About 230 people attended the Capital.150 symposium that I, along with Kings College lecturers Alex Callinicos and Lucia Pradella, dreamed up some time earlier this year. The aim was to discuss the modern relevance of Marx’s Capital, published for the first time in September 1867.
Of course, this was not an original idea and there have been several such conferences around the world on this theme already. But Capital.150 did manage to attract some leading Marxist scholars to present papers and the initial feedback from those attending seems to be that the speakers’contributions were good, but that there was not enough time for discussion from the floor. I agree, especially as those attending knew what they were talking about when it comes to Marx and Capital. The lesson for any future such events (if ever!) is: less speakers, less sessions and more time in each.
The symposium kicked off on the first day with papers on Marx’s theory of crises and its application to modern capitalism. Guglielmo Carchedi delivered a long paper for the symposium but was ill (Carchedi The old and the new). So I was forced to present it as best I could.
Carchedi argued that we could measure the exhaustion of post-1945 capitalism in the increasing number of financial crises and slumps as the 20th century ended. He did so by identifying indicators that could reveal why and when slumps took place.
Carchedi based his analysis on Marx’s law of the tendency of the rate of profit to fall as the underlying driver of regular and recurrent slumps in capitalist production. He used data from the US economy to show that if you stripped out the effect of any rise in the rate of exploitation in the US corporate sector (CE-ARP), there was a clear secular decline in the rate of profit from 1945 to now, running inversely with the rise in organic composition of capital. Even if you relaxed the condition of an unchanged rate of exploitation (VE-ARP), the average rate of profit in the US economy still fluctuated around a secular fall.
Carchedi also showed that the three major countertendencies to Marx’s tendential law of falling profitability: namely a rising rate of surplus value; a falling cost of means of production and technology cheapening constant capital; and in the neo-liberal era, a shift from productive to financial investment to boost profitability, did not succeed in reversing Marx’s law. The tendency overcame the countertendencies in post-war US.
Now this result is nothing new, as many scholars have found a similar result. But what was new in Carchedi’s paper was that he identified some extra tendential forces driving down profitability AND key indicators for when crises actually occur.
The secondary tendential factors, as Carchedi called them, were: steadily falling employment relative to overall investment: and steadily falling new value as a share of total value. It is these factors that demonstrate the progressive exhaustion of capitalism in its present phase – according to Carchedi.
Going further, Carchedi identified three indicators for when crises occur: when the change in profitability (CE-ARP), employment and new value are all negative at the same time. Whenever that happened (12 times), it coincided with a crisis or slump in production in the US. This is a very useful indicator – for example, it is not happening in 2017 in the US, where employment is rising and so is new value (just). So, on the Carchedi gauge, a slump is not imminent.
The other great innovation in Carchedi’s new paper is to show that financial crises were the product of a crisis of profitability in the productive sectors, not vice versa as the ‘financialisation’ theorists claim. He shows that financial crises occur when financial profits fall, but more important, they must also coincide with a fall in productive sector profits.
As Carchedi points out, “the first 30 years of post WW2 Us capitalist development were free from financial crises”. Only when profitability in the productive sector fell in the 1970s, was there a migration of capital to the financial unproductive sphere that during the neo-liberal period delivered more financial crises. “The deterioration of the productive sector in the pre-crisis years is thus the common cause of both financial and non-financial crises… it follows that the productive sector determines the financial sector, contrary to the financialisation thesis.”
Carchedi goes on to show that it was not the lack of wage demand that caused crises or the failure to boost government spending as the Keynesians argue – of the 12 post-war crises, eleven were preceded by rising wages and rising government spending!
Thus Carchedi concludes that Marx’s law of profitability remains the best explanation of crises under capitalism and its secular fall, particularly in the productive sector, reveals that capitalism is exhausting its productive potential. It will require a major destruction of capital values, as in WW2, to change this. What happens after that is an open question. As he puts it in the title of his paper, taken from a Gramsci quote, The old is dying but the new cannot be born – and to rephrase: what will the new be?
Now I have dwelt on Carchedi’s paper in some depth because I think it has much to tell us with lots of evidence to back up Marx’s contribution to an understanding of crises in modern capitalism – and also because it hardly got a mention from the discussant in this session, Professor Ben Fine from SOAS. Although Ben said he did ‘agree with’ Marx’s law of the tendency of the rate of profit to fall, he ignored the relevance of Carchedi’s paper because he reckoned the modern ‘structure of capital’ had changed so much through ‘financialisation’. Ben did not have any time to explain what he meant, but presumably the changing financial structure of capitalism has made Marx’s law of profitability irrelevant to crises.
The other participant in this session was Paul Mattick Jnr who also had nothing to say on Carchedi’s paper, but for a different reason (Mattick Abstraction and Crisis). For Paul, even trying to estimate the rate of profit a la Marx is impossible and unnecessary. It is impossible because Marxian categories are in value terms and modern bourgeois national accounts do not allow us to delineate measures of value to test Marx’s law. And it is unnecessary because the mere facts of regular financial crises and slumps in capitalist production show that Marx was right. In Capital, Marx provides us with abstractions that enables us to explain the concrete reality of crises. We can still describe these crises, but we cannot and don’t need to try to ‘test’ Marx’s laws in some pseudo natural science way with distorted bourgeois data.
Now Paul has presented this view on Marxist scientific analysis before, when he was discussant at Left Forum in New York on a critique of my book, The Long Depression, and he is soon to publish a new book on the subject. As I replied then, “Using general events or trends to ‘illustrate’ the validity of a law can help. But that is not enough. To justify Marx’s law of profitability, I reckon we need to go further scientifically. That means measuring profitability and connecting it causally with business investment and growth and slumps. Then we can even make predictions or forecasts of future crises. And only then can other theories be dismissed by using a body of empirical evidence that backs Marx’s law.” This may be difficult but not impossible. Moreover, it is necessary. Otherwise, alternative theories to Marx’s theory will continue to claim validity and hold sway. And that is bad news because these alternative theories deliver policies that look to ‘manage’ or ‘correct’ capitalism rather than replace it. So they will not work in the interests of the majority (the working class) and will instead perpetuate the iniquities and horrors of capitalism.
Moreover, I think that was Marx’s view to test things empirically, at least according to the evidence shown by Rolf Hecker in another paper in this session (Hecker 1857-8 Crisis). Rolf is a top scholar on Marx’s original writings and notebooks. And in looking at Marx’s analysis of the 1857-8 general economic crisis, he found that Marx compiled detailed data (a la excel) on credit, interest rates and production (Hecker Crisis PP) in the search for empirical indicators of the direction and depth of the 1857 crisis.
Rolf reproduced Marx’s work in modern graphic form.
Apparently, Marx did not think it a waste of time to do empirical testing of his theories. And now we have a great advantage over Marx. We can stand on his shoulders and use the last 150 years of crises and data to test Marx’s laws against reality. Carchedi’s paper adds further explanatory power to that task.
And so did other papers at Capital.150. But more on that in part two of my review of the symposium.
Michael Roberts Blog 
Empirical testing is a condition sine qua non for Marxism and science in general. I completely agree on this with Michael. . I believe Carchedi’s contribution is a great step forward that strengthens our capacity for prediction of cycles and crisis. Which in turn is very useful for activists in the struggle against every day exploitation, allowing us to anticipate situations and attacks by the bosses..
