A rising share of profits in Europe are going into finance rather than productive investment.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Why is Europe falling behind in investment and growth compared with the US, let alone China and India? In a new report, Labour Squeezed, Investment Stalled – the renowned economist Mariana Mazzucato and a team at the UCL Institute for Innovation and Public Purpose, financed by the European Trade Union Federation (SETU), reckon that the EU’s declining competitiveness is not the result of too much regulation or the lack of cheap credit as mainstream economists and Mario Draghi is his report for the EU Commission argued.
Instead it is due to “falling investment and productivity caused by the hoarding of profits and higher payments to shareholders and CEOs rather than reinvested in production, innovation and good jobs”. The decline is the result of an emergence of a “capitalism of rent” in Europe, where income is increasingly captured not by producing anything, but by owning assets, financial positions and market power, and charging for access to them. Mazzucato concludes that Europe must switch from “an economy based on value extraction to one based on value creation”.
Mazzucato and and the IIPP show that headline profits have stayed healthy even as profitability in production have declined since 2000. They claim that’s because profits have been captured through ‘financialisation’ ie non-financial corporations are increasingly make more money through financial investment rather than in production. In study of over 300 EU corporations, they find that around one in six firms surveyed now draw more than 10 percent of earnings from financial rather than productive activity.
This rise in financial income has also been helped by the significant cut in corporation tax in the EU from an average 35% in 1995 to just 21% in 2023. The extra profit reaped from these tax cuts has not led to increased productive investment but just freed up more cash for shareholders, share buybacks and interest-bearing investments. As a share of net profits, dividends and share buybacks more than doubled, from 27 percent to 68 percent from 2000 to 2024. The entire non-financial corporate sector now saves more than it invests (€2.28 trillion against €2.18 trillion in 2024); hoarding has rocketed.
Mazzucato shows that the average return on invested capital in the surveyed companies fell from 13.4 percent in 2000 to 10.5 percent in 2024, a 22 percent decline; in other words the rate of profit on capital fell, “making each euro sunk into plant or R&D less attractive than its financial alternative”. So productive investment stock has shrunk to the point that investment is reduced to replacing the depreciation of old stock, with none left for new investment. Mazzucato finds that EU net capital formation (ie after depreciation) more than halved, from 3.7 to 1.6 percent of GDP. And 35 percent of firms report no R&D investment at all.
These are important results. In my view, they confirm the Marxist thesis that falling profitability drives a slowdown and even a fall in productive investment. But that is not how Mazzucato reads these results. She claims that the rate of profit has fallen ‘as a result’ of the switch to financial investment and hoarding – thus as a result of ‘financialisation’. But this is back to front. Profits are not the result of investment, as Kalecki and other post-Keynesian economists argue, but investment is the result of profits.
When profitability of capital invested in productive activities falls, then, as has happened in the last 30 years or so, capital hoards its cash or switches to more speculative but more profitable investment in financial assets, in what Marx called ‘fictitious capital’. But as Mazzucato says, value is not created in financial markets; that’s a fiction. “Value is created, now as ever, by human labour, by workers, by the knowledge and skills built up over generations.” And “rentier capitalism does not produce that value. It captures it and reroutes it upward.” But rentier capitalism is not ‘rent’ replacing ‘profits’, but profits being used to invest in fictitious capital. This is an important distinction from the Mazzucato and rents thesis.
Mazzucato argues that it is the ‘misdirection of capital’ that is the decisive reason for the decline in productive investment. But the evidence of her study does not back that conclusion. The key figure is the fall in overall profitability. From 2000 to 2024, she finds that the median gross profit margin of companies surveyed – “the most basic measurement of total revenue minus the cost of producing goods and services” – fell 15 percent, while the median net profit margin during this same period was up slightly, from 4.9 percent in 2000 to 5.5 percent by 2024. “In other words, the profits made available to shareholders have grown, even as the most basic measure of operational profitability has declined.”
Mazzucato finds that financial income as a share of total income at the median company surged from 1.1 percent in 2021 – when interest rates were at near-zero – to 3.7 percent by 2024, after interest rates were hiked. Around 1 in 6 companies now derive more than 10 percent of the median company’s financial assets, as a share of net productive assets. Among the top quarter of the most financialised corporations in the panel, financial assets now exceed the entire net value of their physical productive base (Figure 2).
At the EU level, interest and dividend income received by the non-financial corporate sector has far outpaced the growth of their operating surplus (Figure 3). The divergence is sharpest after 2020: in the four years to 2024 financial income rose twice as fast as operating surplus.
