HM1 – Marx’s double-edge law

This year’s Historical Materialism (HM) conference in London was apparently attended by over 850 people with some 400-plus papers presented over three days.  HM brings together radical and Marxist academics and activists to discuss and debate issues covering the spectrum of socialist issues: philosophy, culture, science, history and economics. This year’s theme was on climate change and ‘extinction’. But as usual, this blog will concentrate on the Marxian economics sessions and, within that, only those sessions at which I presented or attended, and thus only scratching the surface.

My first presentation was to help launch a new revised version of Invisible Leviathan, a book by Professor Murray Smith of Brock University, Ontario, Canada. Postgraduate student Josh Watterton also added some new insights on the empirical work on the US rate of profit too.  Murray Smith’s book is a must read for those who want to understand Marx’s law of value (the ‘invisible leviathan’) and get a clear rebuttal of all the distortions and mistakes made by Marxists and others about the law since Marx died.  I have reviewed this book before and wrote a foreword to the new edition.  You can read that here.  And Josh Watterton’s work will soon be available too.  So I won’t go any further in reviewing that session.

Instead in this post, I want to concentrate on my second session, namely the discussion between me and Professor David Harvey.  David Harvey (DH) is one of the world’s pre-eminent geographers and a prolific writer of books and articles on Marxian economic theory, as well as on the structure and trends in modern capitalism. For his latest view on that, see his book  Capital and the Madness of economic reason.

Over the years, DH and I have debated and discussed issues on Marx’s law of value and his law of profitability.  DH rejects the view that Marx’s law of the tendency of the rate of profit to fall (LRTPF) has much to do with changes in a capitalist economy or as a cause of crisesHe has criticised me and others who hold that view of being ‘monocausal’ ie obsessed with one cause when crises are the result a multiplicity of causes. He also thrown doubt on whether Marx’s law is logically valid, empirically supported and even if Marx continued to support it in his later years.  I won’t go over old ground here and you can read these various issues on my blog in many posts.

On this occasion, DH entitled his presentation, Marx’s ‘Double-Edged Law’ of the Falling Rate of Profit and the Rising Mass of Profit.  DH kindly sent me an unfinished paper of his that outlined the argument he was going to make.  The gist of it was that many Marxists pay too much attention to the rate of profit in looking at capitalism and not what is happening with the mass of profit.  And yet Marx’s law is double-edged.  Marx spells it out in Volume One of Capital: “despite the enormous decline in the general rate of profit…the number of workers employed by capital i.e. the absolute mass of labour set in motion by it, hence the absolute mass of the surplus labour absorbed, appropriated by it, hence the mass of surplus value it produces, hence the absolute magnitude or mass of the profit produced by it, can therefore grow, and progressively so, despite the progressive fall in the rate of profit.” He then adds: “this not only can, but must be the case…. The same laws “produce both a growing absolute mass of profit, which the social capital appropriates, and a falling rate of profit.” And then Marx asks:  How, then should we present this double-edged law of a decline in the rate of profit coupled with a simultaneous increase in the absolute mass of profit arising from the same causes?”

Thus DH argues that it is really the mass of profit and capital that we must look at for an indication of what is happening in a modern capitalist economy.  At the HM session, DH pointed out examples of why mass was more important than the rate of change in the mass.

Quantitative easing (an expansion of the mass of money supply) used by central banks since the end of the global financial crash to save the financial system and the economy with floods of money was one example.  Central banks were using ‘mass’ rather than rate (interest rate).  But this had only benefited the rich through the stock and bond markets.

Then there was climate change. So large had annual carbon emissions reached (over 400ppm) that the rate of increase was increasingly irrelevant; the damage was already done and cutting back the mass was now the issue.

On the economic front, DH pointed out that world GDP had doubled in real terms every 25 years and so even slow growth in GDP was less important to analyse than the sheer size of annual output and use of resources.  China was now sucking up the world’s natural resources fast and producing cement at astronomical levels; not because it was growing fast (growth is slowing) but because China was now so large (mass).

These were very imaginative insights by DH.  But disconcertingly for me, he made no further explanation of this theme in relation to Marx’s law of profitability (LTRPF) or for that matter the double-edged nature of Marx’s law as expressed above.  I had prepared a detailed response to the arguments in his paper, most of which he had not mentioned in his address.  But I decided to plough on regardless and try to answer his new critique of what I called the work of ‘we falling rate of profit boys and girls’ (and there are girls).