There is also a great need to understand how crisis spread from central imperialist countries to other imperialist and colonial countries and regions. In Latin America we are entering the sixth year since the global crisis hit the region (1911), and though there are some signs of recovery in Brazil and Argentina, these are very weak. Indicating that we are -as Michael explained in his book- in a prolonged downturn.
Why isn’t there a raise in the rate of the profit with the new measure in the neo liberal period?
I mean, I can see the parameter that the rate of exploitation did not rise, but how that can kept constant, to begin with?
here I prove another of Marx’s theories based on empirical data
On Thu, Sep 21, 2017 at 12:46 PM, Michael Roberts Blog wrote:
> michael roberts posted: “About 230 people attended the Capital.150 > symposium that I, along with Kings College lecturers Alex Callinicos and > Lucia Pradella, dreamed up some time earlier this year. The aim was to > discuss the modern relevance of Marxâs Capital, published for the fi” >
This: “The secondary tendential factors, as Carchedi called them, were: steadily falling employment relative to overall investment: and steadily falling new value as a share of total value.”
is exactly right. However, I wouldn’t call them secondary factors– but the long term predominant factors. Less new value, proportionately, pumped into the system.
I think that points to the misapprehension of the “role” of productivity in Marx’s analysis– in that productivity itself cannot create any more value; it can appropriate already existing value– but it creates no new exchange value. Hence capital is compelled to seek lower wage sources of labor power, and drive the wage below the cost of reproducing the labor power.
What then accounts for periods of “improved” profitability? a)the improvement generally is within the trend of a structural decline b) the improvement is also generally the result in improvement in means of communication and transportation– leading to accelerated turnover of capital, boosting profits. The overall “value trend” however remains on the structural decline, as the organic composition retains its structural bias– displacing living labor with accumulated labor embodied in the means of production.
Thanks for making Carchedi’s and Hecker’s papers available.
I was at Capital 150, which I thoroughly enjoyed, but was disappointed with Fine’s seemingly supercilious attitude and Mattick’s approach, which seemed to effectively reduce Marxist theoretical development to some sort of scholastic appreciation of the unknowable.
Congrats to the organisers.
M.
One more really great post; thank you. Carchedi’s results and approach match mine pretty closely. In the first of a series of papers I have presented since 2014 to Canada’s Socialist Studies Society, I argued that Keynesian policies can neither keep capitalism from falling into crisis nor get it out.
In the second I demonstrated that the 2007-8 crisis, far from being purely or primarily a financial crisis as some have argued, in fact began with over-investment and over-production in US residential home construction; the collapse of the home-building boom was delayed because even after its profitability began to decline in 2005, homes were still being built and land accumulated in anticipation of the profits to be made in securitizing the mortgages. The foreclosure crisis was pushed along as layoffs spread outward from the home-building and land-development sectors.
Long before mortgage dealers and financial houses began failing, a banking crisis was already spreading due to the mounting insolvency of builders, property developers and speculators. The foreclosure crisis led to more layoffs, foreclosures etc in a growing downward spiral. The banking crisis undermined the markets for mortgage-backed securities because failing banks and corporations began flooding them with increasingly devalued paper. It expanded into a general crisis of capital when the money markets stopped functioning, requiring state intervention. From all this, it’s clear that financial crises are never very far removed from problems in production and the realization of surplus value. After all, all that fictitious capital has to be based on production somewhere.
The paper I gave this year is also consistent with Carchedi’s emphasis on the falling profit rate. Based on the assumption that productivity will continue to rise and profitability to fall, I demonstrate the reasons for both a growing reserve army of unemployed workers and the likelihood of a jobs crisis as the US trends toward “peak jobs” — the point at which job creation in the service sector no longer covers off jobs lost in goods production and growth in the working-age population.
There will almost certainly be accelerated job loss in goods-producing sectors and an aggressive drive toward more tech change in service industries over the coming decade. Pretty much anyone who closely studies technology believes that will happen. And net job growth is already losing ground to increases in the size of the working-age population, which is why the labour-force participation rate has plummeted in the past decade. I even closed with Carchedi’s same citation: Gramsci’s observation about the old, the new and the “morbid symptoms”. Certainly I have never seem more of them, although at the same time never have so clearly seen the possible end of “factory tyranny” and the wage system.
All this underlines the power of the falling-profit theory as an analytic device. I loved Paul’s “Business as Usual”. But I strongly disagree with his resistance to using the concept as an empirical means of getting at capital’s laws of motion. Using it along with other Marxist concepts such as the circuits of capital, finance capital and fictitious capital allows us to develop amazing insights into how capitalism works and where it is likely to take us — discoveries that are totally unavailable to mainstream economics.
Thanks for all your posts, by the way — they are fabulous!
Warmest regards,
K.
The rate of profit that Marx talks about in relation to the tendency for the rate of profit to fall, is the profit margin.
“{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay.”
(Theories of Surplus Value, Chapter 16)
In other words, all its really saying is that as the volume of production rises, the profit margin falls, and that is due to the fact that whilst the proportion in each unit of output, of labour and wear and tear of fixed capital falls, the proportion of material cost rises, which is a direct consequence of the rise in productivity. More and better machines, mean that each unit of labour processes more material, (and each machine, also now cheaper machine, also processes more material, so its wear and tear gets spread over more output) so the proportion of material (circulating constant capital) rises in total output, and the proportion of labour, and wear and tear of machines declines.
Its to that that the countervailing factors apply. But, the other point here is that the range of commodities being produced also expands. In Theories of Surplus Value, Marx chastises Ricardo for believing that there was some average rate of profit down to which all other rates of profit must be reduced. Marx sets out this argument in relation to the role of foreign trade. If the rate of profit in foreign trade is higher than domestic trade, then contrary to what Ricardo says, the average rate of profit must be raised, Marx says. Competition will, indeed tend to average out the rate, but it must, simply on the basis of mathematics, average it out to a now higher level than it stood at previously.
So, if capital migrates overseas because a higher rate of profit is available there, this must act to raise the average rate of profit at home, Marx says, for the same reason that competition raises the rate of profit in low profit spheres, via the process of forming an average rate of profit. But, that also applies to every new higher profit sphere of production.
What determines the potential for capital accumulation is not this rate of profit/profit margin on which the falling rate tendency is based upon, but is the annual rate of profit. Having gone through various refinements in Capital III, of these different rates of profit, Marx even says that from that point on the term should be the General Annual Rate of Profit. It is the General Annual Rate of Profit, which determines – setting aside the use of credit, and other sources of capital – the rate at which the total social capital can be expanded.
Yes, of course, if the rate of profit rises sharply that may cause capitalists to borrow and rush to invest, and vice versa, but such short spikes and contractions of the rate of profit are not what the Tendency for falling profits is about. It is about a long run tendency, so long run, Marx says that, it cannot even be perceived on a day to day or even year to basis! The sharp rises and contractions of the rate of profit are not a consequence of the long run tendency, but of short run squeezes, as wages spike higher, as sharp rises in output cause material shortages, and so on. In other words, they are the kind of squeeze on profits that Adam Smith describes, and which formed the basis of his own theory of the falling rate of profit, and which provoked Marx to respond.
“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.”
The annual rate of profit has been driven higher as a direct result of the sharp rise in productivity, which has reduced the value of the fixed capital stock, via moral depreciation, has made the potential for reproducing fixed capital much greater, due to its reduced value, has vastly reduced the value of labour-power, driving the rate of surplus value. The average rate of profit, therefore, based upon the annual rate of profit, not the profit margin has thereby, been driven higher, making increased accumulation possible.
