Australia’s Economic Risk

1.    Introduction

The recent lowering of Australian banks’ rankings by credit rating agencies, such as Moody’s and Standard & Poor’s, has rekindled the debates on the health status of the Australian economy. A wave of articles is currently flooding the media and research publications assessing Australia’s economic risk. While most of those articles employ mainstream economics, this essay takes a heterodox approach.

In Section 2, I present the theoretical foundation of the essay’s approach. I first provide the general categorisation of Marxist perspectives on economic crisis. Then, I discuss the rate of profit approach in more details. I also provide the simple equations, which quantify the theory. I devote Section 3 to the empirical analysis. I briefly introduce the sources of data and then provide the analysis of the indicators, including employment types, wage growth, inflation, inequality, exploitation rate, the rate of profit. Section 4 summarises the essay’s findings and provides the general assessment of Australia’s risk.

2.    Theoretical approach

Thomas Weisskopf (1979) distinguishes three main Marxist perspectives on economic crisis. All the three variants attempt to explain the dynamics of the trend of profit rate. The first group focuses on the problem of full realisation of the produced commodities (the RF variant). It considers the sphere of circulation and associates the falling rate of profit to the products not being sold at a profitable price. It proposes explanations related to ‘underconsumption’, ‘underinvestment’, and ‘disproportionality’ (1979: 346). This variant does not seem to view growth as internally limited and thus, is sometimes categorised as post-Keynesianist rather than Marxist.

The second variant focuses on class struggle and associates crisis with the rising strength of labour (RSL). This perspective, also known as the “profit-squeeze” theory (Shaikh 1978: 220), proposes that during booms the “unemployed reserve army of workers” (Engels 1886: 57) shrinks, and thus, the wages rise. The higher the wages go, the lower becomes the surplus and the profit of capitalists. To regain the rate of profit, the ruling class forces real wages down by increasing unemployment.

Compared to the first variant, the profit-squeeze view is more exclusively Marxist. However, many Marxian and Post-Keynesian theorists have contended its validity. Political economists, such as Kalecki, associate higher wages with higher inflation. A high inflation offsets the effect of rising wages and thus, renders them ineffective on profits (Weisskopf 1979: 346). John Weeks (1979: 259) views the “profit-squeeze” theory, not a step forward but a step backwards from underconsumptionism. He considers it wrong as a crisis theory, a theory of the timing of state fiscal policy, or an analysis of the role of wages on accumulation cycles.

The third group of Marxist economic crisis theories focuses on the rising organic composition of capital (ROC). Started by Marx himself, this perspective studies the long-term trend of the rate of profit and attempts to explain its tendency to fall. I discuss this theory in more details in the next section and employ it in the data analysis section.

2.1. The Falling Tendency of the Rate of Profit

An exclusive feature of Marxian theories of economic cycles and crises is the focus on the dynamic trend of the rate of profit in the capitalist system. Mainstream macroeconomics lacks a comprehensive theory of the profit. The only relevant theory is the marginal productivity theory of profit, which has two main issues. First, it is static and does not include time. Second, it is logically contradictory due to the ‘capital controversy’. (Moseley 2003: 159)

Marxian economics starts with the labour theory of value. The main source of a commodity’s value is labour, which enters the process of production directly or indirectly. The direct way is through live labour expended through production (L), and the indirect way is through the necessary means of production (C). The (net) final value of a commodity equals the value of the labour embedded in it (L).

In the capitalist mode of production, labour earns only a part of the produced value through wages and benefits, i.e. variable capital (V). The difference between the created value and wages is the surplus value (L-V = SV), which is pocketed by the owners of the means of production. The appropriation of the surplus value by the capitalist class is exploitation. 

It is necessary to define two ratios whose evolution demonstrate the dynamics of a capitalist economy. First, the rate of surplus value is equal to the ratio of surplus value relative to wages, i.e. SV/V. Second, the rate of profit is equal to the ratio of the surplus value to the fixed capital, i.e., SV/C (Foley 1982; Mohun 1994; Mohun 2003), the ratio of the surplus value to the fixed capital plus the surplus value, i.e., SV/(C+SV) (Petri 1990).

In Marxian theory, the rate of profit falls over time due to Two main reasons. First, with the advancement of the technologies of production, machinery replaces workers. However, since labour is the main source of value, reduction of labour means less value. While technology can increase labour’s productivity and the value produced per working hour, in the long run, the effect of labour reduction prevails, and the rate of profit falls.

