The fallacy of causation and corporate profits

Paul Krugman recently launched into a new attack on the priests of neoclassical economics, Eugene Fama (the new Nobel prize winner – see my  post, https://thenextrecession.wordpress.com/2013/10/14/the-noblest-fama-and-shiller/) and John Cochrane in a recent post (http://krugman.blogs.nytimes.com/2013/10/16/fallacies-of-immaculate-causation/). Krugman reckoned that Fama had committed an error of ‘immaculate causation’ whereby Fama started with an accounting identity, in this case savings = investment, and treated it as a causal relationship, namely savings => (leads to) investment, but makes no attempt to prove that this is the direction of causation.  As Krugman says: “Why not the other way around?” After all, he says that Keynesian models do the opposite of Fama’s neoclassical (Say’s law) causation and reckon the “investment (determined by animal spirits) does in fact determine the level of savings.”

Krugman goes onto argue that if consumers (for some reason due to a change of ‘animal spirits’) start to save more, the accounting identity is only maintained by producers running up more investment in the form of unsold inventories.  So investment then equals savings in an environment of overproduction.  For Krugman and the Keynesians, the only way higher savings could lead to higher investment without causing ‘overproduction’ would be if interest rates fell, encouraging producers to invest more voluntarily.  And that won’t happen in an economic world where interest rates are already zero, as now.  Thus Say’s law (that supply or savings causes its own demand or investment) and Fama’s direction of causation are nonsense.

Indeed, recently Brad de Long, another Keynesian guru, pointed out that Say himself eventually rejected his own law (http://delong.typepad.com/sdj/2013/10/macroeconomics-in-the-public-square-part-iiib-of-my-the-economist-as-the-public-square-and-economists-equitable-growth.html): “By 1829, in his analysis of the British financial panic and recession of 1825-6, Jean-Baptiste Say was writing that there could indeed be such a thing as a general glut of commodities after all: “every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared…”  Say reckoned that the overproduction or glut in commodities was due to a sudden flight to financial assets.  In other words, Say confirmed the Keynesian theory that crises are caused by extreme ‘liquidity preference’ on the part of consumers who stop spending and hold their money and a collapse of ‘confidence’ by investors.

De Long goes onto to explain why that should suddenly happen: “these financial market excess demands can have any of a wide variety of causes: episodes of irrational panic, the restoration of realistic expectations after a period of irrational exuberance, bad news about future profits and technology, bad news about the solvency of government or of private corporations, bad government policy that inappropriately shrinks asset stocks, et cetera.”  Well, that’s a long list of irrational and speculative causes of crises, along with more rational causes like expectation of future profit.  If all these are causes, we’ll never know what can cause sudden and drastic collapses like the Great Recession – it’s just instability.

Krugman says “accounting identities can only tell you so much. Anyone who claims that the identities tell you everything you know, without an actual model of how things work, is just doing bad economics.”  Yes, bad economics.  It is in the causal direction of these accounting identities that Marx parts with Keynes.  And here is the irony in Krugman attacking Fama.  Keynes (and Krugman) tells us that the direction of the causation is from investment to savings.  But this is not realistic if the only ‘proof’ is that investment is moved by the psychological mysticism of ‘animal spirits’ or ‘confidence’ (see my post, https://thenextrecession.wordpress.com/2012/04/21/paul-krugman-steve-keen-and-the-mysticism-of-keynesian-economics/).  Keynesian theory falls back on the irrational and speculative behaviour of individual consumers or investors (thus we have the work of that other Nobel prize winner, Robert Shiller – see my post, op cit).  There is no recognition of the objective reality of profit.  So the Keynesians have their causation in the wrong direction.

Before savings and before investment is the generation of profit (or surplus value) from the activity of labour in the production process.  Marxist economics says that it is not the speculative irrationality of investors, but the objective movement of profit that decides whether the owners of that profit will invest more or less.  What’s the proof of that?  Well, many Marxist studies have shown the causal connection between profit and investment, in that order. The Keynesian models present a myriad of causes and a myriad of causes provides no theory of crises at all.

Shiller’s (noble) contribution was that the Great Recession could have been predicted by ‘excessively’ high stock market prices relative to corporate earnings (profit) and excessively high property prices compared to household income prior to 2007.  At least, this shows some objective empirical evidence and is not really based on any models of the psychological motivations of consumers or speculators.  Financial and property markets were just way out of line with profits and workers’ incomes in 2007.  Capital values were mostly fictitious, as Marx would have said.  But what is decisive here is the level of profit and profitability, not the level of stock or real estate prices.

The other irony is this means that the neoclassical (Fama) direction of causation going from savings to investment is actually closer to reality than Keynes and Krugman – but for different reasons from Fama.  For if we assume that workers save little or nothing and consume all their wages, and we exclude the impact of government net spending or savings, then savings are entirely composed of profit.  ‘Profit calls the tune’, to reverse the phrase of radical Keynesian Hyman Minsky, now so popular among radical left economists, who coined the aphorism that ‘investment calls the tune’
(see my post, https://thenextrecession.wordpress.com/2012/06/26/profits-call-the-tune/).

The Keynes-Kalecki accounting identity was recently dug up again by another Keynesian, Cullen Roche, in a recent post (http://seekingalpha.com/article/1753482-budget-deficits-contribute-to-corporate-profits-but-dont-matter-right).  According to Roche, profits depend on investment minus what households and government save.  He admits that “It’s strange to think of the government as a source of profits because some people don’t generally like to think that the government is a large source of private sector profits.  But that really shouldn’t surprise anyone.  After all, when the government pays contractors in Virginia to build planes then those payments get listed as corporate revenues which contribute to the bottom line of corporations.  And when you net out investment, household savings, foreign savings and dividends you get the total of corporate profits.”

