The profitability of Marxian economics

I was recently interviewed on my book, The Long Depression, and on other economic ideas, by José Carlos Díaz Silva from the Economics Department of the National University of Mexico (UNAM) where I have been invited next March 2018 to deliver a series of lectures.  In the first part of this interview, posted over a week ago, Jose questions me on the basic themes of my book.

In this second part of an interview, we discuss the importance of profitability in understanding the state of capitalist economies and whether Marxist economics can be attractive to economics students.

JCD: Is the falling profit rate a general explanation of the crisis, which is expressed in different ways in each country?

MR: Yes, that is a good way of putting it.  We do not have a proper world rate of profit because there are national boundaries to trade and capital flows and national states with different laws and taxes etc that affect the flow and holdings of capital.  More dominant capitalist states will thus have different rates of profit and different triggers of crises than weaker and smaller capitalist economies.

JCD: Is it possible to think about calculating a world profit rate? What is the meaning of that?

MR: Well, theoretically, in my view, the concept of a world rate of profit based on a global amount of fixed and circulating capital moving from sector to sector globally is becoming more realistic.  Compared to 150 years ago, capitalism now stretches to every corner of the world.  National barriers to trade, employment and capital flows remain.  So it is not possible to justify entirely such a world rate and measuring it is equally difficult.  However, we can start to make some measurement and several scholars, including myself, have attempted to do so, using an aggregate of national rates of profit.  The results have been encouraging because they show broadly similar trends and generally validate Marx’s law.

JCD: There are big differences of the profit rate among countries? Those differences could explain the international movement of capital? How this can be linked with the international movement of financial capital and, more specifically, with money capital? 

MR: Yes, there are big differences in the level of the rate of profit in different countries.  Theoretically, Marx’s law would suggest a higher rate of profit in so-called emerging economies where the organic composition of capital should be lower (more use of human labour).  And we would expect that, as these countries industrialise, the organic composition of capital would rise and the rate of profit would fall.  And the empirical work that has been done shows just that!

Theoretically too, we would expect capital flows to be towards those economies with higher rates of profit.  There is some evidence to suggest this is the case – in the period of globalization, capital flows to the emerging economies rose sharply. But it is also the case that flows among the more advanced economies (Europe, US, Japan) are still larger.  That is perhaps due to trade and investment pacts and the huge stock of capital already in these areas.  Finance capital flows more efficiently and effectively there.  Also in the recent period of ‘financialisation’ and with falling profitability in productive capital, capital has flowed into fictitious capital markets (portfolio capital) and not into the more productive sectors.

JCD: From the point of view of the falling profit rate thesis: how can you explain so-called financialization? For the neoliberal period what do you think about the explanation in Anwar Shaikh’s latest book?

MR: Although profitability in the major economies stopped falling from the early 1980s up to the end of the 20^th century due to counteracting factors, one of those counteracting factors was the switch from productive capital, where profitability did not recover, to financial and unproductive sectors like property.  Financial profits boomed and investment was into fictitious sectors.  Financialisation could be the word to describe this development.  In my view, it does not mean that finance capital is now the decisive factor in crises or slumps.  Nor does it mean the Great Recession was just a financial crisis or a ‘Minsky moment’ (to refer to Hyman Minsky’s thesis that crises are a result of ‘financial instability’ alone). Crises always appear as monetary panics or financial collapses, because capitalism is a monetary economy.  But that is only a symptom of the underlying cause of crises, namely the failure to make enough money!  Anwar Shaikh’s explanation of crises in his latest book seems fairly close to mine, except that he seems to have more faith in Keynesian policies of government spending and the multiplier to enable capitalism to avoid or at least delay a slump.

JCD: According to the data, the line of causation of the crisis goes from falling profitability to an eventual reduction of the gross level of profits. This leads to a fall in the level of investment, and later to production and consumption. So the fall in the consumption is the expression of the crisis, but not its cause? This thesis invalidates the Kalecki-Minsky theory in two ways: a) the determinants of profit, and b) the role of financial instability?