As Marx explained and DH quoted, the LTRPF has a double-edge.  As the rate of profit falls in a capitalist economy, it is perfectly possible, indeed likely, that the mass of profit will rise.  It’s arithmetical really: a falling rate still implies a rising mass.  But a double-edge cuts both ways.  As Marx goes on to explain in Volume 3 of Capital (chapter 13).  The two movements not only go hand in hand, but mutually influence one another and are phenomena in which the same law expresses itself….. there would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0.   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.”  So the mass of profit can and will rise as the rate of profit falls, keeping capitalist investment and production going.  But as the rate of profit falls, the increase in the mass of profit will eventually fall to the point of ‘absolute over-accumulation’, the tipping point for crises.

And it is not true that the LTRPF supporters ignore this double edge law. On the contrary, the most important exponent of the LTRPF in the 1920s, who virtually revived this theory of crisis against alternatives, Henryk Grossman, built his whole theory around the double-edge law and what happened to the mass of profit as the rate of profit fell.  I quote: “Not only does the rate of profit fall but the rate of growth of the mass of profit …. also falls behind the rate of growth of the total value of production.  So a point is eventually reached when the increase in mass of profit is not large enough to cover the projected increase in investment, which is growing at a higher rate. The rate of profit cannot, therefore, fall indefinitely. Whatever the rate of accumulation assumed in the model, the rate of profit eventually declines to a level at which the mass of surplus value is not great enough to sustain that rate of accumulation (Grossmann 1929b p. 103, Grossmann 1932a pp. 331-332). It was this mechanism, which he saw as intrinsic to the process of capital accumulation, that Grossman regarded as ‘the decisively important’ factor in Marx’s theory of economic crisis and breakdown (Grossmann 1929b p. 183).

Grossman spent a large part of his masterpiece creating tables showing how the rate and mass of profit affect each other and so ended up with a crisis based on insufficient profit to sustain further investment.  The table below gives you a simple arithmetic version from me.

Here we have two capitals, one Big ($100) and one Small ($10).  The whole economy totals 100+10 = 110.  There is an average rate of profit that applies to both capitals.  I start this at 10% and reduce in each following year. The rate of profit falls but the mass of profit (the profit for big and small capitals combined) rises each year.  So that by year 9 the mass of profit is $132.8 compared to $100 at the start of year 1.  But note that the rise in the mass of profit is falling towards zero.  Indeed, the growth in profits for the small capital in absolute dollars is infinitesimal by year 9.  And with a slowing rise in the mass of profit, investment will also slow and Grossman argues would eventually stop, triggering a crisis of production.

This is a very unrealistic example, however.  In the example, the rate of profit falls from 10% to nearly zero.  That does not happen in any capitalist economy.  So let us consider a real example.

Here we have the actual figures for the US rate of profit and the mass of profit (as calculated by me – see my post Measuring the US rate of profit in 2018) leading up to the Great Recession.  The rate of profit rises from 2002 to 2006 and then starts to fall, reaching a trough in 2009.  The mass of profit also rises but then contracts in 2007 (one year later than the rate) and in 2008 coinciding with the Great Recession.  So the falling rate of profit eventually takes the mass of profit down, leading to an investment collapse and a slump in capitalist production.  Marx’s double-edge law.

This is seen much more clearly when we use quarterly figures for the mass of profit, investment and GDP.  The graph below comes from Chapter 1 of the book World in Crisis (2018), edited by G Carchedi and me.

The mass of corporate profits peaks in mid-2006; while business investment and GDP follow 18 months later.  The mass of profits starts to recover at the end of 2008 but the Great Recession only ends in mid-2009 when investment and GDP recover.  Profits lead investment, and the rate of profit leads the mass.

And in every US recession since the war, it is broadly the same.  The rate of profit falls before each recession from a peak by between 6-20% and the (growth) in the mass of profit then drops by 5-12% points.  The mass of profits may not go negative (although it did before the Great Recession) but it slows considerably, causing an investment strike by capital.

This is not really surprising.  If company management see their profits or earnings slowing, they reduce their investment expansion and employment hiring and even reverse it.

