Marxism & economic crisis

Marx & Crisis

  • Awash with cash? by Mick Brooks                 The financial press reports that firms in the US and UK in particular are sitting on mountains of money. This cash mountain must come from profits. How ...
    Posted 10 Sept 2013, 10:51 by Admin uk
  • Marxist Theory of Crisis   by Mick Brooks Part One Towards an understanding of capitalist crisis Why do we need a theory of capitalist crisis? As Marxists we believe we need to understand the basic ...
    Posted 27 Feb 2013, 10:35 by Admin uk
  • Rob Sewell on the tendency of the rate of profit to fall By Mick Brooks     Rob Sewell (in his article entitled The tendency of the rate of profit to fall in In defence of Marxism 2, Autumn 2012, some of which is ...
    Posted 21 Jan 2013, 02:06 by Admin uk
  • Gravity, the Higgs boson and the law of the TRPF   by Michael Roberts  http://www.thenextrecession.wordpress.com I’ve just returned from Paris where there has been a joint conference of academic leftist economists organised by the Association of ...
    Posted 23 Jul 2012, 13:33 by Admin uk
  • Permanent crisis? By Mick Brooks        There has been a debate in recent years within the IMT as to the cause of capitalist crisis. On one side were those who stressed Marx’s ...
    Posted 30 Aug 2011, 11:31 by heiko khoo
Showing posts 1 - 5 of 17. View more »

Awash with cash?

posted 10 Sept 2013, 10:44 by Admin uk   [ updated 10 Sept 2013, 10:51 ]

by Mick Brooks                

The financial press reports that firms in the US and UK in particular are sitting on mountains of money. This cash mountain must come from profits. How, then, is it possible that the crisis was caused by a fall in the rate and mass of profit?        

The other question is: if firms have money coming out of their ears and profits have recovered – why is this money not being invested, leading to a sounder and broader based recovery?

Peter Taaffe put the case in ‘Socialism Today’ June 2012: “I wrote about the colossal piling up in the banks and big business of what is now $7.5 trillion of cash reserves – half the GDP of the US. It seems inconceivable that this would have been possible without a huge rise in the mass of profits and possibly the rate as well.”

An author in ‘Socialist Appeal’ agrees that business is awash with cash in Britain as well. “British businesses are sitting on a mountain of cash – some £750bn. So there is no shortage of money. Big business is loaded.” (Welcome to the ‘new norm’, September 2013)

This is part of a widespread scepticism as to our explanation that the underlying cause of the Great Recession was a fall in the rate of profit. This occurred because of the law of the tendential fall in the rate of profit identified by Marx.

The facts about the evolution of the rate of profit in the USA, the best attested case, are as follows: there was a collapse in the rate, and also the mass of profit after the 3rd quarter of 2006, a year before the onset of the Great Recession. Profits recovered after the end of 2008 but still remain below the level of 2007. Michael Roberts’ blog gives an authoritative assessment of profit rates from a Marxist point of view. Roberts’ most recent comment at time of writing on the rate of profit is http://thenextrecession.wordpress.com/2013/08/28/down-in-the-jackson-hole/. Official figures from the US Bureau of Economic Analysis show the same trends over time.

‘Socialism Today’ and ‘Socialist Appeal’ are talking about cash reserves. How are cash reserves related to the rate of profit? Reserves are a sum, a stock, accumulated over years. They are not an indication of current profitability. The rate of profit is a flow measured over time.

More importantly, we need to look at the net asset position of companies – not just their pile of cash and other assets but also their underlying debts, and balance the two off against each other.

Companies can pay for investment in two ways; by directly investing their own profits or by borrowing and going into debt. These loans ultimately come from the surplus accumulated by other capitalists. Capital investment comes from surplus value, and historically there has been a close link between the rate of profit and the rate of accumulation.

In recent years, in Britain and the USA, there has been a tendency for corporations to become more reliant on debt finance. The reason why the ‘credit crunch’ in 2007 (when bank lending suddenly stopped) had such wide and rapid repercussions on the ‘real economy’ was because firms were head over heels in debt.

The drive to use debt for accumulation is often for practical scams, for instance to minimise tax. These decisions have little to do with Marxian economic categories such as interest and profit of enterprise, and often make applying these categories to understanding economic processes very difficult.

For instance Apple has $100bn in cash parked abroad, out of the way of the US tax system. At the same time the company has entered the US bond market to borrow $17bn in order to distribute the money to shareholders as dividends. It does so because it gets a tax break on borrowing. This does not change the amount of surplus value generated by Apple, but just distributes it differently to take advantage of the tax regime. In the case of Apple these are monopoly profits to be made and handed out.

The leverage (debt dependence) of UK corporations has increased in recent years for several main reasons:

·       The accounting practice known as ‘marking to market’ has allowed firms to virtually name the price of their capital assets. So they can inflate the value of the firm, enabling them to borrow more on the basis of this collateral.

·       Because of the process known as financialisation, more and more of corporate profits are attributed to financial firms. Financial corporations are growing faster than manufacturing industry and are much more highly leveraged than the others because their core business is playing around with other people’s money.

·       Nonfinancial corporations have also been holding a bigger proportion of their assets on their balance sheets as financial assets and commercial property. Financial assets, exotic pieces of coloured paper, are fictitious capital, that is to say they represent no value in themselves yet entitle the holder to a slice of surplus value. As fictitious capital much of their value melted away during the Great Recession with catastrophic results. Likewise titles to land are fictitious in that they have a price without a value, since they entitle the bearer to claim rent.

·       Firms have an increasing tendency to borrow to go on a merger and acquisitions spree – they buy up other firms. This does not increase the total capital available but just transfers it into other hands.

·       Private equity companies characteristically load their victims with debt in order, as they put it, to sweat their assets in search of higher returns.

It might be useful to look at the leverage (debt-dependence) of UK nonfinancial corporations since the recession struck. McKinsey Global Institute issued a report in January 2012 called ‘Debt and deleveraging: uneven progress on the path to growth’. Here are their conclusions for the UK:

“The United Kingdom: Deleveraging has only just begun

Total UK public- and private-sector debt has risen slightly, reaching 507 percent of GDP in mid-2011, compared with 487 percent at the end of 2008 and 310 percent in 2000, before the bubble...

While the largest component of US debt is household borrowing and the largest share of Japanese debt is government debt, the financial sector accounts for the largest share of debt in the United Kingdom.” (British banks are bigger in relation to British GDP than is the case of Japan or the USA – MB.) “Although UK banks have significantly improved their capital ratios, nonbank financial companies have increased debt issuance since the crisis... Nonfinancial companies in the United Kingdom have reduced their debt since 2008.”

 

Despite this comforting final sentence, McKinsey still assesses the debt of UK nonfinancial corporations as 109% of GDP. Total UK debt is 507% of GDP. Of the countries surveyed only Japan is more indebted, at 512%.

 

So, despite the talk of cash mountains, (a figure of £750bn for all firms in Britain was mentioned in ‘Socialist Appeal’) nonfinancial corporations are lumbered with more than twice as much debt as monetary assets. In the wake of the Great Recession they face a crushing debt burden.

 

To you and me £750bn in cash sounds like a lot of money. Indeed it is half of Britain’s national income in a year. Bear in mind though that the UK’s total debt is equivalent to more than what 63 million British people earn and spend in five years.

 

The McKinsey Report is more positive about the USA, running the headline, ‘A light at the end of the tunnel’. All the same total debt was 279% of National Income at the time of the Report. US companies are reputed to have a cash mountain of $2trn with another $2trn offshore, according to Edward Luce (Stuck in the mud, ‘Financial Times’ 13.05.13). This is for both financial and nonfinancial corporations. But, to put this in perspective, America’s National Income is around $15trn. And the corporate debt for nonfinancial corporations alone in the USA is 72% of GDP. Once again cash assets are weighed in the balance against corporate debt and found to be relatively insignificant.

 

Perhaps what is more relevant to our enquiry is not the total indebtedness of a country, or that of its nonfinancial firms, but how the total debts of nonfinancial firms stack up against their assets.

 

A ‘UK Economic Outlook’ report for 2010 called ‘Red ink rising: how worrying is the UK economy’s total debt burden?’ deals with the issue. It states that actual nonfinancial corporate debt at the time was £1.7trn (actual GDP was £1.4trn at the time). The Report measures gearing of nonfinancial companies as debt divided by debt + equity, when equity means share prices [debt/( debt + equity)]. The gearing ratio is seen as a measure of the affordability of debt. It is strongly influenced by the rise and fall in share prices. According to the Report it peaked at 50% in 2008. In other words debt grew to become equal to assets as measured by the share price.

 

Gross debt of nonfinancial corporations is then compared with corporate income in the Report. It peaks at five times income in 2008. The net debt figure is the most suitable measure for our purposes. Net debt is total debt minus money holdings and bank deposits (the famous cash mountains). Net holdings peaked at three times income in 2008. In other words nonfinancial corporations had three times as much debt, minus monetary assets, as income. This is a scary situation. British nonfinancial corporations face a debt mountain, not a cash mountain.

 

The latest information for the advanced capitalist world as a whole comes from the Bank of International Settlements in their June 2013 report. Nonfinancial corporate debt continues to rise. “The average non-financial debt to GDP ratio for the major developed markets is currently 312% compared to 280% in March 2007. While the household debt ratio has declined from 97% of GDP to 88% now, non-financial corporate debt has risen from 101% to 105% now and government debt has rocketed from 83% to 120%.”

 

Capital Destruction

 

The destruction of capital was identified by Marx as a central aspect of the healing process after a downturn. He meant not just the physical rusting and decomposition of capital but the destruction of capital values, in particular of fictitious capital. The debt mountain is a measure of the build-up of fictitious capital. Capital destruction lowers the organic composition of capital, raises the rate of profit and prepares the conditions for a new boom. Clearly the destruction of capital has a long way to go yet.

 

The weakness of British capitalism at present can be seen in the case of the zombie companies, neither really alive nor completely dead. The ‘Financial Times’ suggests that 1 in 10 British firms fit the bill (perhaps 146,000 companies). See their survey ‘The rise of the zombie’ 09.01.13. These zombie firms are just ticking over, generating enough money from their activities to pay the interest on their debts, but not to wipe out the loans themselves. The banks for their part are reluctant to write off these debts on account of the dent it will make in their balance sheets.

 

These zombie companies are kept in this half-life only by the unprecedentedly low interest rates provided by the Bank of England, desperate to prevent the economy slipping back into recession. The recovery is artificial so far and the main beneficiaries of this cheap money have been the banks. It seems that small and medium companies are effectively locked out of access to this free cash.

 

Why no investment?

 

The second question posed at the outset of this article was - why doesn’t this cash pile get invested to produce a healthy recovery? As we have tried to show these apparently enormous sums of money are more than counterbalanced by the overhang of corporate debt.

 

Secondly a recovery is actually under way. It is a very slow revival but all the signs point upward. Its recovery is slowed by the crippling level of corporate debt, representing fictitious capital that has not yet been destroyed.

 

The Bank of England complains about the zombie firms retarding the recovery. Yet the Bank’s policies of cheap money and quantitative easing (printing money) help keep the zombies alive. It they were to cease suddenly thousands of struggling firms, and their workers, would face disaster. Would that speed up the recovery? It is a dilemma for them.

 

International Repercussions

 

World capitalism is also in a dilemma. The very ‘threat’ of making an end of quantitative easing (‘tapering’ it off) has put countries like India, Turkey and Brazil in a spin. Since the onset of the recession in 2008 such emerging markets have grown much faster than the metropolitan heartlands of capitalism. Profits have been healthier. Capitalists in the advanced countries, thwarted by the low profit rates at home, have been putting their money abroad. This inflow of credit is now at risk, as it was generated by quantitative easing in the advanced capitalist countries. They now threaten to cut it off.

 

Take the case of India; the economy has been slowing down for some time. As India, Brazil and Turkey grew faster than capitalism in the West they all sucked in imports, but their currency appreciated as money flowed in. Exports became more expensive and, as the money kept flowing in, it began to blow up a speculative financial bubble. The fear of an end to capital inflows, and possibly a panicked and disorderly outflow of foreign funds, has put the Rupee in a tailspin. This is causing a devastating spike in the price of imported food, hitting the poorest hardest.

 

The Turkish Lira and Brazilian Real are on the slide for the same reason. This poses the prospect of a panic like that of 1997 when Far Eastern countries, starting with the Thai Baht, came under siege. Governments in India Turkey and Brazil will be forced to retrench, inevitably at the expense of the working class. Indian economist Jayati Ghosh states, “It is a crisis. This is the big one. But it has been building up for a while due to many reasons: the current account deficit, the industrial slowdown, the lack of infrastructure development, the negative investment in the economy.” She could be right.

 

The backwash effects from the Great Recession go deep and wide. This shows the shallowness of the recovery and the depths of the continuing crisis. It also shows that movements in the rate of profit are  critical to the development of the capitalist economy.

 

(Thanks to Michael Roberts for drawing my attention to some of the statistics in this article.)

Marxist Theory of Crisis

posted 25 Jan 2013, 10:30 by Admin uk   [ updated 27 Feb 2013, 10:35 ]

  by Mick Brooks

 Part One


 Towards an understanding of capitalist crisis


 Why do we need a theory of capitalist crisis? As Marxists we believe we need to understand the basic laws of motion of the capitalist system. We know that capitalism is a system that goes through periods of boom and slump. We should be able to explain why this is the case.

This article is mainly aimed at explaining the boom slump cycle that lasts about ten years and has been in operation for nearly two hundred years. There is nothing definite about the span of the cycle, of course. But in Marx’s view crises come about whatever the stage of the class struggle. They are important to us since they may be expected to influence the course of class struggle.

Periodic booms and slumps are not the sole or principal meaning of capitalist crisis. The Russian revolution did not take place because Russia went into a slump. That is elementary. It was carried out by the revolutionary working class. When workers in their millions call the system into question, then that surely is a crisis for capitalism, in a different sense. But we are concentrating on periodic crises in the sense usually used by Marx and Engels in their writings.

It is the case that capitalism goes through distinct periods. The period of the post-War boom from the 1940s to 1974 is one example. These longer periods all have their own characteristics. But this article is intended to deal with the perpetual boom-slump cycle, and will only touch on longer developments incidentally.

It is also true that each recession or slump has unique features. All historic events are unique. “The real crisis can only be deduced from the real movement of capitalist production, competition and credit.” (Theories of surplus value Volume II pp. 512)

What we are attempting


Marx was not able to systematically work up the theory of crisis for publication in his economic writings. Capital Volumes II and III, the Theories of Surplus Value and the Grundrisse were not made ready for publication in his lifetime. They were all part of a vast, unfinished project. It would be futile to deny that inconsistencies can be found in his writing. Different academic schools have been formed since his death to espouse monocausal theories of crisis based on isolated quotes.

The purpose of this article is to look at Marx’s scattered writings on crisis and to try to find out what he actually said on the subject. It will not be possible to take up all or even many of those who have come to the subject with their own interpretation over the past century or more. The reader will also appreciate that looking at what Marx said is not the same as showing that everything he said was correct.

Secondly we try to test Marx’s interpretation of how capitalism accumulates, and how it stumbles, against the reality of the post-War capitalist economy.

For generations of Marxists, Sweezy’s Theory of capitalist development has proved a popular guide to Marx’s political economy. It is lively, well written and introduces the reader to the debates and the literature. Unfortunately we believe that his interpretation of Marx’s crisis theory is wrong. We are following his broad categorisation of the different interpretations as a guide to our presentation. They are:

  • · Crises associated with falling tendency of the rate of profit
  • · Realisation crises – crises arising from disproportionality – crises arising from under-consumption.


It is also true that crisis is an issue subject to scholarly debate within the Marxist movement. It is not a subject where a ‘party line’ needs be laid down.  Nobody proposed drumming Rosa Luxemburg out of the brownies on account of her crisis theory. There is no one dominant view or comprehensive analysis of the ‘cause’ of capitalist crisis among Marxist writers.

Nevertheless I believe a consistent thread can be found in Marx’s writings. And the attempt must be made. We cannot change the world unless we understand it.

The reason I put ‘cause’ of capitalist crisis in inverted commas in the previous paragraph is because much of the confusion as to the reasons for the boom-slump cycle comes from the different levels of causation that are at work.

To anticipate, I argue that the crisis takes the form of appearance of a realisation crisis. That means goods produced cannot be sold. But the cause of this crisis is neither an institutional tendency to produce too many consumer goods relative to capital goods or any other disproportionality inherent in the capitalist system. Notions of over-production and under-consumption have no explanatory value for the boom-slump cycle. They cannot tell us when, where and why the crisis breaks out. I try to show that the fundamental cause of crisis, and the basic explanation for the cycle, aremovements in the rate of profit. These movements in turn can be analysed using Marx’s law for the tendency for the rate of profit to fall which manifests itself as a periodic over-accumulation of capital.

Marx’s method


Back to Marx. We have to be mindful of the method he used in his economic work. Though Capital Volume I stands almost alone as a work prepared for publication, it is not the last word on the subject. He outlined his method in his Introduction to A contribution to a critique of political economy. (This manuscript is also part of the Grundrisse.)

“Seventeenth century economists always took as their starting point the living organism, the population, the nation State, several States etc., but their analysis led them always in the end to the discovery of a few decisive abstract general relations e.g. division of labour, money and value. When these separate factors were more or less clearly deduced and established, economic systems were evolved from simple concepts such as labour, the division of labour, demand, exchange value advanced to categories like the State, international exchange and the world market. The latter is obviously the correct scientific method. The concrete concept is concrete because it is a synthesis of many developments, thus representing the unity of diverse aspects” (pp. 205-6).

Over-production


As is well known, the Communist Manifesto refers to a capitalist crisis of over-production. Sometimes over-production is referred to as the realisation problem. This means that the crisis manifests itself as capitalists being unable to sell goods that have already been produced. Over-production, in other words, is not absolute but relative to the purchasing power of the population.

Now it is true that the Manifesto is not a major economic work of the mature Marx. In 1848 he had not yet developed the notion of labour power, for instance.

But there is absolutely nothing wrong with the formulation of the Manifesto, as long as we understand that over-production is the form of appearance of capitalist crisis. We can and do point to the paradox of idle workers confronting idle machines as the cause of want. This is a distinctive feature of capitalism, an ‘achievement’ no other social system can show.

“It is enough to mention the commercial crises that by their periodical return put on trial, each time more threateningly, the existence of the entire bourgeois society…In these crises there breaks out an epidemic that in all earlier epochs would have seemed an absurdity – the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce.”

This is all very clear. It is description, not explanation. It tells us what happened, not why it happened.

Engels has a very similar approach in Anti-Duhring. (This passage is reproduced in Socialism utopian and scientific.) “As a matter of fact since 1825, when the first general crisis broke out, the whole industrial and commercial world, production and exchange among all the civilised peoples and their more or less barbaric hangers-on, are thrown out of joint about once every ten years. Commerce is at a standstill, markets are glutted, products accumulate as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of workers are in want of means of subsistence because they have produced too much of means of subsistence.” (pp. 379-80)

Engels is making the point that more is produced than can be sold. This is a contradiction. “Contradiction in the capitalist mode of production. Workers are important in the market as buyers of commodities. But as sellers of their commodity – labour power – capitalist society has the tendency to restrict them to their minimum price. Further contradiction: the periods in which capitalist production exerts all its forces regularly show themselves to be periods of over-production, because the limit to the application of the productive powers is not simply the production of value, but also its realisation. However the sale of commodities, the realisation of commodity capital and thus of surplus value, is restricted not by the consumer needs of society in general, but by the consumer needs of a society in which the great majority are always poor and must always remain poor.” (Capital Volume II, p.391)

Crisis is actually the (temporary) resolution of this contradiction. “The independence of two correlated aspects (production and realisation) can only show itself forcibly as a destructive process. It is just the crisis in which they assert their unity, the unity of different aspects. The independence which these two linked and complementary phases assume in relation to each other is forcibly destroyed. Thus the crisis manifests the unity of these two phases that have become independent of each other.” (Theories of surplus value Volume II, p.500)

The main quote used to show that Marx regarded over-production as the fundamental cause of crisis is the following. “The ultimate reason for all real crises is the restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity set a limit to them.” (Capital Volume III p. 615)

What does Marx mean by ‘ultimate reason’?  ‘Reason’ is here translated from the German word ‘grund’. Here’s Hegel on ‘grund’ (translated into English as ‘ground’ in Hegel’s Logic, from the section on Essence as ground of existence). “Considerations of this sort led Leibniz to contrast causae efficientes and causae finales, and to insist on the place of final causes (‘ultimate reason’) as the conception to which efficient causes were to lead up. If we adopt this distinction, light, heat and moisture would be causae efficientes, not causa finalis: causa finalis is the notion of the plant itself.” (Hegel’s Logic p. 177-8) Causa finalis is Latin for ‘final cause’ or ‘ultimate reason’. Causae efficientes is Latin for ‘efficient causes’.

Most of us brought up in the tradition of David Hume’s concept of causation would regard light, heat and moisture to be the causes of the plant’s growth (efficient causes) rather than the notion of the plant (final cause). Ultimately this distinction comes from Aristotle’s four levels of causation – formal cause, material cause, efficient cause and final cause. Aristotle’s ‘final cause’ can be interpreted as the unfolding of a thing’s essence or nature (telos).

Marx’s comment comes as an aside in Capital Volume III in Chapter 30 on Money capital and real capital: 1. Marx wants to remind us of the fundamentals in a section dealing with the intricacies of financial crisis. The statement does not explain to us what causes crisis – when, where and why there’ll be a crisis.

The essence or nature of the capitalist system causes crisis. The nature of capitalism is that it restricts the consumption of the workers. The reason – it runs on profit.

Under-consumption


Engels, in his chapter on ‘Production’ in Anti-Duhring, is a stern critic of Duhring’s under-consumptionist interpretation of capitalist crisis. He points out that the restricted consumption of the masses is a permanent feature of capitalism.

“But unfortunately the under-consumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes. Even in those periods of history when the situation of the masses was particularly favourable, as for example in England in the fifteenth century, they under-consumed. They were very far from having their own annual total product at their disposal to be consumed by them. Therefore, while under-consumptionism has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as a result of a surplus of production is a phenomenon only of the last fifty years;” (pp. 395-396).

But if under-consumption (in the sense that the workers can’t buy back all the commodities they produce) is a permanent condition of capitalism, then how on earth does capitalism survive, let alone develop? What happens to this excess production (the surplus)?

It is quite true that workers can’t buy all the value they produce. Surplus value ends up, of course, in the hands of the capitalist class. This is just another way of saying capitalism is a system where production is for profit.

This under-consumption, this inability to realise commodities already produced is really only a potential problem. It would only be a real problem if all the capitalists were to instruct their workers to make workers’ wage goods. In that case the workers would be unable to buy those goods.

But why should we assume that this will happen? The workers haven’t got the money to buy the goods, because the capitalists have kept some of it. That is their surplus value. What do the capitalists do with it? There are two possibilities: either they consume the entire surplus unproductively (very rare in practice). In this case the surplus is still spent. It is spent by the capitalists on themselves. The alternative is that the capitalists invest it. If they invest it, that also ‘solves’ the problem of under-consumption for the time being – because the surplus has now been spent on capital goods.

Not all capitalists oversee the production of goods they expect to be sold to the workers. Iron and steel capitalists never sell their products to the masses (though, of course their output enters into consumer goods targeted at workers). They are producing capital goods and they know it. Other capitalists specialise in the production of ‘luxury’ goods for consumption by capitalists. Marxists call the products of this sector elements of uncapitalised surplus value. For both these sections of the capitalist class their customers are exclusively other capitalists.

The demand for capital goods, for workers’ consumption and for luxury goods is provided by the incomes of the classes generated in the production process, and by the investment decisions of the capitalist class. Of course how much you ‘need’ is determined under capitalism by how much money you’ve got. We expect the relevant sort of goods in roughly the right proportions to meet this purchasing power to be provided by the usual operation of the market. Capitalists in search of profit try to produce commodities aimed at meeting a need. (Actually capitalists produce nothing. Workers produce commodities under the instruction of capitalists. Please accept this as shorthand.) If nobody wants the good, nobody will buy it and the capitalist will make a loss. And purchasing power is derived from the revenues from capitalist production. (Getting the proportions of the material elements of production right is a real problem in an unplanned system. We take it up later.)

There is no reason at all, at this level of analysis, why all these products cannot be sold to people (workers and capitalists) who have the money to pay for them. We should no more automatically expect capitalism to produce too many workers’ consumption goods than too many luxury goods or too many capital goods.

So there is sufficient purchasing power in the economy to buy all that is produced. And the goods should be in place to satisfy this purchasing power. There seems to be no over-production/under-consumption problem, since markets exist for the surplus. There is always someone out there to buy these products and someone else to sell them. The cause of capitalist crisis must be sought elsewhere.

If the crisis were really caused by the ‘restricted consumption of the masses’ we would expect it to be manifested by an over-production of consumer goods relative to capital goods. In fact this is by no means the usual case in actual capitalist crises. Most crises have actually begun in the capital goods sector. If the crisis were caused by under-consumption we would expect the workers to suddenly cease providing an adequate market for the capitalists, so triggering the crisis.

Actually workers’ consumption usually falls as they are laid off as a result of the crisis, further shrinking markets. Their restricted consumption is thus a symptom of the crisis, not its cause. If capitalists generally accumulate a great part of their surplus, then we can expect the capital goods sector to grow relative to consumer goods in the economy. But the effect of this accumulation of capital is to make the workers more productive and therefore make the problem of over-production potentially more severe in the future.

Over-production and under-consumption


Aren’t under-consumption and over-production really the same thing? In one sense they are opposite sides of the same coin. Engels polemicises against the concept of under-consumption because it locates the problem with the restricted consumption of the masses, while the notion of over-production poses it as a crisis of capitalism. We prefer the expression ‘over-accumulation’, which was introduced by Marx in Capital Volume III. This points to over-production in relation to the possibility of profit-making. We shall return to this. However there seems little point arguing over a word if we agree on the underlying processes.

We have seen earlier that Engels was quite happy to describe capitalist crisis as one of over-production. The difference he draws with under-consumption is that the crisis occurs because the capitalists produce too much, not because the workers suddenly stop buying and consuming enough. Anyway what is ‘enough’ or ‘too much’? The concept of over-production emphasises that what has been produced cannot be sold. This is true. But it does not explain when, where and why the realisation crisis breaks out.

The theories of under-consumption and over-production cannot be used to predict the onset of crisis. We cannot allow ourselves to be reduced to saying after the event, “There you are, we always said this would happen.”

Lenin also had to argue in his early writings against the under-consumptionist views of the Narodniks. They alleged that capitalism couldn’t develop in Russia because it restricted the consuming power of the masses. Without in any way denying that capitalism kept the many poor, Lenin showed in many books, culminating in The development of capitalism in Russia, how it was actually creating a market there. Rather than growing and making things for themselves, peasants and artisans were increasingly deprived of access to the means of production and forced to use the market for their daily needs.

In Capital Volume II, Marx pointed out that towards the end of the boom, as it was on the point of toppling over to bust when there was relatively full employment, was the time when workers were likely to make gains in real wages and increase their share of national income.

“It is a pure tautology to say that crises are provoked by the lack of effective demand or effective consumption…If an attempt is made to give this tautology the semblance of greater profundity that the working class receives too small a portion of its own product and that the evil would be remedied if it received a bigger share if its wages rose, we need only note that crises are always prepared by a period in which wages generally increase and the working class does receive a greater share in the part of the annual product  destined for consumption.” (p. 486)

Under-consumption: Baran and Sweezy


Sweezy favoured what he calls the under-consumption school. In The theory of capitalistdevelopment (in Chapter XII, entitled Chronic depression?) He argued, “That capitalist production normally harbours a tendency to underconsumption (or overproduction) was demonstrated in Chapter X…” (p. 216) Chapter X is one of the chapters in his book mentioned at the beginning of this article (see What we are attempting). He goes on, “Since the tendency to underconsumption is inherent in capitalism and can apparently be overcome by the partial non-utilization of productive resources, it may be said that stagnation is the norm towards which capitalism is always tending.” (ibid. p. 217) Sweezy then goes on to discuss various processes in modern capitalism which may counter the tendency to stagnation by absorbing surplus resources that would otherwise be unuseable.

