The rate of profit is key

On his blog, Steve Keen announced that the Union for Radical Political Economics is holding a Summer School for the Occupy movement, and as part of that, the URPE invited papers that explained the crisis in 1000 words or less.  Keen’s effort is presented on his blog (

As it happens, I was also invited by the URPE summer school to do the same trick.  Below is my version – somewhat different from Keen’s as you will see.

The Rate of Profit is the Key
The modern world economy is dominated by the capitalist mode of production. Under capitalism, money is used to make more money. Profit drives production, not social need. And capitalist production does not proceed in a straight line upwards. It is subject to recurrent crises of ‘booms and slumps’ that destroy and waste much of the value previously created by society (workers). The 1880s and 1890s saw a massive destruction of US production and wealth; the Great Depression of the 1930s also. Now we have suffered the first Great Recession and are still in the Long Depression of the 21st century.

The capitalist mode of production has recurrent crises because it has two major fault-lines. First, in a monetary economy, of which capitalism is the epitome, there is always the possibility of crisis. Holders of money may not always spend it or invest it, but hoard it. If they do so for whatever reason, it can cause a dislocation of the exchange process and create a crisis in buying and selling.

Second, the capitalist system of production for profit will falter if not enough profit is created to satisfy the owners of the means of production. And there is an inherent tendency for the rate of profit to fall. This is the underlying cause of all slumps.
Individual capitalist businesses do not cooperate to produce the things and services that society needs. On the contrary, they compete with each other to sustain and increase their profit. To do so, they make workers work longer or harder, but they also increasingly use new technology to boost the productivity of labour to get more value. But this is capitalism’s Achilles heel. The accumulated cost of investing in new plant, equipment etc inexorably rises compared to the size and cost of the labour force. As only labour can create new value (machines on their own cannot do it), the profitability of each new unit of investment begins to fall. If profitability falls consistently, eventually it will cause a fall in the mass of profit. Then capitalists stop investing and ‘go on strike’. A crisis of production ensues.

Capitalists try to avoid this crisis in various ways: by trying to exploit workers more; by looking for cheaper forms of new technology; and by speculating in unproductive areas of the economy i.e. the stock market, banking and finance, where they gamble for gain. But these things can only work for a while. Eventually, the law of falling profitability will operate.

The rate of profit in the US is well below where it was in 1948. But it has not moved in a straight line. After the war, it was high in the so-called Golden Age from 1948-65. This was also the fastest period of economic growth in American history.

Then profitability fell consistently from 1965 to 1982. GDP growth was much slower and American capitalism (like elsewhere) suffered severe slumps in 1974-5 and 1980-2.

Then in the era of what is called ‘neoliberalism’, from1982 to 1997, profitability rose. Capitalism managed to get counteracting factors to falling profitability into play i.e. greater exploitation of the American workforce (falling wage share); wider exploitation of the labour force elsewhere (globalisation) and ‘speculation’ in unproductive sectors (real estate and the rise of finance capital). This ‘neoliberal period’ had less severe slumps, although economic growth was still slower than in the Golden Age because much of the profit was diverted away from real investment.

Profitability peaked in 1997 and began to decline. This laid the basis for the Great Recession of 2008-9. That slump and the ensuing Long Depression that we are still in was more severe than anything seen since the 1930s, because of the huge build-up of debt and financial assets in the previous two decades that did not create real value. Instead, there were credit-fuelled bubbles first in hi-tech stocks (crash in 2000) and then in housing (crash 2007). The unproductive financial sector contributed 40% of all capitalist profit.

Finally, this credit bubble burst, bringing down the banking sector and the economy. The high level of private sector debt was compounded by the state having to bail out the banks. Until this overhang of debt is cleared (deleveraged), profitability cannot be restored sufficiently to get investment and economic growth going again. Indeed, it is likely that another huge slump will be necessary to ‘cleanse’ the system of this ‘dead (toxic) capital’. The Long Depression will continue until then.

Ending the Long Depression will not be possible by more government spending through increased borrowing and/or taxes, as this eats into the profitability of the capitalist sector. While that sector remains dominant, lower profitability means that new investment will not take place to restore lost jobs and incomes. The New Deal in the 1930s did not succeed in ending the Great Depression, even though it was much more radical than any measures now proposed by Obama. It was watered down by capitalist opposition. But also it did not work because it could not restore profitability – on the contrary. In the end, only a World War that put the labour force onto a military footing (while killing millions globally) did the trick.
Under capitalism, terrible slumps will reoccur and inequality will remain. The end of poverty and prosperity for the majority can only come through replacing private production for profit with democratically-planned production for social need.

URPE summer school MR

33 thoughts on “The rate of profit is key

  1. Your series of well-targeted and clearly-written posts elucidating the differences between Keynesian economics and Marxist political economy are extremely valuable. Thank you. Please keep up the good work – it is greatly appreciated!

