Apples and pears: the Economist on profits

A number of readers of this blog have remarked or asked me to comment on a recent article in the Economist magazine that asserted that both profits and even the return on capital or profitability in the US are at “near-record highs”.  As quoted, “The past two decades have seen most firms make more money than they used to. And more firms have become very profitable”.

Economist on profits

This would seem to be in contradiction to the assertions and evidence continually made by me in this blog and elsewhere that US profitability has been in secular decline since 1945 and is near post-war lows not highs.

US rate of profit

This contradiction can be resolved in several ways.  The first is what one blog reader pointed out: we are comparing apples with pears; the second is that we are comparing harvests of apples and pears at different times; and third, we are looking at the best apples, and not the bulk of the rotten ones.

On apples and pears: it is obviously true that US corporate profits are higher in absolute terms than they were 30 years ago.  US national output is higher, the population is higher, employment of labour is higher, investment is higher.

Of course, the Economist is not so crude as to measure the health of the US economy in absolute profits.  This is what it said: “The last year has seen a slight dip in aggregate profits because of the high dollar and the effect of the oil price on energy firms. But profits are at near-record highs relative to GDP and free cash flow—the money firms generate after capital investment has been subtracted—has grown yet more strikingly. Return on capital is at near-record levels, too (adjusted for goodwill). The past two decades have seen most firms make more money than they used to. And more firms have become very profitable.”

Now some of this is true.  Corporate profits to GDP are still near post-war highs.  But this measure is not a measure of profitability against capital.  Profitability of capital invested is measured as profits divided by the value of stock of the means of production owned and used by corporations and the cost of employing the labour force to use them.  In Marx’s formula, this is s/c+v.  Profits to GDP is really the share of value created going to capital and is much closer to the Marxist rate of surplus value, s/v.  That’s why it is possible to have high corporate profits to GDP and low profitability of capital.  Which is more relevant to how well US capitalism will do is open to discussion: is it the apples of profit share or the pears of profitability?

The Economist purports to measure the profitability of capital too with its ‘global return on capital’.  However, this is a measure not of the profitability of the stock of capital in US corporations but the annual rate of return on invested capital (including financial assets) domestically and globally by US corporations, as compiled by the McKinsey Institute.  That annual return, according to the graph, was actually flat until 2002 and then rocketed.  That reflects US corporations’ investment returns from buying its own shares and investing in foreign assets in the period since 2002, not the overall profitability of US capital stock in productive assets.  Again, it is a matter of debate whether the Marxist measure of profitability is more relevant than the rate of return on American capital as defined by McKinsey.

Moreover, the McKinsey measure reflects the profitability of the largest and most profitable US corporations.  As the Economist piece explains, taking its data from the McKinsey Institute annual corporate valuation report, there is a huge variance in profitability among US companies, with the lion’s share going to the top four firms in each sector of US industry and services.  As the Economist says, profitability is highest and has risen most in the more oligopolistic sectors.  “Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%.”   So some apples are doing very well, but many apples are in a sorry state.

Actually, the Economist does not like this monopolistic development in the US corporate sector: it wants ‘more competition’.  More competition would mean lower profitability but would also drive corporations to be more efficient.  “High profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand. This has been a pressing problem in America. It is not that firms are underinvesting by historical standards. Relative to assets, sales and GDP, the level of investment is pretty normal. But domestic cash flows are so high that they still have pots of cash left over after investment: about $800 billion a year.

Much of this argument is nonsense.  As I have explained in a recent article in the Jacobin magazine that took up similar arguments by Goldman Sachs: “Goldman Sachs’s declaration that falling profit margins are a measure of the “efficacy” of capitalism and a return to “normal” sounds pretty hollow.  It disguises the real issue.  High profit margins are masking a broader decline in corporate profitability and the depressing likelihood that an economic recession — and its inevitable negative impact on working people in lost jobs, incomes and homes— is once again on the horizon, only eight years after the end of biggest slump in the American economy since the 1930s..This is the real measure of capitalism’s efficiency for the 99%.”

It’s not that profits are so high that they cannot be spent; it’s that corporations don’t want to invest because profitability is too low and debt is too high.  It’s not true that the level of US business investment is “pretty normal”.  As a share of GDP, since the 1980s, it has been steadily falling and its growth is now slowing.