But ‘some people’ are right.  Government is not the source of even these profits. Profit does not come from investment or government spending – that’s nonsensical.  Reality is the opposite. Profits come from the unpaid labour of workers and then are distributed to shareholders, government and foreigners, with what’s left being reinvested.  Dividends come from profits not profits from dividends, as Roche wants us to think. Thus Roche repeats a Keynesian-Kalecki version of Krugman’s ‘fallacy of immaculate causation’.

Moreover, this leads to serious error in economic policy, as I have shown in a previous post (https://thenextrecession.wordpress.com/2012/06/13/keynes-the-profits-equation-and-the-marxist-multiplier/).  If the Keynes-Kalecki causal direction were right, it would mean that if government increases spending and widens its budget deficit and consumers save less and spend more, then capitalist investment will rise.  As a result, profits will rise with investment and capitalism will be saved, thanks to government spending.  But if it were the opposite causal direction as Marxist economic argues, namely that profits get ‘used up’ by investment and government deficits, then profits come from outside the accounting identity (namely they are exogenous) and the only way investment will rise is if there are lower not larger government deficits and more saving by consumers or foreigners, not less.

And this is the real logic of capitalist austerity policies – reducing the surplus value created by labour being siphoned off to government spending or into workers savings.  How?  Well, raise taxation on workers, reduce corporate taxes and cut ‘unnecessary’ government services.

Roche wants to claim that more government spending will boost investment and thus profits.  But he actually shows in his post that government spending has been slashed during the recession and yet profits are at record highs. So how does that work?  ‘Austerity’ and deleveraging, and most important, a huge squeeze on labour’s income share, have raised profits, not more government spending.  As we know from many sources, including this blog, profits have been booming in America, reaching the highest proportion of GDP since the second world war.

The issue we have been debating in this blog and elsewhere is why US business investment to GDP is still close to the lows of previous cycles. Instead of investing, businesses are handing cash back to shareholders through buybacks and dividend increases and hoarding cash. In 2011, the value of American share buy-backs was equal to 2.7% of GDP; in Britain, the figure was 3.1%.

In the early 1970s American companies invested 15 times as much cash as they distributed to shareholders; in recent years the ratio has dropped back to below two (see chart).  In his new book, The Road to Recovery: How and Why Economic Policy Must Change, Andrew Smithers, very much a mainstream economist, argues that the main cause has been management incentives. Executives are now paid largely in the form of bonuses rather than salary. These bonuses are often tied to the share price, which in turn depends on the ability of the company to meet its quarterly earnings-per-share target. Buy-backs tend to boost earnings per share; investment plans may dent them.  Indeed, according to the national accounts, American companies have been paying out in cash more than 100% of their domestic profits to shareholders.  There is barely a sign in the national accounts of a fall in the ratio of non-financial corporate debt to GDP. As a result, the dangers of high debt are underestimated. A collapse in asset prices could still provoke a crisis.

Smithers is arguing that company management prefer to boost stock prices than invest in productive capacity.  He reckons this is due to bonus schemes.  Well, it’s an argument.  But it suggests that if management incentives are reformed, business investment will return.  I think the more likely explanation for relatively low investment remains with high debt relative to earnings in many smaller companies and still relatively low profitability (not profit) relative to corporate assets for the sector as a whole.

This explanation holds for European capitalism (see my recent post, https://thenextrecession.wordpress.com/2013/10/18/eurozone-corporate-profitability/) and for Japan
(see https://thenextrecession.wordpress.com/2013/02/14/japans-lost-decades-unpacked-and-repacked/).

I shall return to the question for the US.  But I don’t think it is an accident that relatively higher profit growth and profitability in the US compared to Europe has delivered relatively better business investment growth.

40 Responses to “The fallacy of causation and corporate profits”

  1. Boffy Says:

    As Marx says, Ricardo never had time to analyse the crisis of 1825, so his theory of crisis. But, as Marx points out Say, Ricardo and Mill argued that it was not that there was general overproduction, but that the problem was under production by others, for example, China did not produce enough of the commodities Britain might want in order to exchange for the commodities we wanted to dump on them.

    “In other words, Say confirmed the Keynesian theory that crises are caused by extreme ‘liquidity preference’ on the part of consumers who stop spending and hold their money and a collapse of ‘confidence’ by investors.”

    Of course, it is not just Keynes who held this position. Marx makes this argument too in Theories of Surplus Value II in setting out his theory of crises. He says,

    “At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.” (TOSV2 p 505)

    The only commodity that cannot be overproduced he says is money itself. And Marx and Engels themselves describe how this may be manifest in a speculative mania even when profits from productive active are extremely high. That is what happened in the 1840’s, as Engels described.

    “But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844. Stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.”

    Capital III, Chapter 25

    “There is no recognition of the objective reality of profit. So the Keynesians have their causation in the wrong direction.”

    The problem here, of course is that there is no objective reality of profit. Profit is only the phenomenal form of surplus value, and whilst value may be determinant of supply, as Marx says, it is not determinant of demand. Use Value is determinant of demand, and that is not objectively determinable because Marx says it is measured by a “different measuring rod”. The problem then being that “profit” as the phenomenal form of surplus value only exists when the commodities have been sold, and the surplus value realised in them. Before that can happen there must be an adequate demand for them, and as that demand is a function of use value (subjectively determined) not Value the problem for the concept of an “objective reality of profit” becomes rather apparent.