He wrote a later book jointly with Paul Baran called Monopoly capital. Baran and Sweezy still felt in 1966 that capitalism was threatened by a tendency towards chronic stagnation. They derived this analysis from left Keynesians such as Kalecki, Steindl and Hansen. Such a perspective comes naturally to those who, trained in the Keynesian tradition, see crisis as caused by under-consumption.

Monopoly capital identifies a systematic trend for capitalism to generate a surplus. “The economic surplus, in the briefest possible definition, is the difference between what society produces and the costs of producing it.” (Monopoly capital p. 23) This surplus of saving occurred because money couldn’t all be spent. It was vital for capitalism’s survival to find ways of investing this surplus. Chapter 3 of Monopoly capital deals with the Tendency of the surplus to Rise and Chapters 4-7 – virtually half the book – with different ways of absorbing this surplus. For instance Chapter 7 is titled The absorption of surplus: militarism and imperialism.

Readers familiar with the theory of surplus value will realise that this is a different concept of surplus from Marx’s. Briefly, Marx divided the labour added in the production process in any form of class society into necessary labour and surplus labour. Necessary labour is that part of the work done required to feed, clothe and house the toiling population. They will be maintained at the level of subsistence which is usual in that form of society at that time. The toilers may be slaves, feudal peasants or wage workers under capitalism. In every case they produce a surplus above their own requirements. This surplus is appropriated by the ruling class, whether the latter are slaveholders, feudal lords or capitalists.

The index to Monopoly capital does not make reference to the words under-consumption, over-production or crisis. The tacit assumption was that since the Second World War the capitalist system had overcome its earlier tendency to crisis. So we see that flirtation with under-consumptionism as a theory of crisis led to an acceptance of the Keynesian interpretation of capitalist crisis, and to the efficacy of Keynesian solutions. It seems that Baran and Sweezy felt that, as long as convinced Keynesians were at the helm of the economy, the mass unemployment of the inter-War years would remain a thing of the past.

Yet writing in the middle of the most dynamic period of twentieth century capitalism, the post-War boom of 1948-73, they identified the principal problem of the capitalist system as to find ways of absorbing (wasting) a surplus that threatened an era of chronic stagnation. This, surely, was a fundamental misunderstanding of the nature of the era they were writing in.

Against Keynesianism

Keynes was a subtle thinker. As an influential economist, his writings have given rise to different interpretations and schools of thought. This section is not intended to give a definitive critique of Keynesianism from a Marxist point of view. It merely shows how Marxist crisis theory engages with Keynesian analysis and solutions. Keynes was an intelligent man. He could see that in the Great Depression of the 1930s, the central problem seemed to be a lack of effective demand, of markets, of ‘over-production’.

The Marxist argument against Keynesianism can be derived from the critique of over-production above, although it is slightly more complex. The last quote in the section on Over-production and under-consumption could certainly be used against proposals by reformists to deal with capitalist crisis by reflating the economy. The Marxist argument against Keynesianism is not at base political, though it is true that the ruling class wouldn’t like to carry out expansionary measures. The economic establishment usually urges caution upon central bankers and fiscal probity on the government. But sometimes the ruling class may be forced to do something it doesn’t like.

The Marxist argument against Keynesian solutions is at bottom economic. Keynes proposed that the government should reflate the economy by ‘priming the pump’ – by spending some money. This would have a knock-on or multiplier effect on the rest of the economy. Prosperity would radiate throughout society.

If need be, the government could spend money they didn’t have. In other words they would borrow it. This is called deficit financing. Some followers have suggested that, by giving capitalism a pick up, taxes would increase and pump priming would eventually prove to be a ‘free lunch.’ It would pay for itself.

Marxists believe that Keynesianism doesn’t work. It doesn’t work because capitalism can’t be made to work. The problem of capitalism in crisis is not just a matter of inadequate demand – of markets – it’s a problem of profitable markets. Putting money in workers’ pockets may create a market for capitalists but it doesn’t give them any incentive to put their money into production. On the other side, boosting profits must necessarily be at the expense of workers’ living standards somewhere along the line. There are no free lunches to be had, as the capitalist world has discovered in the era of mass unemployment since 1974. Deficit financing doesn’t do away with the class struggle.

The dilemma of any individual capitalist is that they want to pay their own workforce as little as possible to maximise profits; but they want every other capitalist to pay their workers as much as possible so they will act as a market for the goods. But any attempt to boost profits hits the workers as a market for capitalist commodities; any attempt at boosting markets by upping wages or the social wage is seen as a threat to profits. This is the contradiction of capitalism in crisis.

A contradiction, as we have seen, is a situation where either alternative proves impossible. The contradiction is finally overcome by preparing the way for its recurrence on a larger scale. As Marx puts it, “World trade crises must be regarded as the real concentration and forcible adjustment of all the contradictions of bourgeois economy.” (Theories of surplus value Volume II p. 506)

Now it is true that economics is today dominated by neoliberal orthodoxy, hostile to Keynes and in denial that crisis is inherent in capitalism. But this may not remain the case for ever. It can be predicted that reformists will return to the call for Keynesian measures in the teeth of a crisis. We need to be able to answer them and explain the real solution to the problems facing the working class.

Say’s Law


We have attempted to refute naive over-productionist theories of capitalist crisis. But crises happen. At some point capitalists produce goods that can’t be sold. Nevertheless Say’s law declares that a realisation crisis is impossible. This theory is accepted by the dominant equilibrium school in neoclassical economics to this day.

Say’s law was developed by the French economist Jean-Baptiste Say at the beginning of the nineteenth century. It is usually expressed as ‘supply creates its own demand’ or ‘every seller brings a buyer to market with him’ or sales = purchases. The idea is that the seller comes to the market also to buy. If it were an accounting identity expressed as ‘sales = purchases’ or ‘aggregate supply = aggregate demand’ it would be true by definition, rather than a ‘law’. In that case sales would be equated with purchases through forcible quantity adjustments, by painful contractions in national income, by crises.

But that is not what the capitalist apologists have in mind. Regarded as an economic ‘law’, Say’s law is plain wrong. It was mistakenly adopted by Ricardo. Marx made a critique of it in Theories of surplus value Volume II. He explicitly describes this section as dealing with the possibility of crisis, rather than a cause. Chapter XVII is subtitled Ricardo’s theory of accumulation and a critique of it. (The very nature of capital leads to crises.) It is a critique of Say’s law. Crises are not only possible, they are inevitable under capitalism.

If we lived in a barter economy, then Say’s law would be trivially true. If I as a baker exchange loaves of bread with you as a butcher in exchange for a piece of meat, neither good would remain without a home – ‘unsold.’ (Actually, neither would be ‘sold’ in a barter economy – just exchanged).

We move to a money economy. As a baker I need to sell my bread, but I’m not buying meat today. So I exchange my bread for money and then go shopping for what I want. Marx calls this the C-M-C circuit (commodity – money – commodity). Say says it’s the same thing as C-C. A modern capitalist economy is just like barter. Each producer brings equivalent purchasing power into the marketplace, so everything will be sold.

If Say’s law were right, capitalism would permanently be in full employment equilibrium. Crisis would be absolutely impossible. Contrary to what Say’s law suggests, in a money economy the sellers need not buy at once. They can hang on to their money. If they do so, they are depriving some other potential seller of a market. Economic processes take place in real time. In a society of petty commodity producers, the separation of sale and purchase is likely to be conceptual, not a real problem. The artisans need to sell their products right away in order to buy the things they need to live on. The ‘purpose’ of production is consumption, the satisfaction of the needs of the producers.

It is otherwise under capitalism when production is conducted for profit. Then it may be entirely rational for sellers to hang on to their money if the alternative is making a loss. Interestingly, Marx’s critique identifies the same points as those developed by Keynes, who definitely had not read Marx.

Whichever way we look, it is the nature of capitalism as production for profit that is at the root of the crisis.

Disproportion


Another argument is that the crisis is caused by capitalist anarchy. Capitalist firms are dependent on one another. How much they produce depends on how much other firms produce. This is true of their inputs (of raw materials etc.) and for the sale of their finished products. But capitalist firms are unaware of their interdependence and regard themselves as independent, free spirited buccaneering outfits. Even if they became aware of their mutual interdependence, they would not be able to communicate this to other firms.

So capitalists can produce commodities in the wrong proportions. Marx investigated the problem of the reproduction of the material elements of production in Capital Volume II. He identified the problem of disproportion between different sectors of production, particularly between Dept I (capital goods) and Dept II (consumer goods).

Each capitalist is producing outputs that are inputs for other capitalists. National income consists of a circular flow of commodities, and every capitalist has to find the material components of production in the marketplace. Definite proportions between the different sectors of production have to be established for this to happen. But of course the individual capitalist just takes it for granted that this will always happen.

To keep things as simple as possible we assume that all goods take a year to produce. They are all swapped round at the end of the year and production then resumes for the second year.

Marx divided the value of a commodity (or the total value produced in any sector of production) into constant capital such as plant and raw materials (c), variable capital which is the outlay on wages (v) and surplus value (s). Surplus value is conventionally divided into rent, interest and profit. Marx started off with the case of simple reproduction, where none of the surplus value is capitalised – ploughed back into production. All the surplus value is consumed unproductively by the capitalists. Production in the next period is carried on unchanged, so output continues at the same level as before.

Let us assume an economy where:

Dept I is composed of 4,000c + 1,000v + 1,000s.

Since Dept I produces all the capital goods in the economy, it is able to replace all its constant capital ‘in house’. But it will have to purchase the components of variable capital and surplus value from Dept II, the sector producing consumer goods.

In the same way we have:

Dept II, consisting of 2,000c + 1,000v + 1,000s.

Dept II can supply the elements of variable capital and surplus value from its own output, but will have to buy replacement constant capital from Dept I.

The economy as a whole therefore consists of -

Dept I: 4,000c + 1,000v + 1,000s

Dept II: 2,000c + 1,000v + 1,000s.

The conditions for balanced reproduction are that Dept I (v + s) = Dept II c. These are the elements of reproduction that have to be exchanged between the two Departments. In this case Dept I is (1,000 + 1,000) = 2,000, which is equal to Dept II c.

Simple reproduction is the simplest case, showing the need for proportionality between the different sectors of production. Marx goes on to examine the case of expanded reproduction, where some of the surplus value is accumulated as additional constant capital and production in the next period takes place at an expanded level. The reader suspects and fears (correctly) that the arithmetic is likely to prove more difficult in this case. However, enough has been said for now to establish the importance of proportionality between the sectors in capitalist production.

How are these proportions established in practice? It is a central feature of capitalism that the system is unplanned. It is actually a permanent feature of capitalism that there is localised overproduction of some commodities and underproduction of others at the same time. Corrections are made after the fact, through falling prices and profits in the case of overproduction, and rising prices and profits in the case of scarcity. This in turn will cause capital flows into and out of those sectors. The question is – why should this continuous process lead to a generalised crisis?

It is true that in a horse race, if one horse trips that can bring the others down. But why should the horse trip in the first place? Surely the molehill (or whatever) is what we would say caused the accident? It is not just that the horses are bunched – competing with one another, yet dependent on the other horses keeping the right distance. Yet disproportion between different sectors is often presented as another cause of capitalist crisis.

In any case why ‘privilege’ the capital goods and consumer goods sectors? In a model of the economy composed of two sectors, we are in effect simplifying it down to two firms, one producing ‘capital goods’ and the other ‘consumer goods.’  According to Alex Nove (Economics of feasible socialism) there were 12 million different commodities in Russia at the time he was writing his book. Each one has a quantitative relationship to every other one. If more ball bearings are produced, for instance, some of the extra workers employed will buy woolly hats with pompoms. There is therefore a coefficient between woolly hats and ball bearing production.

In principle these proportions could be worked out and set up in a giant input-output table such as those pioneered by Leontieff. Since it is not in the interests of individual capitalists for their system to go into crisis, the central planning authority in a hypothetical planned capitalist system could use a Leontieff input-output table to work out the necessary proportions and instruct firms how much to produce. In principle could a planned capitalism be a crisis-free capitalism? I argue that crisis-free capitalism is impossible, since capitalist crisis is not caused by disproportionality.

Disproportion in Rosa Luxemburg’s The accumulation of capital


So the disproportion theory of crisis is just another example of capitalist anarchy or planlessness. As we have seen in Capital Volume II Marx looked at the problem of proportionality in terms of the relations between Department I and Department II. The most famous attempt to turn this analysis into a theory of crisis was made by Rosa Luxemburg in her book The accumulation of capital. She detected a tendency for Marx in his schema to establish proportionality between the two departments by arbitrarily restricting the amount of surplus value that was capitalised in the consumer goods sector. If the consumer goods sector capitalised the same proportion of the surplus value generated as the capital goods sector, there would be a systematic tendency for over-production of consumer goods relative to capital goods.

Here is a sample of her reasoning. “Marx enables accumulation to continue by broadening the basis of production in Department I. Accumulation in Department II appears only as a condition and consequence of accumulation in Department I, absorbing in the first place the other’s surplus production and supplying it secondly with the necessary surplus for its additional labour. Department I retains the initiative all the time, Department II being merely a passive follower” (p. 122). Was Marx cheating?

In Rosa’s view, if we correct the schema to allow Department II to accumulate at the same rate as Department I, we would see a systematic tendency towards a relative over-production of consumer goods. This over-production of consumer goods relative to capital goods would then force advanced capitalist countries to seize lands not yet in the capitalist orbit in order to dump its excess of goods upon them. Rosa’s ‘correction’ thus yields a theory of imperialism.

There are a whole series of misunderstandings at work here. The first pertains to Marx’s method. The reproduction schemes in Volume II are not intended to be a description of the real world. They are used to pose the problem of proportionality between the different sectors of production. Marx was the first economist to see this as a problem since the Physiocrats, who were by this time neglected and misunderstood. In my view Marx was able to see this as a problem because he was a socialist and perceived the problems of planning the economy. Marx’s method, as we have seen, was one of increasing concretisation in his analysis. The posing of the problem of proportionality was one stage in his analysis of capitalism as a system. It was not the last word.

Secondly, note that accumulation in Volume II takes place extensively. By that I mean the following. In the case of expanded reproduction, if the capitalist originally lays out c400 and v100, then he receives surplus value of s100. Deciding to capitalise half, he then adds 40 to constant capital and 10 to variable capital in the same proportions as at the original level of output. Production is expanded, but there is no technical innovation. There is no tendency to increase the organic composition of capital, as we would expect with accumulating capital. (The organic composition of capital is discussed in more detail in the section on the rate of profit.)

As Lenin pointed out in The characterisation of economic romanticism, Rosa’s analysis does not hold up in her own terms. “The romanticist” (i.e. Narodnik, who was making the same point as Luxemburg) “says: capitalism cannot consume the surplus value and therefore must dispose of it abroad. The question is: do the capitalists supply foreigners with products gratis, or do they throw them into the sea? They sell them – hence they receive an equivalent; they export certain kinds of products – hence they import other kinds.” Commodities that are sold in non-capitalist sectors are not thrown into the sea. They are exchanged for money, purchasing power that re-enters the system, and so ‘dumping’ goods in non-capitalist regions does not solve the problem of the over-production of consumer goods  for capitalism.

At several points Luxemburg raises the problem of ‘where does the money come from?’ (for instance Chapter 5. The circulation of money). Surely nobody really sees this as an issue with the credit creation possibilities of modern capitalism. And Rosa’s marvellous historical section on imperialism and the third world (Section 3) does not back up her central thesis – it shows capitalism increasingly encroaching on non-capitalist parts of the world. But we all agree that’s what happened!

Finally, Rosa treats the two Departments as like two independent super-tankers, set on their separate courses. In fact these Departments are made up of firms operating within a single capitalist economy. If there is systematic relative over-production of consumer goods, that will cause their price to fall relative to capital goods. That in turn will reduce profits in the consumer goods sector. Capital will flow towards the capital goods sector till the adjustment is completed. In marginal cases, such as a capitalist selling computers, he will just market them as capital goods rather than consumer goods. In most cases this adjustment is likely to be messy, wasteful and take place after the fact. But what’s new about that under capitalism?

Disproportion: fixed capital and the cycle


As a matter of fact, investment is the most volatile component of national income. The boom-slump cycle is thus an investment cycle. Booms correspond to periods with high profits leading to high levels of investment, while slump is a period when profits collapse, leading to steep falls in investment.

“Just as the heavenly bodies always repeat a certain movement once they have been flung into it, so also does social production, once it has been thrown into this movement of alternate expansion and contraction. Effects become causes in their turn, and the various vicissitudes of the whole process, which always reproduces its own conditions, takes on the form of periodicity.” (Capital Volume I p. 786)

Here Marx compared the economic cycle with the movements of heavenly bodies, such as comets. Once put in orbit for any reason they continue to circulate round their orbit with great regularity. Once a great volume of investment comes on stream at the beginning of an upswing, we can expect a mass of this investment to become obsolescent at about the same time later on. This will produce an investment cycle linked to the boom-slump cycle. We have the same problem as the astronomer who wants to find out how Halley’s Comet got into its present orbit. We are still not able to explain whycapitalism goes into crisis when it does.

“To the same extent as the value and durability of fixed capital applied develops with the development of the capitalist mode of production, so also does the life of industry and industrial capital in each particular investment develop, extending to several years, say an average of ten years. If the development of fixed capital extends this life on the one hand, it is cut short on the other by the constant revolutionising of the means of production, which also increases steadily with the development of the capitalist mode of production. This also leads to changes in the means of production; they certainly have to be replaced because of their moral depreciation long before they are physically exhausted. We can assume that, for the most important branches of large-scale industry, this life cycle is on average ten years. The precise figure is not important here. The result is that the cycle of related turnovers extends over a number of years, within which capital is confined by its fixed component, is the material foundation for the periodic cycle…But crisis is always the starting point of a large volume of new investment. It is also therefore, if we consider the society as a whole, more or less the new material basis for the next turnover cycle.” (Capital Volume II p. 264) We shall try to show later that the cycle is primarily caused by movements in the rate of profit, and that the profit cycle produces a corresponding investment cycle.


Marxist Theory of Crisis: Part 2

The dynamics of capitalism


The foundation of the capitalist system is the exploitation of the working class. The workers produce more value than what they are paid for. They are paid not for the labour they put in, but for their labour power. This is their keep, though as Marx says there is a ‘historical and moral element’ in it. The prevailing level of wages is determined by class struggle, and the subsistence of a worker in an advanced capitalist country today is much higher than it was two hundred years ago, or remains for a worker in a third world country today. Nevertheless it is still a subsistence in the sense that the worker has no alternative way of making a living other than working for a boss. The boss class collectively own the means of production, the means of making a living.

The working class are exploited in the strictly scientific sense that they produce more than they are paid. So the working day, the working hour or any piece of value added at work can be divided into paid labour and unpaid labour. Marx calls this unpaid labour surplus value, and it is divided into rent, interest and profit by the different fractions of the ruling class. To get more surplus value, the capitalist has to raise the rate of exploitation.

The first decision taken by the industrial capitalist is what proportion of the surplus value to consume unproductively on his own upkeep and what proportion to capitalise, invest back into expanded production. We have presented this as an individual decision, but in fact there are pressures upon the individual capitalist. He is competing with other capitalists, so he must either compete with them on price or go to the wall. In Marx’s view it was the progressive nature of the capitalist system that it developed the productive forces, thus preparing the way for a classless communist society of abundance. The productive forces were developed because individual capitalists were forced to plough back a great part of the surplus value rather than just consuming it unproductively. The mechanism that produced this result is the production of relative surplus value.

Absolute and relative surplus value


There is an imperative upon the capitalist to raise the rate of exploitation. As Marx explains in Capital Volume I, the rate of surplus value is the rate of exploitation, or s/v (surplus value divided by the value of variable capital laid out on labour power by the capitalist in the production process). There are two ways for the capitalist to raise the rate of exploitation. They are by increasing the production of absolute surplus value and the production of more relative surplus value.

It may be useful to look first at absolute surplus value. If the rate of surplus value = 4 hours unpaid labour divided by 4 hours paid labour = 100% then, if the capitalist can force the worker to work 10 hours for the same daily wage, the rate of surplus value will rise to 150%. So far, so easy.

The reader may well find this example extremely unrealistic. How can the bosses push the workers around in this way? In fact the long Chapter 10 in Capital Volume I The working day is about how they tried to do precisely this in the nineteenth century, and how the workers fought back. In the twenty-first century there are other ways of achieving exactly the same result. We all know occupations (such as security guard) where workers cannot live on the basic rate for a standard working day and will be forced to take all the overtime available to make up a living wage. This section, however, is not concerned to show the continuing ingenuity of modern capitalists in coining absolute surplus value from their workers – important though this is – but to contrast it to the production of relative surplus value.

There are obviously limits to this continued extension of absolute surplus value, which basically consists of exploiting weaknesses in the working class movement. Increasingly capitalism has historically sought the path of extracting more and more relative surplus value. If the minimum acceptable wage and the maximum hours in the working day are set by working class struggle, then capitalists must seek to get more out of ‘their’ workers in a given time. They must raise the productivity of labour. If the capitalist can get his work force to produce double the quantity of products in a given time, then each commodity will contain less labour and will tend to cost less. If these commodities are part of the basket of goods the workers take as part of their standard of living (‘wage goods’) then the workers will need to spend less time on producing the elements of their own wage and more time will be ‘freed’ up to produce relative surplus value.

This is an unconscious result on the part of the capitalist, a result from the process of capitalist competition. What are the mechanisms of this process? What is the capitalist trying to do? He wants to know how he can undercut his competitors. The best way to sell cheaper is by producing cheaper. The way to do this is by being the first to introduce new machinery that enables the workers to produce the same quantity of products in less time – and thus make things cheaper. In doing so the capitalist is, of course, exploiting the workers more – they are producing more commodities in their working time.

The first capitalist in a sector of production to innovate is likely to make a super-profit by pricing the commodity above its individual value (the labour time required to produce it under the new technology) but below the socially necessary labour time determined by the old level of technology.

Let us assume that the value of the commodity under existing production conditions is £10. The innovating capitalist can produce it for £8, including the same profit rate as his rivals. He can sell the commodity at any price between £8 and £10. Above £8 he will make a super-profit. He may choose to sell it below £10 since the new technique probably means he is producing on a larger scale than before and wants to get rid of all his finished goods. In any case choice will go out of the window as his competitors start to retool and bid the price down to its new value.

So his super-profit will not survive. The other capitalists will either have to retool with the new technology or go to the wall. The overall result will be the establishment of a new, lower, amount of socially necessary labour time to make the product and a new average rate of profit within the industry.

This is the dynamic for capitalism as a whole. Increased productivity and the accumulation of capital are the result and the eternal impulse of this process. Later we will see how these cheaper prices can act as countervailing tendencies to Marx’s tendency for the rate of profit to fall.

The rate of profit since the Second World War


We are going to try to test the theories against ‘the facts’. The facts in this case are the record of economic statistics. Economic statistics are drawn up, for the most part, by honest people. With few exceptions, none are Marxists. They don’t think in Marxist categories. For instance we saw earlier how Marx divided the value of a commodity into constant capital, variable and surplus value. Variable capital is outlay on wages, constant capital on all the other costs and surplus value is rent, interest and profit. These categories are needed to work out the rate of profit in Marxist terms, as we find out later.

This division does not concern the capitalist, or the economic statistician. The individual capitalist is more concerned as to whether he recovers his capital at the end of the production period (which is true both of wages and raw materials costs – together called circulating capital) or whether it is tied up as fixed capital (which means it can take years to get his money back). These are the concepts captured in economic statistics. Marx’s categories just disappear from the statistical record. They can be quite difficult to recover.

The profit share can be measured as a proportion of national income. National income is a flow of revenues usually measured over a year. For our purposes Gross National Product and Gross Domestic Product can be regarded as the same thing as National Income (though there are some differences).  Deduct the share of wages and other factor income flows from national income as a whole and the profit share is what is left. It can be presented as P/Y, when profit is P and national income is Y.

The rate of profit is more difficult to work out than the share. It is shown as P/K where K is the capital stock. It is necessary to make sure the source of the stock figures for K are compatible with the flow figures for Y, and that they are compiled in the same way.

For Marx the rate of profit is calculated against the entire capital stock, whether used up over a year or not. One way to work out the rate of profit is to multiply the profit share by the output/capital ratio (Y/K). P/Y x Y/K gives you P/K (dividing both denominator and numerator by Y).

The rate of profit has been the heartbeat of capitalism throughout the whole period we are investigating. Generally speaking, periods when the rate of profit has been high have been periods when investment has been high (a rapid rate of capital accumulation), and periods of relatively high employment. All these generalisations refer to the advanced capitalist countries. These are the only countries with consistent and accurate statistics for the whole period. But these, after all, are the heartlands of capitalism that contribute so much to the rhythms of global capital accumulation.

Andrew Glyn and his fellow authors first made their name by analysing the emerging crisis of capitalism in the 1970s in terms of a profits squeeze. To identify this profits squeeze they looked at the rate of profit, but also at the share of profit in the national income.

Let us look first at the evidence from Capitalism since 1945 (Armstrong, Glyn and Harrison). This in turn is based on earlier, pioneering works such as British capitalism, workers and the profits squeeze(Glyn and Sutcliffe). This team of authors were the first to identify the centrality of the profit rate in the evolution of global capitalism since the Second World War.

Armstrong et al. also deal with the profit share (which is easier to measure). There is a difference between the profit rate and the profit share, but one important and obvious reason the profit share might increase or decrease is because the rate of profit has gone up or down – so there is also a connection. Armstrong’s central thesis was that the profit share was squeezed by militant workers, and that this was the basic cause of the breakdown of the ‘golden years’ after World War II. Our historic critique of their position can be found at The tendency for the rate of profit to fall and post-war capitalism - AG and MB.

On page 8, Armstrong et al. deal with the increase of investment as a result of the War. “In Japan throughout the period 1939-44 private industrial investment ran at around the rate of the mid-thirties. In Germany between 1936 and 1943 the volume of investment in industry grew continuously to an unprecedented level….In the United States investment grew rapidly during the early years of the war. The peak in 1941, however, still represented a lower level than that achieved in 1929, and it then declined and stayed at a rather low level (less than half the 1929 peak) for the remainder of the war. Investment in plant and machinery in the United Kingdom rose by nearly one-half between 1938 and 1940, but then declined to well below half the previous rate for the last three years of the war.”

So far, then, investment was recovering from the Great Depression as a result of the open-handed arms spending by the warring states. Rates of profit were extremely high throughout the War in the fascist countries, as the authors point out, because of the repression of the labour movement.

Post-War chaos and devastation at first held the economies back. Despite the ‘advantages’ of fascism in Italy, “the low level of capacity utilisation, especially in 1946, substantially increased overheads, such as depreciation. Overall the share of profits in industrial output in 1947 can hardly have been much below that in 1938.” (ibid. p.53).

In Japan the profit share rose year on year from 1947-1951 from 8%, to 9%, to 15% to 22%, to 26% (ibid p. 91). In Germany “profits were high” (ibid p. 97). A graph shows industrial production, industrial employment and industrial productivity increasing by leaps and bounds after the War.

The authors sum up the causes of the post-War recovery. “The balance between wages and productivity was extremely favourable to the employers. Profits were comparable to prewar levels even in the countries then under fascism” (p. 105). The revival of the possibility of profitable production was a precondition of the great post-War boom.