US business investment to GDP

Moreover, corporate profits in the US are now falling and if this continues, business investment will drop, not rise as the Economist thinks.  I have shown before how the correlation and causal connection flows from profits to investment.  This something that even mainstream investment pundits like Albert Edwards have noticed recently (see Edwards’ graph below).

US profits and investment

As for cash piles, I have discussed the nature of these cash reserves in posts before: they are concentrated in the very large US multi-national and relative to overall financial assets and rising debt, these cash reserves are not particularly large.

US corporate cash

Corporate cash piles among the largest US multi-nationals go alongside rising corporate debt for the majority.

US non-financial corporate debt to GDP (%)

US corporate debt

I have shown this in several posts and the risk of corporate debt defaults will rise as profits and profitability falls.  Losses on bonds from defaulted companies are likely to be higher than in previous cycles, because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities.

Leverage levels have been rising as more US companies use borrowings to refinance existing liabilities, buy back shares and take other steps that do not increase asset values.

US debt leverage

And global corporate debt is rising too.  According to McKinsey, at the end of 2007 the global stock of outstanding debt stood at $142 trillion. Then in 2008 the financial world fell apart. Less than seven years later, in mid-2014, there is an additional $57 trillion in global debt, and the data this year is going to show that we’ve hit another record high. Debt as a percentage of GDP is even higher now than it was in 2007: 286% vs. 269%. Total debt grew at a 5.3% annual rate from 2007–14. But corporate debt grew even faster at 5.9% annually.

The global corporate default ratio has climbed to its highest level in seven years, led by oil and gas companies. This month saw four new major corporate defaults, which took the overall tally to 40 for 2016, ratings agency Standard & Poor’s said. That’s the highest year-to-date default tally since 2009. Of those, 14 defaults came from the oil and gas sector and a further eight from the metals, mining, and steel sector. The overall default tally for the same time last year was 29.  Companies in the US saw the biggest default rate with 34, with five in the emerging markets.

I referred to the McKinsey study in a previous post.  What McKinsey (MGI Global Competition_Executive Summary_Sep 2015) found was that “the world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end”.  According to McKinsey, the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years!

From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labour, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a share of global GDP from 7.6% to almost 10%.

But McKinsey reckons that profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5% to 1%, to practically the same share as in 1980, before the boom began.   According to McKinsey, margins are being squeezed in capital-intensive industries, where operational efficiency has become critical.  Meanwhile, some of the external factors that helped to drive profit growth in the past three decades, such as global labour arbitrage (globalisation) and falling interest rates, are reaching their limits.

So, in a way, the Economist is out of date.  Corporate profits as a share of GDP are falling and are set to fall further over the next decade.  The apple harvest will be less each year.  The boom days of the ‘neoliberal’ period of 1980 to 2007 are over.  As I have shown in previous posts, global corporate profit growth has ground to a halt and in the US corporate profits are not only falling as a share of GDP, but also in absolute terms.

Far from a reduction of ‘too high profits’ being a good thing in boosting ‘competition and efficiency’ as the Economist claims, falling US corporate profits and profitability will herald a drop in investment and increase of corporate debt defaults and so lay the foundations for a new economic slump.

32 Responses to “Apples and pears: the Economist on profits”

  1. Peter Petrov Says:

    Falling profitability is a result of cheap money. With the free money any profitability is manna from heaven. The same is about corporate debt or any other debt.

  2. jim drysdale Says:

    From jim drysdale
    The bourgeoisie certainly keep and eye on profits:

    Financial Times 24th. September 2002. (extract)
    ‘Poor profitability persists for years after companies make profit warnings, according to new research by the Bank of England.
    The Bank’s research found that between 1997 and 2001, operating profit margins fell for 77 per cent of UK companies issuing a warning. In the year of the warning, their operating profit margin deteriorated by 21 per cent, compared with a control group of companies not forced to issue a warning. The poor profitability then persists. Two years after a warning, 80 per cent of companies’ operating profit margins were still below the level before the warning. Meanwhile, 70 per cent of non-warning companies had lower profit margins.
    Four years after a warning, more than 60 per cent of companies had not recovered to previous profitability levels, and the gap between them and non-warning groups was rising.’
    (end of extract)

    Not every nuance of capitalist society is explained by the thought of Marx but, as long as value, capital, the market hold sway we will continue to see….