    As Marx sets out here are indeed any number of reasons why demand may not be sufficient to absorb all of the supply at the given Prices of production, as say had anticipated. Demand depends upon use value, and so the demand for any commodity will depend upon individual consumer preferences. As Marx says,

    “The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

    (Theories of Surplus Value 3)

    So, supply can rise without bounds, but there is no reason why this increased supply finds sufficient demand. As Marx also says,

    “The value supplied (but not yet realised) and the quantity of iron which is realised, do not correspond to each other. No grounds exist therefore for assuming that the possibility of selling a commodity at its value corresponds in any way to the quantity of the commodity I bring to market. For the buyer, my commodity exists, above all, as use-value. He buys it as such. But what he needs is a definite quantity of iron. His need for iron is just as little determined by the quantity produced by me as the value of my iron is commensurate with this quantity.

    It is true that the man who buys has in his possession merely the converted form of a commodity—money—i.e., the commodity in the form of exchange-value, and he can act as a buyer only because he or others have earlier acted as sellers of commodities which now exist in the form of money. This, however, is no reason why he should reconvert his money into my commodity or why his need for my commodity should be determined by the quantity of it that I have produced. Insofar as he wants to buy my commodity, he may want either a smaller quantity than I supply, or the entire quantity, but below its value. His demand does not have to correspond to my supply any more than the quantity I supply and the value at which I supply it are identical.”

    (Theories of Surplus Value 3)

    And, in fact these kinds of overproduction arising from disproportion in supply are inevitable as a result of different levels of productivity in different industries.

    “By the way, in the various branches of industry in which the same accumulation of capital takes place (and this too is an unfortunate assumption that capital is accumulated at an equal rate in different spheres), the amount of products corresponding to the increased capital employed may vary greatly, since the productive forces in the different industries or the total use-values produced in relation to the labour employed differ considerably. The same value is produced in both cases, but the quantity of commodities in which it is represented is very different. It is quite incomprehensible, therefore, why industry A, because the value of its output has increased by 1 per cent while the mass of its products has grown by 20 per cent, must find a market in B where the value has likewise increased by 1 per cent, but the quantity of its output only by 5 per cent. Here, the author has failed to take into consideration the difference between use-value and exchange-value.”

    Theories of Surplus Value 3

    I think unfortunately, in forgetting about the need for surplus value to be realised before it can assume the form of profit, you have ignored the question of demand. You therefore make the same mistake as Say, Ricardo and Mill in assuming that so long as the value relations match up, demand can be assumed to follow on from Supply, in other words as Marx puts it above, you fail to take into consideration the difference between use value and exchange value.

  2. Boffy Says:

    “Government is not the source of even these profits. Profit does not come from investment or government spending – that’s nonsensical. Reality is the opposite. Profits come from the unpaid labour of workers and then are distributed to shareholders, government and foreigners, with what’s left being reinvested. ”

    That is true but not the whole story. In order for workers to produce surplus value they have to be put to work by Capital, and under a Capitalist system that generally requires that the capitalist envisages making a profit. But, not just making a profit. They also have to realise that profit, which requires there to be sufficient demand. That in part depends upon general economic conditions.

    If Capital can be expanded in conditions where there are unused resources then that can result not just in increased supply but also in increased demand for that supply. As Marx sets out the State plays an important role in that regard in creating Capital via Keynesian fiscal deficits (Marx obviously didn’t refer to it as Keynesian intervention but that’s what it is). He says,

    “Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

    The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.”

    Capital I, Chapter 31

  3. David Kotz Says:

    Why assume it is only demand or profit that matters? Marx’s circuit of capital shows that both matter, for profit and for accumulation.

    Profit (surplus value) is created in production but realized in the last step of the circuit. Profit can arise only if the capitalists can extract it from labor. However, if the full value created cannot be realized, we know what happens — a downward spiral. If capitalists expect inadequate future demand relative to existing fixed capital, even having high profit is not a reason to accumulate more fixed capital. This has relevance for today’s US economy, in which the profit rate has recovered but the rate of capital accumulation remains far below rates before 2008.

    The advantage of Marxian analysis over Keynesian is not that the latter is wrong but that it is one-sided.

    • michael roberts Says:

      Good to hear from you, David. I have admired much of your work.

      Yes, I agree that demand and profit both matter for accumulation. But I do not see demand leading profit but the opposite. You must start somewhere. Profit is created in the process of production and then realised in the market. That is the analytical order of capitalist accumulation. You say that if capitalists expect that future demand is inadequate to deliver sufficient profit relative to their stock of capital invested (both constant and variable), they won’t invest more. But they only find that out when they try to sell commodities already produced. Then, as you say, if they cannot realise sufficient profit from sale, the ‘downward spiral’ begins, starting with the weakest capitalists and multiplying through the rest.

      But we start with the existing profitability of accumulated capital. The profitability of the stock of capital is determined by Marx’s law of the tendency of the rate of profit to fall and its accompanying counteracting factors. This is outside the control of each individual capitalist. When the impact of this law reaches a critical point, then profits are insufficient and weaker capitalists start making losses. Thus, in my view, the Marxist theory of crisis shows that the cycle of boom and slump is generated by the process of capitalist accumulation in the sphere of production and the crisis is ‘realised’ in the sphere of circulation, but not vice versa. In that sense, the Marxist theory of crisis is diametrically opposed to the Keynesian one.

      Yes, Marx recognised the role of money and hoarding, well before Keynes, who ignored Marxist theory. But Marx saw the demand for money as an endogenous process stemming from the objective contradictions in the production sphere, not due to the psychological motivations of the holders of money in the sphere of circulation. In that sense, Marxist theory is not one-sided like Keynesian theory, as you say.