The second factor pertains to the productive nature of labour. Labour can be productive or unproductive. Productive labour includes activities that directly and indirectly engage with actually producing, designing, or transporting a product. Unproductive labour includes all other labour activities, which do not result in production. Examples of unproductive labour are sales and supervisory employees (Moseley 2003: 161).

Value is only produced by productive labour. All other labour activities are only costs to the process of production. Profit is essentially part of the produced value, and thus, it is created only by the productive labour.

According to Marxian theory, the ratio of unproductive labour to productive labour increases over time, which means that the proportion of costs increases. In short, the rate of profit falls due to the increase in the size of unproductive activities.  

The theory of the falling rate of profit has been applied to various economies, for example the US (Mohun 2005; Mohun 2006; Moseley 2003; Paitaridis & Tsoulfidis 2012), Australia (Jones 2015; Mohun 2003; Roberts 2012), Greece (Maniatis & Passas 2013), South Korea (Jeong 2007), the UK (Cockshott, Cottrell & Michaelson 1995). The next section provides a simple outline of the mathematical formulations for the application of this theory.

2.2. Mathematical formulations

To be able to quantitatively assess economies based on the Marxian approach, the theory needs to be mathematically formulated. In the following, I provide the general formulations based on (Duménil & Lévy 1993; Foley 1982; Mohun 1994; Mohun 2003; Paitaridis & Tsoulfidis 2012; Petri 1990).

An important ratio in the Marxist economic analysis is the rate of surplus value (RSV), which is defined as



In which,

SV = Surplus value

V = Variable capital

MVA = Marxian Value Added

GDP = Gross domestic product

W = Wages

An even more important parameter for Marxist economic analysis is the rate of profit ():


(Mohun 2003)


(Petri 1990)



Where, K is the fixed capital formation.

3.    Empirical analysis

In this section, I employ the Marxist theories that I outlined above to evaluate Australian economy. I consider several indicators including employment, wages, inflation, inequality, the rate of surplus value, and the rate of profit. The statistical data is from various sources, introduced in the following subsection.

3.1. Sources of data

          World Bank (2017): This source provides a detailed dataset of major development indicators. I extracted inequality data from this source.

          OECD (2017b): The Organisation for Economic Cooperation and Development (OECD) provides quality data and reports on economies. I used “Simplified Non-Financial Accounts” dataset as a data source for the analysis of the rates of profit and surplus value. I also used the overview of economic survey of Australia (OECD 2017a) for comparison.

          ILO (2017): The International Labour Organisation website offers valuable data on economies, especially on the labour force. I used the output per worker data from this source.

          ABS (2017): The Australian Bureau of Statistics is the most comprehensive source of data on the Australian economy. In fact, most of other sources’ data is based on this source. Despite, and probably because of, the exceptionally high-quality of data and the unparalleled level of details, it was impractical, due to time constraints, to extract all the necessary data from this source.

3.2. Analysis of data

·       Employment

Employment data provides interesting insights into Australia’s economy. Figure 1, presents the evolution of unemployment in recent times. After a peak in 1993 (11%), the unemployment consistently decreased and reached an all-time minimum in 2008 with 4%. Since then, the unemployment has been on the rise, with the most recent peak in 2014 (6%).

Australian unemployment rate - Dianoetic
Figure 1 – Unemployment rate – Source ABS

Breaking down employment into its types, full-time, part-time, and unemployment, reveals an interesting trend (Figure 2). Since the late 70s, the rate of part-time work has increased constantly and more than doubled (14% to 30%). During the same 40-year period, the full-time proportion has decreased from 79% to 64%, suggesting that almost all the part-time gains came at the expense of full-time jobs.

Employment ratios by type - Dianoetic
Figure 2- Employment ratios by type – Source: ABS

This trend of changes in the type of employment is not restricted to Australia. The ‘(re)casualisation of labour’ began in the 1970s and persisted in developed capitalist countries ever since. This phenomenon has given rise to the ‘contingent economy’ (Broad 1995: 69), characterised by precarity, flexibilisation, casualisation, contractualisation, nonstandard, and irregular employment (Arnold & Bongiovi 2013: 289). 

·       Wages

Two important factors that demonstrate the ability of the population to consume and save are wages and inflation. To study the status of these two factors, I explore the changes in Wage Price Index (WPI) and Consumer Price Index (CPI).