    The Injuries of Profit:
    global warming, global pollution of land sea and air, long-term MASS UNEMPLOYMENT, redundancy, lower wages, longer hours, WAR, all inequality, all poverty, world debt, military dictatorships, inept and authoritarian government, austerity, human rights abuse, nuclear weapons, nuclear waste, WAR the military industrial complex, refugees, diseases from food, GM crops, animal welfare, child labour, slave labour, cut-backs in the public sector, privatisation, rising drug culture, WAR, rising suicide among young and old, work-related stress, the arms industry, cost-cutting, downsizing, out-sourcing, mergers and acquisitions, corruption, personal debt, destruction of rain forests, endangered species, (including humanity) so-called globalisation, pensions collapsing, negativity equity, savings collapsing, WAR, the forces of production of humanity retarded, failing safety in all companies, the goodness of humanity stunted and travestied, racism, sexism, etc. etc. etc.

    Understanding what determines the relations of domination and servitude in capitalist society more important to the working class (and should be also for left academia) than analysis and reflection on bourgeois statistics, data and theory. Especially when attempts are made to relate this empirical data to the categories used by Marx. They do not map.
    http://www.capitalismnofuture.co.uk including: ‘Marx: Capitalism No Future’

  3. jim drysdale Says:

    Please excuse,
    Forgot to request email updates on new posts.

  4. semyorka Says:

    Shouldn’t debt subtracted from the rate of profit, in Marxian economy? It’s logica: since the value was not realized, there is no reason to include it in the mass of profit.

    • sartesian Says:

      Why? Debt doesn’t mean anything; debt service means everything. So interest and principal payments should be subtracted from earnings and they are, although broken out as a separate line item. But such payments are just a redistribution of the realized surplus value, so there is no basis for excluding such payments from overall profit calculations.

      • semyorka Says:

        Debt, discounted the interest, is non realized value. Consider that wages circulate back to M’ to realize the part of value of commodities used to pay wages. Or, instead of wages, the surpluseof companies used to by means of productions. I am not thinking about individual companies, but the overall effect on the global economy.

        But since the 70’s, when the gold standard was not used anymore as a measure of paper money, and also with the spread of mainframe computers, it was possible to insert in the circulation, larger and larger quantities of credit, since you can now automatically keep track of debts(which works as liability for credit, Marx used the example of the bank of Scotland, so it’s not something new), or speculate on future of credits/debts. It’s a larger and larger quantity inserted in the system and it grows. So credit increases like a bubble, and is never payed, it is just circulated as if it were money.

        The law of value is not suspended, though, and there is not enough value produced by workers to fill this bubble. Lowering the rate of interest to 0 is not enough on the long run, since the chain of tiny debts, due computerized micro transactions keep growing. Just printing (or creating values on the central bank’s computers) paper money is only another way of creating debt.

        This inflated debt is, in any case, used as advanced capital, which makes matters worse, since it cannot just be payed without large profits. There is huge tower of debts. So, this credit/debt is like using a carrot to guide a donkey to an abyss.

        So, there is a large amount of things that a company announces as profit, but that, seeking the trail of the money, it goes back to a mountain of debt. Since, the machines they bought, the money they were payed back by workers and other companies, are ultimately debt. But it won’t appear in the cash flow, since they are all chaotically embedded in computer transactions.

      • sartesian Says:

        This: ” So credit increases like a bubble, and is never payed, it is just circulated as if it were money. ” I agree with. Like I said, debt is nothing, debt service is everything. Indeed, debt acts “like money,” it can be exchanged, discounted, marketed, and realized as money. It, credit/debt, is the shadow of money, of value.

        Debt service can also act like money, and be packaged as an instrument– hence asset-backed securities, collateralized debt obligations, etc. all of which are trading instruments, with the purpose of the trades being a claim on a portion of profits being generated in the economy.