      • David Kotz Says:

        Dear Michael,

        In response to your response: Of course Marx never wrote a piece focused on fully analyzing economic crisis, but I found that reading the many comments Marx made on crisis does not lead to the conclusion that the tendency of the rate of profit to fall is the fundamental starting point for analyzing accumulation and crisis. Instead, I found suggestions of many possible crisis causes in capitalism, including developments affecting the creation of surplus value and its realization, factors in the real aspect of capitalism and in its monetary/financial aspect.

        Why must one “start somewhere” if that means choosing among the various factors that can cause a crisis and calling it the fundamental one? I think history shows that the main cause of capitalist crisis varies depending on concrete conditions. A falling profit rate can be the underlying cause, as I believe it was in the late 1960s through the 1970s.

        But that need not be the underlying cause of every crisis. It is possible that deficient demand over a long period can cause, not a crisis, but a growing under-use of productive capacity. The capitalist have a gradually rising profit rate due to rising rate of exploitation, but lagging demand relative to output causes a lower capacity utilization rate at each successive business cycle peak — I think that fits the US economy form the early 1980s through 2007. The gradually falling capacity use rate limits the rise in the profit rate, since the profit rate depends on utilization rate as well as profit share.

        Once the debt-based means of bringing growing demand (in the face of falling real wages) are exhausted, as I think occurred in 2007-08, a combined financial and real sector crisis breaks out. Thus, the underlying cause of the crisis that broke out in 2008 was three interrelated unsustainable trends in the neoliberal form of capitalism: 1) increasing household and financial sector debt; 2) growing excess capacity; 3) the spread of greatly overvalued high-risk financial instruments.

        Keyesian theory suggests capitalism has one big flaw, that can be fixed by wise state action. Marxist theory suggests that capitalism has several contradictions, any one of which can cause a big crisis. Fixing one typically makes the others worse.

      • michael roberts Says:

        Dear David

        This is an important debate that has been pursued already and no doubt will continue. Suffice it to say now that I agree with what G Carchedi said about this debate back in 2010,
        “some Marxist authors reject what they see as “mono-causal” explanations, especially that of the tendential fall in the rate of profit. Instead, they argue, there is no single explanation valid for all crises, except that they are all a “property” of capitalism and that crises manifest in different forms in different periods and contexts. However, if this elusive and mysterious ‘property’ becomes manifest as different causes of different crises, while itself remaining unknowable, if we do not know where all these different causes come from, then we have no crisis theory”. He went on: “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence. If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the ”monocausality” of crises.”

        As you know, in a recent joint paper, in your excellent journal WRPE, Carchedi and I try to provide empirical backing to the thesis that it is Marx’s law of profitability that offers the best ‘monocausal’ explanation of recurrent crises in capitalist production. “The Long Roots of the present crisis” WRPE Spring 2013.

        Michael

      • Boffy Says:

        Michael,

        “But they only find that out when they try to sell commodities already produced.”

        Its true that they can only “know” this post facto, but that doesn’t prevent them anticipating what they think the level of demand is likely to be, and it is what they anticipate it to be that is determinant of whether they decide to invest or not.

        For example, take Engels examples of the conditions in the 1840’s, and his discussion with other industrialists who concluded that after the Opium Wars, and the opening up of the Chinese markets, they had 300 million people to supply to.

        Moreover, for modern Capitalism, which had detailed information from EPOS systems etc. of the current conditions of demand, the anticipation is not such a work of guesswork.

        As Kliman put it,

        “Companies’ decisions about how much output to produce are based on projections of demand for the output. Since technical progress does not affect demand – buyers care about the characteristics of products, not the processes used to produce them – it will not cause companies to increase their levels of output, all else being equal.” (Note 4, Page 16, The Failure Of Capitalist Production)

      • Boffy Says:

        “Thus, in my view, the Marxist theory of crisis shows that the cycle of boom and slump is generated by the process of capitalist accumulation in the sphere of production and the crisis is ‘realised’ in the sphere of circulation, but not vice versa.”

        But that is not what Marx says. Marx shows that analysed on a value basis production could be extremely profitable. If consumers bought the output at its value, which on the basis of value relations they could do then that surplus value would be realised. But, the whole point Marx says is that there is no reason whatsoever as the volume of production of use values increases, why consumers should simply buy this increased volume of use values, just because the total of their value only comes to what it was previously.

        ““The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

        (Theories of Surplus Value 3)

        The problem is precisely, as Marx sets out that in order to reduce individual value, capital produces more use values without limit, but the market for these use values is limited by the elasticity of demand for each type of commodity.

      • Boffy Says:

        “When the impact of this law reaches a critical point, then profits are insufficient and weaker capitalists start making losses. Thus, in my view, the Marxist theory of crisis shows that the cycle of boom and slump is generated by the process of capitalist accumulation in the sphere of production and the crisis is ‘realised’ in the sphere of circulation, but not vice versa.”

        But, Marx says that the Law of the falling rate of profit only applies to individual spheres not to the economy as a whole. At any one time he says, falls in one sphere are being counteracted by rises in another. So, it could only ever explain a crisis in one or several spheres, though if they are significant it could result in what Marx calls a crisis of the second form, i.e. they fail to pay suppliers and so, it spreads via a money crisis.

        But, there seems to be both a misunderstanding and a logical flaw in your argument. You seem to suggest that all industries obtain the average rate of profit. Marx makes clear they do not. Indeed, if they did, there would be no driver for capital to move from low profit areas to higher profit areas! So, the simple answer to such a crisis, is for capital to move from those areas where the rate of profit is low, organic composition of capital is high, to areas where the organic composition is low, and the rate of profit is high!

        That indeed, is how the average rate of profit was formed in the first place, as Capital sequentially invaded new areas, starting with the most profitable. If Capital moves out of areas where the rate of profit is falling, and invests in new areas where the rate of profit is high, then the rate of profit stops falling in the former, and the average rate is raised as a result of the latter.