    On a related note: I recently heard a Keynesian professor at a local university speak on “Marx and Keynes,” where he started his talk by rejecting Marx’s theory of the falling rate of profit on the basis of Paul Sweezy’s critique of it in “Theory of Capitalist Development,” namely, that a rise in the organic composition of capital is just as likely to raise the rate of profit by lowering the value of labor power as it is to cause the rate of profit to fall by increasing the organic composition of capital. Since this pertains to the subject of your post, that the rate of profit is key, have you ever commented on Sweezy’s specific criticism of Marx on the falling rate of profit? Or, is there a specific rebuttal of Sweezy on this question by another author that you can recommend? Thank you very much.

    1. Have a look at Mario Cogoy’s piece

      and Paul Mattick’s review of Sweezy’s work

      for starters

      There is a lot of stuff on this. The gist is that Marx’s law of the tendency of the rate of profit to fall is not ‘indeterminate’ as Sweezy, the neo-Ricardians and any Keynesians quickly claim. Andrew Kliman has also dealt with this in both his books, Reclaiming Marx’s Capital and The failure of capitalist production.

  2. Thanks for that. Presumably the factor of WW2 in ending the great depression was ‘only’ successful in ‘ending’ the depression by viruue of the fact that during the preceding years debt had been paid down, or else the implication is that we could just as easily end the current malaise with another war [only kidding] or a war like equivalent spending splurge by the state. As in an infrastructure splurge?

  3. But the Great Depression wasn’t triggered by excessive debt, just as the Great Recession of 2007 was not triggered by excessive debt, “fictitious capital,” “excessive exuberance” of Minsky’s moment. Overproduction of the means of production as capital is the problem for capital itself, and WW2 “resolved” that issue by mass incineration of the both living and dead components of capital.

    1. So you are stating that it was not the massive increases in war spending that ended the depression, but the physical destruction of capital, both labour and plant. Yet the US economy was surely back to full employment well before any destruction of capital had occurred in the US itself.

      1. sartesian is right, as I understand it, according to Marx. As he explains, . In Volume I of The Capital, capter XXIII (General Law of Accumulation of Capital), where we must not confuse causation with consequence by saying that the cause of a capitalist crisis is due to a credit crisis. In reality, the causation is overproduction of means the means of production. The credit crisis appears because surplus was converted into profit and what was fed back as a way to accumulate capital was financial capital and not the result of a trade. So, you have lots increasing debts, with increasing penalty over the surplus, that is, the interest rates. This makes the profit harder and harder to make until not even the interests can be paid. In his moment, the capitalism goes into a crisis.

        The fact that unemployment rates fell and plants were more productive can be seen as a delay of crisis due the offloading of more capital investment with more financial capital (more debt) together with protectionist policies. These can be seen as a way of guarantee that interest and debts will be paid with a more stable market. This was not enough, though, for a recovery since the capital needed vastly bigger markets.

        The destruction of capital and workforce, in Europe, made sure that production could be met with actual trade for the industries that remained intact, most of them in US. The tremendous technological advance in the WW2, in basic science, never seen before, as make it possible that workforce was used intensively and extensively as never before.

      2. No, I’m saying it was not the massive increase in credit/debt that created the “recovery.” Nor did that increase create the “crisis.” That’s what I’m saying.

        I am saying that the driving force behind the recovery was driving wages down below their 2000 peak, and drastic declines in capital spending, so great that the replacement rates for fixed assets in the US fell below 1, that is to say assets were consumed and not replaced.

        Along with this, we have to account for the increase in oil prices, which historically have served to concentrate profit in the most capital-intensive of the capitalist sectors, and moving profit to the US from Europe and Japan.

      3. As for WW2, the destruction doesn’t have to occur in the US for the US to benefit. Overproduction is a feature of capitalism as a global entity.

  4. Anyway, forgot to add… quite like the piece accept for the euphemistic bit at the end:

    ” The end of poverty and prosperity for the majority can only come through replacing private production for profit with democratically-planned production for social need.”

    First thing the “…and prosperity..” part is confusing. Secondly, we should say what we really mean– which is to say replacing private production for profit can only be accomplished by a proletarian, socialist revolution.

    While there is no doubt about the expansion of credit and leverage during the 2004-2007 recovery, that recovery is driven by the bourgeoisie’s ability to drive wages back below the previous highs, and draconian controls on capital spending. The wobbling and then collapse of the credit markets is prefigured by a resumption in capital spending, and a decline in profitability.