What drives the normal pace of accumulation, as Marx sets out against Ricardo, is the expansion of the market, i.e. usually in Mar’s time the rise in population. As the population expanded, demand expanded, and capitalists expected such expansion, and so devoted a portion of their profits to such expansion, and that meant also that the increased population provided the additional workers required for the expansion, and those workers then had wages to spend so that the increased output found the increased monetary demand from the resultant wages, prices, profits, rent and interest, as well as from capital itself that required to reproduce in kind its constant capital.
Its clear that the long run tendency for the rate of profit to fall, as opposed to short run sharp movement in the rate of profit due to a profits squeeze, or vice versa, can have no impact in that regard, precisely because its a long run tendency. But, taking marx’s analysis even of the tendency for the rate of profit to fall, as opposed to the Smithian, Malthusian and Ricardian theories of the falling rate of profit, which are really just theories of a profits squeeze caused by rising wages, and falling profits, its clear that the Law itself in modern capitalism is pretty much dead as a doornail.
The law depends upon rising social productivity, which causes the proportion of labour and wear and tear of fixed capital to fall as a proportion of the value of output, whilst the proportion of material cost rises. In a capitalism based upon material production that makes perfect sense, increased material production requires ever expanding amounts of material to be processed, and rising productivity brings that about. Indeed, in regard to continued material production that continues to be the case. All of the cars, chocolate bars and so on continue to be produced in ever expanding quantities, requiring more and materials, but requiring less and less labour for their production, and less and less wear and tear of materials (both proportionally, and sometimes absolutely).
But, in the modern capitalist economy, such material production accounts for only 20% of value creation, and surplus value production. 80% of the economy comprises service industries. These industries can expand their output considerably, but require very little if any additional material, because they are not based upon the processing of such material, other than the requirement for auxiliary materials. So, the driving force of the law of the tendency for the rate of profit to fall, as described by marx as against the theories of Smith, Malthus and Ricardo, no longer exists, in 80% of the economy.
If you are implying that increased turnover time can save the annual average rate of profit from falling, then I would have to disagree.
Imagine that the typical turnover time in, say, the production of a certain type of shoe is 1 year. Imagine that the average rate of profit is 100% (crazy number, I know, but it will make the math simpler later). Imagine that a shoe’s socially-necessary (i.e. typical) cost of production is 10 gold ounces. The price of production of the shoe will then be 20 gold oz.
What happens if an individual producer can reduce the turnover time to six months? Now that producer can invest 10 gold ounces and obtain 20 gold oz. back by mid-year, which can be immediately re-invested to produce 2 shoes, which will sell for 40 gold z. by mid-year. It would seem that this individual’s yearly profit rate has exploded from 100% to 300%.
However, what happens if this decline in turnover time spreads to the entire shoe-making sector generally, or even to the entire economy?
If it spreads to the entire shoe industry, then shoe-makers will now be making above average yearly profit rates of 300%, so capital will flood into the shoe industry, driving supply up and the market prices of shoes down until shoe production once again yields only a 100% annual profit rate. What price of production will it take to yield a 100% annual profit rate if the typical turnover time in this industry is now 6 months instead of 1 year? The new price of production will be 14.14 gold oz. Where before the price of production was a factor of 2^1 more than the cost of production (i.e. a 100% profit rate), the new price of production will be a factor of 2^(1/2) (i.e. sqrt(2)) more than the cost of production, since the turnover time has halved. Now a production price of 14.14 gold oz. will allow a typical shoe producer to obtain a profit of 4.14 gold oz. from the first circuit of capital, which can then be plowed back into production at mid-year to produce 1.414 shoes, each of which will sell for 14.14 gold oz, yielding 20 oz. by the end of the year, for a 100% annual rate of profit as before, despite the fact that the profit margin per-unit is now only 41.4%.
In other words, techniques to decrease turnover time are just like any other technique in the production process. At first it gives the early adopters an advantage, but as it becomes adopted generally by producers, the party is ruined for everyone. As with any other productivity-enhancing technique, it is the per-unit price that changes, not the average rate of profit.
But what if shorter turnover times became generally adopted across the economy as a whole? Surely that would increase the average rate of profit! Nope. Not without a corresponding increase in money material (i.e. gold) in order to realize a higher average annual rate of profit. And gold can’t be conjured out of the ground simply by circulating goods more quickly–especially if we are talking about needing a 300% increase in the world gold stockpile in a given year rather than a 100% increase!
As for what drives the expansion of the market, it is not population growth, for what good are more people if they collectively have no more money to purchase things with? It is the expansion in the world gold stockpile (or rather, the commodity-money stockpile, whatever that commodity-money serving as the universal equivalent may be at any given time) that ultimately determines and constrains the expansion of the market, as Sam Williams has explained in detail in his blog.
You seem to have misunderstood the principle of the effect of the rate of turnover on the annual rate of profit, as described by Marx. The whole point that Marx makes is that the change in the rate of turnover does not affect the value of the commodities produced. In terms of the amount of laid-out capital, i.e. cost of production, it does not change, as a result of a rise in the rate of turnover, and if the rate of surplus value remains the same, the proportion of surplus value also thereby remains constant.
The means by which the rate of turnover affects the annual rate of profit is that it reduces the amount of capital advanced, in order to produce a given mass of value, and of surplus value, and thereby causes the annual rate of profit to rise.
For example, suppose that the amount of output required for a working period is 100 units. To produce this output currently requires 5 weeks of a 50 week year. We will assume no circulation time, for simplicity of calculation, and also no fixed capital.
The capital comprises:
c 100 (material) + v 100 and with a 100% rate of surplus value s = 100. The value of the output is 300 for 100 units equals 3 per unit. The rate of profit is 50%, and as the capital turns over 10 times the annual rate of profit is 500%.
Suppose the workforce doubles, so that the 100 units are now produced in 2.5 weeks, so that the capital turns over 20 times in a year. The capital advanced for materials remains the same, and so does the capital advanced for wages, because although twice as much material and labour-power is now employed, it is advanced for only half the time.
So now, we have,
c 100 materials + v 100 + s 100. The rate of surplus value remains 100%, the rate of profit remains 50%. The value of the output for the working period remains 300, and the value per unit of output remains 3. But, now after just 2.5 weeks the advanced capital returns and is advanced again. So, now the capital of 200 turns over 20 times in the year, and the amount of surplus value is 100 x 20 = 2,000, as opposed to being only 1,000 previously.
The annual rate of profit is now 2000/200 = 1,000% or twice what it was before, whilst the value of output per unit has remained exactly the same as has the rate of profit and rate of surplus value.
Now, as Marx and Engels set out, it may be that the rise in the rate of turnover is itself the result of a rise in productivity, in which case its not the rise in the rate of turnover which causes a fall in the value of the output, but the rise in social productivity. But, for the reasons they set out, the rise in social productivity, will have all of the countervailing effects on the rate of profit itself as set out in Chapter 14, such as a cheapening of the fixed and circulating constant capital, which itself raises the rate of profit, and a cheapening of labour-power which raises the rate of surplus and thence the annual rate of surplus value,a nd rate of profit and annual rate of profit.
The only area in which the rate of turnover affects the unit price of commodities, as Marx describes is in relation to the turnover of merchant capital. So, Marx demonstrates that a merchant capital of £1,000 with a 10% average annual rate of profit of 10%, would have to obtain £1,100 for the sale of commodities, if this capital turned over once during the year. If it sells 1,000 units, that means that each unit sells for £1.10.