        This: “So, there is a large amount of things that a company announces as profit, but that, seeking the trail of the money, it goes back to a mountain of debt. Since, the machines they bought, the money they were payed back by workers and other companies, are ultimately debt. But it won’t appear in the cash flow, since they are all chaotically embedded in computer transactions.”

        I don’t see how that changes anything: the issue is not what the individual capitalist claims as profit; but what the class expropriates as profit and then distributes among its various members. The profit is in fact generated in the valorization process, whether the machinery is leased, financed by an equipment trust [ as is the case in the commercial airline industry, or paid for in cash at the time of purchase, or over a period of time. And the rate of valorization is not impacted by the ownership “status” of the machinery deployed in the production process.

        Can you show us how that works in real life? And what difference it makes? If it is as you say it is, and the law of value is not suspended, as you also say, then there is no practical significance to your observation: the limits of and to capital are not overcome, but are reproduced on a more, or less, extensive scale; the tendency of the rate of profit to fall still exerts itself, as do the countervailing actions the bourgeoisie take; capital still goes through periods of expansion, of accumulation, and then contraction.

        The debt is, practically, of no consequence to the determination of the condition of capital– at one and the same time accompanying real accumulation, real upticks in profits and profitability, and at the next “rotation” of capital, “demanding” liquidation of parts of the already existing productive apparatus in its existence as capital values.

        Debt is, first and foremost, derivative, not causal, not primary. Marx makes it pretty clear that the origins of the credit system are in the different realization and turnover times of capital, in order to maintain the continuity of production among the various capitals with their differing production and circulation times.

      • semyorka Says:

        I just showed using an argument about circulation.Marx is OK when it comes to advance capital and paying it back. But he never analyzed the case when it is not payed back, otherwise, where would these huge debts would come from, even with nearly 0 interest? Debt is used as credit, in the hope that financing something, the profits will eventually pay them. But it seems that it hasn’t happened. It is not the causality here, that I am reasing awareness, but the method of measuring profit

        Regarding TRPF, I am arguing that it is overestimated on a global scale since the surplus measurement is influenced by what is exactly payed to the workers and the value they produce. It might not be money, but rather credit, which will be used to buy stuff or the company for which they work for, which, due financial magic, will be transformed into more “money”. So, the real surplus will be actually be lower than in reality. The constant capital would not be affected.

      • semyorka Says:

        Correction: “It might not be money, but rather credit, which will be used by workers or the company for which they work for to buy stuff, after which, due financial magic, will be transformed into more “money”.

      • sartesian Says:

        “It might not be money, but rather credit, which will be used by workers or the company for which they work for to buy stuff, after which, due financial magic, will be transformed into more “money”.

        So are you saying, for example, that, back in the day when coal mining companies in the US paid workers with scrip exchangeable at company stores, or ran “credit” accounts for purchases, and then deducted those purchases from wages, that reduced the surplus value produced by the workers?

        Or that auto-loans represent an additional increment to “v”?

        What happens when debt cannot be repaid? The capital values securing the debt get liquidated, or devalued. We have plenty of examples where and when that has occurred.

        ” I am arguing that it is overestimated on a global scale since the surplus measurement is influenced by what is exactly payed to the workers and the value they produce.”

        It might be. But that’s a concrete calculation to be made, not presumed. It needs to be demonstrated, or shown, how this is made manifest in the actual condition of capital; how it is expressed in the actual processes of exchange. The ROP is a concrete manifestation of the value relations of production, of labor-power as both value, and value-producing, not an abstract one. Certainly not to the bourgeoisie. .

      • semyorka Says:

        No, it’s different from paying coal workers. What you have there is a simple system, which is within control of a few people. I am talking about something much more different, that credit/debt can spread from hand to hand, and change in apparent nature because computers are used with more and more intense. Banks can by debts and sell them at a “profit”, with the release of more credit. And these can be used to buy stock, that is, raise money for companies. Part of the crash in 2008 can be explained by the bankruptcy of credit originated from bad debt.

        This requires immense processing power. And remember, it doesn’t involve human decision, micro transactions happen between banks “to pay” for services.

        And this is all I what I am pointing out a more accurate concrete calculation that can show reality behind debt. For example, note that the upward tendency in profit from the 80’s is followed not only by squeezing workers real wages but increase of debt.