These data apparently justify Mazzucato’s conclusion that Europe’s capitalist corporations gain their income from ‘rent’ rather than ‘productive profit’ and this is why they are failing to invest to raise value for all.
But consider this evidence for a moment: financial income has risen faster than ‘core business profit; companies hold more financial assets (fictitious capital); and the very large companies now have more financial assets than productive assets. But financial income is still only 3.7% of total non-financial corporate income – tiny. The vast majority of corporate income is still in the form of profits from operations, not from investment in fictitious capital. And note in Figure 2, that Europe’s ‘largest companies’ may have had more than half their assets in financial instruments up to 2008, but following the global financial crash of 2008 and ensuing Long Depression, that ratio has fallen back below 50% up to 2024. So this piece of evidence suggests that ‘financialisation’ came to an end for even the largest companies after 2009.
Indeed, there are several other papers that show that the vast majority of profits are still made by selling goods and services produced by workers. Joel Rabonovich calculated the US non-financial companies got less than 2.5% of their total income from financial transactions. And Subasat and Mavroudeas show that over the last 30 years, the financial sector share in GDP fell by 51%, hardly evidence of financialisation. Solow, using an extensive dataset of all publicly available corporations in 37 states,shows that while real capital accumulation has declined, so has the level of financial income and financial assets.
Mazzucato concludes that “a substantial part of what is recorded as corporate profit is more accurately understood as economic rent: income derived from the ownership and control of assets, financial positions and market power rather than from new production.” This is not correct from her own data: income from fictitious capital has risen significantly, but it is not “a substantial part” and indeed only one in six companies get up to 10% of their income from this ‘rent’ from their financial holdings. This is not a ‘capitalism of rent’.
What is true is that corporate profits have risen sharply in recent years through the compression of the share of corporate income going to labour – what Marx called a rising rate of surplus value. Across the EU non-financial sector, compensation per employee grew 87 percent between 2000 and 2024 while non-financial corporate gross profit grew 151 percent. Average wages have lagged behind profit, and the nonfinancial corporate sector’s labour share of income is lower in 2024 (59.2 percent) than it was in 2000 (59.8 percent). And workers have been ‘double squeezed’. The tax wedge on the average single worker reached 35.1 percent in 2025, the highest since 2016. As Mazzucato correctly says at one point, the fall in profitability of productive capital “can be explained by compounding pressures such as increasing global competition and rising input costs”. This fall has been counteracted by squeezing the share of profits going to labour in the EU, as Marx argued in Capital could happen.
The cause of the relative decline in EU investment and productivity is not ‘misdirected capital’, as Mazzucato claims. What Mazzucato does not explain or ignores is why non-financial firms in Europe (and for that matter in the US) have increased investment in fictitious capital over productive capital in since the end of the 20th century – the reason is clear: the rate of profit on productive capital has fallen and with it there has been a slowdown in investment in productive activities and a consequent slowdown in productivity growth. This is particularly the case in the EU compared to the US after 2008.
Mazzucato says that “diverting profit to shareholders is not an accident or a failure of judgement, it is a strategy, and a deliberate one.” Exactly, it is the result of low or falling profitability in the productive sector. Because Mazzucato argues that what is wrong with growth, investment and productivity in the EU is ‘misdirected investment’, not the falling rate of profit in the productive sector (despite her own evidence), her policy proposals follow.
She says that the task now is “to steer capital towards production, innovation, decent work and resilience….. capital has been pointed in the wrong direction, and that direction has been set by policy. What policy has shaped, policy can reshape. The choice is not between competitiveness and social justice, but between a model that rewards extraction and one that builds the collective foundations of long-term prosperity”. Mazzucato argues that “the state, together with business and labour, can ameliorate entrenched inequalities of wealth and power and lay the stable, long term foundations on which sustainable innovation and growth are built.” As with all her policy conclusions, capitalism as a mode of production is to stay; it just needs to be ‘redirected’ towards productive social needs.
I have reviewed the work of Mazzucato in several previous posts. She has been deemed ‘the world’s scariest economist’ by some mainstream financial media. In her book, Mission Economy, Mazzucato sums up her view: “Mission Economy offers a path to rejuvenate the state and thereby mend capitalism, rather than end it.” In my view, that is a mission impossible. Can labour really work with business to reduce inequality and redirect resources to productive sectors without ending the private ownership of the key finance and productive sectors of the European economy and adopting an overall socialist plan? I think not.
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