However, if it turns over its capital twice during the year, it will sell 2,000 units during the year. The rate of profit/profit margin on these units must then halve to 5%. So, it then sells each unit for £1.05 rather than £1.10. This £0.05 of profit per unit then on 2,000 units produces £1,000 of profit for the year, which gives it the 10% average annual rate of profit, provided it can sell all of these 2,000 units as opposed to the 1,000 units it previously had to sell to make the average profit.
In fact, Marx sets this out again as another potential cause of crises.
You also seem to have misunderstood this point, where you say,
“If it spreads to the entire shoe industry, then shoe-makers will now be making above average yearly profit rates of 300%, so capital will flood into the shoe industry, driving supply up and the market prices of shoes down until shoe production once again yields only a 100% annual profit rate.”
The effect of the rise in the rate of turnover, will indeed be to raise the annual rate of profit in that sphere,a nd the consequence is that capital from other spheres will then flood into that area to obtain this higher annual rate of profit, and the effect of this will be to drive down the annual rate of profit in this sphere to the average. But, you have made the same mistake as Ricardo in believing that the average rate of profit is some mystically arrived at given quantum rather than being the total profit made in the economy divided by the advanced capital.
The whole point is that because in the example you give of the shoe industry, the annual rate of profit has risen from 100% to 300%, the average annual rate of profit for the entire economy has also thereby been changed. It is no longer 100% but something more than 100%, and how much more will depend upon what proportion of the total capital shoe production constitutes.
Marx chastises Ricardo for the mistake you and Sam Williams are making in that regard in relation to the effect of a higher rate of profit for capital involved in foreign trade. Ricardo made exactly the same argument you are making that if the rate of profit was higher in foreign trade capital would migrate to it, and the average would be reduced to its former level. Marx says this is totally impossible.
“On this point, Ricardo always helps himself out with the phrase: But in the old trades the quantity of labour employed has nevertheless remained the same, and so have wages. The general rate of profit is, however, determined by the ratio of unpaid labour to paid labour and to the capital advanced not in this or that sphere of the economy, but in all spheres to which the capital may be freely transferred. The ratio may stay the same in nine-tenths; but if it alters in one-tenth, then the general rate of profit in the ten-tenths must change. Whenever there is an increase in the quantity of unpaid labour set in motion by a capital of a given size, the effect of competition can only be that capitals of equal size draw equal dividends, equal shares in this increased surplus-labour; but not that the dividend of each individual capital remains the same or is reduced to its former share in surplus-labour, despite the increase of surplus-labour in proportion to the total capital advanced. If Ricardo makes this assumption he has no grounds whatsoever for contesting Adam Smith’s view that the rate of profit is reduced merely by the growing competition between capitals due to their accumulation. For he himself assumes here that the rate of profit is reduced simply by competition, although the rate of surplus-value is increasing. This is indeed connected with his second false assumption, that (leaving out of account the lowering or raising of wages) the rate of profit can never rise or fall, except as a result of temporary deviations of the market-price from the natural price. And what is natural price? That price which is equal to the capital outlay plus the average profit. Thus one arrives again at the assumption that average profit can only fall or rise in the same way as the relative surplus-value.
Ricardo is therefore wrong when, contradicting Adam Smith,
“Any change from one foreign trade to another, or from home to foreign trade, cannot, in my opinion, affect the rate of profits” (l.c., p. 413).
He is equally wrong in supposing that the rate of profit does not affect cost-prices because it does not affect values.
Ricardo is wrong in thinking that if, in consequence of particularly favourable circumstances, profits in a branch of foreign trade [rise above the general level,] the general level [of profits] must always be re-established by reducing [these profits] to the former level and not by raising the general level of profits.”
(Theories of Profit, Chapter 16)
As well as the whole basis of your argument being false and based upon a misunderstanding of the role of changes in the rate of turnover of capital on the average annual rate of profit, this other bit is also completely wrong, where you say.
“But what if shorter turnover times became generally adopted across the economy as a whole? Surely that would increase the average rate of profit! Nope. Not without a corresponding increase in money material (i.e. gold) in order to realize a higher average annual rate of profit. And gold can’t be conjured out of the ground simply by circulating goods more quickly–especially if we are talking about needing a 300% increase in the world gold stockpile in a given year rather than a 100% increase!”
That is totally wrong for the reasons that Marx sets out in Capital Volume II. Firstly, let’s take an economy where gold actually does function in the form of coin as money. The difference between money as the general commodity and all other commodities that it circulates, is that it is not consumed. If the velocity of circulation is, and say a gold coin has a nominal value of £1, then it will circulate £1 of commodities. If £1,000 of commodities are to be circulated, it will require 1,000 coins.
At the end, of the year, the £1,000 of commodities are circulated and consumed, but the £1,000 of gold coins remains in circulation. In fact, no additional gold need be produced to provide additional coins in order to circulate an additional £1,000 of commodities in the following year, because the required coinage already exists and is in circulation. The only additional gold production would be to replace any gold coins who’s wear had made them unusable.
True if the volume and value of commodities to be circulated rose from £1,000 to £3,000 that would require an additional £2,000 of gold coins, but even that in reality is false. Firstly, as Marx sets out in Volume II, the rise in the turnover of capital, would itself bring about a rise in the velocity of circulation of the currency. By its very nature the value of the commodities that previously were tied up in a working period of 5 weeks in the example I gave is now only tied up for 2.5 weeks. At the end of the 2.5 weeks, the capitalist now obtains money to the value of the produced commodities they would previously have had to wait 5 weeks to receive back.
They now throw this money equivalent back into circulation to buy the labour-power and material required for the next 2.5 week working period. As marx describes this increase in the circulation of capital necessarily implies an increase in the velocity of the currency. If the rate of turnover of capital trebles, the velocity of circulation of the currency may well treble along with it so that each coin now performs three transactions in the year, and so the original 1000 coins £1,000 circulates £3,000 of commodities.
Secondly, as Marx describes the development of industrial capitalism is inseparable from the development of commercial credit. Gold, as Marx says in Theories of Surplus Value, is only an external derivative form of value. The value of commodities continues to be determined by labour-time, not gold, and it is labour-time which is the immediate measure of value. To the extent that gold continues to act as the money commodity, and play the part of this external form of value, its role is to first act as the unit of account, and for that role the gold itself does not have to be present. I do not have to have physically present 1,000 £1 gold coins to be able to measure the exchange value of a collection of commodities to be £1,000. The gold simply acts as an equivalent form of the value of those commodities, a means of expression, of their actual value.
So long, as the value of the commodities in the possession of A and B are thereby measured on this basis, no gold is needed whatsoever for them to be able to exchange. If A sells £1,000 of commodities to B (which here is merely stating their exchange value in the form of a quantity of gold), they can accept from B an IOU to that equivalent amount of value. If then B sells £1,000 of commodities to A, they can similarly accept an IOU from A, or alternatively A can rip up the IOU they previously received from B. That is precisely, a Marx sets out, the basis upon which commercial arose. So long as clearing houses exist – and Marx describes that such clearing houses arose early on – so that these IOU’s (Bills of Exchange) can be reconciled one with another, the vast bulk of the value of transactions cancels itself out, with actual money, in the form of gold coins only required to cover the residual balances of these exchanges.
The more the turnover of capital increases, and the extent of trade increases with it, the more these residual balances form a proportionally smaller and smaller amount of the total value of trade, so that trade and the value circulated in the economy can increase way faster than the need to increase the amount of gold coinage put into circulation.