Throughout what the authors call the ‘golden years’, the rate of profit was in gentle decline. This was not a straight-line movement, of course. The rate of profit went down in years of downturn and revived in the upturn. There continued to be a cycle of boom and slump, but it was much more moderate over this period. The rate of profit did revive after each downswing, but did not generally recover its previous peak. So the graph lines for Europe, the United States, Japan and the advanced capitalist countries as a whole show profit rates dipping as we approach 1974, the year of the first generalised post-War crisis of capitalism. Diagrammatically, the movement in the rate of profit resembles the teeth of a saw that tapers downwards.

At bottom, as we show later, the 1974 crisis was not an oil crisis, or an inflation crisis: it was a crisis of profitability. In a diagram on p. 251 Armstrong shows manufacturing profit rates in Europe, Japan and the USA recovering after 1974, but never returning to the levels seen in the ‘golden years’.

We will now pass the torch to Robert Brenner. Brenner wrote an article entitled The economics of global turbulence, which took up the whole issue of New Left Review issue 229, May/June 1998. He effectively updated his analysis in a book, The boom and the bubble, published in 2002. We have criticisms of Brenner’s analysis, as we have of Glyn and his colleagues. Our critique of Brenner is atRate of profit and capitalist crisis. Brenner’s writings are undoubtedly the most authoritative on the world economy within the Marxist tradition over the last ten years, as Armstrong, Glyn and Harrison’s were for the earlier period. The statistical analysis of both sets of writing is usually unassailable – but see the Appendix.

In his earlier work Brenner begins, “Between 1970 and 1990, the manufacturing rate of profit for the G-7 economies taken together (the biggest capitalist economies) was on average about 40% lower than between 1950 and 1970…the radical decline in the profit rate has been the basic cause of the parallel, major decline in the growth of investment and with it the growth of output, especially in manufacturing over the same period. The sharp decline in the rate of growth of investment – along with that of output itself is – I shall argue, the primary source of the decline in the rate of growth of productivity, as well as the major determinant of the increase of unemployment. The reductions in the rate of profit and of the growth of productivity are at the root of the sharp slowdown in the growth of real wages.” (p. 7-8). This is Brenner’s central thesis. And we agree with him. What we need to find out is why this happened.

On page 8 of The boom and the bubble Brenner has a diagram showing the fall in average profits in the 1970-1993 period compared with the golden years of 1950 – 1970. The US sees falls from 24.3% to 14.5%, Germany 23.1% to 10.9%, Japan 40.4% to 20.4% and the G-7 as a whole from 26.2% to 15.7%. Moreover output, net capital stock, gross capital stock, labour productivity and the real wage all follow the trend set by the net profit rate. It is clear that profit determines the whole rhythm of capital accumulation.

How Glyn explains the falling profit rate


Glyn et al. suggested that the profit share was falling because of the rising share of national income that went to wages. Class struggle explained the crisis! For a time their explanation seemed to fit the facts, but the Marxists remained unconvinced. After all, the 1970s was a period of sharply fought class struggle. Here is Brenner’s criticism of the profits squeeze thesis. (These points are taken unchanged from our critique of Brenner, Rate of profit and capitalist crisis.)

First ‘the universality of the long downturn’. “…none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune.” (1998 p.22)

Second ‘the simultaneity of the onset and various phases’. “The advanced capitalist economies experienced the onset of the long downturn at the same moment – between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 1974-75, 1979-82 and from 1990-91.” (ibid. p.22) How is it possible, Brenner asks, for the different course of the class struggle in different countries to produce these global trends?

Last, ‘the length of the downturn’. “Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach.”…”it is almost impossible to believe that the assertion of workers’ power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century.” (ibid. p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself. Marx said, “To put it mathematically: the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable.” (Capital Volume I p. 770)

Marx realized that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

Marx and the tendency for the rate of profit to fall


In Capital Volume III Marx wrote three chapters on The law of the tendential fall in the rate of profit. They are The law in itself (ch. 13), Counteracting factors (ch. 14) and Development of the laws’s internal contradictions (ch 15). This law is also referred to in the Grundrisse, where Marx describes it as “in every respect the most important law of modern economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated” (p. 748). We shall argue that Marx was right and that crisis in the post-War capitalist economy can be explained in terms of Marx’s theory.

We are assuming here that the reader has a basic grasp of the process of extraction of surplus value (exploitation), at least in outline, as explained in Capital Volume I and in pamphlets such as Wage labour and capital and Wages, price and profit. Why, in view of its importance, does Marx wait till Volume III (which was not published in his lifetime) to explain this law? The answer lies in Marx’s method. Rosdolsky, in The making of Marx’s Capital, gives what we believe to be a definitive account of Marx’s plan for his work on Capital. In 1865-66 he came up with a four volume project:

  • Book I      Production process of capital
  • Book II     Circulation process of capital
  • Book III   Forms of the process as a whole
  • Book IV   The history of theory (This became the three volumes of Theories of surplus value)

(Rosdolsky p. 13)

So before he can explain the tendency for the rate of profit to fall, Marx has to show how the drive by individual capitalists to maximise their own profits leads to the emergence of a general rate of profit. We shall do the same. These issues are to be dealt with in the discussion of capitalist production as a whole.

The formation of a general rate of profit


Marx divides the value of a commodity into constant capital such as plant and raw materials (c), variable capital which is the outlay on wages (v) and surplus value, conventionally divided into rent, interest and profit (s). The capitalist doesn’t care about all this stuff about c + v + s. All he knows is that he lays out a sum of money at the start of the production process and ends up with more (this circuit of capital is money – commodity – more money or M – C – M’). So he calculates his total capital  regardless as to whether it is spent on constant or variable capital. (We shall call total capital C in accordance with Marx’s usage. Note that we earlier symbolised it as K, as is usual in national income accounting.)

The capitalist works out his rate of profit based on total capital. The individual capitalist is not interested in the origins of surplus value. Indeed in his account books, and in the consciousness of the capitalist class, surplus value disappears as a separate category altogether.

One important observation from this is that the capitalists can sell their commodities below their value and still make a profit. Capitalists are continually trying to undercut one another, concerned as they are with market share and trying to win the war of competition. This still further pushes the origins of surplus value out of vision.

We have to be careful here. When we dealt with the value of a commodity, we resolved it into c + v + s. Now c (constant capital) consisted of two parts: fixed and circulating capital. The capitalist keeps separate records of the two, for they have consequences as to how he spends his precious money. This distinction between fixed and circulating capital (with wages seen as just another part of circulating capital) is another reason why the origins of surplus value are obscured. Circulating constant capital passes its entire value to the final product. An example would be the chocolate sprayed on to a Mars bar. We are mainly talking about raw materials here. It is fairly obvious that the chocolate is constant capital in the sense that it only passes its own value to the chocolate bar. It does not magically add value to the final product.

Then there is fixed constant capital, such as plant and machinery. When we examine the value of a commodity, we realised that a machine may help to produce millions of commodities and does not pass all its value to each one. The value it passes on can be explained by the notion of depreciation. The machine costs £1 million and produces a million commodities and is then worn out. We can assume that it passes value of £1 to each commodity it helps us produce. If the capitalist charges £1 depreciation in calculating the costs of each commodity, and puts £1 aside every time one is sold, he will have enough money to buy a new machine when it wears out. It is quite likely that the ‘straight line’ depreciation we have suggested is simplistic. The machine may become out of date before it wears out. Like buying a new car, its resale value may decline sharply as soon as the workers start using it. For now all we need to establish is that it is the depreciation of fixed constant capital that contributes to the value of the commodity.

But it is a different matter when the capitalist comes to think about his profits, which he calculates against his total capital (C). The whole point about the investment in fixed constant capital is that it locks away his money for years. So the rate of profit is calculated on the total capital advanced, whether used up or not.

The rate of profit is therefore s/C – surplus value divided by total capital. We are still assuming that all the surplus value is taken by the manufacturing capitalist at this stage. But remember that rent and interest, incomes which go to other sections of the ruling class, all come from the unpaid labour of the working class.

How is the rate of profit determined within an industry? An industry standard of technology is established by competition among the existing firms. Firms either keep up by producing commodities at the socially necessary labour time prevailing at the time, or they go to the wall. Occasionally laggard firms can maintain a fly-by-night existence if they have access to cheaper labour or some other advantage to compensate for their lack of productivity. But generally you don’t have farming with ploughs and oxen competing with farming conducted with combine harvesters. We may regard the achievement of higher productivity by accumulating capital and applying relatively more fixed capital in the form of machinery etc. to the production process as a basic tendency of capitalism.

Though technology and productivity may be standardised within an industry, it is obvious that different industries have very different levels of technology from one another. What is important from the Marxist point of view is that they therefore have very different organic compositions of capital.

The organic composition of capital measures the ratio of constant to variable capital in the production process or the proportion of dead to living labour. It is often presented symbolically as c/v. Now let’s look at an apparent problem when we have capitals of different organic compositions in different industries.

To keep things as simple as possible we will assume that the rate of exploitation is the same in both industries. We will also assume that all the fixed constant capital is used up over the production period we are studying, one year. There are only two industries in our simplified model:
I c350 + v50 +s50.  Profit rate = 50/400 = 12½%

II c50 + v50 + s50. Profit rate = 50/100 = 50%

So the same rate of surplus value produces a very different rate of profit depending on the different organic composition of capital in different industries. But this contradicts everything we know about the nature of capitalism. Capitalism is production for profit. The rate of profit is the central determinant of capital flows. Marx was well aware of this when he outlined the labour theory of value in Capital Volume I. In Volume III he explained that the consequence of the formation of an economy-wide rate of profit was that surplus value was redistributed between the different industrial sectors. As a result commodities are sold at money prices tending to their prices of production, a modified value.

“The whole difficulty arises from the fact that commodities are not exchanged simply as commoditiesbut as products of capitals, which claim shares in the total mass of surplus value according to their size, equal shares for equal size” (Capital Volume III p. 275)

In our simplified economy, equalisation of the rate of profit, through the flow of capital from the sector with the lower rate of profit to the sector with a higher rate, would produce the following result:

I c350 + v50 + p80 (profit rate = 80/400 = 20%)                             (where p is profit)

II c50 + v50 + p20 (profit rate = 20/100 = 20%)

So in industry I, output of 450 in values has been transformed into 480 in prices of production. In industry II, output of 150 in values has been transformed into 120 in prices of production. Surplus value has been transferred from industry II with a lower organic composition of capital to industry I with a higher organic composition.

One way Marx explains this is by asking us to think of a workplace with two departments, both necessary to produce the commodity. The capitalist who owns them doesn’t actually care where the surplus comes from as long as he gets his hands on it.

Marx concludes therefore that commodities are not actually sold at prices corresponding to their values, but tend to their prices of production, a modified value. In the example above, commodities in industry I are sold above their value and commodities in II below their value. But total values are equal to total prices of production and total surplus value is equal to total profit.

Does this contradict the law of value? Marx presents the process as a historical development. “The exchange of commodities at their values, or at approximately these values, thus corresponds to a much lower stage of development than exchange at prices of production, for which a definite degree of capitalist development is needed” (ibid. p. 277). In the same way, when we look at the labour theory of value, we start off with simple commodity production, and then move on to look at wage labour and capital.

The increasing organic composition of capital


The organic composition of capital measures the ratio of living to dead labour in the production process. To remind ourselves, “By the composition of capital we mean…the ratio between its active and passive component, between variable and constant capital.” (Capital Volume III p. 244) Marx adds, “The organic composition of capital is the name we give to its value composition, in so far as this is determined by its technical composition and reflects it.” (ibid. p. 245).

We have seen how there is a tendency for a uniform rate of profit to be established throughout the economy, despite the differing organic compositions of capital within different branches of industry. This tendency, like any other tendency under capitalism, emerges precisely through individual capitalists searching for a higher rate of profit than the rest.

We have also seen (in the section on Absolute and relative surplus value) that there is an impulsion on every capitalist to raise the productivity of labour. Though there are other ways he can do this, historically and in practice it has been crucial to put more and more machinery (fixed capital) behind the elbow of each worker in order that they can produce faster and cheaper.

There is therefore a tendency for the organic composition of capital to rise over time in those branches of industry where labour saving equipment can be applied, and therefore in the economy as a whole.

Here is an illustration of the capital intensity of modern capitalist production, taken from a newspaper article (Mark Milner, Guardian April 17th 2007). The General Motors plant producing Astra cars at Ellesmere Port is to be revamped:

  • The plant will employ 2,200 workers
  • Productivity is likely to rise by 30%
  • The plant will produce 180,000 cars a year
  • Investment will be 3.1 billion Euros (round about £2 billion)

So each worker will produce nearly 90 cars a year on average. (Of course no worker produces a car single-handed. It is a team effort.) The machinery behind the elbow of each worker is getting on for £1,000,000!

This is casual and empirical but powerful evidence as to the correctness of Marx’s analysis of the dynamics of capitalism – the connection between rising productivity and a higher level of exploitation, the increasing scale of production and the greater mass of dead labour relative to living labour applied in the production process as the system develops.

Marx goes on to specifically link this rising organic composition with the tendency for the rate of profit to fall. “With the progressive decline in the variable capital in relation to the constant capital, this tendency leads to a rising organic composition of the total capital, and the direct result of this is that the rate of surplus value, with the level of exploitation of labour remaining the same or even rising, is expressed in a steadily falling general rate of profit. (We shall show later on why this fall does not present itself in such an absolute form but rather more in the tendency to a progressive fall.) The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour.” (ibid. pp. 318-9)

Explaining the tendency for the rate of profit to fall


Marx presents this tendency as a law. Different people use the word ‘law’ in different senses. Some scientific writers quite legitimately use the term to mean a statistical regularity. In this case there would be a law for the rate of profit to fall if we could observe the rate of profit falling continuously.

We can’t. And Marx is quite clear that is not how the tendency for the rate of profit to fall operates in practice. For him a tendency is a force operating in a certain direction. We shall present the law in Marx’s own words.

“Once wages and the working day are given, a variable capital which we can take as 100, represents a definite number of workers set in motion: it is an index of this number. Say that £100 provides the wages of 100 workers for one week. It these 100 workers perform as much surplus labour as necessary labour, they work as much time for the capitalist each day, for the production of surplus value, as they do for themselves, for the reproduction of their wages, and their total value product would then be £200, the surplus value they produce amounting to £100. The rate of surplus value s/v would be 100%. Yet, as we have seen, this rate of surplus value will be expressed in very different rates of profit, according to the differing scale of the constant capital c and hence the total capital C, since the rate of profit is s/C. If the rate of surplus value is 100%, we have:

if c = 50 and v = 100, then p’ = 100/150 = 66 2/3 %;

if c = 100 and v = 100, then p’ = 100/200 = 50%;

if c = 200 and v = 100, then p’ = 100/300 = 33 1/3 %;

if c = 300 and v = 100, then p’ = 100/400 = 25%;

if c = 400 and v = 100, then p’ = 100/500 = 20%.

“The same rate of surplus value, therefore, and an unchanged level of exploitation of labour, is expressed in a falling rate of profit, as the value of the constant capital and hence the total capital grows with the constant capital’s material volume.

“If we further assume now that this gradual change in the composition of capital does not just characterise certain individual spheres of production, but occurs in more or less all spheres, or at least the decisive ones, and that it therefore involves changes in the average organic composition of the total capital belonging, then this gradual growth in the constant capital, in relation to the variable, must necessarily result in a gradual fall in the general rate of profit, given that the rate of surplus value, or the level of exploitation of labour by capital, remains the same” (Capital Volume III pp. 317-8,The law itself).

Countervailing factors


Marx deals with the counteracting forces on the tendency for the rate of profit to fall in Part Three ofCapital Vol. III. Chapter 13 is ‘The law itself.‘ Chapter 14 is entitled ‘Counteracting factors’. Chapter 15 is ‘Development of the law’s internal contradictions.‘ We can see at once that the ‘law’ does not mean that the rate of profit will always fall. It is not a prediction. The tendency for the rate of profit to fall is aforce operating on the capitalist system, as we have seen. This force, in a dialectical way, actually unleashes contradictory forces that may tend to drag the rate of profit up.

Marx mentions six counteracting factors to the underlying tendency for the rate of profit to fall:

  • More intense exploitation of labour
  • Reduction of wages below their value
  • Cheapening of the elements of constant capital
  • The relative surplus population
  • Foreign trade
  • The increase in share capital


Increasing the intensity of exploitation


How can the bosses exploit the workers more? Apart from making workers more productive so as to increase the extraction of relative surplus, Marx realised that they could get exactly the same result without investing in more machinery. Through an offensive on the shop floor they could increase what he called the intensity of labour. In effect workers would be made to do ten hours’ work in eight hours. The main two ways of increasing the intensity of labour is by speeding up the assembly line and by making workers mind more machines.

Generally raising the intensity of labour and increasing its productivity have the same effect. They both raise the rate of exploitation by increased the production of relative surplus value. They both tend to make goods cheaper. We shall therefore consider them together.

Let us begin by assuming that the goods made cheaper are the ones workers buy with their wages, for instance KitKats. Obviously if the price of KitKats fall you don’t feel materially much better off, but this raising of productivity is assumed to be going on all over in the economy. As we discussed earlier (Absolute and relative surplus value), we can assume to start with that the worker works four hours to earn enough wages to buy the elements of her subsistence and four hours making surplus value for the boss class. If productivity for all the items going to make up the wage bundle doubles, then the worker need only work two hours for herself and six hours for the capitalists. Marx is assuming that workers’ real wages (in terms of purchasing power) will remain unchanged. The end result of raising the productivity of labour is thus to increase the rate of surplus value (rate of exploitation) by increasing relative surplus value

Reduction of wages below their value

Second Marx assumes that on average commodities are sold at their value (or rather price of production) for the purposes of his analysis. He was well aware that this is not always the case. In fact, he was by far the finest and most systematic chronicler of his time of the abuses of the capitalist system. He knew that the value of labour power was established by class struggle and had ‘a historical and moral element’. Therefore in practice depression of wages below the value of labour-power is important in practice in raising the rate of profit, not this time by making workers produce more but by paying them less.

Cheapening of elements of constant capital.

Just as the elements of variable capital can be made cheaper through raising the productivity of labour, so can the elements of constant capital. So, though there may be a much greater mass of machinery behind the elbow of each worker, each unit of capital may cost less and the organic composition of capital could be lower. “Also related to what has been said is the devaluation of existing capital (i.e. of its material elements) that goes hand in hand with the development of industry. This too is a factor that steadily operates to check the fall in the rate of profit, even though in some circumstances it may reduce the mass of profit by detracting from the mass of capital that produces profit. We see here once again that the same factors that produce the tendency for the rate of profit fall, also moderate the realisation of this tendency.” (ibid. p. 236)

Though the labourer is working up more and more raw materials over a given period of time, each piece costs less because it takes less time to produce those raw materials. “For example, the quantity of cotton that a single European spinning operative works up in a modern factory had grown to a most colossal extent in comparison with that a European spinner used to process with the spinning wheel. But the value of the cotton processed has not grown in the same proportion as its mass. It is the same with machines and other fixed capital. In other words the same development that raises the mass of constant capital in comparison with variable reduces the value of its elements as a result of the higher productivity of labour, and hence prevents the value of the constant capital, even though this grows steadily, from growing in the same degree as its material volume. i.e. the material volume of the means of production that are set in motion by the same amount of labour power.” (ibid. p. 343)

The relative surplus population


The unemployed can be used as a whip against the demands of employed workers. Then as now the discovery of pockets of workers who will work for wages below the average can be a Klondike for individual sectors of capitalists, and serve to raise the overall rate of profit for the system as a whole.

Foreign trade

Foreign trade enables capitalists to buy commodities from the cheapest sources in the world and so lowers their costs. It produces a global division of labour and enables national economies to reap the advantages of scale economies within world trade, further cutting costs all round.

Marx also introduces some important concepts that can serve as the base for a theory of imperialism. We cannot pursue these here. Note that Marx is dealing with the formation of national rates of profit, and how they are influenced by cheap imports. Realistic as this was for his time, we might consider whether the twenty-first century, with its vast capital flows, has produced a tendency for a global rate of profit to emerge. In any case we cannot treat foreign trade as a rabbit out of a hat, negating the basic tendencies of capitalist accumulation.

The increase in share capital


Finally Marx points to a tendency then in its infancy. It is now fully realised – a stratum of the capitalist class has become purely parasitic, and lives off the income of shares that their brokers, not they themselves, select. In this case surplus value undergoes a further division, with share dividends approximating to interest-bearing capital.

We have to say that some of Marx’s countervailing tendencies are mentioned very briefly, sometimes in a single paragraph. Fascinating though they are, they are not fully explored in the text. They almost come across as a sort of checklist for further research.

We regard the two most important counter-tendencies as raising the rate of exploitation andcheapening the elements of constant capital. They are the most important because they both explore how the central tendency to raise the productivity of labour that causes the tendency for the rate of profit to fall actually produces its own counter-tendencies.

In the case of raising the rate of exploitation, wage goods are produced faster and therefore cheaper, thus enabling the worker to spend more of her time producing surplus value and less in producing the elements of her own subsistence.

In the second case capital goods are produced faster and therefore cheaper. In this case while the mass of constant capital (what Marx called the technical composition of capital) may rise, the price of those material elements of constant capital (for the organic composition of capital is expressed in money prices) could fall.

Could these counter-tendencies indefinitely offset the tendency for the rate of profit to fall?

Increasing the rate of exploitation. In the example we used earlier, the worker works four hours to produce the elements of her own subsistence and four hours producing surplus value. As a result of new techniques, productivity doubles and the worker is now only working two hours for herself and six hours for the bosses. Her standard of living is unaffected – she can still buy the same bundle of wage goods as before. But there are limits to this process in increasing the rate of exploitation. In mathematical terms the rate of exploitation is bounded by the new value added by the worker (v + s). In mathematical terms, as productivity continues to rise in the wage goods sector, s tends to increase towards (v + s), while v tends to zero. As long as constant capital continues to increase (c tends to infinity), the rate of profit must eventually fall.

Cheapening the elements of constant capital. The cheapening of elements of constant capital through rising productivity tends to reduce the organic composition of capital expressed in market prices. The question is: can this indefinitely offset the tendency for the rate of profit to fall? Marx believed it could not. We agree.

Since this issue has been in contention for more than a century, we cannot treat it fully here. We would refer the reader to the historic debate Tendency for the rate of profit to fall and post-war capitalism – AG and MB. We have included further material on this question in the Appendix.

More recently, Kliman’s Reclaiming Marx’s ‘Capital’: A refutation of the myth of inconsistency has, we believe, definitively rebutted those who argue that ‘Marx got it wrong’ and that by implication there is no long term tendency for the tendency for the rate of profit to fall.

How the tendency manifests itself in practice


Marx’s analysis is actually subtler than many give it credit for.  “There is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time…We have seen how it is that the same reasons that produce a tendential fall in the profit rate also bring about an accelerated accumulation of capital and, hence, a growth in the absolute magnitude or total mass of the surplus labour (surplus value, profit) appropriated by it.” (ibid. p. 331)  In Capital Volume III, Marx even referred to the law as a “double-edged law of a decline in profit rate coupled with a simultaneous increase in the absolute mass of profit, arising from the same reasons.” (ibid. p. 326)

So the rate of profit can fall, and usually does fall, while the mass of profit available to the capitalist class rises. In addition the mass of profit is expressed in a greater and greater quantity of use-values (‘wealth’), each of which involves less and less labour time to produce, and so each has less value congealed within itself.

Secondly, the reader should bear in mind that, “we are deliberately putting forward this law before depicting the decomposition of profit into various categories, which have become mutually autonomous.” (ibid. p. 320) Rent, interest and profit, conventionally presented as the components of surplus value, all vary against one another and all follow their own economic laws. This is very important when we consider the actual onset of crisis.


Marxist Theory of Crisis Part 3

Development of the law’s internal contradictions


The three chapters on the Law of the tendential fall in the rate of profit, and particularly Chapter 15 (The development of the law’s internal contradictions), provide the only complete explanation provided by Marx of boom and slump as part of a cycle and not, as over-production theorists would have it, as a crash coming out of a clear blue sky. Bearing in mind Rosdolsky’s outline of Marx’s 1865-66 economic ‘project’ referred to earlier, we find it exactly where we would expect it to be in his writings. After dealing with the production and circulation of capital he turns in Capital Volume III toThe process of capitalist production as a whole. Crisis theory deals with all the contradictions of capitalist society.

Marx appears to raise the realisation problem in Chapter 15. “The conditions for the immediate exploitation and for the realisation of that exploitation are not identical. Not only are they separate in time and space, they are also separate in theory. The former is restricted only by society’s productive forces, the latter by the proportionality between the different branches of production and by society’s power of consumption.” (Capital Volume III, p. 352)

It is precisely at this stage in his analysis that Marx introduces the concept of over-accumulation. “Over-production of capital and not of individual commodities – though this over-production of capital always involves over-production of commodities – is nothing more than over-accumulation of capital.” (ibid. p. 359)

He goes on, “There would be an absolute over-production of capital as soon as no further additional capital could be employed for the purpose of capitalist production. But the purpose of capitalist production is the valorisation of capital, i.e. appropriation of surplus labour, production of surplus value, of profit.” (ibid. p. 360)

So over-accumulation is over-production of capital, which manifests itself as over-production of commodities. But too much capital is produced only in relation to profit-making potential. And this tendency produces an unseemly scramble among the capitalists for their chance to grab what profit there is.

“Concentration grows…since beyond certain limits a large capital with a lower rate of profit accumulates more quickly than a small capital with a higher rate of profit. This growing concentration leads in turn, at a certain point, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises. The so-called plethora of capital is always basically reducible to a plethora of that capital for which the fall in the rate of profit is not outweighed by its mass.” (ibid. p. 359)

So Marx sees no contradiction in raising the so-called realisation problem in the middle of a chapter dealing with the falling rate of profit as the fundamental cause of capitalist crisis. It is precisely the fall in the profit rate that produces the crisis, and over-production (over-accumulation) is its form of appearance. To put it another way, the fact of over-producing firms may be regarded as the trigger, while the fall in the rate of profit is the cause of the crisis.

Moreover viewing the crisis as a crisis of profitability enables us to understand how the downturn prepares the basis for a later upswing. The essential mechanism is through the destruction of capital in a recession.

“The periodic devaluation of existing capital, which is a means immanent to the capitalist mode of production for delaying the fall in the profit rate and accelerating the accumulation of capital value by the formation of new capital, disturbs the given conditions in which the circulation and reproduction process of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process” (ibid. p. 262).

This destruction of capital is not mainly physical destruction and obsolescence. The destruction of capital values in a crisis actually prepares the way for a reduction in the organic composition of capital, and a revival in the rate of profit. In this way we can explain the entire boom-slump cycle.

In a slump unwanted stocks and unused machinery are sold in fire sales of the assets of bankrupt firms. “Secondly, however, the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use values…A large part of the nominal capital of the society i.e. of the exchange value of the existing capital is once for all destroyed, although this destruction, since it does not affect the use value, may very much expedite the new reproduction.” (Theories of surplus value Volume II p. 496)

The crisis therefore prepares the way for a new upturn in the same way as naturalists explain that forest fires can actually prepare the woodland for a new period of growth.

Once Marx has explained how the movement in the rate of profit is the mainspring of economic crisis, he can introduce the ancillary factors that play their role in preparing for the individuality and complexity of any particular capitalist crisis.

Ancillary factors


Now we introduce those economic factors that give each specific historic period its own colour and character. They interact with the general movement of the capitalist economy, based as it is on movements in the rate of profit, accelerating its upswings and deepening its downward drops. The items below are just an indicative list of these epiphenomena.