  5. Apostolis Says:

    I would like to make an argument that the Marxist rate of profit doesn’t necessarily have to fall and propose a counter proposal on why we have crises.

    I assume that everyone agrees with the theory of value, in other words that in the long run, prices are determined by the effort spent to produce something.

    The Marxist falling rate of profit is defined as the ratio of the variable capital to both the variable and fixed capital.

    V/(V+C)

    It is evident from this equation that if the variable capital is reduced the rate of profit will fall. Thus the main question is whether the aggregate variable capital of the economy does fall while all other remain constant.

    The decrease in variable capital happens because of a new scientific discovery that reduces the cost of production.
    In the case that production produces capital goods, the aggregate fixed capital doesn’t remain constant. Thus, the type of research determines whether the condition of the fixed capital is constant or not. The type of research is a probabilistic event and it would require us to analyze it in order to draw any conclusions.

    Now, having fixed capital not constant doesn’t mean that the aggregate rate of profit will rise. I will present you with an example in which it happens, thus it will act as a counterexample.

    Consider a chain of enterprise in which all previous ones provide capital goods and the last one consumer goods. In every event in the economy it is assumed that enough time passes that the theory of value holds.

    This diagram show the rate of profit of each company for the production of a single consumer commodity. I assume that the RoP is the same in all companies. That is not true in general but I do not believe that it will affect the validity of the counterexample.

    A -> B -> C -> D
    8/(16 + 8) 12/(24 + 12) 18/(36 +18) 27/(54 +27)

    The average rate of profit is equal to
    ARP = 8 + 12 + 18 + 27/ (16 + 8 +24 + 12 + 36 + 18 + 54 + 27)
    = 0.33333 , not surprisingly since all rop are equal.

    Now a new invention occurs that reduces the variable capital of firm A, from 8 to 2.

    Then after a while when all the firms in the chain have bought this machine (but without having the rop get equal for simplicity) these are the new rops:

    A -> B -> C -> D
    2/(16 + 2) 12/(18 + 12) 18/(30 +18) 27/(48 +27)

    The average rate of profit is equal to
    ARP = 2 + 12 + 18 + 27/ (16 + 2 +18 + 12 + 30 + 18 + 48 + 27) =
    = 0.345

    Thus as we can see, the average rate of profit as defined by Marx does increase.

    Let us consider another counterexample. Let’s suppose that B is bought by A. What would be the rate of profits? :

    A -> C -> D
    20/(16 + 20) 18/(36 +18) 27/(54 +27)

    The average rate of profit is equal to
    ARP = 20 + 18 + 27/ (16 + 20 + 36 + 18 + 54 + 27) =
    = 0.38

    Here again the rate of profit increases because we do not consider the product of company A as fixed capital for company B.

    Does this mean that Capitalism is not prone to have crises. On the contrary, capitalism is prone to crises. Let us see why.

    For every scientific discovery, what happens for sure is that the total cost of production is reduced.

    In our example, before the intention, we had:

    AC = 54 +27 = 81

    After the invention:

    AC = 48 +27 = 75

    Thus after the invention, the capitalists only need to give 75 to continue the exploitation of the workers. The remaining 6 cannot go to the previous investment, they need to go to another investment. But the profitability of new investments do not depend on the sum of profits that were previously obtained by the current investment. In fact, because of all the innovations that are happening and the shrinking of cost of production, it is impossible to invest those sum of money.

    Now it is important to understand that if a sum of money remains dormant in the hands of a few, that also means that debt is kept in the hands of the many. That debt forces people to underconsume, that forces companies to lower their prices and thus decrease their profits which then forces them to exploit more their workers that eventually leads them to underconsume.

    The way to get out of this spiral can be done in many ways:
    A) Tax the rich and redistribute the wealth.
    B) Make the debt payable in 2500.

    Both of those cases do not solve the problem but its consequences.

    The reason why capitalism has the tendency toward crises is because capital investment is performed by force with a complete disregard of the needs of the economy/people. Money are siphoned because capitalists have the means/ability to exploit the working class. The only way to stop the crises is if production is performed democratically by the people for the people. In such a case profits would not exist, only individual and social good.

