^^^ I got it.
If the profits increase, wouldn't the company use the profits to further their business? That would increase their expenses and the profits would drop. To me, corporate growth would be a source of reversion to the mean. Perhaps my view is over-simplistic and I'm missing a basic point here.
The theory is that as profits increase you attract more capital chasing those higher returns. More investment, which leads to more competition and more productive capacity, and so margins and returns are driven back down.
That theory is as old as Karl Marx, maybe older. In Marx's view it is what leads to the inherent instability of capitalism (there's a lot more to his theories than that) and boom and bust.
However it's not clear there is such a thing as a 'normal' in returns on capital/ profit margins and therefore that we can speak of 'reversion towards the mean'.
Globalization and changing technology undoubtedly have a big impact on corporate profitability. The American (or European) worker now is effectively competing with a factory in China and a call centre or software development centre in India. *that* restrains wage growth, and may increase corporate profits.
It's what corporations do with profits, to:
- they could invest them in expanding operations (leads to the situation Marx described)
- invest them in buying other companies (good for shareholders of the targets, not so much the acquirers)
- buyback shares and pay dividends - good for shareholders
You won't get a shift back towards workers unless the unemployment rate drops significantly, say with changing demographics. Someone turning aged 10 now is probably going to be in fairly good shape (pace globalization and technology).
The most important decision you make about your career, other than your choice of high school and university major (and trivially what country you were born into), is the year you chose to be born. That's a fairly strong and consistent result in the research. In the classic study, Stanford MBAs in the investment banking industry (very cyclical) join in a particular year. What year you joined i banking has an impact on your earnings *20 years later*.