Wages: One important economic effect of the crisis, of course, is that, by creating mass unemployment, the boss class has the whip hand in trying to drive down the wages of the employed workers. “Stagnation in production makes part of the working class idle and hence places the employed workers in conditions where they have to accept a fall in wages, even beneath the average; an operation that has exactly the same effect for capital as if relative or absolute surplus value had been increased while wages remained at the average.” (Capital Volume III p. 363) The point is that movements in wage levels are based on the bargaining power of the contending classes, which is determined by the level of unemployment – itself dependent on the stage reached in the economic cycle.

Competition: Marx is also aware of the competitive struggle between individual capitalists, and its deleterious effect on their system as a whole, in the teeth of a crisis. Unlike Adam Smith, he does not see competition as the driving force of the falling rate of profit. “Competition, generally this essential locomotive force of the bourgeois economy, does not establish its laws, but is rather their executor. Unlimited competition is therefore not the presupposition for the truth of the economic laws but rather the consequence – the form of appearance in which their necessity reveals itself.” (Grundrisse p. 552)

For Marx the fall in the rate of profit intensifies the pressure on individual capitalists to compete with one another. “(T)he fall in the profit rate that is bound up with accumulation necessarily gives rise to a competitive struggle. Compensation for the fall in the profit rate by an increase in the mass of profit is possible only for the total social capital and for big capitalists who are already established. New and independently operating additional capital finds no compensatory conditions of this kind ready made; it must first acquire them, and so it is the fall in the profit rate that provokes the competitive struggle between capitals and not the reverse”(Capital Volume III p. 365)

Raw material prices: Typically a prolonged upswing will produce a boom in the price of raw materials. We suppose in theory that an increase in the demand for an industrial product is likely to call forth an instant increase in its supply as its price goes up and capitalists, mindful of the profit motive, respond by boosting production. But there are biological and geological limits in the responsiveness of organic and mineral materials’ production to demand conditions. As a result commodity prices are likely to respond spasmodically to changes in demand, with soaring peaks and dizzying drops.

This was most noticeable in the case of oil, which was actually the major basic cheap resource that fuelled capitalism in the ‘golden years’ after the Second World War. Our ‘rigorous’ neoclassical economists descend to the most casual empiricism when they characterise the 1974 crisis as an ‘oil crisis.’ They are incapable of noticing that oil prices generally are determined by the demand for oil, given the supply constraints, and that the demand is provided by capital accumulation in the industrial countries.

Of course, since oil is an important resource for capitalism, if the price of oil rises towards the end of an upswing, that is going to cut into manufacturing costs and therefore profits. And because the rate of profit is likely to be falling by this stage, it is theoretically possible that the oil price hike could help push them over the edge. The important point is to see how commodity prices are located in the cycle of accumulation.

Stocks (Inventories): In a boom the capitalists exude confidence. They develop the belief that ‘this time it’s different’ – this time the boom will last forever. As a result they build up stocks of raw materials, confident in the good times to come. In doing so, of course, they act as excellent customers to the capitalists responsible for producing raw materials. They may also allow stocks of finished goods to accumulate in the warehouses, sure that they will be sold in the fullness of time.

It’s a different story in a slump. Unsold stocks of finished goods are a millstone around their necks. They may well reduce output below what is actually required so as to realise the values of their unsold stocks first. They may be forced to do this because their profits have disappeared and that is the only way to escape bankruptcy. The niggardly approach they develop in the slump to husbanding raw materials hits the capitalists producing these raw materials, for whom this market is the only way they have of making a living.

Expectations: Capitalists have no way of knowing what the future will hold for them. Yet they have to develop a view as to how markets are likely to evolve. Under these conditions capitalists’ expectations can acquire the power of a material force in the economy. Marx gleefully chronicles the swindles carried out by capitalists upon one another. Yet these swindles were indicative of a certain mentality – the belief that anyone with money could make more money. This outlook becomes dominant after a long period of boom because it reflects a certain reality.

On the other hand a crash caused by failed capitalist projects can drag quite reputable and viable capitalist firms and individuals down with it. That is the price capitalists pay for their system. Really the market division of labour makes them all interdependent upon each other and dependent upon the operation of the law of value. But they do not realise this. “(I)n the midst of accidental and ever-fluctuating exchange relations between the products, the labour time socially necessary to produce them asserts itself as a regulative law of nature. In the same way the law of gravity asserts itself when a person’s house collapses on top of him.” (Capital Volume I p.168) After the crash, caution becomes the dominant mood. And of course that caution makes recovery slower.

Finance: When we discussed the tendency for the rate of profit to fall, we made it clear that by ‘profit’ we meant surplus value as a whole and that the rate of profit is calculated as total surplus value divided by total capital invested. Yet surplus value is usually divided into rent, interest and profit (actually there are others who share in this surplus). All three factors can vary against one another.

Traditionally, the share of surplus value going to finance capital is called interest. Interest rates are connected to the boom-slump cycle in a complex way, analysed by Marx in Capital Volume III. We cannot treat the subject fully here.

“If we consider the turnover cycles in which modern industry moves – inactivity, growing animation, prosperity, over-production, crash, stagnation, inactivity, etc.,.. – we find that a low level of interest generally corresponds to periods of prosperity or especially high profit, a rise in interest comes between prosperity and its collapse, while maximum interest up to extreme usury corresponds to a period of crisis.” (Capital Volume III p. 482)

After a recession, interest rates are generally low. Manufacturing capitalists are not making much profit, so they cannot afford to pay the banks much interest. They are not investing in new plant. They are certainly not investing with borrowed money, but gradually trying to cover their losses and restart production on a modest scale with the resources available to them. As production picks up, the demand for loan-capital from manufacturing capitalists rises.

When a crash is looming, “In times of pressure, the demand for loan capital is a demand for means of payment and nothing more than this; in no way is it a demand for money as means of purchase. The interest rate can then rise very high”…just when the industrial capitalists can least afford it. (Capital Volume III p. 647) In a crash everybody needs hard cash. The whole crazy process is about to begin again.

Trade: We would expect that, as profit-making opportunities re-emerge, capitalists would exploit the division of labour to introduce more economies of scale and divide the world ‘rationally’ into areas that can produce goods at the lowest possible cost. This division of labour between capitalist firms is not organised but governed by market forces. We would therefore expect to see trade, including international trade, advance during the upswing and contribute to the strength of that upswing. We would also expect to see trade shrink in the downturn as each capitalist, and each capitalist nation-state, turns on the others, determined to load the burdens of the crisis on anyone but themselves.

As Armstrong (Capitalism since 1945) shows, trade liberalisation did not kick-start

the revival of the European and Japanese economies in the years right after the Second World War. The reason for this was the enormous imbalances in the world economy – in particular the complete dominance of the USA over the capitalist world. All the other advanced countries had massive deficits with America.

“Nor was continued European expansion based on massive import growth from the United States or elsewhere…Indeed, imports fell in 1948 and only regained 1947 levels in 1951. Meanwhile exports steamed ahead and by 1950 had regained prewar levels, with imports still some 10% below.” (pp. 82-3) In other words the increased exports were not a sign of reviving economic health, but served just to repay accumulated debts.

When the road was clear, trade interacted dialectically with profit-making potential in production to push the upswing higher. “The years of the boom saw a phenomenal explosion of trade. Between 1951-3 and 1969-71 the volume of world trade in manufactures grew by 349% whereas the volume of output grew by 194%” (ibid. p. 153).

The slowdown hit trade as well as production. The slowdown in trade made the slowdown in production worse. “The growth of world trade slowed down sharply after 1973, growing at an average 3.8% a year over the period 1973-88, compared to 8.7% per year during the previous decade” (ibid. p. 296). As we shall see later, world trade actually fell in volume terms in the wake of the 1974 crash.

The crash of 1974


The 1974 recession was the first generalised recession of global capitalism since the Second World War. It marked the end of the ‘golden years’. We look briefly at this event as an example of the processes we have been analysing.

In the first instance bourgeois economists, desperate to show that crisis is not inherent in their system, assert that the 1974 crash was ‘all about inflation.’ Certainly inflation was very high in 1974. In the US it was 11%, in Japan 21%, in Britain, 16%, in Germany 7%, and in Italy 19%.

World capitalism had actually thrived on the more moderate inflation, which had become a feature of the whole post-War era, gradually and insidiously increasing over the years. The causes of inflation are complex and cannot be dealt with here. But in Britain, for instance, the government budget deficit was 10% of GDP in 1975. Such deficits have to be paid for, and can contribute to the inflationary spiral.

The main point is that in 1974 inflation ceased to be a stimulant and started to become a major obstacle to economic growth, reflecting imbalances that were making the recession worse. Before 1974 Keynesian economists had perceived inflation as a sign that the economy was growing too fast, while unemployment was evidence that it was going too slow. Now the economy was simultaneously sending out messages that it was running too fast and too slow! The alternative, of course, was that Keynesianism had failed as an explanatory tool and as a remedy for economic problems. Economists started to mutter about ‘stagflation’ and ‘slumpflation’ and to develop alternative theories.

The second illusion spread about 1974 was that it was an ‘oil crisis’. It is true that the price of oil, the basic feedstock of post-War capitalism, quadrupled in less than a year. The oil price hike was not a result of sober economic calculation. After the 1973 Arab-Israeli War, oil producing Arab nations boycotted western countries because of their perceived pro-Israeli bias. Both they and their customers were then astonished at the economic power they had accumulated.

Itoh and Lapavitsas (Political economy of money and finance) put the oil shock in context. “The world market prices of primary products such as corn, wood, cotton, wool and minerals also began to rise rapidly in the later 1960s, reflecting the relative shortage of these products. The quadrupling of the price of crude oil within a few months in 1973-4 owed much to the fourth Arab-Israeli War, but was also integral to the general shortage of primary products due to the over-accumulation of capital in the advanced countries. The terms of trade relative to manufactures were raised by more than 10 per cent in 1970-3 and by nearly 70 per cent in 1970-4. The price of raw materials for manufacturing nearly doubled within the year prior to the first oil shock.” (p. 193)

All the other epiphenomena mentioned in the abstract in the section above (Ancillary factors) came into play in a concrete and painful manner. At the end of the boom speculation and swindling were rife. More and more resources were devoted to the acquisition of raw materials and of land, the price of which was soaring. This feverish speculation was a product of the mentality that the good times would never end.

Banks had been lending more and more to speculators to buy land, thus creating the perfect bubble. The bubble duly burst at the end of 1974, threatening to take the banks with it.

In Britain a dodgy bunch called secondary banks (really property speculators) had to be saved by a rescue operation launched by the Bank of England. The alternative was that, as they sank beneath the waves, they would take large chunks of the financial establishment with them.

The overheated stock exchanges all over the world had the opportunity to chill out. In London share prices went from a high of 339 to a low of 150 in 1974.

Commodity prices, with the exception of oil, also collapsed. By December 1974 copper had lost 60% of its value, posted in April of the same year. Other commodities recorded similar losses. These dry statistics are actually a trail of tears for the poor people totally dependent on their sale on the world market.

World trade, which had actually grown faster than the national economies throughout the post-War period and was regarded as an ‘engine of growth’ took a hit and fell in absolute terms in 1975. It fell because of a recession located in production and the profit-making engine of the capitalist economy.

The crash actually started in the car industry, and spread and spread.  Production fell sharply. From peak to trough over two years industrial production fell 14.4% in the USA, 19.8% in Japan, 11.8% in Germany, 10.1% in Britain, and 15.5% in Italy.

Naturally unemployment soared. By the trough it was 7.9 million in the US, 1.1 million in Japan, 1.1 million in Germany, 1.3 million in Britain and 1.1 million in Italy. The ‘full employment’ era was over.

Capacity utilisation fell in the US from 83% in 1973 to 65% (less than two thirds) in 1975. 1973 was a peak year. But in the 1966 peak 92% of manufacturing capacity was in use. In 1969 it was 86.5%. Measured from peak to peak or from trough to trough capacity utilisation had been falling over the whole post-War period.

Why? Capacity utilisation, investment, output and employment were all falling in line with the rate of profit. Capitalists use manufacturing capacity to the maximum if they think they can make profits. They invest if they think they can make profits. They produce if they think they can make profits. They employ workers if they think they can make profits.

In the USA industrial (pre-tax) profits were 16.2% in the years 1948-50, 12.9% in 1966-70, and 10.5% in 1973. Then they crashed, and so did the economy.

In Britain our figures are taken from Glyn and Sutcliffe - British capitalism, workers and the profits squeeze. In 1950-54 the rate of pre-tax profit was 16.5%, in 1955-59 14.7%, in 1960-64 13%, in 1965-69 11.7% in 1968 11.6%, in 1969 11.1%, and in 1970 9.7%. As we have seen from Capitalism since 1945 quoted earlier, profits then recovered after the 1974-75 recession, but never regained the levels they achieved in the ‘golden years’.

Brenner’s works confirm that, since the 1974 crash, the good times have gone for good. The rate of profit has been consistently lower in the 1970-1990 (or 1993) period than it was from 1950 to 1970. Within the later period, the rate of profit rose in times of boom and fell as the economy entered a recession, as it did in the 1950 – 1970 period.

More recently Andrew Glyn’s most recent book Capitalism unleashed is mainly concerned with other matters. On page 136 he does briefly suggest that the American capitalist class has achieved a clawback of the rate of profit up to the level of the early 1970s. But for Europe (pp. 145-6) and Japan (p. 141) the picture we have painted remains the same. Likewise Brenner’s 2006 book The economics of global turbulence (an update of his previous work) is subtitled The advanced capitalisteconomies from long boom to long downturn. It does not challenge the link between movements in the rate of profit and the health of the capitalist economy. The fit is almost perfect.

We conclude that the tendency for the rate of profit to fall as explained by Marx is the key to understanding the cycle of boom and slump in the capitalist economy.

Appendix


Countervailing tendencies to the tendency for the rate of profit to fall. Cheapening the elements of constant capital.

The same process of rising productivity that cheapens wage goods can also cheapen capital goods and so reduce the organic composition of capital. Certainly this can happen in practice. But those who have argued that this process can indefinitely offset the tendency for the rate of profit to fall have all too often adopted a false method. The following quotes are taken from a historic debate (The tendency for the rate of profit to fall and post-war capitalism - AG and MB)

“The typical figures used to back up the LTRPF (law for the tendency of the rate of profit to fall) are the huge increase of fixed capital per worker, such as these shown in columns 1-3 below.” (AG)

The author’s Table 1 covers industry for the years 1953-72 and deals in percentage growth rates per year. Column 3 details Capital/Worker and shows the ratio rising by 8.8% (per year over the twenty year period) in the case of Japan, 4.8% for France, 6.0% for Germany, 4.8% for Italy, 4.2% for the UK and 2.2% for the USA.

This would appear fairly clear evidence to most people that the organic composition of capital did indeed rise over that period. But AG goes on to argue that, “These statistics for the capital stock at constant prices are attempts to measure the volume of the capital stock (i.e. number of machines before taking account of their cheapening due to productivity growth). They do not simply get rid of the effect of inflation, but they also ignore productivity growth – the devaluation of capital, which cheapens machines. We want to get at the value composition, i.e. what is relevant for the rate of profit which is calculated on the value of capital – not its physical volume – we have to account for this devaluation of capital. This I have done in a simple way by subtracting the growth of productivity (Column 4) from the growth of the volume of capital per worker to give the growth in the value of capital per worker.” He is introducing the method pioneered by neoclassical equilibrium theorists in treating Marx’s economic system as a set of simultaneous equations.
So AG introduces a Column 4, which measures Productivity (Devaluation of Capital), again measured as an annual rate. The figures for Japan are 8.9%, 5.4% for France, 5.0% for Germany, 5.0% for Italy, 3.0% for the UK and 2.7% for the USA.

He then proceeds to subtract the results of the percentage figures of Column 4 from the results in Column 3. A quick glance at the figures for Capital Growth per Worker in Column 3 will show that they show very similar national trends to the Productivity increase in Column 4.

In fact, using this technique, Column 5 (which AG asserts shows the Ratio of Dead to Living Labour) records, in what AG regards as the ‘proper’ measure of the organic composition of capital, that it actually falls over the period in Japan, France, Italy and the USA. Rises in Germany and the UK are insignificant and it seems from Column 5 that overall movements in the organic composition of capital are indeterminate. AG is treating the increase in productivity as causing an instant and equivalent fall in the price of capital goods.

To many readers who have followed this discussion so far, it is probably not surprising to find that productivity rises as capital per worker increases – as the reason for increasing the organic composition of capital is usually to raise the productivity of labour. But do input prices fall instantly and at the same rate?

AG’s method in ‘depreciating’ the rise in capital per worker by using productivity increases was criticised at the time in the course of the debate. AG is a scrupulous economic statistician. But this method is one that generations of conventional economists have used to try to assimilate Marx into neoclassical economic theory.

They in effect regard the economy as a set of simultaneous equations and Marx as an equilibrium theorist like them.

Marx on the other hand regarded accumulation as a process that takes place in real time. Marx was well aware that rises in productivity in the industries producing the elements of constant capital could lead to a fall in their unit price. But he regarded this adjustment of relative prices to be a messy and protracted result of competition between individual capitalists, not as an instantaneous outcome.

Marx also knew that what are outputs for one capitalist are inputs for another. He raised precisely that issue in his reproduction tables in Capital Volume II. The fall in the prices of these inputs through rising productivity will eventually be reflected throughout the economic system. But these commodity prices are devalorised (depreciated) in real time. This is not the same as the way a mathematician ‘solves’ a set of simultaneous equations, a method applied by neoclassical economists to their ‘model’ of the economy.

More recently, Andrew Kliman has trenchantly denounced this tendency to turn Marx into an equilibrium theorist (Reclaiming Marx’s Capital). Neoclassical economists have for a century accused Marx of ‘inconsistency’, beginning with von Bohm Bawerk’s Karl Marx and the close of his system in 1896. In Capital Volume I, they say, Marx deals in values. In Volume III he introduces prices of production as modified values. Von Bohm Bawerk regarded this as a ‘contradiction.’

As we have indicated earlier Marx uses this procedure because after dealing with the production of capital in Volume I and its circulation in Volume II, he comes to The process of capitalist production as a whole in Volume III. This is where the formation of a general rate of profit is properly dealt with. Until he has derived the general rate of profit, Marx cannot move on to the formation of prices of production from values, so this too belongs in Volume III.

Following von Bortkiewicz’s 1906-07 papers, neoclassical economists have dealt with what they call the contradiction in Marx by using simultaneous equations to transform an economic ‘system’ made up of values into a system of prices. Not surprisingly, they arrive at different results from Marx in the process.

Kliman is an advocate of what is called the temporal single system interpretation (TSSI) of Marx’s economics. By ‘temporal,’ TSSI theorists mean that economic processes take place in real time, unlike the simultaneous equations that instantly devalue output prices as input prices for other capitalists.

The ‘single system’ is contrasted to a dual system, where values have to be transformed into prices in the manner suggested by von Bortkiewicz. In fact prices and values are interdependent. As Kliman explains (p. 33), “First, prices of production and average depend on the general (value) rate of profit s/C, so there is no distinct price system. Second, prices influence value magnitudes, so there is no distinct value system either. The constant capital advanced and the value transferred depend upon the prices, not the values, of means of production.”

When capitalists consider the costs of inputs in calculating their profits, there are three possibilities. (Kliman Chapter 6):

  • They can use historical cost – costs they incurred at the time of purchasing the elements of production in the marketplace.
  • They can use pre-production reproduction cost – costs of the commodities at the time of production
  • They can use post-production replacement costs – costs of the constant capital at the time of sale and after production.

The example Kliman uses is that of apples used to make apple sauce – costing $0.60 when the apple is picked, falling to $0.50 when the apple sauce is made and $0.45 when the apple sauce is cooked and available for sale. It is unfortunate for the capitalist that the price of his input is continually falling in this way, but he can’t buy apples as the cost of an input at 2pm ($0.45) when he actually starts making the sauce at 1pm – when apples cost $0.50. Yet that is the miracle that simultaneous equations perform when they turn output prices instantaneously into input prices!

Is it not obvious that the relevant cost of inputs is this pre-production reproduction cost? This remains the case even if the value of that constant capital later depreciates, and replacement costs therefore fall, as a result of technical progress in the production of means of production.

AG is therefore entirely wrong when he uses increases in productivity to instantaneously depreciate capital values, and thus produce a corresponding fall in the organic composition of capital and increase in the rate of profit, in his Column 5. Yet this procedure is at the heart of his ‘rebuttal’ of Marx’s tendency for the rate of profit to fall, as it has been for generations of neoclassically trained economists.


by Mick Brooks, November 2007



Bibliography


Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Baran and Sweezy-Monopoly capitalism, Penguin Books 1966

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, Verso Books 2006

Engels-Anti-Duhring, Foreign Languages Publishing House, Moscow 1959

Glyn and Sutcliffe-British capitalism, workers and the profits squeeze, Penguin Books 1972

Glyn-Capitalism unleashed, Oxford University Press 2006

Hegel-Hegel’s Logic, Oxford University Press 1975

Itoh and Lapavitsas-Political economy of money and finance, Macmillan 1999

Kliman-Reclaiming Marx’s ‘Capital,’ Lexington Books 2007

Lenin-A characterisation of economic romanticism, Progress Publishers, Moscow 1967

Luxemburg-The accumulation of capital, Routledge and Kegan Paul 1951

Marx-A contribution to the critique of political economy, Lawrence and Wishart 1971

Marx-Grundrisse, Penguin Books 1973

Marx-Capital Volume I, Penguin Books 1976

Marx-Capital Volume II, Penguin Books 1978

Marx-Capital Volume III, Penguin Books 1981

Marx-Theories of surplus value Volume II, Lawrence and Wishart 1969

Nove-The economics of feasible socialism, Allen and Unwin 1983

Rosdolsky-The making of Marx’s ‘Capital,’ Pluto Press 1977

Sweezy-The theory of capitalist development, Monthly Review Press 1956



Capitalist crisis theory and practice

A Marxist analysis of the Great Recession
By Mick Brooks           
 

Copies are available from the author for £11 including postage (UK), £13.50 (Europe)
or £16 (rest of the world)

Send cheques to: M. Brooks, 117A, Uxbridge Road, London W7 3ST   or via Paypal to 

mickandbarbara@btopenworld.com, with details of your postal address.


Rob Sewell on the tendency of the rate of profit to fall

posted 18 Jan 2013, 05:41 by Admin uk   [ updated 21 Jan 2013, 02:06 ]

By Mick Brooks     

Rob Sewell (in his article entitled The tendency of the rate of profit to fall in In defence of Marxism 2, Autumn 2012, some of which is on http://www.marxist.com/the-capitalis-and-the-tendency-of-the-rate-of-profit-to-fall.htm and http://www.marxist.com/the-capitalis-and-the-tendency-of-the-rate-of-profit-to-fall-2.htm begins his treatment with a rant against unnamed ’academic ‘Marxists’  who have, in his view, exaggerated the importance of the law of the tendential fall in the rate of profit as a component in Marx’s crisis theory. Unfortunately he gives not a single quote from these sinners. We don’t know who they are or what they actually said; we just know that RS doesn’t like them. The problem with this approach to writing an article is that you can’t make a proper critique of opponents’ work if you don’t actually tell your readers what they are saying.             


In fact this article appears to be a belated reply to arguments raised among Socialist Appeal supporters and their international co-thinkers on the causes of capitalist crisis. Some comrades raised the importance of the law of the tendential fall in the rate of profit and its operation as an explanation for the present crisis. That is the theme of my book Capitalist crisis – theory and practice.


RS begins interpreting Marx on the subject by referring to a quote in the Grundrisse where he explains the tendency for the rate of profit to fall. Marx shows that, in their search for profit, capitalists accumulate more and more constant capital relative to living labour. But, since constant capital is dead labour, though it makes the worker more productive, it does not itself yield surplus value. Only living labour does that. The declining proportion of living labour in the production process thus leads to a tendency for the rate of profit to fall.


Marx goes on to state: “This is in every respect the most important law in political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated.” (p.748)


 Marx made this statement twice, in the Grundrisse  written in 1857-8: and in almost exactly the same words in the 1861-3 economic manuscripts (Collected Works Volume 33, p.104): “This law, and it is the most important law of political economy, is that the rate of profit has a tendency to fall with the progress of capitalist production.”


Clear enough? Apparently not. RS goes on: “By the time Marx writes Capital, he writes not about the most important law, but rather of the law being of “great importance” for capitalist production. The emphasis had clearly changed.”


If you actually look the complete quote from Capital Volume III up (which 99 out of 100 won’t bother to do) you find: “Since this law is of great importance to capitalist production, it may be said to be a mystery whose solution has been the goal of all political economy since Adam Smith, the difference between the various schools since Adam Smith having been in the divergent approaches to a solution.” (Capital Volume III p.319)

As the reader can see Marx is developing the same idea he expressed in the Grundrisse in a different way. He is not attempting to downgrade the significance of the law. By truncating the quote, RS seems to intend to mislead the reader.


RS stresses that the law is simply a tendency, suggesting that it doesn’t matter. “It is a tendency and not a law, as Marx emphasised,” in the section Tendency always applies? Unfortunately for RS, he doesn’t seem to grasp that for Marx all economic laws take the form of a tendency. If he doesn’t understand this, he doesn’t understand much about Marx’s approach to political economy. For Marx a tendency has the meaning of a force at work, not a statistical trend.


For instance: “Such a general rate of surplus-value — viewed as a tendency, like all other economic laws — has been assumed by us for the sake of theoretical simplification.” (Capital Volume III p.275)


A few paragraphs later RS contradicts himself, stating that, “Marx also points out that all economic laws have the nature of tendencies.” Which is it to be, RS?

Marx deals with The law of the tendential fall in the rate of profit in Chapters 13-15 of Capital Volume III: they are called The law itself, Counteracting factors, and Development of the law’s internal contradictions. Marx thus deals successively with tendency, counter-tendency, and the interaction of tendency and counter-tendency to produce crisis.


How does the law manifest itself? RS quotes Marx:

“Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.”


This is the only reference to “long periods” in Marx’s writings on the subject. RS helpfully interprets this as, “only a tendency which manifests itself over the whole history of capitalist development.” We are sure that Marx is posthumously grateful for RS’s clarification. The whole passage from Chapter 14 reads differently. It explains the interaction of the tendency with the counteracting factors generated by the tendency itself to burst out into crisis. This is dealt with fully in the following Chapter 15.


“We have thus seen in a general way that the same influences which produce a tendency in the general rate of profit to fall, also call forth counter-effects, which hamper, retard, and partly paralyse this fall. The latter do not do away with the law, but impair its effect. Otherwise, it would not be the fall of the general rate of profit, but rather its relative slowness, that would be incomprehensible. Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.” (Capital Volume III p.346)

Is this a reference to a “tendency which manifests itself over the whole history of capitalist development?” Surely it just tries to explain why the tendency for the rate of profit to fall doesn’t instantaneously and continuously manifest itself.


When he comes to deal with the counteracting factors, RS cites Marx on “capital invested in foreign trade”. Marx explains that if capitalists can produce goods for export in order to import (for instance) raw materials from abroad cheaper than they cost from home country suppliers, then that will reduce the organic composition of capital and tend to raise the rate of profit. RS uses this point to go on about “capital invested in foreign countries”. Does he really not know the difference between foreign trade and foreign investment?