The CPI is an index that demonstrates the costs of goods and services that households consume. It is based on the Cost of Living Index (COLI) approach. A cost of living index “measures the expenditure needed for an optimizing consumer to maintain a specified level of utility as prices change” (Lebow & Rudd 2008: 2).

Another approach to the measurement of consumer costs is the Cost of Goods Index (COGI). This approach considers a basket of goods and monitors the changes in the price of the basket over time. This approach, however, has a significant weakness. The components of the basket are constant while the economy, including manufacturing and consumption patterns in the country, vary over time. This shortcoming renders the COLI approach and hence, the CPI, more favourable as measurement tools.

“The WPIs measure changes over time in the price of wages and salaries unaffected by changes in the quality or quantity of work performed” (Australian Bureau of Statistics 2017). The construction and calculation of this index follows a methodology similar to the CPI and includes procedures that only take into consideration the changes in price.

Figure 3 presents the changes in the WPI. The three graphs represent total wages excluding bonuses, ordinary working time with bonuses, and total wages including bonuses. The three graphs follow a similar trend. They start from 3% in 1998 and follow an upward trajectory until 2008, reaching almost 5%. After that, they all decrease with a steeper slope and reach almost 1% in 2017.

Yearly Changes in Wage Price Index - Dianoetic
Figure 3 – Yearly Changes in Wage Price Index – Source: ABS

·       Inflation

Figure 4 presents the annual change in the CPI as a measure of inflation. The graph starts from its peak in 1975 with 17.7%. It follows a downward trajectory and reaches its absolute minimum in September 1997 with -0.4%. After that, it regains part of its value and from 2001, fluctuates between 1 to 3%.

Inflation rate (rate of CPI change) - Dianoetic
Figure 4 – Inflation rate (rate of CPI change) – Source: ABS

·       Wages and inflation

To assess the condition of the working class and its ability to consume, the changes in wages should be contrasted with the changes in prices (inflation). Figure 5 presents the relative changes in the WPI relative to the CPI. It is done by numerically implementing the left-hand side of equation (4). However, using the right-hand side would also yield a similar result.


Changes in WPI relative to CPI – Dianoetic
Figure 5 – Changes in WPI relative to CPI – Source: ABS

For most of the period between 1998 and 2017, the WPI change has been higher than inflation, i.e., wages have grown (about 1%) faster than prices. However, several times during this period, the relative change of wages has become negative, the worst instance being in 2000 with almost -3% relative change. At such times, the workers virtually become poorer and they lose their ability to consume.

Since 2004, and especially since 2012, the relative wages have demonstrated a falling trend. In other words, the growth rate of wages has been decreasing for more than a decade, especially for the past five years. This trend is similar to the findings by (OECD 2017a: 11). The weakening of workers’ condition is occurring while the output per worker has constantly been growing at least since the early 90s (Figure 6).

Output per worker - Dianoetic
Figure 6 – Output per worker – Source: ILO

·       Inequality

The decrease in full-time jobs, the increase in part-time employment and unemployment as well as the slowing wage growth raise concerns about the condition of equality in Australia. The Gini coefficient is a common measure to address such concerns and to study the changes in the level of inequality of income, as defined in equation (5) (Cowell 2008: 3-4). The value of the Gini coefficient varies between 0 (perfect equality) and 1 (perfect inequality).



In which

 = an income distribution

= income receivers

 = the number of income receivers

 = the mean value

Figure 7 presents the rising level of inequality in Australia’s economy from 1981 to 2010. The Gini coefficient has constantly increased since 1980 (0.31) to 2008 (0.36) and slightly falling in 2010 (0.35).

Inequality presented as Gini coefficient - Dianoetic
Figure 7 – Inequality presented as Gini coefficient – Source: World Bank

Figure 8 more dramatically illustrates the level of inequality by presenting the share of population quintiles out of Australia’s net worth and Equivalised Disposable Household Income (Australian Bureau of Statistics 2015). It reveals that while the top 20% of households own about 62% of the net wealth, the lowest quintile’s wealth is even less than 1%. In other words, the wealth of the top quintile is about 70 times the wealth of the lowest quintile.

