| Pub. Date | : Jan, 2019 |
|---|---|
| Product Name | : The IUP Journal of Applied Economics |
| Product Type | : Article |
| Product Code | : IJAE11901 |
| Author Name | : Ivan D Trofimov |
| Availability | : YES |
| Subject/Domain | : Economics |
| Download Format | : PDF Format |
| No. of Pages | : 44 |
This paper considers convergence and equalization in industry profit rates in the Republic of Korea during the period 1970-2015, from the perspective of alternative paradigms of competition—classical and neoclassical. Two measures of profitability— average rate of profit based on the total capital stock in the economy, and Incremental Rate of Profit (IROP) based on the concept of regulating capital—are estimated. It is shown that little convergence in industry rates of profit occurs when the former measure is used, while almost complete equalization of IROP is achieved. The classical-type equalization takes place in particular capital accumulation and competitive settings in Korea, characterized by the prominent role of diversified conglomerate firms, the capital flows within conglomerates, investment coordination by the state, and the fast pace of capital accumulation and renewal.
The dynamics of the profit rates at industry level is a salient topic in economics for a variety
of reasons: the rate of profit serves as an indicator of the overall health and vitality of
individual industries. It highlights the pace of technological progress and industrial change,
and it is a key regulator of competition, of the speed and direction of capital investment
across the firms and sectors, and of the degree of capital mobility.
The possibility of a reduction of profit rate differentials between industries is discussed
in the neoclassical economic theory, while the tendency of the equalization of profit rates
between industries is observed in classical economics. In both instances, the process is
likely to be driven by the movement of capital to more profitable activities and uses. D’Orlando
(2007) and Tescari and Vaona (2014) thus define two alternative paths along which industry
profit rates may evolve: ‘convergence towards long period positions’, when the initial
difference in the level of profit rates between individual industries is reduced over time, as
capital flows to the industries with higher rates, and ‘the random oscillation of actual magnitudes
around their long-period counterparts’, or oscillation of profit rates around some stable
level. Convergence of profit rates is thus related to the gravitation of profit rates, albeit the
latter concept is more restrictive, as far as the dynamics of profit rates are concerned.