    • Edgar Says:

      I will skip that I thought the rate if profit was s/(C+V).

      Why are you calling this the average rate of profit:

      ARP = 2 + 12 + 18 + 27/ (16 + 2 +18 + 12 + 30 + 18 + 48 + 27)

      Isn’t this just the rate of profit for economy? Why do you call it the average?

      • Apostolis Says:

        You are right that it is s/(C+V). Because the falling rate of profit argument relies on V/(C+V) I was hasty. So we need to assume that S/V is the same in all of the economy. This is not completely true but it doesn’t seem to invalidate the argument.

        The rate of profit of the economy is the average rate of profit, isn’t it? I put as weights the (C+V) of each company.

      • Edgar Says:

        But you appear to just be adding up the S and then adding up C and the V and then doing the calculation, S/(C+V).

        This is just giving us the rate of profit for the economy.

        Where is the average? Shouldn’t that divide by the number of firms and then apply some standard deviation etc?

      • Apostolis Says:

        Here is the formula for the weighted average of the rate of profit for 2 companies:
        Let ex = S/V then
        ARoP = (RoP1 * (C1 + V1) + RoP2 * (C2 + V2)) / (C1 + V1 + C2 + V2) =
        = ((V1 * ex * (C1 + V1))/(C1 + V1) + (V2 * ex * (C2 + V2)) / (C2 + V2) ) / (C1 + V1 + C2 + V2) =
        = (V1 + V2) * ex / (C1 + V1 + C2 + V2)

      • Edgar Says:

        Yes, but in this case the rate of profit always equals the average rate of profit.

        I am not saying you are using the wrong measure, I am just not convinced by the terminology.

        The issue as I see it is explained in the maths question below:

        http://math.stackexchange.com/questions/80583/simple-question-regarding-ratio-and-average

    • sartesian Says:

      Slight problem with the math: Why, If the new machine/invention/process whatever in enterprise A reduces “v” from 8 to 2, by a proportion of 75% wouldn’t the same machine have the same proportional impact on the other enterprises, reducing “v” in B from 12 to 3, C to 4.5, D to 6.75?

      • Edgar Says:

        Am I wrong in also questioning why V went down in A but in the others C went down?

      • Apostolis Says:

        I chose this specific invention because it is the weak point of the falling rate of profit argument. So it is not doing it by design.

        Let me give you an example:

        A few years ago, you bought a coffee machine for 100 $. It took the machine 30 seconds to make the coffee when you pressed the button.

        Now you buy a new coffee machine for 50$. It takes you the same amount of time ,30 seconds, to make coffee.

        Now if that coffee machine is used in a cafeteria, the variable capital that it needs is the same for the creation of a cup of coffee. But it will reduce its expenses in fixed capital by 50%.

      • Apostolis Says:

        Edgar, you have to understand that each company has its own perspective.

        The coffee machine maker considers the work of its workers as variable capital, or living work.

        For the cafeteria, the coffee machine, thus the exact same product that was produced by the coffee machine maker, it is dead work, or else fixed capital.

      • Edgar Says:

        Looking at your first example, to which I replied, I can’t see any reference to Coffee machines or cafeteria?

        From what I can see you said firm A uses a new machine which reduces its variable capital and then the other firms follow suit and use the same machine and the affect is that it reduces their constant capital.

        If I am missing something basic please let me know.

      • Apostolis Says:

        Edgar, I did not articulate it correctly. Only B buys the new machine. B then makes a machine that C buys. It is a different machine. The reduction of Fixed capital costs for C happen because B reduced his costs by buying the original machine. etc.

        So we need to wait a period of time so that all enterprises buy new machines that are cheaper because of the invention.

        A B C produce capital goods. D is the only one that sells to the consumer.

      • Edgar Says:

        That certainly changes things!

    • sartesian Says:

      I don’t think Edgar is wrong. I think the math is wrong; the “applications” are wrong. The same invention that reduces v by 3/4 in enterprise A, has no impact on v in B,C,D; but on the contrary reduces c by the gross amount that it reduced v in enterprise A.

      That doesn’t quite make sense.