Thirdly, of course, very early on, it is not just Bills of exchange that replace gold coins in the process of circulation of commodities between trades, but that base metal coins, and paper replace gold coins in general circulation. In which case any amount of increase in the value of commodities being circulated can be accommodated without any additional gold being produced or minted into currency, because it merely requires the proportionate amount of increase in paper and other money tokens to achieve that effect.
Even that is increasingly irrelevant, because a large part of such transactions are now performed using electronic money, with the relevant amounts of value being transferred between accounts electronically without money or money tokens, or even credit, having to appear whatsoever.
Boffy: “The whole point that Marx makes is that the change in the rate of turnover does not affect the value of the commodities produced.”
It doesn’t affect the labor-values of the commodities produced, but it certainly is one source (alongside different organic compositions of capital) of systematic divergence of prices of production from labor-values!
Otherwise, you have no way of explaining the “aged wine paradox.” Why does finely aged wine that requires a long turnover period tend to fetch a higher price? Is it because the oak barrels and other capital equipment confer more value on the wine over time without any labor input, as the bourgeois economists would claim, or is it because the aged wine must have a higher price of production than its labor-value would normally warrant in order for that line of production to fetch an equal rate of profit over a period of time? It is the latter. The profit margin must increase to compensate for the slower typical turnover period so that the profit rate over time can equalize. I thought this was Marxism 101?
Boffy: “The means by which the rate of turnover affects the annual rate of profit is that it reduces the amount of capital advanced, in order to produce a given mass of value, and of surplus value, and thereby causes the annual rate of profit to rise.”
I agree with you here, except for the fact that the annual rate of profit is not measured in value, but the form of value—exchange-value. A higher turnover rate can indeed produce more value with a given value of capital initially advanced, but this higher valued produced will not automatically translate into higher exchange-value realized. Here prices of production will systematically diverge from labor-values so that the exchange-value realized remains the same (unless more money material is also produced, which is the only way that more exchange-value can be realized).
Boffy: “So now, we have,
c 100 materials + v 100 + s 100. The rate of surplus value remains 100%, the rate of profit remains 50%. The value of the output for the working period remains 300, and the value per unit of output remains 3. But, now after just 2.5 weeks the advanced capital returns and is advanced again. So, now the capital of 200 turns over 20 times in the year, and the amount of surplus value is 100 x 20 = 2,000, as opposed to being only 1,000 previously.
The annual rate of profit is now 2000/200 = 1,000% or twice what it was before, whilst the value of output per unit has remained exactly the same as has the rate of profit and rate of surplus value.”
It is correct that the surplus value will now be 2,000 as opposed to 1,000 on 100 advanced. However, it is an incorrect leap to assume that this will automatically mean a higher rate of profit. The rate of profit is measured in exchange-value—actual money—not abstract labor-value. And remember that profit is not truly realized until it is sold for money—a commodity “said to be worth x amount of money” is not the same thing as x amount of money. So, for average balances of exchange-value to be greater after a given time period, more exchange-value—money material—must actually exist! If the production of money material does not keep pace with surplus value generation, then production prices and actual annual profit rates will be forced to systematically diverge from labor-values.
“True if the volume and value of commodities to be circulated rose from £1,000 to £3,000 that would require an additional £2,000 of gold coins, but even that in reality is false. Firstly, as Marx sets out in Volume II, the rise in the turnover of capital, would itself bring about a rise in the velocity of circulation of the currency.”
I agree that this might bring about a rise in the velocity of circulation of currency, but no rise in the velocity of currency circulation, no matter how great, can increase the amount of profit realized in the form of money at any given time. If, at the start of the year, 10 capitalists collectively own 1,000 gold oz. (plus various assorted commodities “said to be worth x amount of gold”), and at the end of the year, those 10 capitalists collectively own 1,100 gold oz. plus various assorted commodities, then the average rate of profit over that given year can only be 10%, no matter how fast those commodities or capital have circulated over that year.
If those commodities and capital circulated faster over that year, then more commodities and a greater mass of *potential* (but not realized!) surplus value will have been produced, but neither these commodities nor their surplus value can be counted towards the profit rate except insofar as they can be exchanged to obtain a greater money balance! (And they won’t be able to realize a vastly greater money balance for their owners, on average, unless vastly more money material has been produced).
Remember, these commodities are just use-values to each capitalist except insofar as they can be exchanged for money. Counting these commodities as already practically the same as money is like counting one’s chickens before they hatch. It is falsely treating all commodities as if they all get to equally act as universal equivalents, as the “queen of commodities,” as Sam Williams puts it in his latest blog post.
Boffy: “So long as clearing houses exist – and Marx describes that such clearing houses arose early on – so that these IOU’s (Bills of Exchange) can be reconciled one with another, the vast bulk of the value of transactions cancels itself out, with actual money, in the form of gold coins only required to cover the residual balances of these exchanges.
The more the turnover of capital increases, and the extent of trade increases with it, the more these residual balances form a proportionally smaller and smaller amount of the total value of trade, so that trade and the value circulated in the economy can increase way faster than the need to increase the amount of gold coinage put into circulation.”
I agree that more gold is not needed in order to FACILITATE INCREASED CIRCULATION. But increased circulation is not the same thing as capitalists having more exchange-value, on average, at any given time. An ounce of gold that enters your hand one moment and leaves it the very next to purchase some other commodity is not a realized profit. You’ve simply converted one use-value into another use-value by using money as an intermediary. The latter use-value might be more useful to your production process, or your personal consumption wants, but it is not abstract social wealth. Capitalists have not accumulated more abstract social wealth except insofar as they have greater balances of the universal equivalent, on average, compared to before.
Think of this as a “stock”/”flow” discrepancy. You are conflating a “stock” phenomenon (profit) with a “flow” phenomenon “velocity of circulation,” or the number of individual gold coins or bills of exchange or other representations of value that happen to pass through your fingers over any given time. We don’t call a capitalist wealthy just because he has seen a lot of money pass through his hands, if his or her bank balance is only $1.
Reply To Citizen Cokane
“It doesn’t affect the labor-values of the commodities produced, but it certainly is one source (alongside different organic compositions of capital) of systematic divergence of prices of production from labor-values!”
That is absolutely true, and as you say Marxism 101. The point is it shows that you have misunderstood the function of the rate of turnover of capital on values and prices of production, if you think that a rise in the rate of turnover has no effect on the average annual rate of profit, which is what you had stated.
Let me first deal with the question of the price of production in the individual case. A rise in the rate of turnover of capital in the production of some particular commodity does not automatically result in a change in its price, which is the implication of what you have said. Yes, the price of production changes, but the price of production is only a notional price, a mathematically derived quantum, as indeed is the average rate of profit. But whether the particular commodity ever sells at this notional price of production, or whether it acts as the locus for the fluctuations in its market price is contingent on a number of factors that either enable or prevent competition from operating so as to reallocate capital accordingly.
The price of production is not some automatically arrived at quantum, but is itself the result of a process of movement of capital into and out of one sphere and into another, which raises the supply of some commodities, and reduces the supply of others. If anything prevents the operation of competition from achieving that, then the price of production cannot be established. The most obvious example of that, is Marx’s analysis of rent. The products of the land be they agricultural products, minerals, oil etc. never sell at their price of production (where landed property exists). They continue to sell at their exchange value, because the existence of landed property, prevents the influx of capital that would be required to compete away the surplus profit. The rent obtained by landed property is equal to this surplus profit.