Is the tendency for the rate of profit to fall a secular or a cyclical factor? In part it is both. There is no doubt that capitalism has gone through eras with average rates of profit that differ from other eras. Michael Roberts’ blog (The US rate of profit – the latest 25/11/12 – referred to later) deals well with these secular movements. But there is also a clear cycle of the rise and fall of the profit rate that closely shadows the cycle of boom and slump. In my book (Capitalist crisis – theory and practice) I was particularly concerned to concentrate on these cyclical factors. In particular I show that there was a fall in the rate and mass of profit in 2006, before the onset of the Great Recession; and that this was the underlying cause of the crisis:


“Underlying all the financial jiggery pokery was the fall in the rate of profit. Eventually this must cause a fall in the actual mass of profit. This is what happened. The US Bureau of Economic Analysis (BEA) shows that in the 3rd quarter of 2006 the mass of pre tax profits peaked at $1,865bn. By the 4th quarter of 2008 it bottomed out at $861bn. This represents a fall of more than one half. The collapse in profits that the BEA records from 2006 would have caused a recession in any case, with or without a banking crisis. A halving in the mass of profits is catastrophic for capitalism and explains on its own the severity of the Great Recession.” (p.32) RS on the other hand is anxious to deny this and to conceive the law as a purely secular phenomenon.


RS has a lot of quotes from Chapters 13 and 14 of Capital Volume III.  Weirdly there is not a single quote from Chapter 15: Development of the law’s internal contradictions. This is the chapter that explores the interpenetration of The law itself (Chapter 13) and Counteracting factors (Chapter 14) to produce crisis. 


Chapter 15 is the best single explanation of crisis in Marx. To take just one example, “A fall in this rate” (‘of profit’- MB) “slows down the formation of new, independent capitals and thus appears as a threat to the development of the capitalist production process; it promotes overproduction, speculation and crisis.” (Capital Volume III p.350)


You can look up quote after quote in RS’s work and find them to be deliberate distortions. To take one case, he quotes Fred Moseley in a 2008 interview on the rate of profit. He doesn’t mention that Moseley is building up to explain the present crisis as a ‘Minsky moment’. In other words Moseley is abandoning Marxism as an explanation in favour of Minsky’s financial instability thesis. Is Moseley the right person to quote on Marxist analysis of the cause of the current crisis?


Actually Moseley does admit in the interview that, “mid-2006 was the peak of its current profit cycle.” This is not what RS wants to show. The quote from Moseley suggests that the fall in profits preceded the crash and therefore might have caused it.


RS asserts, “The present crisis was not caused by a crisis in profitability, but certainly resulted in one.” In that case we would not expect profits to fall till the onset of recession in 2008. But they fell before the crisis. How does he explain that?


RS quotes Kliman to show that, “the rate of profit fell from a peak of 25% in 2006 to 17.9% in 2008”. The actual time at which profits fell is not clear from this quote. Kliman has since published a book. In it he clarifies when profits fell. He computes several measures of the rate of profit, but all of them crash in 2006 (See Chapter 5 of The failure of capitalist production). 


This is quite different from RS who strives to misrepresent Kliman by dating the fall in profits to 2008, after the onset of recession. RS ‘interprets’ Kliman’s quote above to show that, “In 2008 there was a massive fall in production which drove down profit rates. The rate of profit peaked in 2006 and then began to fall in 2007 with the onset of the financial and banking crisis following the bursting of the US housing bubble in 2005.”


It is definitely not Kliman’s view that the Great Recession was essentially a financial affair, though it seems to be RS’s. If it were a pure financial crisis the conclusion would surely be that, if we sort out the cowboys who run the banks, capitalism could carry on indefinitely. In his Introduction Kliman specifically repudiates, “The conventional wisdom that the latest economic crisis was an irreducibly financial one.” (The failure of capitalist production p.6) His view is that capitalism is the problem, not just the financial system.


In  his book Kliman explains, “I argue that Marx’s theory regards a fall in the rate of profit as an indirect cause of crisis, it leads to crisis only in conjunction with financial market instability and instability caused by low (as distinct from falling) profitability” (p.13). This coincides broadly with the view in my book that the fall in profits is the underlying cause of crisis.


RS then offers a long quote from Brenner (in The TRPF in practice) beginning, “profitability has rebounded significantly.” In fact the quote begins in Brenner‘s book “In the US, in sharp contrast, profitability has rebounded significantly...” (p.252) RS’s misuse of the quote produces an outright distortion. Brenner is presenting the US case as an exception to the general trend he is analysing.


RS quotes Brenner again, “the US profitability recovery has been very major and its positive economic effects very real.”


The full quote is as follows:


“This new and optimistic scenario certainly cannot be ruled out, for the US profitability recovery has been very major and its positive economic effects very real. Even so there are grounds for doubting that the international conditions are in place to realize it...”


What is the point in lying about what a writer says, rather than proving them wrong if you disagree with them? In any case Brenner wrote this book in 1998, one year after profits peaked from their post-War low point in 1983. He has continued to comment on the rate of profit. My book mentions his views from 2009 where he holds to his opinion that there has been a secular decline in the rate of profit, with occasional revivals.


RS also quotes extensively from Graham Turner’s No way to run an economy. Why? Turner does not regard himself as a Marxist or as an authority on Marxist political economy. He uses widely available official data, such as comes from the US Bureau of Economic Analysis. Some authors quoted here (such as Michael Roberts and Andrew Kliman) have made strenuous efforts to apply Marxist concepts to official data and derive a ‘Marxist rate of profit’. Turner has been impressed by the close fit between movements in the rate of profit (however calculated) and the unfolding of the crisis, but raises some reservations. Naturally RS emphasises the reservations and downplays the close fit of movements in profits as a possible cause of the crisis. 


RS also gives a ‘non-quote’ from Michael Roberts in January 2009 (No footnote, no reference. Does he make them up?). “The rate of profit in the major G7 economies peaked in 1997; it fell sharply to 2001 and then recovered to 2007.” He could have quoted from Roberts’ book, but then his audience might find out that it exists and want to read it. As far as I know the only other outfit apart from RS that pretends that books it disagrees with don’t exist is the papacy. 


In his book The great recession Roberts gives the date each chapter was written. In it he corrects an article written in November 2006 as follows: “Subsequent data to 2008 shows that the rate of profit in the US peaked in 2005 and declined thereafter” (p.117). Clear enough?


Towards the end of his article RS asserts that, “Profits in the US corporate sector are 25-30% greater than before the recession.” Where does he get this from? He doesn’t say. Compare this cavalier approach to the meticulous analysis by Michael Roberts in his blog (The US rate of profit – the latest 25/11/12), which shows this is the reverse of the truth. Roberts states, “Indeed, after making some reasonable assumptions about the data for 2012, I reckon the Marxist rate of profit fell in 2012 back to levels of the early 2000s.” (http://thenextrecession.wordpress.com/page/2/)


So what causes capitalist crisis? At the outset RS asserts that, “In reality there are a host of interacting causes of crisis, some fundamental, others secondary, one of which can be the falling rate of profit.” Coming to the conclusion of his article he contradicts himself by naming overproduction as “the fundamental cause of crisis” (In the section Lowering profitability).  “This explanation of crisis is repeated again and again throughout Marx’s work,” he tells us.


No Marxist that I know of denies that capitalist crisis takes the form of overproduction, though RS seems to be setting himself up as the sole defender of this great truth. RS simply refuses to see the different levels of causation at work in capitalism. What actually causes the onset of overproduction? After all, crisis is not a permanent condition of capitalism.


The analogy in my book is of the detective in a country house murder. Colonel Plum is found bludgeoned to death in the library. The detective has not exhausted his role by observing that the Colonel has been murdered. That is plain, as is the fact of overproduction – of unsold goods – in a crisis. What the other guests want to know is who killed him, why and will the killer strike again? In other words they want to know the cause of the murder/outbreak of overproduction.


Capitalism is not just a system which undergoes crises of overproduction from time to time. It goes through cycles of boom and slump. If movements in the rate of profit are not the explanation, then what is? RS does not provide an alternative.


RS quotes in his article from Theories of Surplus Value, Volume II. Chapter XVII of this work begins with a critique of Say’s law, adopted by Ricardo, which claims that ‘every seller brings a buyer to market’ and therefore a general crisis of overproduction is impossible. Marx starts by showing that Say’s law is wrong and that a crisis of overproduction is indeed possible. He is aware that crises occur regularly. He has to go on to show why.

In this chapter Marx carefully qualifies the notion of overproduction:


“The word over-production in itself leads to error. So long as the most urgent needs of a large part of society are not satisfied, or only the most immediate needs are satisfied, there can of course be absolutely no talk of an over-production of products— in the sense that the amount of products is excessive in relation to the need for them. On the contrary, it must be said that on the basis of capitalist production, there is constant under-production in this sense. The limits to production are set by the profit of the capitalist and in no way by the needs of the producers.” (p.527)


“Defined more closely, this means nothing more than that too much has been produced for the purpose of enrichment, or that too great a part of the product is intended not for consumption as revenue, but for making more money (for accumulation): not to satisfy the personal needs of its owner, but to give him money, abstract social riches and capital, more power over the labour of others, i.e., to increase this power.” (ibid p.532)


Overproduction happens because production is for profit.


What sort of crisis are we confronted with? RS asserts: “The present crisis is not a cyclical crisis but an organic crisis rooted within the system itself.” (Are cyclical crises not rooted within the system? Are they pure accidents?  We know what an organic carrot is. What is an organic crisis?)

 “It is a reflection of the epoch of capitalist decline, where the system has exhausted itself.” This suggests the crisis will go on forever, or until the system is overthrown. But as Theories of Surplus Value, Volume II explains (p.497), “Permanent crises do not exist.” This is actually a cowardly revival of the ‘final crisis’ theory put forward by ultra-lefts in the early years of the Communist International. This wrong and dangerously misleading theory was furiously denounced by Lenin and Trotsky.


Finally, we are entitled to ask; what is the point of this article? It is purely abstract, intended solely to denounce the unnamed objects of RS’s ire. It does not help anyone understand the world around us as a precondition to changing it. My book (Capitalist crisis – theory and practice) may be flawed. It is an attempt to apply the theory of Marxism to understand the world around us as a precondition for changing it. Isn’t that what Marxism is supposed to do?     


Gravity, the Higgs boson and the law of the TRPF

posted 23 Jul 2012, 13:33 by Admin uk

  by Michael Roberts

  http://www.thenextrecession.wordpress.com

 I’ve just returned from Paris where there has been a joint conference of academic leftist economists organised by the Association of Heterodox Economists (AHE), the International Initiative for Promoting Political Economy (IIPPE), the Association Francaise d’Economie Politique (AFEP), and the World Association of Political Economy (WAPE).  Phew!  That’s a lot of acronyms.  Anyway, hundreds of participants came to hear a series of papers, four at a session, for over three days on a range of economic subjects, many with a Marxist perspective, even more with Keynesian angle and others that I cannot define.

Among the many, I also presented a paper entitled, A world rate of profit.  But more on that later.  After I delivered my paper along with others, Professor Simon Mohun from the floor raised an important methodological issue of the nature of Marx’s law of the tendency of the rate of profit to fall (TRPF).  Professor Mohun saw it a bit like Newton’s law of gravity, namely that it was always there, pressing us down towards the centre of the earth, but because of the buildings we have constructed with steel and concrete, none of us were driven into the ground by it.  I think the implication of this analogy was that Marx’s law was ever-present but never actually happens, although, of course, with gravity, apples do fall from trees.  Behind Professor Mohun’s analogy may be the view that capitalist crises can and do take place when the rate of profit is rising, not falling as the law of TRPF would suggest.  Indeed, Professor Mohun has argued that a rising rate of profit is a better indicator of crises than a falling one.  For more on his counter-intuitive conclusion, see my previous post on this  (A class rate of profit, 23 January 2012).

But even if the gravity analogy does not quite work, it does raise an important point about the nature of economics.  Is it a science like physics or more a social explanation that leads to action (i.e. revolution) and so is not dependent on so-called scientific proofs of evidence.  Well, I have to say, that I think Marxist economic analysis ought to follow scientific method, which for me is to develop a theory that is causally and logically consistent and then test it as best you can with evidence and data, in order to confirm the theoretical explanation and even generate some predictions.  Of course, we must not get carried away by the power of empirical analysis.  Results are rarely conclusive. Disagreement is widespread, as the debate over the US rate of profit shows.  Some theories are so strongly believed that no amount of empirical evidence will dislodge them, as we find with neoclassical mainstream economics.   And there is academic dishonesty — fake data, mistaken (and even fraudulent) statistical inference and more.   Statistics can be manipulated to make almost any result look reasonable.

I think a better analogy than gravity is the news about the Higgs boson – the apparently now discovered missing sub-atomic particle that can help to explain the most fundamental workings of the universe.  In 1964, Professor Higgs and others developed a theory that required the existence of the Higgs boson as the missing part of the jigsaw that could link gravity with sub-atomic, electromagnetic and other forces of the universe.  Higgs predicted its existence and physicists have spent nearly 50 years trying to find a method of testing whether he and his colleagues were right and the Higgs boson is real.  After spending $6bn to build the Hadron Collider, they compiled evidence from piles of data, analysed it in separate teams and have now concluded that the Higgs boson does exist to a 99% or more degree of confidence.

I think we must try to conduct economic research on similar scientific lines, hopefully at less cost.  There used to be a view among many Marxist economists that there was no need to test Marxist theory against data as this was crude empiricism or ‘positivism’.   So, for example, the law of the TRPF was right in explaining recurrent economic crises, but as value categories could not be detected with hard evidence from the world of capitalist data,  we should not try.  Let’s just continue to argue the toss about what Marx said and meant, just like the sophists in ancient Greece.   I’m afraid that many papers presented in Paris seem to continue this tradition.  In my view, the approach that all you needed was theory and no evidence is really an excuse for avoiding a task that might not produce the ‘right’ result.

There was some excuse for sticking to theory in the 1970s as Marxist economics came under attack from the school of Sraffians and ‘neo-Ricardians’ among heterodox economists who tried to trash theoretically the law of value and the law of the TRPF.  So the question of evidence did not even arise.  But thanks to more recent Marxist scholarship led by the likes of Alan Freeman, Guglielmo Carchedi and Andrew Kliman (among others), Marx’s law of value and theory of crisis has been proved logically consistent and theoretically valid, culminating in Kliman’s brilliant book Reclaiming Marx’s Capital (available on Amazon and elsewhere and see my review in my book, The Great Recession, chapter 23), for which Kliman ought to have got an ‘alternative’ Nobel prize for economics.

So Marxist economics has moved from the question of whether Marx’s theory is not just logical but whether it is right, namely that it is consistent with reality.  This should not be as tall an order as finding the Higgs boson and we have made progress in this too.  The Great Recession confirmed that the Marxist theory of crisis was right in an obviously stark way.  But Marxist economists have also started to deliver hard evidence and data that can be analysed and interpreted, of course, not necessarily with any agreement (see my paper,The profit cycle and economic recession)!

At the Paris conference, there were many papers with a semi-Keynesian orientation that wanted to argue that the Great Recession was the result of a financial crisis and had little to do with the operation of Marx’s law of profitability. And this is still the dominant view among economists, even most Marxists.  It is even more dominant among leftist economic journalists.  Take, for example, the recent column by Larry Elliott, the economics editor of the Guardian, entitled “Confidence is the key to lasting global economic recovery” (http://www.guardian.co.uk/business/2012/jul/08/confidence-key-global-economic-recovery?INTCMP=SRCH).

Relying on the ideas of a new book by the Keynesian Paul Ormerod calledPositive Linking, Elliott argues that the crisis came about and has continued because of a ‘loss of confidence’ (not a loss of profit) by capitalists to invest.  The answer to the crisis is that confidence must be restored.  Apparently, we need to change a ‘bias towards pessimism’ into a ‘bias towards optimism’ and then all will be well.  “Lasting recovery will only come when that pessimism bias is eradicated, and it is proving tough to shift. A change in mood could happen at any time, in which case activity will pick up far more quickly than anybody currently expects”.  So apparently, it is nothing to do with the failure of the capitalist mode of production for profit but merely irrational pessimism.  This is literally wishful thinking!

Luckily, there were also papers in Paris that aimed to provide hard evidence to show that profitability is the underlying cause of capitalist crises i.e. Marx’s law ‘as such’, namely that a rising organic composition of capital (OCC) will eventually lead to a fall in the rate of profit.  For example, Rama Vasudevan presented her paper jointly authored with Deepankar Basu that they published last year on measuring the US rate of profit in all ways possible (deepankar_basu_ramaa_vasudevan_technology_distribution
_and_the_rate_of_profit_in_the_us_countdown
).  I discussed this paper and its conclusions in a recent post, Profits call the tune, 26 June 2012.

There was also a very interesting paper by Peter Jones from the Australian National University (Jones_Peter-Depreciation,_Devaluation_and_the_Rate_of_Profit_final) in which he offers a new way of measuring the US rate of profit to show that it moved in line with changes in the organic composition of capital.  It’s quite technical, but important.  Jones argues that the main counter-tendency to the law of TRPF was not the cheapening of constant capital (machinery, plant and technology) or a rising rate of surplus value, but a quicker turnover time in employee compensation so that capitalists needed less working capital to generate new value.  When you adjust for this, the US rate of profit then moves in line with the OCC.  There are other things in Jones’ paper worth discussing and I shall return to it at a later date when I have looked more closely at the data.

Then there was a paper by Georg Liodakis (Liodakis_George-Transformation_and_Crisis_of_World_Capitalism), in which Professor Liodakis argues that just looking at the US rate of profit is not sufficient to explain Marx’s theory of crisis on a global scale.  Marx’s value theory is really one based on the world economy, not on a nation state, although Marx developed it using data from the British economy.  Liodakis says: “important Marxist scholarship has recently offered the best explanation available of the current crisis of capitalism, based on the law of the TRPF”. But Liodakis says we Marxists need to go further.  After giving my own work a bit of beating, he comments that “Roberts’ important insight related to financialization and the decline in capitalism’ ability to develop productive forces  may be true for the US, but may not be equally true for world capitalism as a whole, especially if we take into account new accumulation frontiers such as China and India.  Indeed, “the real unfolding of crisis cannot be fully grasped within any particular national context, the actual prospects of capitalism can be fully assessed only by exploring its global trends.”

That brings me to my own paper.  In it, I make an attempt to develop the concept of a world rate of profit and put some quantitative figures on it (roberts_michael-a_world_rate_of_profit).  It is really is work in progress and so don’t hold me to every line.   As Professor Mohun commented, it was a ‘heroic effort’ by which I think he really meant foolhardy – and maybe so.  But anyway, the paper argues “that in the 21st century, for the first time in the history of capitalism, we can begin to recognise a world rate of profit that is meaningful”.  I attempt to develop a world rate of profit that includes all the G7 economies plus the four economies of the BRIC acronym.  This is what I find.  The rates of profit have been indexed at 100 for 1963 (see the paper for sources and methods of measurement).

So there was a fall in the world rate of profit from the starting point of the data in 1963 and the world rate has never recovered to the 1963 level in the last 50 years. The rate of profit reached a low in 1975 and then rose to a peak in the mid-1990s. Since then, the world rate of profit has been static or slightly falling and has not returned to its peak of the 1990s. This suggests that boom of the late 1990s and early 2000s was not based on rising profitability, as many have argued, but more on a credit bubble and the growth of fictitious capital. And the data seem to confirm the view that I reached when looking at just the US rate of profit, namely that world capitalism is in a down phase for profitability.

There is a divergence between the G7 rate of profit and the world rate of profit after the early 1990s. This indicates that non-G7 economies have played an increasing role in sustaining the rate of profit, while the G7 capitalist economies have been suffering a profitability crisis since the late 1980s and certainly since the mid-1990s.  This suggests that globalisation was the major force that enabled the counteracting factors to dominate in the 1990s. Capitalism became truly global in the late 20th century, a period that was similar but way more powerful than in the ‘globalisation’ period of the late 19th century. That’s because the huge increase in capitalist investment into so-called emerging capitalist economies brought into the capitalist mode of production for the first time a huge supply of peasant and non-capitalist labour, and much of it at a cost below the value of labour power, i.e. super-exploitation.

But my data do indicate that these countervailing factors are no longer sufficient to drive up the world rate of profit for now. This suggests that further destruction of capital values will be necessary through another significant slump in global capitalism to raise profitability. Only then could the remaining potential value from the world supply of labour be utilised to restore the health of world capitalism.

Finally, let me bring to you attention two things that happened outside Paris.  G Carchedi presented a new paper to the London Marxism Festival to explain why Keynesian policies don’t work to help labour and/or save capitalism (you can read it here, London 6 July 2012-2).  Again, I shall return to this in the future.  And Mick Brooks also launched his new book, Capitalist crisis: theory and practice (published by Expedia).  It is a clear and purposeful Marxist account of the causes of the Great Recession that strips away the jargon.  Again, I’ll return to a more considered analysis of Brooks’ book in the future.

July 11, 2012

Posted in capitalismeconomicsmarxismProfitability | 14 Comments »


Permanent crisis?

posted 30 Aug 2011, 11:29 by heiko khoo

By Mick Brooks       

There has been a debate in recent years within the IMT as to the cause of capitalist crisis. On one side were those who stressed Marx’s tendential fall in the rate of profit as the underlying cause of crisis. The leadership adopted what we shall call an underconsumptionist position. To some this debate may have seemed a little academic. Its importance is revealed by a recently posted comment on Marxist.com on the world economy by Rob Sewell entitled ‘Another day, another crisis.’       

 

Sewell begins by trawling through the Financial Times for alarmist quotes. Long ago Bing Crosby sang a song. ”You gotta accentuate the positive, eliminate the negative”. Sewell adopts the opposite approach. The economic situation is indeed grievous but he steadfastly ignores any quote that indicates that the end of the capitalist world is not yet nigh (still a majority view at the FT). This is the method he has used in economic ‘perspectives’ for thirty years past. It is not the scientific method of Marxism. Still, a clock that has stopped is still right twice a day.

 

Sewell asserts that, “the bourgeois economists” (which bourgeois economists?) “declared the crisis over in the summer of 2009”. Now this is strange, since he later declares inaccurately that, “the mass of profit slumped in 2009.” He then uses his selective quotes from the FT to rubbish this anonymous prediction of recovery. He concludes that the crisis “has got far worse” (than in 2008, when financial meltdown was widely expected) and that the fiscal contraction in the USA, “could be enough to drag the economy into a double-dip recession”.

 

The reader is led by the whole thrust of the article to believe that this is probable. But there is always a get-out in such predictions by Rob Sewell. This is not the method of Marxism. It is the method of Old Moore’s Almanac. The gullible reader finds that ‘fortune may favour you today’, goes out and bets £50 on a horse and loses the lot. He then remonstrates with the author of the Almanac, who replies, ‘we only said fortune may favour you.’ Sewell’s equivalent to that is that this “could be enough to drag the economy into a double-dip recession”.

 

Predictions get even wilder when Sewell foresees what will happen after the break-up of the Euro, (which after all hasn’t happened yet – though it is very insecure). He compares this to the collapse of the rouble area after 1993, which, “resulted in hyper-inflation and a collapse in living standards. Other parallels can be made with Germany in 1923.” The position of the Euro is indeed critical and its break-up would be a calamity for the entire world economy, but why this would take the form of hyper-inflation (In Germany? In Holland? In Finland?) is unexplained. Likewise the assertion that we face “decades of austerity” shows a degree of foresight verging on the divine.

 

Sewell then goes on to explain that Marx, “explained the contradiction of a system based upon the drive for profit”. He then adduces the usual quote used by the IMT leadership that, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption of society set a limit to them.” The idea is that the workers can’t buy back the commodities they produce.

 

Unusually, Sewell actually gives a citation, so the reader can check. (It’s the Penguin edition of Capital Volume III, by the way.) This quote is a mere aside in one of three chapters on ‘Money Capital and Real Capital’. Marx did not have the opportunity to edit this volume of Capital in his lifetime. Volume III was compiled by Engels from Marx’s notebooks.

 

More to the point, this is the only quote ever used in Socialist Appeal on crisis theory. We wonder why Marx bothered to write anything else on the subject, and he actually wrote quite a lot. This quote is the classic foundation statement of the underconsumptionist school of Marxism. The trouble with the theory is that the workers can never buy back the commodities that they produce, either in slump or boom. It is an essential condition of capitalism that the workers produce surplus value. “The poverty and restricted consumption of the masses” cannot therefore explain the onset of crisis.

Here is Engels’ view. "But unfortunately the underconsumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes. Even in those periods of history when the situation of the masses was particularly favourable, as for example in England in the fifteenth century, they underconsumed. They were very far from having their own annual total product at their disposal to be consumed by them. Therefore, while underconsumptionism has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as a result of a surplus of production is a phenomenon only of the last fifty years;" (Anti-Duhring pp.395-6).

 

What actually happened to the consumption of the masses during the course of the Great Recession? It fell in absolute terms on account of the fall in production. But it actually increased as a percentage of GDP because investment fell more. This is the normal course of a capitalist recession, which is characterised above all by an investment slump on account of the fall in profits.

 

Robert Higgs, of the Independent Institute in California says that US consumer spending as a share of GDP actually increased during the Great Recession, going up from 69.2% in the fourth quarter of 2007 to 71% in the second quarter of 2009.  In contrast, private domestic US investment peaked in the first quarter of 2006 when $2.3trn (in 2005 dollars) were spent by firms, worth 17.5% of GDP; it troughed in the second quarter of 2009, having collapsed by 36% to $1.45trn, 11.3% of US GDP.

 

Sewell goes on to deal with nameless people on the left who, “have tried to explain the crisis exclusively by reference to profitability.” In other words these people are taking his earlier assertion that capitalism is “based on the drive for profit” seriously. Tsk, tsk! He seems to be taking aim at Karl Marx in particular as the guilty one, for it was he who declared, “This law, and it is the most important law of political economy, is that the rate of profit has a tendency to fall with the progress of capitalist production” (Marx Engels Collected Works Volume 33, p.104).

 

He goes on to assert that these unnamed people, “attempt to equate the level of profits as an indication of the health of capitalism, but this is very simplistic.” Indeed it is, and we know of no Marxist theorist who does this. Certainly Marx didn’t. But profits matter in a society where production is for profit. Profits tend to rise in an upswing and fall as capitalism enters recession. The rate of profit is the ultimate determinant of the boom-slump cycle. Is that so hard to understand?

 

Sewell points to an ‘enigma’ that profits have since recovered, in 2010 according to his view. He goes on: “However to conclude that US capitalism is relatively healthy is fundamentally wrong, as can be seen from the sluggish growth, continuing high unemployment and declining productivity”. The enigma is one that exists only in Sewell’s mind.

 

Sewell’s critique of those who see the rate of profit as critical is a parody of Marx’s position. Marx discusses the tendential fall in the rate of profit in Chapters 13-15 of Volume III of Capital and deals with its effect as an underlying cause of crisis in a dialectical way. In particular he deals with the destruction of capital that takes place in a slump, that is required to prepare the conditions for a new upturn. These chapters are central in understanding the cause of capitalist crisis today.

 

Sewell’s discussion of the “level of profits” is very frustrating. Is he referring to the mass of profits or the rate? Which country’s profits is he using as his guide? What are his sources?  He must be using secret measures of profitability, as nobody else in the world comes to the same conclusion as he does. We have to ask - is he just making it up?

 

He asserts that, “The mass of profits slumped in 2009 after the collapse of world trade.” He says this to ‘prove’ that profits collapsed after the recession and because of the recession, in particular after the collapse in world trade. Therefore in his view the fall in profits was not the cause of the recession. This is intended to buttress his underconsumptionist theory of the crisis. This is bunkum.

 

We shall quote the profit figures (mass of profits) of the USA from the Bureau of Economic Analysis. These are the official figures and America has the best economics statistics in the world. Unlike Sewell’s assertions, anyone can check the figures on the BEA website. Just Google in BEA and you’re there.

The BEA has pre-tax and post-tax profits and other technical details, and makes small revisions to the statistics as new information comes in, but the broad picture is very clear. The figures below are for pre-tax corporate profits. Of course these figures are not drawn up from a Marxist point of view, but all other profit statistics we have seen show the same trends and turning points as those of the BEA.

