[PEN-L:4869] Re: profit-rate equalization

[GSKILLMAN@xxxxxxxxxxxxxxxxx]

>From Eric's post:

> In response to Doug H:
>    >Despite the deregulation of the markets and a furious
>    >pace of transactions . . . Profit rates were as dispersed
>    >as ever at the end of the decade as at the beginning.
>
> Jim D wrote,
>   >Just because capitalism involves a tendency for profit
>   >rates to equalize between sectors (in the absense of
>   >barriers to mobility) doesn't mean that profit rates
>   >actually equalize.
>
> But I don't think Doug was claiming profit rates should
> equalize, merely that the variance of profit rates should fall.
>

To suggest that there is a "tendency for profit rates to equalize
between sectors (in the absence of barriers to mobility) is to
assume that there are no systematic risk differentials across
sectors, either because investors are risk neutral at the margin or
because riskiness is equalized at the margin.  But the evidence
against such an assumption appears to be quite strong:  consider, for
example, persistent differentials in returns to returns on bonds and
on equity (even on preferred stock, I believe, which enjoys no voting
rights), or the differential returns to "venture capital" vs. returns
on, say, equity in utilities.

Thus, the variance might tend to decline, but it doesn't seem
reasonable to believe in even a "tendency" for it to decline to zero.

Gil Skillman