But, in the 1980’s Marxist economists discussed the role of monopoly, which not only establishes barriers to entry for capital, but also barriers to exist, because huge amounts of capital invested in particular spheres cannot easily relocate to some other sphere, in the short term, simply because of a variation in the rate of profit. A look at the fact that capital remained locked up within GM for a long time whilst it was not just making less than the average rate of profit, but making losses on its car production, is an example of that, and in the UK, we have reportedly around 160,000 zombie companies that can only pay the interest on their loans, and lack the resources to pay off the borrowed capital.
In addition, we have the limitations on the movement of capital to compete away surplus profit that exists wherever some kind of patent exists, or where some factor of production is limited in supply, in which case again the commodity sells at a price above its price of production, resulting in a rent. And, of course, as Marx describes, we have all of those new spheres of production where the commodities produced sell at prices determined by their modified exchange value (modified because their inputs are simultaneously the outputs of other capitals sold at prices of production), because competition from other capitals has not yet been able to reallocate capital so as to compete away the surplus profit.
The actual prices that commodities sell at are continually being changed by changes in productivity, by changes in their actual values, by changes in their organic composition, and changes in the rat of turnover of their capital, and those prices are not at any one time equal to their price of production. There is, at any one time, no single system of prices, because prices are determined by all of these other factors, and competition only acts to create prices of production as a logical and historical process that is on going. As Engels puts in his Preface to Capital III,
“Schmidt strayed into this bypath when quite close to the solution, because he believed that he needed nothing short of a mathematical formula to demonstrate the conformance of the average price of every individual commodity with the law of value.”
As Engels goes on to show, Marx explanation is based upon a logical and historical process whereby exchange values are continually being transformed into prices of production, as a result of this competition, and the movement of capital from one sphere to another.
But, the main point here is your claim that this competition, acts to reduce the average annual rate of profit down to its former level, whenever a change in the rate of turnover in some particular sphere results in it obtaining a higher than average rate of profit. But, as I have already shown in my comment previously that is wrong. It was the argument put by Ricardo in relation to the effect of a higher rate of profit in foreign trade. As the quote I gave from Marx demonstrates, it is impossible for the average rate of profit to be reduced to its former level, if the rate of profit in one sphere rises. Competition must result in the additional surplus value being shared amongst the total capital, so that the average rate of profit rises. So, again, as I said, you were basing your argument on a misunderstanding of the function of the rate of turnover on the average annual rate of profit.
You then try to extricate yourself from that error, to which you had not responded, by leaping to the idea that the produced surplus value may not be actually realised as profit. Marx actually deals with that objection in the closing chapters of Volume III, where he tightens down his definitions of surplus value, to that which is realised. Of course, Marx himself also recognised that the fact that surplus value is produced, does not mean that it can be realised. The very fact that commodities are produced on an ever expanding scale creates that potential problem of a crisis of overproduction, as I also previously set out in relation to the situation facing a merchant capital, which has to sell 2,000 units with a profit margin of 5%, rather than 1,000 units with a profit margin of 10%.
As Marx says, in rejecting Say’s Law, and demonstrating the potential for a crisis of overproduction.
““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)
And,
“Say’s earth-shaking discovery that “commodities can only be bought with commodities” simply means that money is itself the converted form of the commodity. It does not prove by any means that because I can buy only with commodities, I can buy with my commodity, or that my purchasing power is related to the quantity of commodities I produce. 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.” (TOSV, Chapter 20)
But, this argument, that the recipients of money revenues, are under no obligation to use those revenues to buy commodities, or at least the total output of commodities, from those who previously exchanged this money for the commodities they bought, and certainly no obligation to pay the price of production for those commodities is completely different to the argument you are presenting here. In these comments, Marx is simply saying that consumers may have a falling marginal propensity to consume at least the main commodities, and a correspondingly rising marginal propensity to save, to hold on to the money they have received as revenues. And, the working of the system makes that inevitable in terms of the relations between different commodities whose productivity changes at different rates. So, as Marx says,
“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, Chapter 20)
Rather your argument is actually the kind of thing I would expect to hear from a gold bug or one of the fanatics from the Austrian School, rather than from a Marxist. It is simply a form of commodity fetishism, that confuses gold with money, in the way that Ricardo also did, and which led to the adoption of the disastrous 1844 Bank Act. In fact, Marx answers your point in Capital Volume II, and I have also addressed previously. Even in terms of an economy where gold continues to act as the money commodity, and gold acts as currency, your argument fails. As Marx describes in Capital II, the problem of where the money comes from that realises the surplus value, is itself resolved in answering the question of where the money comes from that realises the value of the commodities thrown into circulation, because the surplus value is itself already a component part of that value!
Moreover, your argument that prices of production diverge from exchange values because it may be the case that less of this money commodity is produced shows another failure to understand the process as set out by Marx, a failure that again was shared by Ricardo. It is not the amount of gold produced that is relevant, because as Marx sets out not all gold acts as the money commodity, some continues to act as a use value in jewellery production etc., but the quantity of gold minted and thrown into circulation. And, your argument demonstrates another misunderstanding, because if not enough gold is thrown into circulation so that effectively its price (measured against all other commodities) rises relative to its exchange value, then this affects both the exchange values of commodities, and their prices of production equally, because the exchange value, and the price of production are both measured in terms of units of this artificially inflated medium. The same is true in reverse, as Marx sets out in relation to the arguments of Samuel Bailey, and the fallacy of Ricardo in searching for a commodity with invariable value as a means of measuring the value of other commodities. If the exchange-value of the money commodity rises, whether because the labour-time required for its production rises, or because as in your argument it is provided in insufficient quantity, this will affect the exchange values of all commodities in the same same proportion, causing their prices to fall, and vice versa. The position in respect of prices of production is, thereby equally affected.
But, as I have already said, following Marx, even where gold acts as currency, this currency remains in circulation from one year to another. If the value of commodities being circulated in year 1 is £1,000, and 1,000 £1 gold coins are in circulation, with a velocity of 1, absolutely no gold production or additional gold coins require to be put into circulation in year 2 to circulate a further £1,000 of commodities, because the required currency is already in circulation. Only worn out coins need to be replaced. Even if the rate of profit rose by 300% for the whole economy in a single year, which is pretty unlikely, the additional gold coinage required, would only be that required to circulate the total value of those commodities, which would have risen by less than 300%.
But, in any case, we all know that this argument is far removed from reality, because the velocity of circulation even of gold coins rises as economic activity intensifies, as Marx had described. And, increasingly, the gold coins play no part in commodity circulation anyway. In Scotland, as Marx describes, there had always been a preference for paper banknotes over gold, and they took exception to the imposition of the 1845 Bank Act which replicated the insanity of the 1844 Act, in Scotland. Not only does commercial credit from an early point replace money in the trade between capitalists, but paper banknotes replace gold, so that the issue of whether enough gold is produced, or thrown into circulation disappears, provided, banknotes are thrown into circulation in sufficient quantity and appropriate denominations to effect the circulation of commodities and capital.
Indeed, as Marx describes the need to produce gold for coinage was an unnecessary expense for capital, which held back capital accumulation, as capital was invested in such production that could have been used productively. That is why it replaced gold with base metals, paper and credit. And, of course, in Britain, it was initially not gold but silver which acted as the money commodity, hence the historical origin of the Pound, as being 1 pound of sterling silver.