MR: Yes, that pretty much sums up my view of the causation process in cycles of boom and slump.  And the empirical evidence supports this line of causation.  Unlike the Keynesians, the movement of personal consumption is not the driver of slumps, it coincides with them, and so is part of the description of a slump.  Indeed, personal consumption does not fall much in recessions (even in the Great Recession).  What does fall heavily is capitalist investment and this drops before the slump or fall in consumption or employment.  So business investment is the driver not consumption.  Investment is part of ‘aggregate demand’ to use the Keynesian category, but it is led by profits and profitability – contrary to the theoretical view of Keynes-Kalecki who see investment as creating profit.  Their view is partly because Keynes and Kalecki accepted marginalism and rejected Marx’ value theory of profit as coming from the exploitation of labour.  Indeed, for Kalecki, profit is only ‘rent’ that comes from monopoly power replacing competition.  Thus we have loads of heterodox explanations of modern capitalism as one of ‘rent extraction’, monopoly capital, finance capital – but not plain capitalism making profit from the exploitation of labour.

JCD: Can we assert, as the Duménil and Levy do, that there are two kinds of crisis: the classic one of profitability and other of the crisis in finance capitalism?

MR: Well, we can assert it, but is it right?  D-L argue that the depression of the 1880s was a classic profitability crisis; that the crash of 1929 and the depression of the 1930s was not.  Instead it was one of rising inequality and debt, sparking a speculative slump.  The 1970s was another classic profitability crisis, but the global financial crash of 2008 and the Great Recession was similar to 1929 and the 1930s – a result of rising inequality and debt.

If D-L are right, then we Marxists do not have viable general theory of crisis as each major crisis under capitalism appears to have a different cause.  So we may then have to fall back on the theories of the post-Keynesian/neo-Ricardians who look to a distribution theory, namely that some crises are ‘wage-led’ like the current one due to falling wage share resulting in a lack of wage demand; or ‘profit-led’, like the 1970s when wages squeezed profits.

Fortunately, the evidence, in my view, does not show that D-L or the post-Keynesians are right.  When wage share is adjusted for social benefits, overall workers’ incomes as a share of net national incomes did not fall in the neoliberal period.  Wage share fell in the capitalist sector, as the rate of surplus value rose, but not in the overall measure of the economy.  Rising inequality was the result of an increased rate of surplus value and capital gains in financial speculation, but it was not the cause of crises.  All the major crises came after a fall in profitability (particularly in productive sectors) and then a collapse in profits (industrial profits in the 1870s and 1930s and financial profits at first in the Great Recession).  Wages did not collapse in any of these slumps until they started.

JCD: Is there a possibility of solution for the current crisis? Can we talk about the tendency of the world capitalism towards its decomposition? Is a broad war scenario a real possibility? In such case, could it be a solution for world capitalism as it was with World War II?

MR: There is no permanent crisis.  If human political action is absent in changing the capitalist mode of production, then capitalism will revive as the profitability of capital is restored – for a while.  In my view, to restore profitability will require another major slump before this decade is out – and the current ‘recovery’ since the end of the Great Recession in mid-2009 is now eight years old.  If a new slump eventually restores profitability, capitalism could have a new lease of life that might last 15 years, as it did after the second world war.  That war was very effective in raising profitability in the major economies to high levels not seen since the 1890s.  That laid the basis for capitalist expansion in Europe, Japan, the US and eventually industrial Asia.

In my view, another world war is most unlikely as this time such a war could threaten to annihilate capitalism itself and us with it.  Only if lunatic fascist or military dictators came to power in the major imperialist countries could this happen.  A war between the US and China or Russia is thus ruled out unless this happens.  More likely, profitability will be restored by economic slump and the failure of the working class to replace capitalism, as happened in the 1890s.  There is a mountain of new technology to be employed (robots, AI, genetics) that can shed labour and raise productivity.  But only for a while.  As Marx’s law shows, the organic composition of capital will rise and the rate of profit will eventually resume its downward trend.  And each time, it is getting more difficult for capitalism to develop the productive forces and be profitable.  That is its nemesis, along with the further growth of a world working class, which has never been larger.

JCD: By defending the falling profit rate it is assumed that the Marxist labor theory of value is valid. In the context of fiduciary money and the administered exchange rates (not in all cases) by the central banks, how can the link be explained between those two phenomena and the labor theory of value?

MR: Yes, Marx’s law of profitability is intimately connected with Marx’s value theory as it rests on two assumptions, both realistic in Marx’s view.  The first is that all value is created by labour alone (in conjunction with natural resources) and that the capitalist mode of production and competition leads to a rising organic composition as a trend.  But capitalism is a monetary economy.  Capitalists start with money as the crystallised form of previously accumulated value, and then advance money to buy means of production and employ a labour force, which in turn produces a new commodity or service (new value) which is sold on the market for money.  Money leads to more money through the exploitation of labour.