Indeed, we ‘falling rate of profit boys and girls’ have been well aware of Marx’s double-edge law, even if DH has only just discovered its importance.  For example, in our World in Crisis book, in one chapter, Jose Tapia from Drexel University, shows the close connection between the changes in the mass of US corporate profits and investment, leading to successive crises.  As Tapia concludes from his empirical analysis: “the evidence is quite overwhelming that profits peak several quarters before the recession.  Then profits recover before investment does as illustrated by the investment trough that occurs around the end of the recession or the start of the expansion, but following the profit trough for at least a few quarters.”  And G Carchedi in another chapter in that book shows that when total new value (mass) in a capitalist economy starts to fall along with a fall in the rate of profit and employment, a slump in production follows.

DH commented in the discussion that I and other LTRPF exponents only ever seem to concentrate on the US for data and ignore other countries.  Anybody who reads World in Crisis will find analyses from scholars on the US, Canada, Mexico, Argentina, Brazil, Greece, Spain, the UK, China and Japan.  At HM itself there was a paper that looked at the LTRPF and the mass of profit in Finland (see HM programme Friday)!  In addition, there are studies on Sweden, Germany, Italy, Korea and South Africa.

In the session, DH brought to our attention the importance at looking at the mass or size of things and not just the rate of change.  That is undoubtedly useful.  But I think DH’s purpose was also to weaken belief in the role of Marx’s law of profitability and its relevance to crises.  By bringing up the double-edge law, it seems to me, DH was saying that a rising mass of profit or capital stock or GDP is the problem. And thus the problem for capitalism is not insufficient profit due to a falling rate but too much surplus due to rising mass.  How are we going to absorb or cope with ‘too much’ is the problem.

This connects with DH’s view that crises under capitalism arise because of too much capital or profit relative to the ability of consumers to use it.  Indeed, DH argues that it is consumer confidence and the level of consumption that matters in triggering crises not the rate or level of profits and investment. But the evidence on that does not support DH’s thesis as I have shown before.

In every US recession since 1945, it has not been a fall in household consumption levels that has emerged before a slump, but a fall in business investment levels.  Consumption may be 70% of US GDP on official accounts (it is actually much less), but it is the 15-20% of GDP in capital investment that is the swing factor in causing slumps.  Consumption hardly drops – because households have to go on paying for energy, food and basics, running up debts and running down savings.

It was argued from the floor in the debate that consumption has stayed up because households borrowed (particularly mortgages for housing) in the neoliberal period, and when that borrowing got too high, then the house of cards collapsed and this caused the Great Recession.  This thesis was expounded by several post-Keynesians and mainstream economists like Mian and Sufi in their book, House of Debt.  It has been dealt with by me in other posts, so I won’t go into it now.

Marx’s double-edge law of profit is actually the basis of the profit cycle that leads to boom and slump and then boom again in capitalist economies – as I show in this graph that I use often.

Starting at the top, the capitalist economy booms but the rate of profit falls; then as we go clockwise, the rate of profit eventually slows the rise in the mass of profit and then leads to the fall in investment.  At the bottom that triggers a financial and credit collapse.  Then once the costs of capital and labour have been reduced through the laying off labour, merging companies and liquidating weak ones, the survivors can start the process again, as the rate and mass of profit rises again.

DH rejects Marx’s law of profitability as the underlying cause of crises in favour what he has called a multiplicity of causes.  He accuses those who focus on Marx’s rate of profit law as being ‘monocausal’.  But he finds it difficult to refute the empirical evidence of a falling rate of profit.  So now he has moved the goal posts from the rate to the mass.  But shifting the goalposts just leaves us with a new goal to score in.  Marx’s double edge law is not a refutation of the law of profitability as the underlying cause of crises; on the contrary, it is the foundation.  And alternative causes (like underconsumption, ‘too much surplus to absorb’, disproportion, financial fragility etc) remain unconvincing and unproven in comparison.

My next post on HM will cover the session on the economics of modern imperialism.

16 Responses to “HM1 – Marx’s double-edge law”

  1. mandm Says:

    Is it possible to show that a condition of “too much surplus to absorb” is a consequence of slowing production (the start of a falling rate of profit), slowing employment rate , increase in the unemployed, decrease in effective demand, various financial “solutions,” etc. No doubt you can lead me to previous posts (i’ve probably read and vulgarized) showing just that.