 

The US Bureau of Economic Analysis shows that in the 3rd quarter of 2006 the mass of pre tax profits peaked at $1,865bn (the rate of profit was already falling before that). By the 4th quarter of 2008 it bottomed out at $868bn. This fall in profits is five quarters before the onset of the Great Recession in August-September 2007and six quarters before US GDP peaked. It is also six quarters before world trade figures peaked, so the idea that the collapse in world trade caused the fall in profits is completely off the wall.

 

This represents a fall of more than one half in the mass of US corporate profits. The collapse in profits that the BEA records from 2006 would have caused a recession in any case, with or without a banking crisis. A halving in the mass of profits is catastrophic for capitalism and explains on its own the severity of the Great Recession. This shows that the fall in the rate and mass of profit was the underlying cause of the crisis.

 

What happened in 2009? Contrary to Sewell’s assertion profits began to recover. In the first quarter they were $1,209bn and by the fourth quarter they were up to $1,723bn. The idea that they fell in consequence of the crisis is therefore false. Sewell can only defend the IMT’s crisis theory by systematically misrepresenting the facts. If he cannot interpret the past correctly, what chance is there of providing a correct perspective for the future?

Finally, there is the statement that “capitalism has reached its limits”. We have heard this before. The official leaders of the Fourth International, Cannon, Healy and the rest of them, all asserted after the Second World War that a post-War boom was utterly impossible because “capitalism has reached its limits”. Who opposed this view? Ted Grant.

 

The logic of the position that capitalism has reached its limits is that we are approaching a final crisis of capitalism. This was part of the ‘theory’ of the German Communist Party in the third period (1929-33) which caused them to refuse any attempt at a united front with the Social Democrats, disarmed them and led directly to the victory of Hitler. Of course Sewell’s ultra-left economic perspectives will have no such disastrous consequences, since the IMT is a much less important force than the German Communist Party.

 

He is in effect offering a perspective of permanent crisis, with “decades of austerity”. This prediction is unexplained and frankly mad. Any upturn would disorientate IMT supporters. Though the economic perspectives for the years ahead are gloomy, capitalism will never just collapse. It must be overthrown. There can be therefore no final crisis of capitalism, (as Sewell is suggesting without actually saying) and eventually capitalism will go through an upturn unless there is a workers’ revolution.

 

Older comrades will recall the Socialist Labour League, later the Workers’ Revolutionary Party, led by Gerry Healy which came out with ultra-left economic perspectives that were constantly falsified. It was a parody of third period Stalinism. Naturally the SLL/WRP had a huge turnover of membership as a result. It is distressing to hear Grant’s supposed heirs coming out with what increasingly sounds like a Healyite rant, and an innumerate one at that.

I have great respect for many rank and file supporters of the IMT. The world economy is indeed in great difficulty, and that should open up opportunities for revolutionaries. I shall return to an analysis of world economic perspectives in a forthcoming book. But the IMT membership deserves better than this.

Measuring the rate of profit and profit cycles

posted 3 Aug 2011, 11:25 by heiko khoo

By Michael Roberts    

I recently presented a paper to the annual conference of theAssociation of Heterodox Economists in which I reviewed various attempts to measure the rate of profit in the US and elsewhere from a Marxist approach.  Apart from my own measures, there have been several different ones made since the Great Recession descended upon us.  I attach my paper (see at end), which also gives the references to the various authors mentioned below.   

It has been my view, regularly presented in this blog, that Marx’s law of profitability suggests a cyclical and a secular movement in the rate of profit (ROP) combined.  The cyclical movement in the ROP in the major capitalist economies is clearly discernible – and in the case of the US economy, the cycle of profitability appears to be about 32 years from trough to peak to trough.  But there is also a secular process where the ROP appears to be on a declining trend over long periods in the life of modern industrial capitalism.

The causes of both the cyclical and secular movements in profitability are broadly two-fold.  The first is driven by the change in the organic composition of capital (or capital productivity).  Any change is brought about through crisis and the destruction of the value of accumulated capital.  The second is driven by the change in the share of unproductive to productive labour and a long term tendency for the organic composition of capital to rise.  A rising organic composition of capital will eventually lead to a fall in the ROP and vice versa.  A rising share of unproductive to productive labour will lead to a fall in the ROP and vice versa.

The evidence of the post-war period (at least in the US) shows that profitability can be divided into four periods of 16-18 years, making up two full cycles.  The first period from 1946-65 was one of rising or high profitability (the so-called Golden Age).  The second period from 1965-82 was one of falling profitability (a crisis period).  The third period of 1982-97 was one of rising profitability (now called the era of neo-liberalism).  The fourth period of 1997-2014? is again one of falling profitability.  As for the secular trend: each trough or peak in profitability has been lower than the previous one throughout 1946-2011.

This is displayed by the following graphics, measured by both current (CC) and historic costs (HC).  In the first graphic, the secular decline in profitability is exposed, whichever way you measure it.

The cyclical movement in profitability (R) is revealed clearly in the second graphic (measured in replacement or current costs) and its inverse relationship with the organic composition of capital (OCC).

There has been much debate about the causes of the Great Recession of 2008-9 and, for that matter, previous economic slumps in capitalist production.  Some have argued that each crisis of capitalism can have a different cause.  But as Guglielmo Carchedi has pointed out “some Marxist authors reject what they see as “mono-causal” explanations, especially that of the tendential fall in the rate of profit.  Instead, they argue, there is no single explanation valid for all crises, except that they are all a “property” of capitalism and that crises manifest in different forms in different periods and contexts.  However, if this elusive and mysterious ‘property’ becomes manifest as different causes of different crises, while itself remaining unknowable, if we do not know where all these different causes come from, then we have no crisis theory”.  (see my post, The crisis of neoliberalism and Gerard Dumenil, 3 March 2011).

Carchedi comments further “if crises are recurrent and if they have all different causes, these different causes can explain the different crises, but not their recurrence.  If they are recurrent, they must have a common cause that manifests itself recurrently as different causes of different crises. There is no way around the “monocausality” of crises.  So the cause of an economic crisis like the Great Recession must lie with the key laws of motion of capitalism.  The most important law of motion of capitalism, Marx argued, was the law of the tendency of the rate of profit to fall.  So it must be relevant to a Marxist explanation.

Marx was clear on what his definition of the ROP was – the general or overall rate of profit (ROP) in an economy was the surplus value generated by the labour force divided by the cost of employing that labour force and the cost of physical or tangible assets  and raw materials that are employed in production.  His famous formula followed: P = s/c+v, where P is the rate of profit; s is surplus value; c is constant capital (means of production) and v is the cost of the labour power.

Marx is clear that the ROP applies to the whole economy.  It is a general ROP derived from the total surplus value produced in an economy as a ratio to the total costs of capitalist production.  All that surplus is produced by the labour power of workers employed in the ‘productive’ capitalist sectors of production.  But some of that value gets transferred to unproductive capitalist sectors in the form of wages and profits and to non-capitalist sectors in the form of wages and taxes.  So the rate of profit is the total surplus value divided by total value of labour in all sectors and the cost of fixed and circulating assets in the capitalist sector.  That means the fixed and circulating capital in the non-capitalist sector are not counted in the denominator for calculating the ROP.  But wages are.   Profit as a category applies to the capitalist sector of the economy.  Wages as a category applies to the non-capitalist sector too.   The value measured in the non-capitalist sector has been transferred from the capitalist sector through taxation, sales of non-capitalist production to the capitalist sector and through the raising of debt.

There are many ways of measuring the ROP a la Marx, to use the phrase of Dumenil and Levy.  Take constant capital.  This is measured by the fixed assets of capitalist production plus raw materials used in the production process (circulating capital).  In measuring the rate of profit, we must therefore exclude the residential assets (homes) of households and the assets of government and other non-profit activities.

Also, a capitalist economy can be divided between a productive and unproductive sector.  The productive sector (goods producing, transport and communications) creates all the value, including  surplus value.  The unproductive sector (commercial trading, real estate, financial services) appropriates some of that value.

You could just look at the business sector of the capitalist economy for all parts of Marx’s ROP formula and exclude the wages of public sector workers.  You could narrow it further and exclude the wages of unproductive workers within the productive sector (supervisors, marketing staff etc).  You can measure constant capital in current costs or in historic costs.   And you can measure profit before or after tax.

In my view, the simplest is the best.  My graphic for the US economy follows a simple formula.  S = net national product (that’s GDP less depreciation) less v (employee compensation); c = net fixed assets (either on an historic or current cost basis); and v = employee compensation ie wages plus benefits.  My measure of value is for the whole economy and not just for the corporate sector (which would exclude employee costs or the product appropriated by government from the private sector through taxation).  It also includes the value and profits appropriated by the financial sector, even though it is not productive in the Marxist sense.  My measure of constant capital is for the capitalist sector only and so excludes household investment in homes and government investment.

And here is the interesting bit.  It does not seem to matter how you measure the Marxist ROP – at least when revealing its secular decline in the US.  All measures show that for the US economy, the largest capitalist economy with 25% of annual world GDP and twice as large as the next largest capitalist economy, there has been a secular trend downwards in the ROP for any period in which we have data.  And this is correlated with a trend upwards in the organic composition of capital, suggesting that Marx’s most important law of motion of capitalism, namely the tendency of the rate of profit to fall as the organic composition capital rises, is confirmed by the evidence.   As Dumenil and Levy reach the conclusion after their measurement that,“the profit rate in 2000 is still only half of its value in 1948. Finally, we show that the decline of the productivity of capital was the main factor of the fall of the profit rate, though the decline of the share of profits also contributed to this evolution.”

Also, most of those who have provided measures of the rate of profita la Marx, have found that the ROP peaked in 1997 after the rise from the trough of 1982 and was not surpassed even in the boom of 2002-07.  Simon Mohun spells out his thesis in a recent paper “that US capitalism is characterised by long secular periods of falling profitability and long secular periods of rising profitability and crises are associated with major turning points”.  Mohun’s turning points seem to be a 1946 trough in profitability, a 1965 peak, a 1982 trough and a 1997 peak – similar to mine (see my post, The cycle of profitability and next recession, 18 December 2010).

Li Minqi, Fenq Xiao and Andong Zulooked at the movement of the profit rate and related variables in the UK, the US, Japan, and the Euro-zone.  According to them, since the mid-19th century there have been  four  long  waves  in  the  movement  of  the  average  profit  rate  and  rate  of accumulation.   They find a peak at 1997 in the ROP for the US.  David M Kotz uses an after-tax rate of profit measure of the nonfinancial corporate business sector as a percentage of net worth.  Kotz finds that the US ROP rose rapidly to 1997.  Then it peaked and fell sharply thereafter.  Anwar Shaikh, using another measure of ROP as profits of enterprise, which excludes rent, interest and taxes, finds that the US ROP peaked in 1997.  George Economakis, Alexis Anastasiadis and Maria Markakimeasure the Marxist rate of profit by the net product less employee compensation divided by net fixed capital of US non-financial corporates, which is very close to my broader measure.  They find that the ROP rose from 10.6% in 1946 to a peak of 19% in 1966, falling back to 9.6% in 1983 and then rising to a peak of 18.2 % in 1997 before dropping back again remaining under the peak of 1997 thereafter.  They also find that adding the financial sector into the equation makes no difference to the turning points or trend of the ROP.  And Erdogan Bakir and Al Campbell find that US after-tax profit rate peaked in 1997 at about 7.5% before falling back and the next peak in 2006 was still below that of 1997.  So all these studies not only confirm the secular decline in the US ROP since 1946 but also agree that there was a cyclical movement in the ROP, with turning points of a peak in 1965-6, a trough at 1982 and then a peak in 1997, not surpassed since.

Again, there are two more studies not reported in my paper that confirm this pattern in the US ROP.  Alan Freeman reports in Capital & Class, 34(1), 2010 (Marxism without Marx) that the US ROP was in secular decline from 1946 and the peak in the ROP in 1997 has not been surpassed (his data go only to 2008).  Freeman uses almost exactly the same categories of data that I have used to measure the ROP.  Freeman also concludes that accumulation (a rising organic composition of capital) accounted for 82% of the variation in the ROP and the share of profits in output (the rate of surplus value contributed little.  In the July 2010 edition of Science and Society, Paul Cockshott and David Zachariah reach a similar conclusion on the movement of the US ROP>  Interestingly, in another study (Determinants of the average profit rate and the trajectory of capitalist economics, Bulletin of Political Economy, 2009) , Zachariah uses more or less the same categories as Freeman and I did and reaches the same results for the US.  He then applies his categories to other major capitalist countries with interesting results, not dissimilar to the results I came up with my book, The Great Recession, for the UK and Japan.  More on that on another occasion.

There are three recent measures that disagree with the majority.  Guglielmo Carchedi shows that the US ROP has a secular decline and has cyclical changes too.  But for him, the ROP did not peak until 2006 at the onset of the Great Recession.  But Carchedi looks only at the productive, goods producing sector.  This is because he wants to show that a rising organic composition of capital leads to a falling ROP, unless counteracting influences intervene.  This works well to show the secular decline in ROP, but not for the cyclical movements of the ROP.

Michel Husson finds that the US ROP did not peak in 1997 but went higher afterwards.  He correctly includes the unproductive sector and financial sector in his measurement of the ROP, as I do.  But Husson applies a very odd way of measuring the US rate of profit.  He uses the net operating surplus of the private sector and then deducts rental income.  Yet rental income is clearly part of overall surplus value.  If he added back rental income to his measure of surplus value, then his measure of ROP would have peaked in 1997 too (I did this calculation with his data).

Andrew Kliman has several measures of US ROP.  He includes the financial sector in his measures.  But his favoured one of ‘property income’ measured against the historic cost of net fixed assets has shown no cyclical turning points but just a ‘persistent’ fall in the ROP.  Kliman argues that the rise in ROP since 1982 as shown by others is because they measure the ROP against current costs and not historic costs, as Marx would.  But both Carchedi’s and my measure use historic costs and they both still show a rise in ROP after 1982.

So the body of evidence from a range of sources on measuring the US ROP since 1946 shows that there has been a secular fall in profitability since 1946, but that it has been interspersed with a cycle of up and down phases.  There is mostly agreement that the first up phase was from 1946 to 1965, the next down phase was from 1965 to 1982 and then there was an up phase from 1982 to 1997 followed by a down phase afterwards.  So there is a cycle of profitability, as well as a secular decline.

I rest my case – for now.

What is Overproduction?

posted 3 Aug 2011, 11:17 by heiko khoo   [ updated 29 Aug 2011, 09:54 ]

The attached document is a draft document by Jeppe Druedahl refuting the theory that overproduction is the root of capitalist crisis. 

Carchedi, Foster and the causes of crisis

posted 22 Jul 2011, 02:20 by Admin uk   [ updated 22 Jul 2011, 02:23 ]

By Michael Roberts     

The annual Marxism 2011 festival took place in London this weekend.  One of the sessions was on Marxist theory and the economic crisis.  The speakers were John Bellamy Foster, the editor of the American Monthly Review, Guglielmo Carchedi, the Italian Marxist economist and Joseph Choonara from the British Socialist Workers Party.  

With three speakers and only a short amount of time, no speaker was able to do justice to their arguments.  But let me summarise.  I won’t comment on Choonara’s contribution, not because he did not say some excellent things, but because I have more to say about the other two speakers.  

Those who have read John Bellamy Foster’s book, The Great Financial Crash: causes and consequences (http://www.amazon.co.uk/Great-Financial-Crisis-Causes-Consequences/dp/1583671846) , will know that he represents that tradition of Marxist economics developed by Paul Sweezy, Paul Baran and Harry Magdoff that argues the cause of capitalist economic crisis can be found in the development of competitive, small firm capitalism of the 19th century into the monopoly, large firm capitalism of the 20th century, which has further developed structurally into a monopoly finance capitalism of the 21st century.  This monopoly capitalism breeds stagnation because competition is weak or suppressed.  Workers’ wages are held back by monopoly pricing and there is shift of profits from small firms to large ones.  But because workers cannot spend as much, monopoly surpluses build up.  They have to be realised through arms spending or a credit boom, the latest of which has seen the development of  ‘financialisation’ (see my post, Financialisation: the cause of crisis?, 19 July 2010).  Eventually the credit bubble bursts and the stagnatory nature of capitalism is revealed.  The crisis occurs not because profitability is too low but because the surplus is too high to be bought or realised.  Capitalist crises are not cyclical (boom and slump), but structural (stagnation).

The Monthly Review analysis is close to the views of those who have ‘neo-liberalism’ and underconsumptionist explanation of capitalist crisis, namely that there is not enough ‘effective demand’ from workers as their wages have been restricted and inequalities of income have grown so large that capitalists can no longer sell their goods and services to the masses in sufficiently profitable amounts.  So there is overaccumulation or overproduction and that causes the crisis. The crisis is caused by inequality and underconsumption, delayed by a credit bubble, which when it bursts, causes profits to collapse.  Low profits are the result of crisis and the lack of realisation, not vice versa (see my posts, The crisis of neoliberalismand Gerard Dumenil, 3 march 2011 and Views of the Great Recession, David Harvey and Anwar Shaikh, 3 September 2010).

In my book, The Great Recession (http://www.lulu.com/product/paperback/the-great-recession/6079458), I show how this explanation of capitalist crisis is both wrong and also not Marx’s view.  Suffice it to say that Foster in his brief speech presented two key facts to support his thesis: that capitalist crisis one of structural stagnation because in every decade since the 1960s, economic growth in the major capitalist countries has been slower than the previous one.  This is true.  But you can often make the stats fit any argument.  Instead of measuring growth decade by decade, if you measure it against the rise and fall in profitability in the US, you find that economic growth was faster from 1982-97, when profitability was rising, than it had been between 1965-82, when it was falling.  In other words, economic growth is faster when profitability is rising and vice versa.

His second fact was that real wages in the US have been stagnant since the 1970s and inequality has increased sharply, so workers became bereft of the incomes to buy the goods and services of monopoly capitalism without credit.  It is true that real wages have stagnated.  But it is not true that the costs of variable capital for the capitalists have stagnated and that is what matters to capitalist production.  Employee costs include not just wages but also benefits (holidays, sick pay, pensions, medical care, social security), which must be paid at least in part by employers.  When these are added in, employee costs have risen in real terms.  In the period 1982-97, employee costs rose, but profits rose faster, so the rate of exploitation (surplus value) rose in the US (and elsewhere).  The increase was so strong and when combined with a fall in the costs of production (a falling organic composition of capital), profitability rose and capitalist production grew faster and did not stagnate.  It was only when profitability peaked and began to fall that growth slowed.

Guglielmo Carchedi has been a major contributor the development of Marxist economics over the last 30 years.  He was among the first to provide a refutation of the Okishio theorem that purported  to show that Marx’s law of profitability was theoretically false or flawed and could not be used to explain crisis.  Carchedi has also shown up the fallacies of the underconsumptionist explanation of crisis that still dominates many parts of the Marxist economic spectrum (see his recent bookhttp://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/carchedireturnfromthegrave ).

At the meeting, Carchedi outlined the main arguments in his latest book, Behind the crisis (http://www.amazon.com/Behind-Crisis-Historical-Materialism-Book/dp/9004189947) and paper (see his excellent two files on his thesis at www.marx2010.weebly.com).  He shows that if you look at the productive sector of the capitalist economy (namely, the US) over the last 50 years, then you can see a secular fall in the rate of profit.  This secular fall has been driven by Marx’s law of profitability, namely a rise in the organic composition of capital. ie the growth of machinery and plant etc has outstripped and displaced the growth in the employment of labour power.  As Carchedi explains, labour is the only source of value, so the rising organic composition of capital may deliver faster productivity, BUT because goods get produced in less labour time, there is a slower growth in value and profitability falls.

Carchedi also shows that within the secular decline in profitability, there are shorter cycles when profitability can rise, in particular a rise from 1986 to date.  This rise is due to the counteracting influences on profitability that are also part of Marx’s law of the tendency of the rate of profit to fall.  From 1986, capitalists drove up the rate of exploitation or surplus value by vicious attacks on working conditions etc to counteract the effect of the rising organic composition of capital.  But eventually, the law of profitability will overcome the counteracting influences and the crisis will ensue.

This is a powerful argument.  But where I have some doubts about Carchedi’s approach is in his measure of profitability.  Carchedi’s data show that US profitability has risen from 1986 to 2009.  So how can the Great Recession be a result of falling profitability?  Carchedi measures only the profitability of the productive sectors of the capitalism, indeed just the goods producing sector.  He excludes services and the finance sector.  This may be justifiable if you want to see the working out of Marx’s law of profitability over a secular period.  But I think it then confuses and obscures what is going on cyclically and thus does not help to explain booms and slumps.  Marx did not exclude from his general rate of profit the financial sector or the unproductive sectors of capitalism.  These sectors do not create surplus value, but they appropriate it from the productive sector (by interest, rent and other charges) and so must be included in the overall rate of profit and considered in the cyclical explanation of crisis.

If you look at the profitability of the whole capitalist economy, as I did in my book and others have done as well (see my upcoming paper!), then we can see that US profitability peaked in 1997 not 2009 and has still not returned to that level (see my recent post, Returning to the long view and others on this).  Indeed, I have argued that after the slump of 2001, US profitability again peaked in 2005-6 (below the level fo 1997) and began to fall well before the credit crunch of 2007 and the recession of 2008-9.   This falling profitability(in the context of the general downphase of profitability from 1997) eventually triggered the credit crunch of 2007 when credit could no longer support profits.   This restores Marx’s law as the underlying (but not proximate) cause of the crisis.

Returning to the long view

posted 22 Jun 2011, 13:31 by heiko khoo

By Marxist economist  Michael Roberts  

There is much talk in the financial press and among economists of the risk that the major capitalist economies could be slipping back into recession.  Economic data for the US and Europe are indicating a significant slowdown in economic growth and a weak recovery in employment and investment.  Is this just a temporary blip or does it represent a significant downturn?  I would like to answer that by returning to the long view.  

Which way are the major capitalist economies going?  Are they set for a long period of economic growth and rising profitability?  Has the Great Recession ‘cleansed’ the capitalist system of production sufficiently of ‘dead capital’ to allow renewed accumulation?  Well, I’ve looked at the data for the US economy and measured the overall rate of profit in Marxist terms to make a judgement.

In my book, The Great Recession, I argued that you can identify a cycle of profitability in the US capitalist economy using Marxist categories for profitability.   Just taking the post-war period, there was a Golden Age of profitability from 1946 to 1965 when the rate of profit (ROP) was high and even rising. During this period, economic recessions were few and relatively shallow. Then there was a period of crisis when profitability fell steadily until it reached a nadir in 1982.  During this period, economic recessions were more frequent, violent and deep i.e.  1969-70, 1974-5 (the first simultaneous post-war economic recession) and 1980-2 (the deepest recession since the 1930s).  After 1982 there was a recovery in profitability right up to 1997.  This was the period of so-called neoliberalism that many have argued constitutes a completely new structure of capitalism based on ‘financialisation’ and neoliberal policies of privatisation and weakening of the labour movement (see my post, Gerard Dumenil and the crisis of neo-liberalism, 3 March 2011).  There was only one significant economic slump in 1990-1.

But in 1997, profitability peaked according to my calculations (this is denied by many others but also confirmed by others – more on this on another occasion).  Since 1997, despite two economic recessions in 2001 and 2008-9 and two subsequent recoveries (2002-7 and 2009-??), profitability has still not recovered to the level of 1997.  This suggests that we are still in a downphase for US profitability and a new bottom has still to be reached over the next few years.  If the cycle is to be repeated that bottom should happen around 2014.  To achieve that, another econ0mic recession would be needed.

See my graphic here.  The purple line shows the Marxist or value rate of profit (VROP) for the US on the right-hand scale and the left-hand scale shows the organic composition of capital (OCC) as a red line.  The OCC is the main driver of VROP , operating in inverse relation, and is heading towards levels last reached when the rate of profit was at its nadir back in 1982.   The cycle of profitability is revealed and the hypothesis that the rate of profit is still in a downward phase.

After the recovery in ROP since mid-2009, is profitability heading down again?  Well, a Marxist measure of US profitability in not available beyond 2009 – we just don’t have the data.  But we can make some reasonable guesses for 2010 and 2011 based on the likely change in economic growth, workers wages and the accumulation of capital.  On those assumptions, it would appear that the ROP jumped back from its low in 2009 and rose in 2010.  However, my forecasts suggest that in 2011 the ROP will fall back – the beginning of its slide to a new low by 2014.  The graph incorporates those forecasts.

But this is guesswork.  We can use a mainstream measure of profitability (profits as a share of GDP) to provide  a more up to date guide to the direction of the ROP.  This is only a crude proxy for a proper Marxist measure but it does show that the ROP recovered after reaching a bottom in 2009 that was lower that in the recession of 2001 but not as low as in 1982.  We now have figures for the first quarter of 2011 and they show that the ROP still rose but at a slower pace, suggesting that it is about to peak.  This could soon confirm my forecast of a fall in ROP in 2011.

What next?  Once the ROP starts falling, it takes a few years before an economy moves into recession.  The ROP has usually been falling for three to four years before that happens.  On that basis, the US economy will not drop into a new recession until about 2014 onwards.  The debate continues among Marxist economists, but if the underlying cause of capitalist crisis is a falling ROP,  then a new slump is unlikely to develop until 2014.  But it confirms that even the Great Recession of 2008-9 was not big enough to restore a sustained rise in the ROP.  That is because it has not destroyed enough value in accumulated capital or in the excessive build-up of debt (fictitious capital) before 2007.  More destruction of value is necessary to do that.

That there is still much fictitious capital in the system is revealed by the value of the stock market relative to a measure of the real value of the companies the stock prices represent.  James Tobin, the leftist economist, developed a measure to tell if the stock market was overvalued or not and whether it would be heading down.  It is called Tobin’s Q, measuring the stock market’s value against the replacement value of all the assets of the companies in a stock market index – in other words, the real value of the accumulated corporate assets.  Tobin’s Q for the US S&P-500 stock index (the top 500 companies by market value in the US) currently looks like this.

The ratio is still relatively high and not near the trough reached in 1982 which created the conditions for a bull market rally.  You can see that the value of the stock market follows closely the movement of the Marxist rate of profit with a lag of about three years.  For example, when the rate of profit peaked in 1997 and started to contract, the US stock market went on rising until 2000 before entering its current period of contraction, or ‘bear market’ as it is called.  It still has some way to go before reaching a trough, probably about 2016-18.

Posted in capitalismeconomicsmarxismProfitability | 2 Comments »

Greece: heading for default

June 13, 2011 by michael roberts

Greece is heading for default on its government or sovereign debt, as it is called.  There are two reasons why it is becoming unavoidable.  The first is economic.  The size of the Greece’s public sector debt is now reaching 160% of GDP (annual output).  That is so large that it cannot be stabilised unless the annual government deficit of spending (excluding interest payments) over tax revenues is turned into a significant surplus (called a ‘primary surplus’).   The swing from deficit to surplus that the Greek government needs is now over 10% pts of GDP by 2014.  There is no possibility that this can be achieved.

The government has announced yet another fiscal austerity package drawn up by the IMF and the EU designed to create a primary surplus.  Public sector jobs will be cut by 15%.  If you exclude the armed forces, Greece has the same number of public sector workers per head of population as Ireland.  Under the package, Greece’s public sector jobs will be 10% smaller than Ireland’s.  At the same time,  the working week for public sector workers will be raised from 37.5 hours to 40 hours.   And on top of the already implemented 20% cut in wages, there will be further pay reductions.   Taxes will be raised by yet another 2-4% on average incomes and the tax threshold will be lowered to just an annual €6000.  So the poorest Greeks will pay even more tax.  The property tax threshold will also be lowered to include very modest properties starting at €200,000.