You say,
“An ounce of gold that enters your hand one moment and leaves it the very next to purchase some other commodity is not a realized profit. You’ve simply converted one use-value into another use-value by using money as an intermediary. The latter use-value might be more useful to your production process, or your personal consumption wants, but it is not abstract social wealth. Capitalists have not accumulated more abstract social wealth except insofar as they have greater balances of the universal equivalent, on average, compared to before.”
That again illustrates your commodity fetishism, which is more appropriate for a gold bug or Austrian than a Marxist. The last time I looked, the vast majority of capitalists, and of everyone else held their stored wealth NOT in the form of gold. The vast majority of people hold their personal wealth in the form of assets or else in the form of money balances held in bank accounts, and those banks too hold their deposits in similar form. Moreover, your argument here, in relation to capital is quite wrong. It is again more appropriate to an Austrian who see everything in terms of money as capital, and the increase in capital value arising from capital gain.
As Marx makes clear in Capital Volume II, and again in Capital III, Chapter 15, the productive and commercial capitalists are not at all interested in simply increasing this store of money, which is the driving force of the miser not the capitalist. They are only interested in obtaining more money-capital as a moment in the process of expanding their actual capital, be it productive capital in the case of the former or, their commodity-capital in the case of the latter. The circuit of capital of the former as Marx sets out in Capital II, is P…C’ – M’.M – C…P, and for the latter is C’ – M’.M -C. Money is not a termination point in these circuits of industrial capital, but only a moment within them. The objective is the increase in the actual capital, which means the increase in the physical use values that comprise that capital, and which thereby make possible the further increase in the production of surplus value and so profit, and the further accumulation of capital.
It matters not one jot to the productive-capitalist whether they see any gold as part of this process, or whether their profits simply take the form of an increase in their bank balance, which enables them to be able to set in motion more machines, material and labour-power, and the same is true of the merchant capitalist who is interested in being able to buy more commodities to resell, and thereby to make greater profits, so as in turn to accumulate yet more capital. The only capitalists interested in increasing their money-capital per se are the owners of loanable money capital, the owners of interest bearing capital.
As Marx sets out in Capital III, Chapter 49,
“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness. If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind. The excess may then be employed to form new additional capital or a larger portion of the product may be given the form of articles of consumption, or the surplus-labour may be reduced. On the other hand, should the productiveness of labour decrease, then a larger portion of the product must be used for the replacement of the former capital, and the surplus-product decreases.”
And, this is why, as Marx explains the rate of profit as a measure of this potential increase in the advanced capital must be measured on the basis of current reproduction costs, and not on the basi of historic prices. First, the use values that comprise the constant capital must be reproduced on a like for like basis, then the use values that comprise the wage goods (variable-capital) must be reproduced on a like for like basis, and then what is left over constitutes the social surplus product. If social productivity rises, the labour-time required to reproduce the use values that comprise the constant capital will fall, their value will fall, and this will be reflected in the value of the total output. If the labour-time required to reproduce the variable-capital declines the rate of surplus value will rise, and the mass of surplus value will rise. But, even if this latter does not occur, the rate of profit will have risen, as Marx explains, because the existing mass of surplus value will be able to expand the physical capital by a greater extent than it would prior to the fall in the value of that constant capital. That is also the truth that he sets out in his analysis of the circuit of productive-capital in Volume II.
As Marx says, in Capital III, Chapter 15,
“And the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour. It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production.”
“Otherwise, you have no way of explaining the “aged wine paradox.” Why does finely aged wine that requires a long turnover period tend to fetch a higher price? “
Not every last commodity produced under capitalism will have a price roughly in relation to its value. Because some prices are the result of the distribution of capitalism, so the concentration of wealth leads to a luxury goods market where prices are dictated by the level of the concentration of wealth. They are goods consumed by the capitalist class due to its exploitation of the other classes. High art prices are not the result of labour values but are a derivative based on how much exploitation there is in society.
I think you are unfair to Ben Fine. As he admitted at the beginning of his reply he had not had sufficient time to be able to read all of the papers he was replying to. However, I suspect that he disagrees with your position and those like Carchedi who follow the same approach on the FROP. I prefer the approach of Simon Clarke and indeed Michael Heinrich that Marx has not reached a complete and defined crisis theory.
Yes, I said, Ben had not had the time. But as you say, even so, he would not agree with Carchedi and me on FROP and its relevance to modern capitalism and crises. Fair enough – but we disagree. Nothing’s perfect but Clarke and Heinrich’s view that we cannot define a workable theory of crises from Marx’s work is wrong, in my view. I think Marx gives us a good ‘model’ with FROP and the general law of accumulation and absolute overaccumulation to work with. But as you can see, the debate continues.
I agree that Marx has given a good model of the causes of crises, as I have set out in my book Marx and Engels Theories of Crisis, but it has nothing to do with the law of the tendency for the rate of profit to fall.
In the main place where Marx sets out his theory of crises, in Theories of Surplus Value, Chapter 17, Marx does not mention the Law of Falling Profits even once, as such a cause. He does in that chapter, and in Chapter 16, discuss the role of profits squeezes in causing crises, particularly in relation to Smith and Ricardo. But, Marx also sets out a series of other factors that may cause a crisis that has nothing to do either with the law of falling profits or a profits squeeze.
Marx’s emphasis on setting out the cause of crises is in dispelling the myth of Say’s Law that supply creates its own demand. Marx shows that Say’s Law can only apply in systems of barter. Consequently, the argument put forward by James Mill, Ricardo and his followers that there cannot be a generalised crisis of overproduction, only of underconsumption, is false.
Once that assumption is dropped, it becomes apparent that a crisis can arise whenever production expands faster than the capacity for the market to absorb that production at prices than enable the consumed capital to be reproduced. The further argument put forward by the Ricardians that there could be an overproduction of capital but not of commodities, is also thereby disproved by Marx, because as he points out, capital is itself comprised of commodities.
As soon as its recognised as Marx says that, in a money economy, all that is required for a generalised overproduction to occur is that the demand for the general commodity – money – is greater than the demand for all other commodities, then Say’s Law falls, a fact that Keynes only recognised 60 years later.
The fact that in an economy based upon generalised commodity production the act of production and consumption is separated means that a crisis can always potentially occur where what is produced is not, therefore, consumed/demanded, i.e. where there has been overproduction. In pre-capitalist commodity producing economies that only affects the individual commodity producer who has overproduced, and can’t sell their output. In a capitalist economy, because production is on a much larger scale, and is based upon a large scale division of labour, whereby the output of one firm is simultaneously the input of another, and especially where such sales and purchases are based upon commercial credit given by each firm that means that an overproduction by several large producers can then become an overproduction of all their suppliers, and so on, and spreads into what marx calls a crisis of the second form, a payments crisis, as firms unable to realise the value of their production fail to make payments to suppliers and so on.
A crisis, Marx says can arise at any of the points where capital value is metamorphosed from one form to another, i.e. from money-capital to productive-capital, productive-capital to commodity-capital, and commodity-capital to money-capital. If, for example, as Marx describes in Capital III, Chapter 6, the US Civil War cuts off supplies of cotton to Lancashire textile producers, the money-capital of the latter cannot be metamorphosed into productive-capital, and a crisis arises. But, as he sets out at length in that same chapter, it need not be that supplies are cut off. It may only be that an economic boom causes demands for inputs to rise so sharply that supply cannot be increased fast enough to meet it that then causes the price of inputs to rise so sharply that the price of the final product rises to a level whereby the manufacturer has to absorb some or all of the higher input cost so as to keep their prices at a level that does not kill off final demand. The consequence may then be that their profit is slashed from having to absorb these higher input costs.