        The determinant of booms and slumps is then not the falling rate of profit, but the availability of sufficient new areas where capital can invest and enjoy these much higher rates of profit. In otehr words, the real determinant is the Long Wave, and the role of the previous Innovation Cycle in creating the base technologies that create the possibility of establishing whole new industries producing these new high profit commodities.

      • Boffy Says:

        David,

        “Of course Marx never wrote a piece focused on fully analyzing economic crisis,”

        Actually, the 50 odd pages entitled “On the Forms of Crisis” in Chapter 17 of Theories of Surplus Value comes pretty close to it! Interestingly in all of the analysis of the cause of crisis contained there, Marx does not mention the falling rate of profit once as a cause. In fact, where he does mention it, it is to argue the opposite. He says,

        “A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”

      • David Kotz Says:

        Yes, I notice that.

        David

      • Boffy Says:

        David,

        “Why must one “start somewhere” if that means choosing among the various factors that can cause a crisis and calling it the fundamental one? I think history shows that the main cause of capitalist crisis varies depending on concrete conditions.”

        I think that is absolutely correct, and Marx says so too. he says,

        “… the further development of the potential crisis has to be traced—the real crisis can only be educed from the real movement of capitalist production, competition and credit—in so far as crisis arises out of the special aspects of capital which are peculiar to it as capital, and not merely comprised in its existence as commodity and money.”

      • Boffy Says:

        “However, if this elusive and mysterious ‘property’ becomes manifest as different causes of different crises, while itself remaining unknowable, if we do not know where all these different causes come from, then we have no crisis theory”.

        Aeroplanes crash. There are many causes of these crashes from sabotage, to pilot error, to engine failure etc. Why do all these causes of crashes have to have one single source? We could say that ultimately whatever caused the plane to stop flying it was the Law of Gravity that caused it to fall to the ground, but is that really a useful theory of why any particular plane crash occurred?

      • matthewrusso9Matt Says:

        “Why do all these causes of crashes have to have one single source?”

        The theory of gravity is obviously too broad in this analogy, and doesn’t belong. The failure to maintain adequate and stable wing lift is the fundamental universal cause that is analogous to the role of profit in capitalism.

        Profit is obviously fundamental to the existence of capital as self expanding value. However this abstraction does not mean every crisis must have as its causal point of departure, a profits crisis.

        Quite the contrary, and especially in the contemporary world, crises can begin from anywhere in the capitalist system. The issue is if the fuse, when once lit, will travel to the core of that system. That core or “nexus” is necessarily *profit* per the above fundamental abstraction.

        Profit as the central nexus of the capitalist system is a better form of imagery that that of a linear causality.

    • Boffy Says:

      David,

      I agree entirely. It is not whether Capital has made large profits or is currently making large profits that determines whether they will invest, but whether they think they can realise such profits as a consequence of future investment.

      Moreover, as Marx points out, for modern capitalism it is not the rate of profit that is determinant, but the amount of profit.

    • Charles A Says:

      Kotz: “deficient demand over a long period …. that fits the US economy from the early 1980s through 2007.”

      What can be a major source of deficient demand over a long period other than a continual increase in the rate of exploitation? However, a rising rate of exploitation leads, cet. par., to a rising profit rate. How does that eventuate in a crisis? Well, it stimulates investment hence a rising composition of capital – and demand for plant and equipment in place of consumer demand. So what has been learned by detouring the train of reasoning through “a long period of deficient demand”? At best, this path of analysis leads to an indeterminate outcome, not explanation of a crisis.

      • Boffy Says:

        “What can be a major source of deficient demand over a long period other than a continual increase in the rate of exploitation?”

        Actually, as Marx describes it could be the exact opposite. The rate of exploitation may fall, real wages may rise, and so the elasticity of demand means that as more of the workers needs are met, the less they increase their demand for particular commodities, without larger and larger reductions in market prices.

        In fact, that is what Marx describes in a number of places in Vol III. Such a crisis frequently breaks out he says, when wages re high not low. Moreover, in Chapter 6, he describes the situation where Capital faces rising prices of raw materials because, in particular. technological changes have led to rises in productivity causing a large rise in demand for materials, which cannot be passed on to consumers in market prices, because of consumer resistance, so capital has to absorb the price rise out of its profits.

      • Boffy Says:

        The same process is also explained by Marx as explaining why during a boom, workers with their rising wages may reduce their demand for certain necessities, and instead begin to buy what have previously been considered to be “luxuries”. In fact, this very process, whereby capital continually reduces the Value of commodities, as increases in productivity increase the quantity of use values produced, is what necessitates capital continually having to find new types of commodity to produce to sell to workers so that it does not suffer this problem of consumer resistance (elasticity of demand) and therefore having to sell commodities at market prices below the price of production.

        In the Grundrisse, Marx describes this process of continually having to expand the workers horizons into the consumption of ever new ranges of commodities, including he says, things like education and culture, as “The Civilising Mission of Capital”. It is he says part of the historic role of Capital in creating the working-class as a class capable of becoming the ruling class.

  4. David M. Kotz Says:

    Dear Michael,

    I often read your blog, from getting the emails you send out. I was moved to reply to your blog below and joined as a commenter. I’d be interested to hear your response to my comment if you have time.

    Yours, David Kotz

  5. Boffy Says:

    “I think the more likely explanation for relatively low investment remains with high debt relative to earnings in many smaller companies and still relatively low profitability (not profit) relative to corporate assets for the sector as a whole.”

    The problem with that seems to be that the companies with the largest cash piles on their balance sheets like Apple, Microsoft etc. are also not only the ones with the biggest, and often fastest rising profits, but also the ones investing relatively little, whilst the firms that are demanding ban financing, are the ones with debts, and the lowest profit rates. The companies that are spending most on share buy backs are the ones that are the most profitable too.

