I’ve just returned from Paris where there has been a joint conference of academic leftist economists organised by the Association of Heterodox Economists (AHE), the International Initiative for Promoting Political Economy (IIPPE), the Association Francaise d’Economie Politique (AFEP), and the World Association of Political Economy (WAPE). Phew! That’s a lot of acronyms. Anyway, hundreds of participants came to hear a series of papers, four at a session, for over three days on a range of economic subjects, many with a Marxist perspective, even more with Keynesian angle and others that I cannot define.
Among the many, I also presented a paper entitled, A world rate of profit. But more on that later. After I delivered my paper along with others, Professor Simon Mohun from the floor raised an important methodological issue of the nature of Marx’s law of the tendency of the rate of profit to fall (TRPF). Professor Mohun saw it a bit like Newton’s law of gravity, namely that it was always there, pressing us down towards the centre of the earth, but because of the buildings we have constructed with steel and concrete, none of us were driven into the ground by it. I think the implication of this analogy was that Marx’s law was ever-present but never actually happens, although, of course, with gravity, apples do fall from trees. Behind Professor Mohun’s analogy may be the view that capitalist crises can and do take place when the rate of profit is rising, not falling as the law of TRPF would suggest. Indeed, Professor Mohun has argued that a rising rate of profit is a better indicator of crises than a falling one. For more on his counter-intuitive conclusion, see my previous post on this (A class rate of profit, 23 January 2012).
But even if the gravity analogy does not quite work, it does raise an important point about the nature of economics. Is it a science like physics or more a social explanation that leads to action (i.e. revolution) and so is not dependent on so-called scientific proofs of evidence. Well, I have to say, that I think Marxist economic analysis ought to follow scientific method, which for me is to develop a theory that is causally and logically consistent and then test it as best you can with evidence and data, in order to confirm the theoretical explanation and even generate some predictions. Of course, we must not get carried away by the power of empirical analysis. Results are rarely conclusive. Disagreement is widespread, as the debate over the US rate of profit shows. Some theories are so strongly believed that no amount of empirical evidence will dislodge them, as we find with neoclassical mainstream economics. And there is academic dishonesty — fake data, mistaken (and even fraudulent) statistical inference and more. Statistics can be manipulated to make almost any result look reasonable.
I think a better analogy than gravity is the news about the Higgs boson – the apparently now discovered missing sub-atomic particle that can help to explain the most fundamental workings of the universe. In 1964, Professor Higgs and others developed a theory that required the existence of the Higgs boson as the missing part of the jigsaw that could link gravity with sub-atomic, electromagnetic and other forces of the universe. Higgs predicted its existence and physicists have spent nearly 50 years trying to find a method of testing whether he and his colleagues were right and the Higgs boson is real. After spending $6bn to build the Hadron Collider, they compiled evidence from piles of data, analysed it in separate teams and have now concluded that the Higgs boson does exist to a 99% or more degree of confidence.
I think we must try to conduct economic research on similar scientific lines, hopefully at less cost. There used to be a view among many Marxist economists that there was no need to test Marxist theory against data as this was crude empiricism or ‘positivism’. So, for example, the law of the TRPF was right in explaining recurrent economic crises, but as value categories could not be detected with hard evidence from the world of capitalist data, we should not try. Let’s just continue to argue the toss about what Marx said and meant, just like the sophists in ancient Greece. I’m afraid that many papers presented in Paris seem to continue this tradition. In my view, the approach that all you needed was theory and no evidence is really an excuse for avoiding a task that might not produce the ‘right’ result.
There was some excuse for sticking to theory in the 1970s as Marxist economics came under attack from the school of Sraffians and ‘neo-Ricardians’ among heterodox economists who tried to trash theoretically the law of value and the law of the TRPF. So the question of evidence did not even arise. But thanks to more recent Marxist scholarship led by the likes of Alan Freeman, Guglielmo Carchedi and Andrew Kliman (among others), Marx’s law of value and theory of crisis has been proved logically consistent and theoretically valid, culminating in Kliman’s brilliant book Reclaiming Marx’s Capital (available on Amazon and elsewhere and see my review in my book, The Great Recession, chapter 23), for which Kliman ought to have got an ‘alternative’ Nobel prize for economics.
So Marxist economics has moved from the question of whether Marx’s theory is not just logical but whether it is right, namely that it is consistent with reality. This should not be as tall an order as finding the Higgs boson and we have made progress in this too. The Great Recession confirmed that the Marxist theory of crisis was right in an obviously stark way. But Marxist economists have also started to deliver hard evidence and data that can be analysed and interpreted, of course, not necessarily with any agreement (see my paper,The profit cycle and economic recession)!
At the Paris conference, there were many papers with a semi-Keynesian orientation that wanted to argue that the Great Recession was the result of a financial crisis and had little to do with the operation of Marx’s law of profitability. And this is still the dominant view among economists, even most Marxists. It is even more dominant among leftist economic journalists. Take, for example, the recent column by Larry Elliott, the economics editor of the Guardian, entitled “Confidence is the key to lasting global economic recovery” (http://www.guardian.co.uk/business/2012/jul/08/confidence-key-global-economic-recovery?INTCMP=SRCH).