That is the case in Marx’s response to Ricardo’s discussion of such a profits squeeze later in TOSV Chapter 17. Also included in that both in Chapter 17, and in Capital III, Chapter 6 and 15, is the consequence as far as wages are concerned. Its here that Marx accepts Smith’s argument in relation to an overproduction of capital leading to a crisis, but only as a short run phenomenon.
Smith recognised that labour produces surplus value, but argued that capital is able to appropriate because labour is abundant relative to capital, so the price of capital is high and of labour low. He thought that as capital accumulates, the demand for labour would rise faster than the supply, so eventually wages would rise to a level whereby profits are squeezed out of existence. Hence mar’x earlier comment. But, Marx makes clear that such crisis do occur as a temporary phenomena. The solution to them is that capital engages in innovation, and introduces labour-saving technology that then causes wages to fall,a nd the rate of surplus value to rise.
As he sets out in Capital III, Chapter 15.
“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given….
There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”
It is the intensive accumulation that arises to resolve such a crisis, by replacing labour that results in the rise in productivity, the rise in the rate of surplus value, which creates the conditions for the Marxian law of the tendency of the falling rate of profit, as opposed to the Smithian, Malthusian, Ricardian versions. It is not the cause of crisis but the means by which they are resolved, and the basis created for the next upturn.
“I agree that Marx has given a good model of the causes of crises, …. but it has nothing to do with the law of the tendency for the rate of profit to fall.”
That’s because Marx always thought crises were short term eruptions, and self-disruptions of capitalist exchanges, brought on by one or more of the many antagonisms and conflicts that capital brought upon itself in its everyday compulsion to expand.
Marx viewed the tendency of the rate of profit to fall as just that– an indication of the overall limit to capital, and of capital, as being a “wealth generating” mode of production. The law of the tendency of the rate of profit to fall was to Marx the “most important law” of the capitalist mode of production precisely because it embodied this inherent limits to accumulation. Still, in Vol 3 Marx does explicitly state that the operation of the law causes crises in capitalism, and is a cause of overproduction, not a result of overproduction.
“He thought that as capital accumulates, the demand for labour would rise faster than the supply, so eventually wages would rise to a level whereby profits are squeezed out of existence. Hence mar’x earlier comment. But, Marx makes clear that such crisis do occur as a temporary phenomena. The solution to them is that capital engages in innovation, and introduces labour-saving technology that then causes wages to fall,a nd the rate of surplus value to rise.”
Got any data to verify that? Like where and when has there been a “crisis” CAUSED by a wage squeeze on profits? Marx, in numerous passages, points out that wages do not squeeze profits– that it is the relation of the wage– the time necessary to reproduce the value equivalent to the wage– to the total working time makes it possible that wages can and do rise without a) squeezing profits or b) causing prices to rise.
But so much for abstractions: where concretely has that favorite bugaboo of bourgeois political economists– the wage squeeze, actually precipitated a crisis of profitability. Certainly not in the US during the long deflation 1873-1898; nor in 1912; nor in the run-up to, or during the Great Depression, nor in any decade of the post WW2 expansion, and then structural decline in rates of growth that followed 1970. Exactly where is there a profit squeeze caused by wage increases that produced a “crisis”? Anybody want to try and make that case for the period since 2008, anywhere in the world?
And this: “It is the intensive accumulation that arises to resolve such a crisis, by replacing labour that results in the rise in productivity, the rise in the rate of surplus value, which creates the conditions for the Marxian law of the tendency of the falling rate of profit, as opposed to the Smithian, Malthusian, Ricardian versions. It is not the cause of crisis but the means by which they are resolved, and the basis created for the next upturn.”
takes the cake. Intensive accumulation that resolves a crisis…” like the crisis of the Great Depression– “resolved” not by the accumulation of capital, but widespread destruction of capital, devastating approximately 70% of the industrial infrastructure of Europe by the end of 1945? Where GDP for both conquered and conquerors countries was below where it had been in 1939–except for the US and the UK?
This is typical Boff-i-cation– nonsense that has only random, and accidental contact with the actual mechanisms by which capital sustains itself.
All of this is gratifying that the theory of the decline in the rate of profit continues to be proved. But, if this doesn’t become part of the consciousness of people, esp in this US, then what is the use? Of course, they won’t see it in the mainstream media or in any significant way in the universities. What about Youtube? I’ve seen a few socialist videos on the subject, but they are swamped by pro-capitalist propaganda.
There must be something that can be done. Otherwise we just lurch from crisis to crisis and neo-liberalism becomes more massive and entrenched although at as increasingly smaller rate.
Where’s the youtube video of this conference?
Coming
“…Then we can even make predictions or forecasts of future crises. … it is necessary. Otherwise, alternative theories to Marx’s theory will continue to claim validity and hold sway. And that is bad news because these alternative theories deliver policies that look to ‘manage’ or ‘correct’ capitalism rather than replace it.” *** Ha. The ruling class will not do away with its capitalism because of predictions no matter how many times they are confirmed. The scientific use of the scientific economics founded by Marx lies in its contribution to the revolutionary overthrow of capitalism. For example, discerning and explaining the arrival of capitalist accumulation at its barrier to doing anything more for mass prosperity. For example, discerning the basic task of socialist advance after revolution in the most highly developed countries.
Michael, I am very glad to have come across Carchedi’s paper.
Could you please explain if the “L” variable (ie. labor) in Carchedi’s page one of the paper, is “employed” Labor, or in general “the labor pool” of the economy being studied?
I think it’s employed labour but I’ll ask Carchedi
Carchedi confirms = employed
thanks for clarifying!
it is interesting to see “Labor” properly “capitalized” in economic analysis.
inspired by this paper i would propose (at the very least) GAAP be amended formally to always break out Labor cost/salary/wages in total, on the income statement of every corporation in America, by fiat.
{As it stands, you can NEVER find labor cost broken out in any of the tens of thousands of pages of 10-Ks produced annually in America.}
Could someone help clarify to me why industry shoots itself in the foot by shedding labor?
what is the motivation to shed labor, as industry sees it:
(1) attraction to fixed capital over “variable capital (ie labor)”?
OR (2) is it tacit realization by industry that ONLY labor is productive and, in a desire to curtail excess production which would lower revenues, they end up inadvertently lowering the average rate of profit ?
thanx.
It’s competition among individual capitals. An individual capitalist wants to gain more profit and more market share by reducing costs by raising the productivity of labour. That eventually means introducing new technology (machines) to replace some existing labour. Then it can undercut rivals. But that technology will soon diffuse across sectors and labour will be shed across the board. A general expansion of capital and production may take place leading to more labour being employed overall BUT the ratio of the value of machines etc to labour will rise. Eventually that will lead to a fall in the general overall rate of profit, even if some technological leaders had gained an increase in their profitability to begin with. The result for capital is the opposite of what an individual capitalist started out with doing.
Well the video recorder industry may have decided to shed jobs because the video tape recorder was a defunct technology or if one supplier can promise components exactly when demanded because of superior technology the supplier with inferior technology will not win the contract!
The question I find more interesting is why does the working class sometimes shoot itself in the foot by not embracing Labour saving technology! From there leads to the problem, what working class!
Thanks Michael for your review; we made a translation in Turkish (incl. parts two & three) available in kizilcik.org web site:
http://kizilcik.org/index.php?option=com_content&view=article&id=1238:gelecegi-oengoermek-icin-gecmisi-oelcmek&catid=113&Itemid=158