    In fact, some of those companies where they have borrowed money have done so precisely to buy back stock!

  6. Edgar Says:

    Mr Kotz said,

    “It is possible that deficient demand over a long period can cause, not a crisis, but a growing under-use of productive capacity. The capitalist have a gradually rising profit rate due to rising rate of exploitation, but lagging demand relative to output causes a lower capacity utilization rate at each successive business cycle peak”

    I find this explanation wrongheaded, in that I wonder what deficient demand actually means, that is when you dig beneath the term, deficient demand.
    How and why does demand lag? I suspect the answer takes the argument away from the under-consumptionist implications of your argument – if I am reading them correctly.

    I also wonder if demand lag is a universal lagging demand of everything or a lagging demand in some area that offsets deficient supply in other areas. I.e. disproportionality. Then we are into the issue of capitalism being very inefficient at responding to change and not really in the area of realisation of profit or even creation of profit.

    • Boffy Says:

      “How and why does demand lag? I suspect the answer takes the argument away from the under-consumptionist implications of your argument – if I am reading them correctly.”

      Its impossible to know why demand might lag, because as Marx says, demand is a function of use value rather than value. In other words, why don’t you buy as many Mars Bars as I do? I have no idea. Maybe I like Mars Bars and you don’t, maybe the use value I get from a Mars Bar is greater than that you derive. Maybe you think that you might not have a job next week so you are saving your money for that eventuality.

      But also as Marx says, it could simply be that whilst the production of Mars Bars has risen by 20%, the consumers of Mars Bars only demand an extra 10% of them at the market value, so if the sellers want to clear the market they have to reduce the price below the market value!

      • Edgar Says:

        I think Engels said that reducing the price below market value was by far the most common occurrence.

        I think where I am coming from is questioning the obsession with rate of profit. Is it because some Marxists believe that this is the secret to the inevitable demise of capitalism? To my mind this is wrong, wrong and wrong again.

        Another issue is how is demand created in the first place. Take buying cars as an example, because demand was so called lagging then the government introduced incentives to buy cars and demand went up. There is more to this than simply clearing the market.

        As socialists we shouldn’t be fixated on what this does to profit rates/realisation but what it says about the capitalism as an inefficient and harmful system. In my view when Marx talked about capitalism’s inevitable demise he wasn’t talking about profit rates but the class struggle. As socialists our efforts should be based around the class struggle, not spending endless hours debating what happened to profit from 1960 to 2012.

        I am not saying economic laws should be ignored, absolutely not, but they should be used to test our proposed solutions.

      • Matt Says:

        Why counterpose the two? This is an old argument as well. One could just as well explain the class struggle by tracking the rate of profit, as this is an indirect indicator of both the rate of exploitation and the prospects for rising investment leading to expanding employment of workers.

      • Edgar Says:

        Matt – you are missing the point I think. For me, rate of profit obsessed Marxists argue about rate of profit because they link it to the inevitable demise of capitalism, they are not really interested in it as an index of exploitation. In fact they focus mainly on the ROP declining!

        For me, Marx belief in the inevitable demise of capitalism was based on the class struggle, or historical materialism. Rate of profit and business cycles play a part, in that they exacerbate problems/bring tensions to the surface etc but they are not the substantive part of the inevitability of capitalism’s demise.

        And as the global inequality stats show, Marx’s historical narrative needs some reworking.

        But the motto, “workers of the world unite, all you have to lose are your chains” still holds.

  7. paulc156 Says:

    I’m curious as to the extent that much lower energy prices is contributing to the relatively high rate of investment and profit in the US. Ambrose Evans-Pritchard waxes lyrical on this issue in his own column.

    Also I’m wondering why the following: “raise taxation on workers, reduce corporate taxes and cut ‘unnecessary’ government services” helps business.

    The lower corporate taxes obviously helps but higher taxes on labour merely ensures the downward rigidity of wages intensifies. With lower taxes on labour business could surely find more workers at lower wages if their after tax wage was somewhat higher?

    • S. Artesian Says:

      I don’t think we can characterize the US as having a relatively high rate of investment. Private, non-residential fixed investment in 2012 finally reached the level of 2007, after declining about 20% peak to trough.

      US industrial output is marginally below its 2007 peak, yes better than the EU, but not better than the emerging market countries as a whole,

      I think it’s important to pay attention to the shifts within the network of global capitalism, but I also think we have to make an assessment of the overall condition of that capitalism.

  8. vallebaeza Says:

    Reblogged this on Econo Marx 21.

  9. S. Artesian Says:

    “Its impossible to know why demand might lag, because as Marx says, demand is a function of use value rather than value. In other words, why don’t you buy as many Mars Bars as I do? I have no idea. Maybe I like Mars Bars and you don’t, maybe the use value I get from a Mars Bar is greater than that you derive. Maybe you think that you might not have a job next week so you are saving your money for that eventuality.

    But also as Marx says, it could simply be that whilst the production of Mars Bars has risen by 20%, the consumers of Mars Bars only demand an extra 10% of them at the market value, so if the sellers want to clear the market they have to reduce the price below the market value!”

    I think it would be helpful if someone could point out where Marx says this, or something like this. I don’t recall it, but it might be somewhere in something I read long ago– so if anyone has a source, that would be great.

    While we’re waiting though– I’d like to point out the contradictions in Boffy’s “explanations.” He claims we can’t know why demand lags because demand is a function of use-value. He explains maybe he likes them more/less than someone else, which conceivably has something to do with use value. But then he hops skips and jumps to the bit about saving money in the face of possible unemployment, which to put it mildly has absolutely nothing to do with the use value of Mars Bars and has everything to do with the social reproduction of value, which only gets expressed as the commodity’s exchange value.