Capitalism is a monetary economy but it is not a money economy (alone).  Money cannot make more money if no new value is created and realized.  And that requires the employment and exploitation of labour power.  Marx said it was a fetish to think that money can create more money out of the air.  Yet mainstream and some heterodox economists seem to think it can.  When central banks expand the money supply through printing ‘fiat’ money or creating bank reserves (deposits), more recently so-called quantitative easing, this does not expand value.  It would only do so if this money is then put to productive use in increasing the means of production or the workforce to increase output and so increase value.  But, as Marx argued way back in the 1840s against the ‘quantity theory of money’, just expanding the supply of ‘fiat’ money will not increase value and production but is more likely to inflate prices and thus devalue the national currency, or inflate financial asset prices.  It is the latter that has mostly happened in the recent period of money printing.  Quantitative easing has not ended the current global depression but merely sparked new financial speculation.  The gap between the prices of fictitious capital and money value of productive capital has widened again – presaging a stock market collapse ahead.

JCD. How can we advance towards a serious Marxist theory of international commerce? Which works can be thought as the path to follow?

MR: Now that capital has become global and dominant, Marx’s value theory can be applied more realistically to international trade and investment.  The basic principles of Marxist theory apply: capital will flow to those areas where individual sector or national profit rates are higher, subject to trade and investment barriers.  National economies with lower average production costs ie more efficient capitals, will generate trade surpluses with those national economies that have higher average costs – subject to trade barriers and protectionism.  Which Marxist authors can help in developing the theory of international trade?  Henryk Grossman provided some important insights (Henryk_Grossman_on_imperialism).  Guglielmo Carchedi, in his book, Frontiers of Political Economy, (218328342-Carchedi-Frontiers-of-Political-Economy) has the most comprehensive analysis.  And Anwar Shaikh’s contribution in his latest book, Capitalism, is important.

JCD: What should be taught about Marxism to students of economics?

MR: Well, Marxism is a big subject.  In my view, Marxism is a scientific analysis of human social relations both historically and conceptually.  It explains how human social organization works, how it got like this and offers a view of where it could go.  Above all, it is fundamentally based on the view that the history of human social organization up to now has been one of class division (and struggle).  Since ‘civilisation’ began, there have been rulers who live off the labour of the ruled and dominate and oppress the many to preserve their wealth and rule.  But this social structure is the result of scarcity and the  ability of elites to gain control of scarce resources.  But now, with technology, a world of abundance and the reduction of toil and labour to the minimum is possible globally.  That creates the objective conditions for a different form of social organization based on planning and democracy for all.

What Marxism also argues is that current mode of production and social relations called capitalism cannot deliver on this world of abundance and the end of toil.  It is a mode still based on scarcity and class division.  And it is a promoter of crises, inequality and wars. But it is not eternal and the best we can do. Capitalism has not always existed and all modes of production come to an end.  And indeed it can be dispensed with as the ‘economic problem’ can now be resolved.

Within this view, students of economics need to learn Marx’s theory of value to understand the different forms of class society and the special nature of the capitalist form.  Against that, they need to understand the theories of mainstream economics and its heterodox critics so that they can follow the differences with Marxian political economy.

JCD: One of the main concerns of students is the utility of the knowledge they acquire in the class rooms to get a job. In that perspective, how do we motivate them to study Marxism?

MR: Well, this is understandable.  Everybody needs to make a living and if they are not to become capitalists themselves (and nearly all will not), they need a job.  The world of jobs is hard even for those with a good education and skills.  I have worked in the financial sector for decades and it pays better than nearly any other sector – so it is popular especially among economics students.  Obviously it is easier to do a white-collar ‘professional’ occupation in terms of physical effort and working conditions etc.  But even then, the stress can be high – long hours, deadlines, lack of job security, dependence on bonuses etc.  Alienation, as Marx called it, applies there too. So students should know that ‘making a living’ is only one part of life and it is mainly toil.

Moreover, if they want things to be better for them and their children, they need a better economy, a better world without war, poverty and nature etc with less hours of toil and more hours for real creative development.  Marxism can explain how things are and why, what can happen next and also how things could and should be better.