Over the next few weeks, I will discuss recent developments in Canadian capitalism and why these could lead to a crisis in the near future. In this installment, I assess the general condition of the economy. In future posts, I will provide more detailed diagnoses.
Profit is a crucial indicator of the general condition of any capitalist organism. Periods of high profitability tend to produce stability, while those of low profitability tend to produce instability.
If profits grow, businesses tend to invest actively in new machinery, equipment, buildings and structures. They tend to accumulate capital. Employment tends to pick up, too, because business owners need workers to operate the new equipment.
If profits stagnate or shrink, however, businesses tend to hold off on adding new machinery and equipment. Instead, they invest passively in stocks or bonds — or maybe they just deposit their money in the bank. Sometimes they engage in riskier, more speculative practices. Whatever they decide to do, when profits falter, active investment slows and employment stagnates. Wages, too.
Profit also impacts business solvency. If it is too low, businesses tend to be more fragile and more likely to succumb to shocks. So, in periods of low profitability, bankruptcies tend to rise, and unemployment too. The reverse is usually true for periods of high profitability.
One measure of profitability is the profit rate, which is the ratio of corporate profit to total investments. Figure 1 shows how this ratio has evolved in Canada over the last three decades.
Since the early nineties, Canadian capitalism has gone through two periods: one of stability and one of instability. The profit rate rose from 3% in 1992 to 10% in 2005. This was a period of growing profitability and general stability for business.
But capitalism has difficulty maintaining sufficient levels of profit. Ten years after peaking in 2005, the profit rate had fallen to 4%. Since 2015, it has averaged just 5% per year.
This does not bode well for Canadian capitalism. The system is becoming increasingly unstable. The profit rate has not been this low since 1989, just before the Great Canadian Slump of 1990-92 — the worst crisis since the Great Depression of 1929-39.
In my next posts, I will look at some of the ways poor profitability has destabilized the economy and what this means for the future of Canadian capitalism.