    So given that, clearly then we can understand and explain why demand lags, and moreover determine that demand is derivative of the general success or lack thereof in capital’s self-valorization.

    The final cherry gets plopped on this cake when Boffy opines that production outpaces demand and so sellers have to reduce the price below market value— again this has nothing to do with use value, absolutely none, and everything to do with the law of value, actually the law FOR the production of value determining how society distributes its total available labor-time.

  10. Boffy Says:

    “But also as Marx says, it could simply be that whilst the production of Mars Bars has risen by 20%, the consumers of Mars Bars only demand an extra 10% of them at the market value, so if the sellers want to clear the market they have to reduce the price below the market value!”

    Its here, as previously provided.

    “Insofar as he wants to buy my commodity, he may want either a smaller quantity than I supply, or the entire quantity, but below its value. His demand does not have to correspond to my supply any more than the quantity I supply and the value at which I supply it are identical.”

    (Theories of Surplus Value 3)

    And here,

    ““By the way, in the various branches of industry in which the same accumulation of capital takes place (and this too is an unfortunate assumption that capital is accumulated at an equal rate in different spheres), the amount of products corresponding to the increased capital employed may vary greatly, since the productive forces in the different industries or the total use-values produced in relation to the labour employed differ considerably. The same value is produced in both cases, but the quantity of commodities in which it is represented is very different. It is quite incomprehensible, therefore, why industry A, because the value of its output has increased by 1 per cent while the mass of its products has grown by 20 per cent, must find a market in B where the value has likewise increased by 1 per cent, but the quantity of its output only by 5 per cent. Here, the author has failed to take into consideration the difference between use-value and exchange-value.”

    Theories of Surplus Value 3

    and here,

    ““The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

    (Theories of Surplus Value 3)

    • S. Artesian Says:

      Thanks for that, it’s quite helpful but I think there are some problems.

      When you talk about “clearing the market” by reducing the price, you are talking about exchange value; you are saying demand is contingent upon price, on exchange value, not use value.

      When Marx says”The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.” this directly contradicts your argument about clearing the market— IF capital were a system for the reproduction of use, for the simple satisfaction of need.

      As a matter of fact, what Marx describes as “unintelligible” is exactly the dynamic inherent in expanded reproduction, in capital accumulation– six knives embodying the same value (represented by price), that is to say six knives produced in the same time that was previously required to produce one, but instead of producing 10,000 knives, capital produces 2 million knives..and most importantly, it has reproduced, expanded its social relation where in order to purchase the knives, to consume, to demand, labor power has to be exchanged as a commodity; labor cannot produce nor consume the knives for itself, by itself.

      Certainly this process is uneven; disproportion abounds, is necessary, and gluts occur, but within that disorganization, there is in fact capital organizing itself.

      Capital produces for exchange, for the expanded reproduction of value. Consumption, in and of itself, is neither the obstacle–NOR the realization of that process.

      The realization is based quite simply in the origin, the primary relationship of capital, the exchange of a portion the already accumulated value with living labor.

      Capital does not reproduce itself by somehow “finding” pristine areas of consumers who untouched by capital who manage anyway to have bank accounts, credit cards, any of the 100 forms of money.

      It creates its markets by and through the aggrandizement of labor power; its exploitation at an intensity that increases the surplus labor time. Consumption, demand, is contingent upon establishing this relation. The relation can and does take some extremely veiled forms, but the relation itself drives all other aspects of the society.

      Wealth is both a physical and a social product. It is the augmentation of material objects and it is the disposition over time.

      This is why, IMO, Michael Roberts hits on something very key, when he remarks a bit offhandedly “We have to start somewhere.” Indeed we do, just as capital does. And it starts with the origin of value. That is where the creation and obstacle to profit, the determination and negation of capital is located.

      There is no doubt that overproduction is inherent to capital and the critical part of capital’s need for crisis. But the overproduction of the commodity is not simply, nor necessarily, the overproduction of use values beyond the powers of consumption when consumption itself is a function of exchange. It is always the overproduction of capital, beyond the limits of profit.

  11. Boffy Says:

    “But then he hops skips and jumps to the bit about saving money in the face of possible unemployment, which to put it mildly has absolutely nothing to do with the use value of Mars Bars and has everything to do with the social reproduction of value, which only gets expressed as the commodity’s exchange value.”

    Wrong. As Marx says, a generalised crisis of overproduction only requires that consumers prefer the Use Value of the commodity money over the use value of all other commodities.

  12. Boffy Says:

    “The final cherry gets plopped on this cake when Boffy opines that production outpaces demand and so sellers have to reduce the price below market value— again this has nothing to do with use value, absolutely none, and everything to do with the law of value, actually the law FOR the production of value determining how society distributes its total available labor-time.”

    Wrong again because as Marx states clearly demand is a function of Use Value not Value, and use value here is a matter of quantity. As ERngels puts it in Anti-Duhring,

    “We have seen that the ever increasing perfectibility of modern machinery is, by the anarchy of social production, turned into a compulsory law that forces the individual industrial capitalist always to improve his machinery, always to increase its productive force. The bare possibility of extending the field of production is transformed for him into a similar compulsory law. The enormous expansive force of modern industry, compared with which that of gases is mere child’s play, appears to us now as a necessity for expansion, both qualitative and quantitative, that laughs at all resistance. Such resistance is offered by consumption, by sales, by the markets for the products of modern industry. But the capacity for extension, extensive and intensive, of the markets is primarily governed by quite different laws that work much less energetically. The extension of the markets cannot keep pace with the extension of production. The collision becomes inevitable, and as this cannot produce any real solution so long as it does not break in pieces the capitalist mode of production, the collisions become periodic. Capitalist production has begotten another “vicious circle”.”
    (p 355)

  13. Boffy Says:

    What are the limits and laws of the market described by Engels. As well as the quotes from Marx already provided, he makes the point in the Grundrisse.