Share of net worth and equivalised disposable household income 2013-14 - Dianoetic
Figure 8 – Share of net worth and equivalised disposable household income 2013-14 – Source: ABS

The rising inequality of income, the declining employment, and slowing wage growth all indicate the worsening condition of the working classes.  The increasing gap between the rich and the poor poses risks, which are even acknowledged by mainstream agencies. OECD’s most recent survey on Australia’s economy highlights the need for “[a]ddressing inequality and ensuring economic rebalancing delivers more inclusive growth” (OECD 2017a: 2).

Under the “profit-squeeze” approach views this situation as the status of class struggle in Australia. To raise the class power and the rate of profit, Australian and transnational capitalists increase the pressure on the working class and decrease its standard of living. However, the amount of labour input declines with the level of employment, which, in turn, leads to the further falling of the rate of profit.

·       Rate of exploitation

Figure 9 presents the rate of surplus value in Australian economy over the period of 1959-2015, based on the equations provided in section 2.2. The rate of exploitation decreased from the late 50s to its lowest point in 1974. It then regained its value and reached its recent maximum in 2009. Since then, the rate has decreased slightly.

The rate of surplus value (exploitation) - Dianoetic
Figure 9- The rate of surplus value (exploitation) – Source: OECD (2017)

·       Rate of profit

I calculated the rate of profit based on equation (2). I used OECD’s “Simplified non-financial accounts dataset” and the gross fixed capital formation, following Shaikh (1999) and (Paitaridis & Tsoulfidis 2012: 223). The result is presented in Figure 10 and covers the period from 1959 to 2015. Based on the graph, the rate of profit decreased from about 12% in the early 60s to almost 0% in 1970. The profit then increased and reached its recent peak, about 28%, in 1991. Since then, the profit rate has fluctuated but fell with a slight slope, reaching 17% in 2015.

The rate of profit - Dianoetic
Figure 10 – The rate of profit – Source: OECD (2017) – Simplified non-financial accounts

Figure 11 contrasts the findings of this essay with other available data in the literature. Simon Mohun (2003) assessed the rate of profit in Australia from 1965 to 2001 and found a minimum rate (9%) in the mid-80s. The rate recovered since then, reaching 11% in 2001. Peter Jones (2015) found the rate of profit in Australia constantly falling until 1991 (9%) and very slightly recovering to 11% by 2013. Michael Roberts (2015) presents three graphs using different interpretations of the falling rate of profit. All three graphs demonstrate an increasing rate of profit since 1976. Two methods find the rate rising from about 6% to almost 11%. The profit rate in the third method increased from 17% to 24% in 2010.

Comparison of the rate of profits - Dianoetic
Figure 11 – Comparison of the rates of profit – Source: OECD (2017) – Simplified non-financial accounts

The ‘radical’ discrepancy among the findings of other researchers makes it almost impossible for me to externally validate my analysis of Australian economy. However, juxtaposing the rate of profit and the employment and wages data can offer a more holistic image.

My analysis of data shows a recent fall in the rate of profit, triggering an increasing pressure from the capitalist class on the working class to recover the rate of profit. This pressure is applied to the wage and employment status of the labour force.   The wages growth has slowed significantly, both absolutely and relative to the inflation rate. The unemployment rate shows a clear rising and is accompanied by an increase in part-time and casual employment.

4.    Concluding remarks: The risk

The previous sections presented data that suggested increasing rate of unemployment and job insecurity, slowing wage growth, and decreasing rate of profit. These signs indicate the possibility of an end to a boom (perhaps the commodities boom) and the beginning of a recession.

While the changes are progressing steadily, their rate is not swift. Thus, the risk of a devastating economic crisis is not significant in the short-term. However, in a mid- to long-term, the continuing fall of the rate of profit may necessitate and lead to the emergence of a new set of institutions and thus a new social structure of accumulation (Karambakhsh 2017).

The current situation can also be considered from a political risk viewpoint. Increasing pressure on the working class, e.g. by lowering the wages and limiting employment, may end up in events led by the ‘precariat’ (Arnold & Bongiovi 2013: 298). The social unrest in the Arab world, Greece, and Spain are examples of such events.

However, the political risk of such scale is not probable in Australia. First, the level of unemployment and the perceived (or real) corruption is not as high as the mentioned countries. Second, the available social security programs (e.g. the “dole”) provide a safety net against such events.

In short, the Australian economy is facing a down-turn and is moving away from its recent prosperous period. Unfortunately, most of the burden of the fall is transferred on the shoulders of the working-class shoulders. Fortunately, changes are not occurring rapidly and thus, in the short-run, the risk of economic crisis or political/social unrest is not high.

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