But none of these measures will do the trick in getting Greek sovereign debt under control because the Greek capitalist economy is now in a deep recession.  The latest data for GDP growth in Q1’11 revealed a fall of 5.5% over the same quarter in 2010.  And the forecasts for 2011 and 2012 are for further falls in real national output of 2-4% a year.  The unemployment rate is now over 16%  and over 40% for young people.  Greek capitalism is on its knees before the dreaded Troika (the IMF, the EU and the ECB).  With nominal GDP falling over the next two years and debt levels in euros rising, it is a mathematical impossibility for Greece’s government debt to be stabilised.

That means the Greek government cannot find the funds to repay the bonds that become due by borrowing from Europe’s banks and other financial institutions.  These institutions are already unloading their holdings of Greek debt and are demanding over 25% annual interest to buy more in secondary markets.  Such a rate of interest would just blow up the budget deficit despite attempts to cut it through fiscal austerity packages.  That is why the Greek government is being forced to get another bailout package from the EU and the IMF.  Back in 2010, it received a package worth €110bn supposedly to tide it over until early next year before it started borrowing again from bond markets.  It has become clear that it cannot ‘return to the market’ next year so it needs more ‘official’ money.  The EU-IMF is preparing a new package in return for yet more cuts in living standards for the average Greek household.  This package will probably involve another €60bn in new money but also €30bn to be raised by selling off Greek national assets like the post office, airports, airlines and lots of real estate (not including the Parthenon yet!).  And there is a tentative plan to raise another €30bn by persuading Europe’s banks to ‘roll over’ their holdings of Greek debt ‘voluntarily’.

This package will be agreed by Europe’s leaders at meetings on 20-24 June and is designed to tide Greece over until 2014 when things will be better (hopefully).  But nobody really believes that it will manage that.  Even by 2014, Greece is unlikely to have got control of its debt levels.  More likely, it will start to fail to meet the targets on the budget deficit set by the EU-IMF over the next year (as it has done up to now).  That will pose the issue for the official lenders.  Will they ignore the failure to meet targets and continue to hand out the money or will they recognise the inevitable and declare that Greece cannot pay and must default?

The second reason that default will happen is that the Greek people are increasingly unwilling to suffer a loss of over 30% in their living standards just to meet government debt payments to European banks, especially as those banks were the cause of very financial collapse globally that triggered the Great Recession and got Greece into this crisis in the first place!  Over the last year public opinion polls showed that the majority of Greeks were prepared to make sacrifices if it meant that Greece could stay in the Eurozone.  Joining the euro was seen by most Greeks as the making of the Greek economy and they wanted to be there.  Of course, most of the gains from Greece’s membership went to Greek business which lived off EU subsidies and a strong euro, while paying little or no taxes to the Greek exchequer.  Corruption and tax evasion were the order of the day for the rich, the corporations and professional classes (the big scandal in Greece has been the revelation that Greek doctors, dentists and lawyers, pop stars and politicians etc paid little or no tax).

But now the leading nations of the Eurozone are driving Greek capitalism into the ground and enthusiasm for sustaining fiscal measures is fading.  The latest polls show that over 80% of Greeks do not want to continue with fiscal austerity. Every Sunday, over 100,000 people have been occupying Syntagma Square in Athens.  The Indignants are copying the style of the Middle East protests and the movement in Spain against the cuts and the unity of the politicians in imposing austerity.   A recent survey found that 25% of of Greek people had been involved in some form of protest in the last month, or 2.2m people, double the previous levels of participation.

The ruling PASOK socialist party in government now trails the conservative New Democracy opposition in the polls for the first time since the crisis began.  More revealing is that both major parties are losing ground to an array of splinter left parties.  Both the leaders of the major parties have all-time low ratings.  If there was an election tomorrow, no party would have an outright majority.  The balance of power would be held by small left parties.  Opposition to meeting the demands of the IMF-EU is growing in PASOK itself and not just from the trade unions.  A split and an early election is possible in the next six months. If that happens, Greece will no longer keep to its fiscal targets and may even opt for default itself.

What would default mean?  The ECB and the banks would consider it a disaster.  They are the institutions that hold the majority of Greek debt.  The value of that debt would plummet by at least 50%, bankrupting Greek banks and causing serious losses to other European banks and the ECB itself.  If markets worried that such a default could lead to defaults in other distressed EMU states like Ireland and Portugal, then there could be a new systemic financial crisis in Europe, this time based on sovereign debt, not private credit.  That is the fear of the ECB and why it opposes those in Germany who are calling for a ‘restructuring’ of Greek debt so that German taxpayers don’t have to keep paying for most of the Greek bailout packages.

For the Greek people it would be the lesser of two evils.  If the Greek government negotiated with bondholders to cut its debt by 50% or more, that would remove a huge burden from the back of the Greek people and enable their sacrifices to be spent on trying to revive the economy through investment and employment rather than paying the interest and principal to to the likes of Deutsche Bank or Societe General.  Greek banks would be nationalised, recapitalised and operated as a public service for loans to Greek small businesses and households, not just as buyers of government debt or conduits for rich Greeks to spirit away their wealth from Greece.

If the Greek government opted for default, they may face expulsion from the euro and certainly they would be frozen out of bond markets for a decade.  Some reckon that it would be a good thing if Greece left the Eurozone.  I don’t see that it benefits the Greek economy.  Sure, leaving the euro and starting a new drachma currency would allow Greece  to devalue heavily and so make its exports much cheaper.  But that would also create a massive rise in inflation, destroying the incomes and savings of Greek households and small businesses, who would still owe money in euros.  Greece would be reduced to a third world economy.    Of course, if they are expelled, Greece would have to take its chances.  But there is no need to go looking for it.  Indeed, a Greek government should appeal to other EMU states to do something similar and dispense with meeting the demand of the banks on public debt and instead bring them into public ownership with a plan for economic revival across Europe.

Default is inevitable.   But it could still be ‘orderly’.  Namely, the upcoming bailout funds may enable Greece to stay out of bond markets until 2014 when economic growth in Europe could have revived sufficiently and Europe’s banks could be strong enough to take a ‘haircut’ on their Greek bond holdings.  That is the hope of the ECB-IMF and the EU leaders.  But the odds of such an orderly default are falling and the odds of a disorderly one are rising.

The accumulation of capital

posted 6 May 2011, 06:19 by Admin uk

By Mick Brooks

The purpose of this article is to show the explanatory power of Marxist analysis in looking at the dynamics of capitalism. The laws of motion of the system affect all our daily lives profoundly. Having a basic grasp of these laws of motion helps us to understand how changes in social being produce changes in consciousness and thus to participate in the fight for a better society – socialism.

 

This is not yet another attempt to repeat Marx’s analysis. This has been done thousands of times, including by the present author (See Brooks, Sewell and Woods-What is Marxism?). At best surveys of that kind will take the reader back to Capital which is, of course, the definitive treatment.

Neither is it an attempt to ‘prove’ the labour theory of value, as Marxists have been challenged to do over and over again. It is intended rather to show the dramatic effects that the operation of the law of value has on working people’s lives.

 

Chapter 1: The problem of value

Value

Marx begins his analysis in Capital Volume I with the commodity. The commodity is first a useful thing. That does not mean it has to be a material thing, as Marx makes clear. But use values are incommensurable. How do we compare apples with oranges?

Secondly it is an exchange value, which means it can be compared and exchanged with other commodities. To possess this quality of exchangeability commodities must possess a common property they share with one another – value. What does this common property consist of? Marx concludes that, “If then we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour” (Capital Volume I, p.128)

This approach to the problem of value is daunting to the first time reader, as Marx himself recognised. We intend to approach the issues in a different way. When his friend Kugelmann raised the difficulty of his approach in 1868, the year after the publication of Capital, Marx replied as follows:

“The chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science. Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products.” (Marx-Engels Selected Correspondence, p.209)

This is our starting point:

  • All societies have to work in order to live.
  • All societies have to allocate the labour available to them according to their priorities.
  • In a market economy this proportional allocation of the products of labour is regulated through the exchange value of commodities.
  • The exchange value of commodities is determined on average by the (socially necessary) labour time required to produce them.

 

Socially necessary labour time

Corresponding to the twofold nature of the commodity is the twofold nature of the labour that produces it. Concrete labour produces specific use values, but use values are incommensurable. Marx shows that the substance of value is abstract labour. Abstract labour may be regarded as labour from the general pool of labour power available to any society. The magnitude of value is determined by the amount of labour time necessary to produce the commodity. Equal quantities exchange for one another. Marx goes on to qualify this at once:

“Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskilful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time…

“We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour time socially necessary for its production.” (Capital Volume I, p.129)

  • The value of a commodity is determined on average by the socially necessary labour time involved in its production.

 

Market forces

The amount of socially necessary labour time to make the commodity is proportional to its price. We are treating money here as the monetary expression of labour time. Labour is not consciously allotted to different purposes. The division of labour is implemented through private exchanges mediated with money.

Let us look at how the allocation of labour is determined through the exchange process under capitalism which is, after all, an unplanned system. How many commodities of each type shall be produced? How much labour time shall be allocated to the production of each? These matters are decided by the impersonal forces of the market. The exchange of commodities is not just a private matter concerning the owners of the commodities. In fact every individual act of exchange is subject to objective economic laws that go to shape the dynamics of the entire capitalist system.

Exchange is the way that a vast global division of labour is established under capitalism through the world market. Capitalism is an unplanned system. Too many of some sorts of commodities are continually being produced, so prices fall below their value in the glut. Too few are produced of others so prices rise above their value with the shortage. How could it be otherwise, since nobody knows how much is the ‘right’ amount to fulfil demand at any point in time? So the capitalists just go ahead, get the commodities produced, and hope they can sell them. Some make fortunes, others fail.

Commodities are usually sold above or below their value, subject to the forces of supply and demand. Only accidentally or occasionally are they actually sold at their value. But value is the axis around which the day to day movement of prices oscillates. Marxists do not deny the importance of supply and demand. For us these surface forces are the executors of the fundamental laws of motion of capitalism identified by Marx. As John Stuart Mill put it, the palpitations of the waves upon the surface of the sea do not negate the fact that there is a sea level and that it varies according to the pull of the tides.

  • The law of value is executed by the forces of supply and demand in an unplanned society where commodity production is universal.

 

What drives capitalism?

The establishment of this average socially necessary labour time is no abstract process outlined in books. In introducing the concept, Marx offers the following example:

“The introduction of power looms into England probably reduced by one half the labour required to weave a given quantity of yarn into cloth. The handloom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labour represented after the change only half an hour’s social labour, and consequently fell to one-half its former value.” (ibid p.129)

The determination of value by the amount of socially necessary labour time means that the quicker the commodity can be produced, the less it will cost. The speed with which the commodities can be produced depends on the productivity of labour. The power loom wiped out the handloom weavers on account of its greater productivity.

The formation of the socially necessary labour time for weaving cloth predominantly by power looms was a huge and dramatic incident in the early history of the British working class movement. It was an event, stretching over decades, which caused the impoverishment and ruin of hundreds of thousands of handicraft workers and their families. And the determination of socially necessary labour time in this devastating and revolutionary fashion is a continuous process under capitalism, causing upheaval and destroying livelihoods as it goes on.

What are the mechanisms driving this apparently impersonal operation of market forces? They are twofold: the need for the capitalists to exploit the working class more and more effectively; and the impulsion caused by competition between the capitalists themselves. As we shall see these processes are interrelated.

  • Capitalism is driven by competition between capitalists and by the need all capitalists feel to exploit their workers more effectively.

 

Chapter 2: Exploitation

Exploitation and class society

All societies, as Marx reminded Kugelmann, have to work for a living. All societies have to allot the products of the total labour among their members. Marx calls the labour required to produce the goods that make up the subsistence of the toilers necessary labour.

When the productivity of labour rises sufficiently to produce a surplus over and above the subsistence needs of the population, the question will be posed: who is to enjoy this surplus? The ruling class in all forms of class society is that section of the population that grabs and appropriates the surplus. Exploitation in all forms of class society is nothing else but the extraction of surplus labour by the ruling class from the toiling and exploited classes. Under capitalism this exploitation is hidden behind a veil, a veil that Marx was committed to pierce:

“Capital has not invented surplus labour. Wherever a part of society possesses the monopoly of the means of production, the labourer, free or not free, must add to the working time necessary for his own maintenance an extra working time in order to produce the means of subsistence for the owners of the means of production, whether this proprietor be the Athenian devotee of the good and the beautiful, Etruscan theocrat, Roman citizen, Norman baron, American slave owner, Wallachian Boyar, modern landlord or capitalist.” (Capital Volume I, pp.344-5)

Marx cites the Reglement organique written by the Boyars (landlord class) of what is now Romania to show that exploitation was central to their class society and to any class society. The Reglement was a kind of rule book specifying how much corvee (an obligation to perform unpaid labour) must be performed by the peasantry. The ‘beauty’ of this document, from Marx’s point of view, is that the principle of exploitation is spelled out and transparent. As he points out in the passage above, the ruling class in all forms of class society legitimises its exploitation through its ownership of the means of production. One difference between capitalism and the rule of the Boyars is that the right to snaffle unpaid labour from the peasantry is written down in a book!

“The comparison of the greed for surplus labour in the Danubian Principalities with the same greed in English factories has a special interest, because surplus labour in the corvée has an independent and palpable form. (ibid p.345)

“The necessary labour which the Wallachian peasant does for his own maintenance is distinctly marked off from his surplus labour on behalf of the Boyar. The one he does on his own field, the other on the seignorial estate. Both parts of the labour time exist, therefore, independently, side by side one with the other. In the corvée the surplus labour is accurately marked off from the necessary labour.” (ibid p.346)

In practice the Reglement allowed for unlimited exploitation. “The 12 corvée days of the Reglement organique cried a Boyar drunk with victory, amount to 365 days in the year.” (ibid p.348)

In all forms of class society the wealth (mass of use values) is produced by the toilers. The product of their labour divides into necessary labour (labour that goes to their subsistence) and surplus labour (the fruits of exploitation enjoyed by the ruling class).

We shall return to the specific form of exploitation of the working class later.

  • Exploitation is a common feature of all forms of class society.
  • It involves a division in the labour performed by the exploited class into necessary labour for their own maintenance and surplus labour, appropriated by the ruling class.

 

Workers and peasants

There are obvious differences between those who work for a wage under capitalism and the wretched Wallachian peasantry. We can assume that the extraction of a surplus from the peasants by the boyars was closely accompanied by the threat of physical force. Exploitation certainly does take place under capitalism. In contrast to pre-capitalist class societies it is not in principle accompanied by extra-economic compulsion. It classically occurs through what appears to be a contract over wages freely entered in to by both parties, as with other relations under capitalism. It happens through impersonal market forces.

That is the theory. In practice the capitalist class has never hesitated to use force when it suits their interests. Marx explains that the process of primitive accumulation examined below, the creation of the modern working class, “is written in the annals of mankind in letter of blood and fire.” (Capital Volume I, p.875) The dawn of capitalism also saw an obscene florescence of outright slavery as the direct counterpart to the emergence of wage labour. And capitalism created the world market through the colonial exploitation of three continents.

The capitalist state does have has a role in guaranteeing the profits of the capitalist class. “The modern representative state,” according to Engels, “Is an instrument of exploitation of wage labour by capital.” (The Origin of the Family, Private Property and the State, p.168) The state guarantees the rights of private property, which disproportionately benefits the capitalists, who own much more property than the workers. The state may intervene in the wage bargaining process, for instance to enforce a minimum wage or to pass anti-union laws. But the worker is usually exploited through the wages contract, without the direct intervention of the state.

It is actually this asymmetry of ownership that makes the wages contract a one-sided affair. The capitalist class, like every ruling class before it, has a monopoly over the means of production.

How this situation came to pass is a long story. Marx calls this process primitive accumulation, the accumulation of the preconditions for capitalist production. This consists on the one hand of the piling up of fortunes in the form of money. The Wallachian boyars, of course, measured their wealth in land.

Secondly primitive accumulation involves the complete separation of the toilers from independent access to the means of production. In the case of peasants, that means the loss of their own plot of land. The workers then have no option but to labour for a wage for the capitalist class, who have progressively acquired a monopoly in the means of production.

The capitalists own the factories, mines, farms and offices, the means of making a living under capitalism. The wage workers are formally free. Unlike the Wallachian peasants, they don’t have to work for a particular boss. The peasants in Romania were serfs, regarded as being as much an appurtenance of the land as a hedgerow, and their unborn children were regarded in the same light. We ‘free’ wage workers rightly see this as a monstrous form of slavery. But, as we can see from Marx’s description, the peasant household has access to its own field. We can assume that, despite the insatiable exactions of the landlords, in normal times the family can feed and clothe themselves at a modest level. Barring famines, their livelihood is more secure than that of a wage worker. Unemployment is not a threat; the word doesn’t even occur in their lexicon.

The difference between workers and peasants is that the workers are ‘free’ in two senses; they do not have to work for any particular capitalist. And they are free from any share in owning the means of production. They have no choice but to work for a capitalist, since the capitalists between them monopolise the means of production.

  • Unlike peasants, workers are free in a twofold sense; first they are not obliged to work for a particular capitalist.
  • Secondly, since they have no right of access to the means of production, they have to sell their labour power to a capitalist in order to maintain themselves.

 

Chapter 3: The case of Henry Ford

We shall illustrate the dynamics of capitalism by looking at the history of a man and a firm – Henry Ford. We are fortunate in being able to make use of Upton Sinclair’s book The Flivver King. The Flivver was a popular name for the Model T Ford which, together with the Volkswagen Beetle, was the most iconic and important car of the twentieth century. Sinclair wrote his book in 1937 as part of a drive to unionise Ford Motor Co. Although the characters in the book such as Abner Shutt, his family and neighbours, are fictitious, Sinclair drew his information on Ford-America from the public domain. It is not only accurate but sharply observed, informed as it is by a socialist perspective.

Labour power

Workers are told they are paid for the work they do. After all, they are free agents. If they don’t like the boss, they can collect their cards and go somewhere else. There seems to be no exploitation in the wages contract. If you work overtime, you get paid more for more work. If the firm falls on hard times and has to impose short time working, you will lose money. If you are paid for piece work, the harder you work the more you get paid. What could be fairer than that?

Marx described the standard of living enjoyed by the exploited in class society as their means of subsistence. Does this apply to the wages that workers earn in capitalist society as well? Marx rooted the exploitation of wage labour in the fact that, despite appearances, workers are not actually paid for the labour they perform. They are paid for their labour power, their subsistence:

“We mean by labour power, or labour capacity, the aggregate of those mental and physical capabilities existing in the physical form, the living personality, of a human being, capabilities which he sets in motion whenever he produces a use value of any kind.” (Capital Volume I, p.270)

So the capitalist buys a capacity, not a predefined lump of work. What does he get for his money? He gets labour. Labour is the use value of labour power. How much labour he gets out of that capability is up to him. Like the Wallachian boyar, he is forever thinking up ways to squeeze more out of this labour power. That drive, and the resistance to it, forms the central thread of much of the remainder of this narrative.

Throughout Capital Volume I Marx assumes that workers are paid by the day, though he carefully examines other forms of payment such as piece work in Part Six: Wages. He does so for two reasons. The first is that most British workers in the nineteenth century were paid by the day. The second reason is that, whatever the form of wages such as payment by results, they really represent a subsistence for the workers.

In comparing the British factory workers of his time with the Romanian peasant, Marx uses the following example to show how the identical process of exploitation is going on:

“Suppose the working day consists of 6 hours of necessary labour, and 6 hours of surplus labour. Then the free labourer gives the capitalist every week 6 x 6 or 36 hours of surplus labour. It is the same as if he worked 3 days in the week for himself, and 3 days in the week gratis for the capitalist. But this is not evident on the surface. Surplus labour and necessary labour glide one into the other. I can, therefore, express the same relationship by saying, e.g., that the labourer in every minute works 30 seconds for himself, and 30 for the capitalist, etc.” (ibid pp.345-6)

In Marx’s hypothetical example above the worker works 6 hours ‘for himself’, that is to reproduce values sufficient to be exchanged for money equivalent to his wages. He then works 6 hours in the 12 hour day he works for 6 days a week to produce surplus labour. Under capitalism this surplus labour is called surplus value. The rate of surplus value, the rate of exploitation, in this case is 100%. As we shall find out later on, not all this goes directly to the capitalist who directly employs the workers. It goes to feed the entire class of exploiters.

The process of exploitation is veiled. Henry Ford didn’t wave a copy of the capitalist equivalent of the Reglement Organique at the workers like a Wallachian boyar. All we see in the factory of the Henry Ford Motor Co. is cars coming off an assembly line. In fact some cars are sold so as to pay the workers’ wages and more cars are sold to be turned into surplus value. This is how the workers are paid for their subsistence. For part of their working day, working hour, working minute or for any piece of work they perform they are in effect working for themselves. The rest of the time they produce a surplus for the boss class, surplus value.

  • Whatever the form of appearance of the wages contract, workers are not paid for the work that they do but for their labour power.

 

Subsistence and class struggle

What does subsistence mean in this case? The subsistence requirements of an American worker working for Ford are certainly different from those of a Wallachian peasant. The Shutts, at one point in Upton Sinclair’s narrative, are a four car household. In fact this was the only way they could get around Detroit at the time. Cars were a necessity, which is not to say that every working class household could afford one. Sinclair’s book is full of incidents where, in hard times, the car has to be sold or is repossessed.

Marx of all people was least inclined to ignore the class struggle. He knew that workers aspired to share in the greater and greater quantity of wealth they were creating. “In contrast, therefore, with the case of other commodities, the determination of the value of labour power contains a historical and moral element.” (ibid p.275)

Upton Sinclair records the fact that in January 1914 Henry Ford introduced a minimum wage of $5 per day for his workers. Sinclair notes that, so far from being a unilateral act of philanthropy, Ford was grappling with massive problems of absenteeism and labour turnover, caused in large part by the relentless speedup imposed at the Ford plant. Sinclair also tells us of the regime of spies and busybodies that were part of the Ford way of life at Highland Park. The book recounts the daily struggle for a decent existence by the Shutt family and their fellow workers. For instance in 1930 when Henry Ford magnanimously unveiled his plan to raise the basic wage to $7, “There were only a few soreheads to point out that since Henry had established his five-dollar minimum, sixteen years back, the cost of living in the Detroit area had nearly doubled, so that the new seven-dollar wage was far less than the old one had been.” (Sinclair p.73)

American workers at this time were the most prosperous in the world. Yet the workers at Ford were still scrambling to keep up with the cost of living. Savings they built up in good times disappeared during layoffs and recession. Workers in the USA were still being paid a subsistence, though with, “A historical and moral element.” (Capital Volume I, p.275)

Meanwhile Henry Ford, who Abner Shutt had first encountered as an enthusiast trying to build a horseless carriage in his neighbourhood workshop, had become a billionaire, the richest man in the world. And he had done so from their unpaid labour.

  • Wages paid for the workers’ labour power do not just provide a bare physical subsistence, but contain a historical and moral element.

 

Ford and socially necessary labour time

The law of value states that the value of a commodity is determined on average by the amount of socially necessary labour time involved in its production. That means that value is inversely related to productivity. The more productive the workers are, the less value the commodities they produce will contain, and the less they will tend to cost. This law is executed by competition between capitalists. It was Henry Ford’s genius that he didn’t see the motor car as a toy for the rich, as so many of his contemporaries and rivals did, but as a tool for the masses. He had to sell cheaper than the competition. The best way to do that was to make his cars cheaper, by means of mass production techniques. Labour saving tools and machinery are so called because they economise on the expenditure of labour time, and therefore allow each commodity to contain a smaller amount of value and to cost less.

“In 1909, before the assembly line method was introduced, just over 12,000 Model T Fords were sold at around $950 each; by 1916 sales had risen to 577,000 while the basic price had fallen to $360. This achievement was partly a result of pronounced economies of scale of speed (the average time for assembling a chassis falling from 12.5 man hours in June 1913 to 1.5 man hours in January 1914). (Schmitz–The Growth of Big Business in the United States and Western Europe, 1850-1939, p.63)

Schmitz talks of ‘economies of scale and speed’ (a term he borrows from Alfred Chandler). What does he mean but the coercive operation of the law of value? Why should the price of the Model T have fallen from $950 to $360 in seven years? Because it took much less labour time, socially necessary labour time, to produce one.

Writing of the panic of 1907, Sinclair observes, “It cut down the Ford sales slightly, but not much, for this new product was more and more wanted, and among the hundred million people of America there are always some who can buy what they want. Henry Ford, planning tirelessly, would find new ways to give it to them more cheaply. In the year after the panic he produced 6,181 cars, a little over three per worker; but within three years he was managing to get thirty-five thousand cars out of six thousand workers. (Sinclair p.21)

Here Sinclair calculates the effect of rising productivity on the price of the cars directly in labour time. One worker in 1910 is now producing nearly six cars in a year. The productivity of labour has doubled in three years.

  • Raising the productivity of labour means that workers produce more use values in a given time.
  • Since the value of the commodities is determined by the socially necessary labour time involved in their production, they will get cheaper as productivity rises.

 

The division of labour

“The work of assembling the flywheel magneto, a small but complex part, was put on a sliding table, just high enough to be convenient for the workers, who sat on stools, each one performing one operation upon a line of magnetos, which crept slowly by. In the old way, a man doing the work of making a magneto could turn out one every twenty minutes; now the work was cut into twenty-nine operations, performed by twenty-nine different men, and the time per magneto was thirteen minutes and ten seconds. It was a revolution

“They applied it to the making of a motor. Done by one man, it had taken nine hours and fifty four minutes. When the assembling was divided among eighty-four different men, the time for a motor was cut by more than forty percent.” (Sinclair p.26)

No doubt when Upton Sinclair penned this passage he was aware as to how strikingly it resembles the example given at the beginning of Adam Smith’s book, The Wealth of Nations. Smith showed how the division of labour in a pin factory means an enormous increase in the productivity of labour in making pins:

“To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business…could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty.”

Then Smith outlined how the division of labour works:

“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations.”

Smith observed the effect at first hand in a small pin factory. The improvement in productivity was dramatic:

“Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day.”

We would expect the price of pins to fall as a result, since they are composed of so much less socially necessary labour time than before, just as the price of cars fell steadily as productivity improved in the motor industry. The other thing to note is that the workers become more and more productive as a natural result of the division of labour. Yet under capitalism the benefits accrue entirely to the owners of the means of production.

  • The division of labour raises the productivity of labour, but the benefits accrue to the capitalist.

 

Rising productivity and the car industry

The effects of enhanced productivity in the car industry were not confined to Henry Ford and his plant. At the dawn of motor production dozens, hundreds of enthusiasts were tinkering with prototype horseless carriages in sheds and workshops. If this reminds the reader of the early days of Silicon Valley, it should do. The transition from craft to mass production methods is a natural and normal part of the innovation process under capitalism.

In the UK alone 221 firms began motor manufacture between 1901 and 1905. S.B. Saul observes that 90% of these had left the industry by 1914. (The motor industry in Britain to 1914) The USA had a much bigger home market for cars and was a more advanced capitalist country by this time. The same process of the concentration of capital advanced there with seven league boots.

Later professionalisation of the trade meant the transition from amateur enthusiasts, such as Henry Ford had been in the beginning, to the production of relatively expensive motors by craft methods, till Ford’s mass production methods began to dominate the industry. What happened to the pioneers of car production? Unless they managed to find a niche as a sports or luxury model (The Model T was a very basic design, which made it easy to mass produce, and it was much ridiculed as a result.) they were bound for extinction. “One capitalist always kills many”, as Marx says (Capital Volume I p.929). Henry Ford’s advances in assembly line production struck down many aspiring motor manufacturers.