      The coffee machine in the cafeteria example is not relevant. In cafeteria “A” for example, it reduces the variable capital in the scheme, but it has not impact on variable capital in cafeterias B,C,D. In B,C, D that portion of c attributable to the fixed assets declines, which is not the case in the A example:

      “A -> B -> C -> D
      2/(16 + 2) 12/(18 + 12) 18/(30 +18) 27/(48 +27)”

      Such things can happen, but they have little to do with Marx’s analysis that as capital– past, objectified labor– accumulates, expands in value, and reduces the PROPORTION of living labor in production, the tendency is for the rate of profit to fall.

      • Apostolis Says:

        Sartesian, the caffeteria is B.
        A is the coffee machine maker.

      • sartesian Says:

        Here’s what you wrote:

        “Now a new invention occurs that reduces the variable capital of firm A, from 8 to 2.

        Then after a while when all the firms in the chain have bought this machine (but without having the rop get equal for simplicity) these are the new rops…”

        They’ve all bought which machine?? — the same machine that reduces the v in enterprise A; or the machines that enterprise A produces?

        If the latter, there’s nothing new here, nothing that Marx doesn’t himself describe– the reduced value of c, whether it be in raw materials or machinery, all other things remaining the same, offsets the tendency of the rate of profit to fall in sectors using that machine or those raw materials.

        If the former, then see above comments re why the machine reduces v in A, but not B, C, C.

        Re the latter case: The value required to produce a barrel of oil falls, this input causes the value required to produce kersone to fall, this input causes the profitability of…..airlines to increase.

        The issue of course is what does it take to cause the reduction in the cost and price of oil production? What is required is the accumulation of capital, applications of greater masses of objectified labor to the production process, thus impeding the valorization process, and so the tendency of the rate of profit to fall, however it may be temporarily offset, reasserts itself through the very same countervailing process.

      • Apostolis Says:

        Sartesian, what you are saying is that you are able to predict the type of inventions that will occur in the future. You simply cannot predict that unless you do actual work and find patterns that verify this. Marx certainly cannot help you here.

        In other words, by using the notion of countertendencies you are masking the failure of the law of the falling rate of profit.

      • sartesian Says:

        No, I’m not “predicting” what inventions that will occur. I am stating what capital will invest in: machinery that reduces the cost of the inputs to production; thereby allowing a greater return of profit. “Invention” in this case is a commercial process, a purely commercial process, subject to the very same value relations that govern all other aspects of the movement of capital.

        The law is not the law of the falling rate of profit, but of the tendency of the rate of profit to decline. This tendency can be offset through various means, but every offset then reproduces itself along the very same value relations, where accumulated, objectified labor is used to replace living labor, and this is the source of the tendency of the rate of profit to fall.

      • Apostolis Says:

        Let’s roll a 6-sided dice. If I predict that any of the 1 2 or 3 will win, then sometimes I will win, other times I will lose but there is no tendency of winning.

        If I predict that 1 2 3 or 4 will win, then sometimes I will lose, but most of the times I will win. Here there is a tendency of me winning.

        Marx correctly pointed that V/(C + V) determines the rate of profit in the long run.

        If you can predict that this ratio will decrease, then there will be a tendency of falling rate of profit. I have shown that predicting the decrease of the ratio is equivalent to predicting the type of inventions that will occur in the future.

      • sartesian Says:

        Apostolis–

        Another thing– you have posited conditions where the mass of surplus value has declined from 65 to 59, where the value of the constant capital has declined from 130 to 112 and where the value of the total capital has decline from 260 to 230– in short where capital has not accumulated, but has contracted, has been devalued.

        Marx says, in the Grundrisse, notebook 7:

        “The rate of profit can rise although real surplus value falls. Indeed, the capital can grow and the rate of profit can grow in the same relation if the relation of the part of capital presupposed as value and existing in the form of raw materials and fixed capital rises at an equal rate relative to the part of the capital exchanged for living labour. But this equality of rates presupposes growth of the capital without growth and development of the productive power of labour. One presupposition suspends the other. This contradicts the law of the development of capital, and especially of the development of fixed capital.”

  6. Don Sutherland Says:

    … and more unemployment / underemployment and greater precariousness for those still in work.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: