1. The expression "rate of profit" itself is often confusing.
This is particularly the case in a context that does not indicate whether the rate of profit in question is on capital, turnover or value added.
2. Let us agree to say:
With C of capital, V of sales or value added, P of profit:
3. This choice of vocabulary makes it easier to take into account two facts.
First fact: since the P/C and P/V rates have the same numerator, a third term regulates their ratio: P/C = P/V times V/C.
Second fact: there is no reason to admit that a rate of profit P/C varies in all circumstances in the same direction as the corresponding rate of profit P/V. Their V/C ratio measures a productivity whose evolution allows the long-term tendencies that affect each of the two rates of profit to often be in the opposite direction.
4. As there are two rates of profit, two families of margin rates exist.
One is that of the margin rates on stock, the other is that of the margin rates on flows. Since profit is a terminal margin, a profit on capital rate is a ratio of the inventory margin rate family and a profit on sales rate is a ratio of the flow margin rate family.
5. The use of the word "rate of return" to refer to a ratio of both the first and the second families is confusing.
One way of distinguishing what needs to be distinguished is the word "return" by following it with a qualifier. Rates of margin on stock, and with them the rates of profit and profit on capital, are said to be "financial returns". Margin rates on flows, and with them profit and profit rates on turnover, are said to be "economic return" or "economic".
6. These qualifications are misleading and ineffective.
The financial is, for better or for worse, a strict subset of the economy. What is commercial is not non-financial, even in the case of contributions in kind and barter. In reality, there are still many cases in which a margin expressed as a proportion of a stock or a flow continues to be called rate of return itself. For example, low margins on sales are often considered to be the least profitable, whereas the rates of these same margins on investment are often the highest.
7. It is better to come to call rate of return only a ratio of the family of margin rates on stock and profitability than a ratio of the family of margins on flows.
In this agreement, a profit and a profit on capital are rate of return, as are gross margin rates on inventory in retail or wholesale trade. The same profit or profit on turnover or value added is profitability, just like a unit gross margin rate on the purchase or sale price.
8. We will see later that these definitions of rate of return and profitability help to identify two economic laws of great importance.
At first glance, these definitions help to avoid mistakes that are still very common in business management. Pushing the most profitable activities exposes the relative share of the least profitable activities to increase. Faced with the resulting erosion of the rate of profit on turnover , it is then the elimination of jobs to redress the situation that can finally be imposed.