    But, what are these limits imposed on production by the market? What are the laws that govern the expansion of these markets, and why do they work less energetically? The answer is given by Marx in the Grundrisse.

    “Here a great confusion: (1) This identity of supply, so that it is a demand measured by its own amount, is true only to the extent that it is exchange value = to a certain amount of objectified labour. To that extent it is the measure of its own demand — as far as value is concerned. But, as such a value, it first has to be realized through the exchange for money, and as object of exchange for money it depends (2) on its use value,but as use value it depends on the mass of needs present for it, the demand for it. But as use value it is absolutely not measured by the labour time objectified in it, but rather a measuring rod is applied to it which lies outside its nature as exchange value.”

  14. Boffy Says:

    “He explains maybe he likes them more/less than someone else, which conceivably has something to do with use value.”

    Why only “conceivably has something to do with use value”? It is precisely how Marx describes Use Value, as something which has utility for someone!!! A utility, which as stated in the Grundrisse quote is measured by a quite different measuring rod than is Value.

  15. S. Artesian Says:

    “Wrong again because as Marx states clearly demand is a function of Use Value not Value, and use value here is a matter of quantity. As ERngels puts it in Anti-Duhring,”

    Are you claiming that you simply cannot account for changes in demand? That changes are unintelligible because they are based on individual assessments of use-value?

    I don’t think we can explain the near catastrophic contraction in auto sales in the EU by some sort of change in the use value of automobiles; in the assessments of that use-value.

    It seems to me to make much more sense if we look at consumption and demand as derivative of and from the overall ability of value production to revalorize itself– to exploit labor intensely enough to offset the decline in the overall proportion of new value in relation to already accumulated value.

  16. Matt Says:

    Clearly it does not follow from “demand is a function of use-value” that the sources of demand are somehow “unknowable” simply because these are not exchange values. This is simply to say that are not entirely comprehensible *within the logic of capital*. But demand under capitalism is quite comprehensible in itself.

    This is particularly true in the case of the consumer demand for use values by the working class, where the consumer demand realized by workers 1) cannot be allowed to permit the withdrawal of labor power from the market (the case of the relative rise of the consumption of non-commodity use values, land, etc) or 2) cause a fall in the rate of exploitation (the case of a relative rise in the consumption of commodity use values).

    Given these rigid constraints, the question of the demand for use values by wage labor can be posed quite objectively, and are therefore quite “knowable”. Even as the process of the consumption of these use values lies entirely (and irreducibly) outside the logic of capital, a question, logically speaking, “safely left to the workers themselves” to determine, to paraphrase Marx in Capital I.

    And since the large majority of demand is provided in the process of the reproduction of labor power (productive or unproductive), calling the sources of demand “unknowable” is tantamount to stating that the social nature of the proletariat is unknowable. In that case, what is the point of practical engagement with the politics of proletarian revolution? How can one “know” how to lead a class whose own needs are “unknowable” under capitalism?

  17. duvinrouge Says:

    Why is it so difficult to accept that a crisis can be caused by the over-issue of credit money without there being any underlying fall in the rate of profit?

    It is always going to be tempting for finance capital to create ‘too much’ credit money because it artifically supports recorded profit rates. Their money creation is in effect their profit creation.

    It is only when they realise they have over-lent & risk not getting their ‘money’ back that credit crunch, financial crisis, recession strikes.

    It is the excessive creation of credit money that can create a crisis of overproduction independent of any fall in profitability due to increases in the composition of capital.

    The TRPF is important, & possibly relevant to today’s crisis, but unlikely to be the ‘mono-cause’ of the business cycle.

    • michael roberts Says:

      Marx reckoned that you could have banking crises without production crises because of the nature of credit creation and banking, as you say. But he also said that major crises spreading to all sections of the economy come from the contradiction within the production process, starting with the problems in the generation of surplus value, explained by his law of profitability, and then leading to crises of ‘realisation’. Banking crises happen often (see Reinhart and Rogoff) and sometimes they ‘trigger’ a general crisis of overproduction because the law of profitability is exerting a predominant influence. The 1987 stock market crash did not lead to a general recession because overall profitability was rising. The credit crunch of 2007 did because profitability was much lower than in the late 1990s and had started to fall by 2006, eventually along with the mass of profit. The stuffed up credit boom was thus being held up by chicken legs.

  18. duvinrouge Says:

    Michael, thanks for the response.
    I think it’s good that you agree that there can be a crisis caused by finance & not by an increase in the composition of capital & subsequent fall in the rate of profit.
    I accept that this crisis may be different & may well involve a profitability problem. Kliman provides evidence of a profitability problem in the USA in the late 1960’s as a result of an increase in the composition of capital. This may well have led to the fiat money regime, financialisation & excessive credit/debt we see today.
    It could also be true that profitability did improve in the 1980’s & 1990’s as China opened up & the neo-liberal onslaught in the west took hold.
    It may also be the case that the increases in the price of energy have had a big impact on the composition of capital (increasing it) as well as reducing the rate of exploitation: more labour time to produce C & V & less left for S, hence the class struggle coming out into the open more.
    Quantifying all these things are obviously very difficult & so controversial. That’s why it’s important, in my opinion, for those who recognise the importance of TRPF, to accept, as you do, that it does not explain all crises & that there can indeed be crises due to excessive creation of credit money.

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