examine the profit rate measures preferred by each in the context of the others’ work.
Our review has suggested that certain measures must be considered. First of all, a broad measure corresponding to Gillman’s ‘marxian’ measures is necessary for a proper test of Farjoun and Machover’s claim that the rate of profit is gamma distributed. We regard Gillman 4 as the appropriate measure, but Gillman 3 is an arguable alternative.
The alternative, traditional interpretation of the transformation problem underlies Glick’s work on gravitation of profit rates. Hence we must investigate the distributional properties of his preferred measures (one which include financial assets in their measure of capital) and contrast the results to those for measures he deprecates. Since some of the measures he considers are in principle identical to traditional accounting ratios we will also test all four of these.
Gibrat’s hypothesis about profit rate distributions is not inspired by the classical tradition of political economy; indeed, he is agnostic about notions of the profit rate. However, he is far from agnostic on the question of its distribution. If his law of proportionate effect is as universal as he appears to believe, all profit rate measures should be log normally distributed, and any measure which fails to exhibit a log-normal distribution will constitute evidence against his views. On the other hand, if some but not all measures display log normality in distribution a new field of theoretical investigation would be opened.
Our data set allows us to compute many varieties of profit rate, and hence to evaluate the effects of different choices in the context of different problems. In the following chapter we will describe this data set and the methods by which we construct the profit rates shown in Table 2.1, undertake an exploratory analysis of the empirical distribution of profit rates across firms and show (i) that different types of profit rate measure have distinct empirical distributions across firms, and (ii) that the greater profit-rate variability of small firms, compared to that of large firms, also applies in cross-section.
Table 2.2: profit rate measures to be tested PRM Type Description Notes
gill.1 Flow no depreciation Gillman describes this as the ‘traditional’ Marxist measure gill.2 Flow with depreciation
gill.3 Stock Fixed capital only gill.4 Stock Fixed and circulating
constant capital
gill.5s Stock Fixed capital, diminished
s (unproductive labour is
deducted from profits)
See also glick.8
gill.5f Flow depreciation, diminished
s
Not actually calculated by Gillman, but mentioned as a possibility, though he claims that it is ‘less pertinent’ to the practical operation of capitalist enterprise; thus we add s and
f to the subscripts
gill.6 Flow augmented c (and diminished s)
Here Gillman tests the effect of considering unproductive expenditure as a form of circulating constant capital.
Note that although his text suggests (page 98) that he intends
to augment c instead of diminishing s, it is clear from line 8 of his Table I (page 99) that he in fact calculates it as shown in Table 3.1 in Chapter Three, which does seem the
appropriate method; see also lines 13-17 of his Appendix 5, where the full results are reported
gill.7s Stock diminished s with taxes Gillman describes this as the ‘capitalist’ measure; he calculates this for three years only, reported in his Table K, page 102
gill.7f Flow diminished s with taxes Not discussed or calculated by Gillman, but included for
comparison with gill.5s and gill.5f ORE Stock Operating return on
equity
See also Glick 6 ROCE Stock Return on capital
employed
See also Glick 1 ATO Flow Asset turnover
NPM Stock Net profit margin See also Glick 7 glick.1 Stock (profit + net
interest)/total assets
See also ROCE glick.2 Stock (profit + net
interest)/(net plant + inventories + cash) glick.3 Stock Profit/total assets glick.4 Stock Profit/(net plant +
inventories + cash) glick.5 Stock (profit +
depreciation)/total assets
glick.6 Stock Profit/equity See also ORE glick.7 Flow Profit/sales See also NPM glick.8 Stock (profit + net interest +
taxes)/net plant
See also gill.5s
Notes: in column 1 profit rates are labelled by the object names used in computations; thus Gillman 1 is