  2. ucanbpolitical Says:

    What you do not, and, cannot explain is how this double edged law, most clearly expressed as the distinction between the relative and absolute fall in the rate of profit, plays out. How it is that the fall moves from the relative to the absolute. This is most important. Marx said quite distinctly that recessions occur, not when the rate falls relatively. but only when it falls absolutely. This fall could be caused by rising wages, but certainly not by falling prices at this time. Rising wages, however, is a non-fatal wound. It only becomes fatal when it is combined with falling turnover which causes circulating capital to spike upwards, and turnover always trends down immediately before the recession proper. In 2008 that occurred from Q1 2007 with the rate of turnover first going negative in Q3 2007. In the session “The Relation Between Profits, Investment and Crises” where you spoke, the interesting Mr Bakir identified the moment of crisis as the point where capitalists could not meet their contractual obligations. He blamed this on interest rates rising, when in fact it was the falling rates of turnover which necessitated extra borrowing in the first place. I have explained on numerous occasions how the relative fall in the rate of profit, which is uneven, leads to pockets of falling investment, which in turn acts on acts on demand slowing down turnover, which in turn generalises the fall in the rate of profit by creating a crisis of realisation, which is why the mass of profits, hitherto rising albeit more slowly, suddenly contracts. The realisation crisis is in effect the crisis of turnover. Michael, thinking in the old way will not do anymore.

    • vk Says:

      The explanation is very simple: the larger a society is, the more wealth it needs just to keep itself the way it is. Since we live in a finite world with finite resources, that means the absolute mass of wealth used is bigger, but relatively smaller than the total size of said society.

      Think about a given pool, with finite dimensions and thus with finite volume of water.

      If you put a small fish in it, even if it, e.g. doubles its size, the amount of water (measured by the subtraction of water volume of the pool) it had to take (“consume”) was relatively much larger than the fish’s own original body, but absolutely smaller than if you put a whale that grew, e.g. nothing on the same pool.

      If you put a whale on the same pool, it will consume much more volume of the pool in absolute terms (because the pool is finite in size and volume), even if it grows, e.g., some centimeters in diameter, even though, proportionally to its own size, it grew infinitesimally at best.

      To use an even more mundane example: an adult will consume more food than a child in absolute terms even though it is growing at a much lower rate than the said child. But the child is growing, proportionally to its own body, at a much higher rate than the adult.

  3. Bruno Miller Theodosio Says:

    Great post Michael. In my master thesis (posted here https://fomentando.wordpress.com/2019/05/18/dissertacao-de-mestrado-ie-ufrj-determinantes-da-acumulacao-de-capital-no-brasil-entre-2000-e-2016-lucratividade-distribuicao-tecnologia-e-financeirizacao/) about Brazilian rate of profit and its decomposition I showed the behavior of the mass and the rop in one graph, figure 16. The file can be directly accessed here http://www.ie.ufrj.br/images/pos-graducao/ppge/dissertacoes_teses/2019/mestrado/bruno_miller_theodosio_d4cf8.pdf#page64

  4. Boffy Says:

    “Quantitative easing (an expansion of the mass of money supply) used by central banks since the end of the global financial crash to save the financial system and the economy with floods of money was one example.”

    QE did not increase money supply, but only increased the supply of money tokens, which thereby devalued each token. As Marx describes in A Contribution To The Critique of Political Economy, the consequence of that is to create inflation. Where the inflation shows up is impossible to determine because, normally, the central bank, having issued the additional tokens has no control over where they go as they enter circulation. However, with QE they did.

    They ensured with QE that the additional tokens were used to buy financial assets, both by buying those financial assets themselves, and by essentially bribing commercial banks to also buy those financial assets. That created the hyper-inflation of asset prices that has been seen.

    In addition, alongside the QE, many governments introduced policies of austerity, which acted to dampen aggregate demand in the real economy. That ensured even more that money, and potential money-capital was diverted from that real economy into the purchase of financial assets and property, reflating and more than reflating the bubble in property and asset prices that had been burst by the 2008 financial crisis.

    As Marx points out in TOSV, this printing of additional money tokens cannot reduce interest rates, because interest rates are determined by the interaction of demand and supply for money-capital. Simply printing more money-tokens adds to money-capital not one jot in real terms. Only a rise in the mass of realised profit, or an increase in the savings rate, mobilisation of sterile savings can increase the supply of money-capital. What it did, was to raise the prices of financial assets, and thereby reduce the yields on those assets. In capital III, Marx specifically states why these yields on bonds should not be confused with the real market rate of interest faced by productive-capital.

