Current costs versus historical costs in the rate of profit calculation: a proposal for empirical solution

Abstract

There is extensive and controversial debate among Marxists about how to compute fixed capital in the denominator of the general rate of profit. This paper deals with two ways of measuring fixed capital: at current costs and at historical costs. The objective is to propose an empirical solution to this dilemma. For this purpose, a Markovian regime-switching model is applied to the relationship between the rate of profit and economic growth in the USA between 1947 and 2007 and corrections are applied for some periods of the series to the rate of profit at historical costs from changes in the rate of profit at current costs. It was found that the corrected rate of profit at historical costs was more capable of explaining economic growth than conventional series at historical costs or at current costs.