  5. Keen’s critique of the labor theory of value, the claim that, as you put it, “only labour can create new value (machines on their own cannot do it)” and the tendency of the rate of profit to fall, are pretty persuasive. He recognizes Marx’s brilliant dialectical analysis of the commodity yet shows that Marx himself demonstrated that all inputs to production create value. Is there a rejoinder to these arguments made as clearly as Keen does in his critique? Otherwise, I think we can recognize Marx’s tremendous contributions to political economy (which have already directly or indirectly helped lay the foundation for an alternative non-neoclassical economics) yet acknowledge that his labor theory of value is not valid. Could not the falling rate of profit be accounted instead by capital overaccumulation along the lines of Robert Brenner’s analysis?

    1. Sam

      It’s a big topic and there is no space to deal with it here. Maybe Ill come back to it in a future post. However, read this recent rejoinder to Keen.

      and above all read Andrew Kliman’s Reclaiming Marx’s Capital for the definitive defence of Marx’s value theory against the Sraffians, which is where Keen is coming from.

      As Brenner accepts the Sraffian critique and the Okishio theorem that comes from it, he falls back on competition as the explanation of a falling profit rate. This is not Marx’s view, indeed, for Marx it is the tendency of the rate of profit to fall that intensifies competition among capitals, not vice versa. Brenner shows that the rate of profit is the key to crisis but cannot explain its causality using his approach.

      1. Unfortunately, Keen’s critique of Marx is largely identical in both volumes. Seems that he hasn’t engaged (or chose to ignore) the rebuttals offered by Kliman and others like the one you linked.

    2. Thanks, Michael. Very interesting. I was impressed with Keen’s engagement with Marx, after all he describes himself as a follower of a “Marx-Schumpeter-Keynes-Minsky” approach. Since he so convincingly argues for dynamic models, however, Keen should not just casually dismiss this approach when applied to Marx’s theory. From what I gather from the rejoinder is that rather than trying to solve the “transformation problem”, Marxists would argue that there is no transformation problem (as Keen himself argues) if one is using a dynamic model. As for Brenner’s analysis, his argument about new capitals coming into play, first in Europe then Asia, etc. seems persuasive, but according to Marx it would seem that existing capitals even in the absence of new players would drive the rate of profit down. Perhaps both of these can be true or are separate yet linked.

  6. Allan Miller;
    Jim Miller’s article found at the Marx Archive is a direct response to Sweezy’s argument against the falling rate of profit. It is titled ‘Must the rate of profit really fall: a reply to Paul Sweezy.

    1. The graph is from my own work using US BEA NIPA and fixed asset tables. This particular version is what I call the ‘whole economy’ measure – namely GDP (less depreciation) less employee compensation for surplus value divided by net fixed assets plus employee compensation. This graphic was first used in my book, The Great Recession (2009), but I updated it with forecasts to 2015 here. The book outlines the method used in an appendix. There are a myriad of issues in measuring the rate of profit for the US and elsewhere, some of which have been debated on this blog. I have dealt with these issues at length in my paper, Measuring the rate of profit, profit cycles and the next recession, 2011.

      1. OK. As you say, the method used to calculate the (US) rate of profit has and been debated and no doubt will be again. Any interpretation of trends in profitability are predicated on the method used and extrapolating to 2015 on a chart is always risky.

        A 17-year crisis period from 1998 would broadly agree with other interpretations not based on the rate of profit. For example, Reinhart and Rogoff on the aftermath of financial crises – based on asset prices, equities, unemployment and output – would see the crisis of 2008/09 easily extending to around 2015. Though many would disagree with your downward trend from 2003 to 2007.

  7. Better late… but very nice post Robert.

    Let me ask, has Andrew taken a look at your methodology and have you considered work done by both Anwar Shaikh and Fred Moseley?

    BTW, Even the Cleveland FRB has a falling rate of profit paper which, while somewhat dated and neoclassic, indicates the post-war decline.

    Su Companero


  8. @GrahamB — The 2007-? crisis is ”merely” one moment of a larger, longer crisis dating from the late 1960’s – early 1970’s.

    As James Crotty wrote in 2000 –

    ”Global income growth has slowed, productivity
    growth has deteriorated, real wage growth has declined, inequality has risen in most
    countries, the less developed nations outside East Asia have fallen even further behind
    the advanced, and average unemployment is higher.

    . Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4%
    annually in the unstable period between 1974 and1979. Dissatisfied with the instability,
    inflation, low profits and falling financial asset prices of the 1970s, advanced country
    elites pushed hard for a switch to a more business friendly political-economic system;
    global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the
    early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the
    post war era.2”
    [Structural Contradictions of the Global Neoliberal Regime
    James Crotty Economics Department
    University of Massachusetts, 2000]

    Click to access assa-final-jan00.pdf

    The ‘noughts’ should be at least as low and, as you might guess,
    Prof Crotty is Left Keynesian – which is good but lacks the more complete/dynamic grasp which should be inherent to Marxist analytics.

  9. ‘The Rate of Profit is the Key’

    ‘Ending the Lomng Depression will not be possible …’ How might the Long Depression come to an end, or will it?

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