Inflation: profitability and growth utilization rate correlation

In Capitalism: Competition, Conflict, Crises page 702, inflation (π) is a stated to be a function of new purchasing power (pp), net profitability (rr’), and the growth utilization rate (σ’), with inflation increasing as new purchasing power and the growth utilization rate increase, and decreasing as net profitability increases. This is summarized in Equation 15.9: π = f [pp (+), rr’ (-), σ’ (+)] and supported by the data in Appendix 15.2 (US Inflation Data tab).

The presentation also claims that net profitability is positively correlated with the growth utilization rate: “insofar as net profit and the growth utilization rates are positively correlated, it would be possible to treat the latter as a proxy for the former…” page 703, “Since net profitability is positively correlated with the growth-utilization rate, it may be possible to proxy the former by the latter terms…” page 722. By treating the growth utilization rate as a proxy for net profitability, Equation 15.9 simplifies to Equation 15.11 π = f [pp (+), σ’ (+/-)].

Looking at Figure 5.10 and 15.11 (page 711), it appears as though net profitability and the growth utilization rate are negatively correlated. Using the data in Appendix 15.2 (US Inflation Data tab), the relation between net profitability and the growth utilization rate is shown below. Overall, the correlation is negative. In the trended data, there is positive correlation only for the period from the mid-50s to the mid-60s (in the heyday of Keynesian stimulus) and briefly in the early 2000s.

Net profitability and the growth utilization rate seem to be negatively correlated for the reasons underlying the tendency for the rate of profit to fall. For the rate of profit to fall, it is typical for profit to grow slower than investment (as investment augments the stock of capital, and capital must grow faster than profit for the rate of profit to fall); the growth utilization rate is the ratio of investment to profit and so the growth utilization rate would tend to increase as the rate of profit falls.

Though net profitability and the growth utilization rate are typically negatively related, their effect on inflation is positively correlated. Case 1: as net profitability falls the growth utilization rate rises. As net profitability falls, inflation increases and as the growth utilization rate rises, inflation increases. Case 2: as net profitability rises, the growth utilization rate falls. As net profitability rises, inflation decreases and as the growth utilization rate falls, inflation decreases.