Relying on the ideas of a new book by the Keynesian Paul Ormerod called Positive Linking, Elliott argues that the crisis came about and has continued because of a ‘loss of confidence’ (not a loss of profit) by capitalists to invest. The answer to the crisis is that confidence must be restored. Apparently, we need to change a ‘bias towards pessimism’ into a ‘bias towards optimism’ and then all will be well. “Lasting recovery will only come when that pessimism bias is eradicated, and it is proving tough to shift. A change in mood could happen at any time, in which case activity will pick up far more quickly than anybody currently expects”. So apparently, it is nothing to do with the failure of the capitalist mode of production for profit but merely irrational pessimism. This is literally wishful thinking!
Luckily, there were also papers in Paris that aimed to provide hard evidence to show that profitability is the underlying cause of capitalist crises i.e. Marx’s law ‘as such’, namely that a rising organic composition of capital (OCC) will eventually lead to a fall in the rate of profit. For example, Rama Vasudevan presented her paper jointly authored with Deepankar Basu that they published last year on measuring the US rate of profit in all ways possible (deepankar_basu_ramaa_vasudevan_technology_distribution
_and_the_rate_of_profit_in_the_us_countdown). I discussed this paper and its conclusions in a recent post, Profits call the tune, 26 June 2012.
There was also a very interesting paper by Peter Jones from the Australian National University (Jones_Peter-Depreciation,_Devaluation_and_the_Rate_of_Profit_final) in which he offers a new way of measuring the US rate of profit to show that it moved in line with changes in the organic composition of capital. It’s quite technical, but important. Jones argues that the main counter-tendency to the law of TRPF was not the cheapening of constant capital (machinery, plant and technology) or a rising rate of surplus value, but a quicker turnover time in employee compensation so that capitalists needed less working capital to generate new value. When you adjust for this, the US rate of profit then moves in line with the OCC. There are other things in Jones’ paper worth discussing and I shall return to it at a later date when I have looked more closely at the data.
Then there was a paper by Georg Liodakis (Liodakis_George-Transformation_and_Crisis_of_World_Capitalism), in which Professor Liodakis argues that just looking at the US rate of profit is not sufficient to explain Marx’s theory of crisis on a global scale. Marx’s value theory is really one based on the world economy, not on a nation state, although Marx developed it using data from the British economy. Liodakis says: “important Marxist scholarship has recently offered the best explanation available of the current crisis of capitalism, based on the law of the TRPF”. But Liodakis says we Marxists need to go further. After giving my own work a bit of beating, he comments that “Roberts’ important insight related to financialization and the decline in capitalism’ ability to develop productive forces may be true for the US, but may not be equally true for world capitalism as a whole, especially if we take into account new accumulation frontiers such as China and India. Indeed, “the real unfolding of crisis cannot be fully grasped within any particular national context, the actual prospects of capitalism can be fully assessed only by exploring its global trends.”
That brings me to my own paper. In it, I make an attempt to develop the concept of a world rate of profit and put some quantitative figures on it (roberts_michael-a_world_rate_of_profit). It is really is work in progress and so don’t hold me to every line. As Professor Mohun commented, it was a ‘heroic effort’ by which I think he really meant foolhardy – and maybe so. But anyway, the paper argues “that in the 21st century, for the first time in the history of capitalism, we can begin to recognise a world rate of profit that is meaningful”. I attempt to develop a world rate of profit that includes all the G7 economies plus the four economies of the BRIC acronym. This is what I find. The rates of profit have been indexed at 100 for 1963 (see the paper for sources and methods of measurement).
So there was a fall in the world rate of profit from the starting point of the data in 1963 and the world rate has never recovered to the 1963 level in the last 50 years. The rate of profit reached a low in 1975 and then rose to a peak in the mid-1990s. Since then, the world rate of profit has been static or slightly falling and has not returned to its peak of the 1990s. This suggests that boom of the late 1990s and early 2000s was not based on rising profitability, as many have argued, but more on a credit bubble and the growth of fictitious capital. And the data seem to confirm the view that I reached when looking at just the US rate of profit, namely that world capitalism is in a down phase for profitability.
There is a divergence between the G7 rate of profit and the world rate of profit after the early 1990s. This indicates that non-G7 economies have played an increasing role in sustaining the rate of profit, while the G7 capitalist economies have been suffering a profitability crisis since the late 1980s and certainly since the mid-1990s. This suggests that globalisation was the major force that enabled the counteracting factors to dominate in the 1990s. Capitalism became truly global in the late 20th century, a period that was similar but way more powerful than in the ‘globalisation’ period of the late 19th century. That’s because the huge increase in capitalist investment into so-called emerging capitalist economies brought into the capitalist mode of production for the first time a huge supply of peasant and non-capitalist labour, and much of it at a cost below the value of labour power, i.e. super-exploitation.
But my data do indicate that these countervailing factors are no longer sufficient to drive up the world rate of profit for now. This suggests that further destruction of capital values will be necessary through another significant slump in global capitalism to raise profitability. Only then could the remaining potential value from the world supply of labour be utilised to restore the health of world capitalism.
Finally, let me bring to you attention two things that happened outside Paris. G Carchedi presented a new paper to the London Marxism Festival to explain why Keynesian policies don’t work to help labour and/or save capitalism (you can read it here, London 6 July 2012-2). Again, I shall return to this in the future. And Mick Brooks also launched his new book, Capitalist crisis: theory and practice (published by Expedia). It is a clear and purposeful Marxist account of the causes of the Great Recession that strips away the jargon. Again, I’ll return to a more considered analysis of Brooks’ book in the future.