    And, so what we have seen is that many smaller companies either could not borrow at all, or had to resort to peer to peer lending at rates more like 10% p.a., or else in many cases, for small businesses even resorted to borrowing against personal credit cards at rates closer 30% p.a. For individual borrowers, of course, we saw them paying rates of up to 4,000% pa. to borrow from pay day lenders!

  5. Boffy Says:

    “Marx’s double edge law is not a refutation of the law of profitability as the underlying cause of crises; on the contrary, it is the foundation.”

    Absolutely not. The crisis is a manifestation of the fact that profits have begun to grow more slowly, but Marx’s law is based upon the mass of profits growing more rapidly! In Marx’s theory of a crisis of overproduction, the overproduction is precisely defined as an expansion of capital relative to the available working population, i.e. to the social working-day.

    “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. ”

    This is what Marx defines as a crisis of overproduction. It means that the social working-day cannot be expanded more so as to generate additional absolute surplus value, and relative surplus value cannot be expanded, because given the level of technology, productivity cannot be adequately increased, whilst the relative shortages of labour push up wages, and so reduce the rate of surplus value.

    These causes of a falling the rate of profit due to a squeeze on profits, a slowdown in the growth of or even reduction in the mass of profit, alongside an expansion of capital, are the opposite of Marx’s Law. Marx’s law says that technological developments mean that a relative surplus population is created. This relative surplus population means that more labour is available once more for exploitation, having been freed from various places, so that it can now be employed in new high profit areas. It also means that wages fall, so that the rate of surplus value rises, and so the mass of profit rises more rapidly.

    It is the application of what Marx says at the start of 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.”

    And what he says at the end of Chapter 15,

    “Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”

    The “aforementioned changes” are precisely those which arise from a technological revolution, which raises the technical composition of capital, so that more raw material is processed by a given amount of labour, which creates the relative surplus population, reduces wages, raises the rate of surplus value and so on. These technological revolutions, which bring about these changes, such as the technological revolution that occurred in the late 1970’s, and early 1980’s, are themselves a response to the outbreak of crises of overproduction in the previous period, i.e. the profits squeeze of the 1960’s/70’s, when wage share rose, reducing the rate of surplus value.

    Marx’s law of the tendential fall in the rate of profit is not the cause of crises of overproduction, but the means by which capital resolves those crises!

    • mandm Says:

      “Marx’s law of the tendential fall in the rate of profit is not the cause of crises, but the means by which capital resolves those crises!”

      I agree with most of your points in this post. But in the above quite you imply that the personifications of capital consciously resolve crises but consciously, collectively, act to reduce their rate of profit.
      But “capital” can “resolve” nothing. However, its personifications may be forced by the intrinsic determinations of their system to react to the fall in rate of profit. It’s a matter of point of view. Marx, historically, takes the point of view of humanity (the working population and its needs). You regularly take the point of view of capital (which Marx often takes himself in Capital 1 and 2, but for strategic purposes of discovering contradictions and fetishes in the ideal formulas of liberal political economists).

  6. realdemocracyinireland Says:

    Thanks for this important post, Michael. I re-posted in Ireland.

  7. Mark S. Says:

    I got transformation problems to!

    Murray Smith’s interpretation is a yes!
    Is Kliman’s TSSI a yes?
    Is Fred Moseley’s MMI a yes?
    Is David Laibman’s interactive interpretation an no?

    I wish someone would go over all these in simple detail that even a five year old like me could understand.

  8. m johnson Says:

    Dear Michael
    in the last few months you wrote a piece on labour theory of value and art wine etc
    can you tell me where i can find this and i think it made reference to the original article. With thanks

  9. antonio Says:

    What is happening in Portugal with the rate of profit? The global profit rate and the rate of its non-monopolistic companies (small and medium enterprises) and workers has not fallen, has remained and has even grown, and for that reason the Portuguese have renewed their support for the parties a few days ago of the left who formed that coalition of government in 2015- (P. Socialist, Bloco, and P. Communist)? Keynesian measures, in this case with only a little public spending without any investment in public companies, applied by the coalition have reversed their previous declining profit rate? Regards,

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