The rise in productivity made possible by assembly line techniques inevitably means that smaller and weaker laggard capitals fall by the wayside. They simply can’t keep up with the industry leaders and innovators. The scale of production inevitably rose with the vastly increased output from the new plants.  By the 1930s the US auto industry was completely dominated by three mass production giant firms – Ford, General Motors and Chrysler. But though there were far fewer firms in the industry, the big three in Detroit still saw each other as rivals. Every Ford sold meant an American citizen who would not be buying a Chrysler or a GM car any time soon. Competition remained the driving force of the accumulation of capital.

“Henry Ford might insist, as he continually did, that competition was wrong, and that he did not believe in it; but the fact was that he was competing at every moment in his life, and would continue to do so as long as he made motor-cars. In a hundred different plants scattered over the United States efforts were being made to beat him. In the long run, the successful ones would be those who contrived, by one method or another, to get the most out of a dollar’s worth of labor.” (Sinclair p.27)

So this competition was not just a contest between capitalists as to who could make and sell cars cheapest. It was also at bottom, as Sinclair notes, a contest in squeezing more and more surplus out of the working class.

  • Competition between capitalists produced dramatic increases in productivity, the scale of production and falls in the price of cars.

 

Surplus value in practice

Where did Henry Ford’s profits come from? From his workers – where else could they possibly come from? The workers at Ford, like the peasants in Romania, were being exploited. That means that some of the value added in production went to reproduce the elements of their wages. And some of the value they added went to make Henry Ford rich. Surplus value is the unpaid labour of the working class.

Upton Sinclair did not have the information to work out the rate of exploitation at Ford. Business secrecy is protected precisely so such details won’t leak out. But the facts speak for themselves. At the beginning of the tale Henry Ford lives in the same neighbourhood as Abner Shutt. By the 1930s he is the richest man in the world, a billionaire.

In 1909, we are told, Ford was selling 12,000 cars at $950 each. Some money from those cars he sold went straight to pay the workers’ wages. Some went to pay for other expenses – the cost of depreciation on the plant, electricity, tyres upholstery and the rest. And some went into Henry Ford’s pocket. This was a surplus, just like that appropriated by Etruscan theocrats, Norman barons and the rest of them. It was surplus value. It was unpaid labour, the fruits of exploitation.

In the hypothetical example Marx used in comparing the exploitation of factory workers in Britain, he suggested that the workers worked six hours to produce the elements of their own subsistence and six hours in producing surplus value. There are two factors that veil the reality of this exploitative relationship: the first is that the nature of the wages contract suggests that the workers are being paid for their labour; in fact they are being paid for their labour power, for their keep.

The second is that (unlike the Danubian peasant) the wage worker doesn’t actually produce all the commodities that they buy with their wages. In the usual way they will specialise in producing a single commodity all day. Usually they will be a detail worker in the production process. Neither will they normally spend part of their time producing goods their boss will consume. They find themselves part of a vast worldwide division of labour imposed by the market, in which commodities produced by the workers of the world are all exchanged against money and pass from continent to continent.

What is the rate of surplus value in the UK today? From the government ‘Blue Books’ used long ago by Marx we can find data that, though rough and ready, can give us a clear idea of the rate of exploitation. We choose the year 2007 as the last set of statistics likely to be unaffected by the crisis. (Crises usually hit profits harder than wages.) All figures are at current market prices.

Gross Domestic Product                         £1,401.042m

Compensation of employees                    £744.857m

Surplus value                                           £656.185m

The formula for surplus value is S/V, where S is surplus value and V is variable capital, the sum laid out by the capitalist on wages. Surplus value is derived simply by deducting employee compensation (which we identify as the wages bill for the country) from GDP. Everything apart from employee compensation counts as surplus value. In the figure for surplus value I have therefore included the following categories:  Operating surplus, Taxes, Government supply, and a mixed, mysterious category called Mixed income, which is a little less than 6% of GDP for that year.

This gives a rate of surplus value of 88%.

Assuming a working day of 7 hours, the workers work on average about 3 hours 43 minutes for themselves and 3 hours 17 minutes to produce surplus value.

(From United Kingdom National Accounts: Blue Book 2007, Office for National Statistics)

Why include taxes as part of the surplus value? Here is the traditional Marxist justification for the procedure

“‘Taxes!’ A matter that interests the bourgeoisie very much but the worker only very little. What the worker pays in taxes goes in the long run into the cost of production of labour power and must therefore be compensated for by the capitalist.” (Engels, The Housing Question, p.36)

  • The working class is exploited by the capitalist class, who extract a surplus from them.
  • The form taken by the surplus extracted from the workers is surplus value, the unpaid labour of the working class.
  • The worker also spends time on necessary labour, producing commodities that are sold to pay their wages.

 

Chapter 4: ‘Getting the most out of a dollar’s worth of labor’

Raising the rate of surplus value

As we have seen, in the battle to make more profits the capitalists need to compete against their rivals. They sell cheaper by making cheaper, raising the productivity of labour in the process. All the time they are engaged, as Upton Sinclair puts it, in the search “to get the most out of a dollar’s worth of labor.”

The extraction of surplus value gives us the basic anatomy of capitalism as a system of exploitation, as a form of class society. But, since the search for surplus value is never ending, it also provides us with the framework to analyse the dynamics of capitalism.

The rate of surplus value or rate of exploitation is given by the formula S/V, when S is surplus value and V is variable capital. For instance, when Marx gave the example of the British factory worker compared with the Romanian peasant, he suggested the former worked six hours for himself and six for the capitalist. In that case the rate of surplus value (S/V) would be 6/6 or 100%. How can the capitalists raise the rate of exploitation? Marx deals with two main methods: these are raising absolute surplus value and increasing relative surplus value.

“The surplus value produced by prolongation of the working day, I call absolute surplus value. On the other hand, the surplus value arising from the curtailment of the necessary labour time, and from the corresponding alteration in the respective lengths of the two components of the working day, I call relative surplus value.”  (ibid p.432)

  • The capitalists are impelled by competition among themselves, and by the need ‘to get the most out of a dollar’s worth of labor’, to increase the rate of surplus value, the rate of exploitation

 

Absolute surplus value

The search for absolute surplus value is dealt with magnificently in Chapter 10 of Capital Volume I, entitled The working day. If workers are paid by the day, as most were in the nineteenth century, then what could be simpler than for the boss to demand that they work more and more hours for their recompense?  In terms of our earlier example, if  the bosses manage to force the workers to work a 14 hour day instead of 12 hours, while still paying them the same daily wage then the rate of surplus value (S/V) rises to 8/6 = 133%.

As is often the case in the early stages of an industrial revolution there were masses of desperate people prepared to work for a pittance. No doubt bourgeois economists would put down the possibility of super-exploiting these workers by extending the working day without limit to the forces of supply and demand. The supply of labour exceeded the demand, so the ‘price’ of the workers fell.

In a sense they are right. Supply and demand is important, specially when it is you who are supplying yourself and being demanded (or not) by the bosses. Marx was very much alive to the opportunities provided by recession for the capitalists to try to drive wages below the value of labour power which, as we know, is a level ultimately decided by class struggle. Upton Sinclair was equally aware of this, as he shows in his book. Both men also knew that periods of boom and relatively full employment provided the working class with the best opportunity to advance the level of real wages.

Upton Sinclair does not deal with the production of absolute surplus value as a way of raising the rate of surplus value in his book. The length of the working day was taken as a given in early twentieth century America by most sections of the working class. Workers were by and large paid by the hour. But the main reason for its unimportance to the likes of Henry Ford comes from the obvious advantages of assembly line production, speedup and other techniques to raise the rate of exploitation.

That does not mean that the extraction of absolute surplus value has ceased in modern capitalism. We can all list the occupations where workers are expected to work all the hours to make up a living wage. The mere payment of wages by the hour does not rule out the setting of an hourly rate at such a low level that vulnerable workers are forced to work far longer than the norm established by the better organised sections of the working class.

The extraction of absolute surplus value does not require much initiative or entrepreneurial skill. All the employer needs is the whip hand over the workers. But it was a very successful means of raising the rate of exploitation in the early years of the British industrial revolution In the end the decisive victory over this process of lengthening the working day was achieved by the British working class itself, pressing for the legal limitation of the working day.

Marx also observes that the capitalist enthusiasm for overworking their employees was in danger of killing the goose that laid the golden eggs. He quotes the Reports of the Inspectors of Factories as advising that, “The Ten Hours’ Act, in the branches of industry subject to it has ‘put an end to the premature decrepitude of the former long hour workers’” (Capital Volume I, p.416)

  • The capitalist gains absolute surplus value by making the worker labour longer for the same wages.
  • That means the worker spends more time in producing surplus value and a smaller proportion of their labour time on necessary labour.

 

Relative surplus value

If the worker is paid by the day and we regard the working day as fixed for the time being, there is only one other way the capitalist can raise the rate of exploitation. Since the working day is divided into a paid part and an unpaid part, the capitalists must reduce the hours that the workers labour to produce the elements of their own maintenance. This will automatically increase the hours they produce surplus value. And the way to do that is to raise the productivity of labour.

The extraction of relative surplus value is a much more complex process than that of absolute surplus value. It is not a conscious outcome of the calculations of the capitalists. Marx says that in essence it consists in shortening the amount of time the workers labour to produce the elements of their wages. But, as we know, the workers do not spend time in the workplace producing all the things they need to subsist on in their natural form. So how does this process work? The impetus comes from the need for capitalists to compete with one another and thus to raise the level of productivity of their workers.

The outcome of increased productivity means that commodities are produced with less socially necessary labour time. In monetary terms they are cheaper. We now have to consider what the effect of cheapening commodities has on the economy as a whole. One possibility is that they are wage goods, commodities that by and large are bought by workers with their wages. If they are wage goods, what will happen when they get cheaper? Will the workers enjoy a higher and higher standard of living through the falling price of necessaries? Our answer is, ‘not necessarily’. Falling prices do not always afford the workers a rising standard of living. The issue is determined by the balance of forces between worker and employer, by the class struggle.

It is quite obvious that workers in advanced capitalist countries have made big gains in their standard of living compared with 200 years ago. There are many more goods in the notional basket of commodities that make up the elements of their maintenance than was the case in the reign of Queen Victoria. Many of these new wants were not even invented at that time. To be fair to Henry Ford, part of his vision was that ordinary working people, wage workers and small farmers, would be able to afford a car made by the methods of mass production he pioneered. It is also the case that for workers and farmers at that time their Model T Ford was not a luxury for riding out on Sunday. It was a necessity for getting to work or sending their crops to market.

  • Relative surplus value is gained by making the worker labour more effectively, more productively, in a given time.
  • This means that the worker spends more time producing surplus value and less time on necessary labour.

 

Raising the productivity of labour

Marx’s analysis of the extraction of relative surplus value in Capital remains the core of our analysis here. If productivity doubles throughout the economy then prices will halve. If we assume that workers’ living standards remain the same in real terms then, if they formerly worked four hours to produce the elements of their subsistence and four hours producing surplus, they now only need work two hours to produce the basket of goods they need to subsist upon. That means they can work six hours for the boss in an eight hour day. The rate of exploitation has jumped from 100% (S/V = 4/4) to 300% (S/V = 6/2).

Here is the classic position outlined by Marx:

“The cheapened commodity, of course, causes only a proportionate fall in the value of labour power, a fall proportional to the extent of that commodity’s employment in the reproduction of labour power. Shirts, for instance, are a necessary means of subsistence, but are only one out of many. The totality of the necessaries of life consists, however, of various commodities, each the product of a distinct industry; and the value of each of those commodities enter as a component part into the value of labour power…Whenever an individual capitalist cheapens shirts, for instance, by increasing the productiveness of labour he by no means necessarily aims at reducing the value of labour power and shortening, by as much the necessary labour time. But it is only in so far as he ultimately contributes to this result that he assists in raising the general rate of surplus value. The general and necessary tendencies of capital must be distinguished from their forms of manifestation.” (ibid p.433)

Just to emphasise the last point. The capitalist does not set out to reduce the labour time necessary to reproduce the elements of the workers’ subsistence. All he seeks is to steal a march over his competitors. Yet raising the rate of surplus value is the ultimate outcome of the capitalists’ acts. Marx does not derive the laws of motion of capitalism from the motivations of the capitalists. On the contrary he sees the motivations of the capitalist as a product of their position in capitalist society.

  • The production of relative surplus value is an unconscious process, driven by competition between capitalists.
  • The overall result of this competition is to raise the productivity of labour and make commodities cheaper.
  • This reduces the necessary labour time performed by the worker, and therefore raises the rate of exploitation.

 

Vanishing super-profits

Capitalists compete with one another. The overall result of this competition is that productivity rises and prices fall. Naturally this is a process that takes place unevenly in real time. The first capitalists who introduce a labour saving technique can sell the commodity at a price corresponding to the prevailing socially necessary labour time. This is set at the standard level of productivity then established within the industry. Since the innovators have actually had the commodity produced with less labour time (i.e. in principle cheaper) they can make a super-profit for a period of time by selling their goods above their individual value, at the prevailing industry norm.

As their competitors hasten to retool with the new technique, the value of the commodity (the socially necessary labour time required to produce it) will gradually fall to a new, lower average and the super profit will disappear. Thus the pursuit of a higher rate of profit is like chasing a will o’ the wisp.

Here is an example showing graphically how the value of a commodity is determined by socially necessary labour time in the longer term, and how raising the productivity of labour drastically reduces the value of the commodity and its monetary expression, price.

The first ballpoint pen was produced for sale by the Reynolds International Pen Company in 1945:

“The price was set at $12.50…In the early stages the cost of production was estimated to be around $0.80 per pen…By early 1946 (Reynolds) employed more than 800 people in its factory and was producing 30,000 pens per day”

Rival firms sprang up. So, “Reynolds introduced a new model, but kept the price at $12.50. Costs were estimated at $0.60 per pen.”…“Fortune reported fears of an impending price war in view of the growing number of manufacturers and the low cost of production.”…“By Christmas 1946 approximately 100 manufacturers were in production, some of them selling pens for as little as $2.98.”…

“In mid 1948 ballpoint pens were selling for as little as $0.39 and costing about $0.10 to produce. In 1951 prices of $0.25 were common. Within six years the power of the monopoly was gone for ever.”

This example is taken from Richard G. Lipsey-An introduction to positive economics, p.393, a standard economics textbook. Lipsey is an opponent of the labour theory of value. The whole of his book is intended to provide an alternative explanation of economic phenomena. Yet this example shows graphically how the law of value is the regulator of production under capitalism.

The search for super-profits not only generalises the use of new technology throughout the capitalist system; it also opens up new areas of the globe to capitalism. The conquest of new markets is usually associated with the reaping of super-profits, with a higher rate of profit. For instance when British capitalists began to export machine woven cotton to the rest of the world, local handloom weavers were wiped out because they could not compete on price. Locals in the rest of Europe, Asia, Africa and the Americas would compare the price of the imported cloth with prices associated with the productivity of handloom weaving and find the British products cheap.

This is the usual good fortune of industrial pioneers under capitalism. They can sell for a time at a price above the individual value of their product but below the norm established by the former level of productivity, the prevailing social value. Eventually the level of productivity associated with the new technology will become the norm all over the world and super-profits will disappear. This was a painful process that involved the destruction of the livelihoods of millions of handloom weavers all over the world. Even when the lower prices associated with the productivity of machine woven cloth became the norm, the sheer mass of profits from a market of the whole world made the Lancashire cotton magnates very rich. The result of this search for super-profits in new and distant markets binds the world together within the capitalist market.

  • Capitalists compete with one another to make commodities cheaper.
  • If they can sell their commodities cheaper as a result, they will make a super-profit for a time.
  • Capitalists also try to make a super-profit by invading markets not yet completely subject to the laws of capitalism.
  • The outcome of their endeavours is to extend the global reach of the capitalist system.

 

The logic of capitalism

This is how Marx explains the effects of this search for super-profits:

“On the other hand, however, this extra surplus value vanishes, so soon as the new method of production has become general, and has consequently caused the difference between the individual value of the cheapened commodity and its social value to vanish. The law of the determination of value by labour time, a law which brings under its sway the individual capitalist who applies the new method of production, by compelling him to sell his goods under their social value, this same law, acting as a coercive law of competition, forces his competitors to adopt the new method.” (Capital Volume I, p.436)

The net result of this competitive process, unknown to the competitors, is that commodities in general will be produced with progressively less labour time and therefore be represented with a smaller quantity of value. That is surely progress for humanity at least in principle, even if it is an unconscious result of the striving of the capitalists for super-profits.

In the twenty-first century we all take for granted many things that were no part of the Shutts’ subsistence basket in the 1930s. So what? The working class has gained some share in the enormous outpouring of commodities we have contributed to. We are more dependent than ever upon wage labour on account of the ruling class’s grip upon our livelihoods for us to make a living. The shackles of wage slavery have still to be struck off.

The motivation of the capitalists in searching for super-profits is not to raise the rate of relative surplus value but to steal a march on their competitors. The intention of the individual capitalist and the outcome of the working of the law of value are two completely different things. The law of value actually works through continual attempts by capitalists to negate its operation. The analysis of the production of relative surplus value is a classic illustration of the general position taken by Marx, that the laws of capitalism operate behind the backs of the individual economic actors, whether workers or capitalists:

“It is not our intention to consider, here, the way in which the laws, immanent in capitalist production, manifest themselves in the movements of individual masses of capital, where they assert themselves as coercive laws of competition, and are brought home to the mind and consciousness of the individual capitalist as the directing motives of his operations. But this much is clear; a scientific analysis of competition is not possible, before we have a conception of the inner nature of capital, just as the apparent motions of the heavenly bodies are not intelligible to any but him, who is acquainted with their real motions, motions which are not directly perceptible by the senses.” (ibid p.433)

  • When the new technology and higher level of productivity associated with it are taken up generally within the industry, the super-profit will disappear.
  • The laws of capitalism operate behind the backs of individual capitalists and independently of their will.
  • The result of the search for super-profits is to raise the overall level of productivity and the global reach of capitalism.

 

Intensity of labour

The production of more absolute surplus value is achieved by making the worker labour for more hours for the same wages over the working day. The capitalist also strives to make the wage earners work harder in the time they are at work. “Increased intensity of labour means increased expenditure of labour in a given time” (ibid p.660).

To achieve this, the capitalist needs to control the labour process. As we have seen in the case of Ford, this is accomplished by mass production methods that turn the workers into an appendage of the machinery.

The principal ways the capitalists can make the labour of one hour worth more to them than before is by making the workers produce more use values in a given period of time; they do this mainly by making their workers supervise more machines and by speeding up the assembly line. This intensification of labour and the accumulation of capital that raises the productivity of labour through the mechanisation of the labour process are two processes that go hand in hand.

“There was always a clamor from the sales department to get more cars. When the plant was turning out a thousand a day, those who had the job in hand knew that by increasing the speed of the assembly line one minute in an hour, they would get sixteen more cars that day. Why not try it? A couple of weeks later, after the workers on the line had accustomed themselves to the faster motions, why not try it again?

“Never had there been such a device for speeding up labor. You simply moved a switch and a thousand men jumped more quickly. It was an invisible tax, like the tariff, which the consumer pays without being aware of it. The worker cannot hold a stopwatch, and count the number of cars which come to him in an hour. Even if he learns about it from the man who set the speed of the belt – again it is like the tariff in that he can do nothing about it. If he is a weakling, there are a dozen strong men waiting outside to take his place. Shut your mouth and do what you’re told!” (Sinclair p.27)

  • The capitalists also strive to increase the intensity of labour, to make the workers perform more labour in a given time.
  • Two classic methods of raising the intensity of labour are speeding up the assembly line and making the worker mind more machines.

 

Chapter 5: The dynamics of capitalism

The general formula for capital

Marx contrasted the circulation of capital with that of commodities under petty commodity production. The sellers in petty commodity production aim to exchange a commodity they own (and which they probably produced) for money. For their purposes this is simply an intermediate step. It’s stage one. They don‘t want to hang on to the money but to exchange it for another commodity. In effect they intend to exchange a use value they don’t want for one they do want. Money is just an intermediary. Characteristically they exchange an exchange value they own for a commodity of equal value.

Marx labels this as a C – M –C exchange. He contrasts this with the circulation of capital. Let us assume capitalists start with money. Their intention is to end with money, more money than they started with. There is no point for them in exchanging a commodity worth £100 for another worth £100. But that is what the traders of commodities usually do in the C – M – C circuit. For the capitalists the exchange of commodities, and the production of those commodities, is purely incidental to the production of surplus value. So the circuit of capital is M – C – M’, where M’ is a greater sum of money than M with which the capitalist started.

As Marx often had occasion to point out, capital is not a thing. It is a social relation. Capital goes through different forms of existence in its circulation process. Let us begin our analysis with money capital. Whereas the boyars start with land as the basis of their social power, the capitalists begin with money. The capitalists lay out their money on means of production and labour power. Then production can begin. As we know the surplus value is actually generated in the production process by the labour power of the workers being set to work to produce necessary and surplus labour. It must then be realised, the value created turned back into the money form and the circuit completed.

But the necessary labour has not at the stage of production been translated into wages for the workers; nor has the surplus labour become surplus value jingling in the pockets of the capitalists. The firm will usually specialise in producing one or a narrow line of goods. Whether these be motor cars or ice lollies, they have to be sold in order for the values congealed in the commodities to be realised. The production of surplus value and its realisation are two acts separate in time and in place. There are no guarantees that surplus value that has been produced can be realised. Yet, till the commodities have been realised, the circuit of capital has not been completed and capitalist production cannot continue.

Purchase and sale represent the unity of two processes. Yet these two processes can be ruptured and become independent of one another. The result is crisis. As Marx puts it, “The independence of the two correlated aspects can only show itself forcibly as a destructive process. It is just the crisis in which they assert their unity, the unity of different aspects.” (Theories of Surplus Value Volume II, p.500)

This gives us the possibility of crisis. We shall follow this up in more detail in Part 2: The Marxist theory of crisis.

  • Under capitalism the aim of the capitalist is to start with money and end up with more money.
  • Capital performs a circuit: from money; to production; to commodities produced; to money once more.
  • Surplus value must not just be produced. It also has to be realised through the sale of the commodity so that the capitalist can begin the process of exploitation again.

 

Constant capital, variable capital and surplus value

So far we have dealt with the determination of the value of commodities and the decisive role of the productivity of labour in this process. We have also dealt with the division of the working day (or working time generally) into paid labour and unpaid labour, surplus value. We have seen that the battle over this division is never-ending, the objective basis for the class struggle.

As we know, Upton Sinclair was not allowed to look at Henry Ford’s account books in order to establish the rate of exploitation. After all he was preparing a novel, whose whole purpose was to aid the union drive at Ford which, if successful  (and it was), would curtail Henry Ford’s ability to extract more and more surplus value from his workforce without let or hindrance.

We postulated rates of exploitation such as 100% in the examples we have given. If we could give Henry Ford the right of reply, he would no doubt explode that his rate of profit was nothing like as high as we have suggested. And he would be right.

The division of the working day which gives us the rate of exploitation can be represented by V (variable capital) and S (surplus value). By variable capital we mean the money the capitalist lays out in wages. We work out the rate of exploitation with the formula S/V.

But the capitalist doesn’t just have to purchase the services of working class people before the production of surplus value can commence. Earlier we suggested a random list of other expenses Henry Ford might have to pay: the cost of depreciation on the plant, electricity, tyres, upholstery and so forth. So the overall rate of profit on capital outlaid will generally be lower than the rate of surplus value (rate of exploitation).

All these other costs apart from wages are regarded by Marx as constant capital. They are constant capital because they pass their value unchanged to the final product. Constant capital is dead labour. When we come to consider the value of the commodity, as opposed to the division of the working day, this can be divided into three parts: constant capital(C), variable capital (V) and surplus value (S).

This notion of constant capital is easy enough to grasp in the case of the tyres. Henry Ford pays the tyre manufacturer $50, or whatever they cost, and adds $50 to the price of the car. Theoretically he could sell cars with no tyres, and the customers could go out and buy tyres for $50. The tyres are the object of a past process of exploitation. The workers in the tyre factory performed paid labour and unpaid labour in making the tyres, just like Henry Ford’s car workers. Then the tyres are sold to Henry Ford at their value (on average). He makes no money out of buying tyres.

It might be more difficult to accept that the cost of the plant is also dead labour and does not produce a surplus for Henry Ford. Doesn’t assembly line production make car workers much more productive than engineers working in a shed, as was the case in the early days of the industry? Of course the assembly line workers produce more cars. But the cars are cheaper, because they contain less socially necessary labour time than motors produced under craft conditions. The workers are now producing more use values, not more exchange value. The same amount of labour time expresses itself in a greater mass of use values.

The assembly line was produced by workers who were exploited just like the Ford workforce. Then it was sold at its value to Henry Ford. Only the depreciation on the assembly line goes into the value of a motor car, not its entire value. If the assembly line cost $10 million and assists in the production of a million cars before it gives up the ghost, then we can say it adds $10 to the value of each car.

The Marxist way of looking at value as being composed of living labour (V + S) and dead labour (C) is not confined to ourselves. Living labour is the value added in the production process. Her Majesty’s Revenue and Customs use the same form of calculation when they send out bills for Value Added Tax. In assessing a motor manufacturer’s liability to pay VAT they may, as a first approximation, bill them for tax on the full sales price of the cars sold.

The car company’s accounts department will at once reply that the costs of tyres, glass, upholstery and all the other components they bought in are not value added. They will not use the expression ‘constant capital’, but that is the basis of their counter-claim. So they will supply copies of the invoices they paid for these items to HMRC, in effect arguing that they are items of dead labour that added no value in the production of cars. VAT is only levied on value added, that it on the new labour (value) added in the production process. And that’s official.

  • The capitalist lays out money on constant capital, which passes its value unchanged to the final product.
  • He also lays out variable capital to pay the workers’ wages.
  • The value of a commodity may be broken down into constant capital, variable capital and surplus value.

 

The rate of profit

What is decisive in the considerations of the capitalists is not the rate of exploitation but the rate of profit – how much extra they get out compared with what they put in (invest). This is not just the lodestar of individual capitalists. It is a vital regulator of the capitalist system as a whole.

We have already had occasion to point out that the capitalist system is unplanned. How much capital equipment is needed at any point in time? Nobody knows. Nobody calculates. Still it is important for Henry Ford that, when he decides it would be profitable to increase the production of motors at his plant, he should be able to go to the marketplace and buy tyres, upholstery, wood for dashboards and whatever other components he needs in sufficient quantities and proportions to turn out more cars.

Likewise it was important for the workers who came to Detroit that they could be decently housed, clothed and fed. This didn’t happen automatically. Detroit at this time was a vibrant capitalist metropolis sucking in all manner of skills and resources to back up the fast-growing motor industry. How is this proportionality between the different inputs needed for capitalist firms to grow established? How do the use values needed for capitalism to reproduce itself as a system come into existence?

All these skills and resources were attracted to the Detroit area by the search for profit. Capital must reproduce itself. It must find the means to satisfy all its material needs in the marketplace. A vast division of labour is achieved entirely through people buying and selling. But when they are buying and selling, they are oblivious to the actual needs of society, which are unknown to them. They are all looking to their own advantage. Capitalists measure the advantage to themselves in profit, and naturally they look to their own rate of profit compared with that of other capitalist firms.

As we pointed out earlier, commodities are only sold occasionally and accidentally at their value. Usually they are sold at a price above or below their value. If supply exceeds demand, and as a result commodities are sold at a price below their value, this means the capitalists who sell them will have to take a cut in profit. If low profits persist, this can be taken as a signal that the capitalist is in the wrong line of business. Marginal capitalists in the industry are likely to drop away.

Likewise if demand in an industry is booming and capitalists in an industry are making bumper profits, then two things are likely to happen; first the incumbent capitalists will maximise output to the fullest extent to take advantage of the super-profits to be made. They will work their capacity to the utmost, take on more workers and offer overtime to those already on the books. They may plan to expand their output potential. Secondly other capitalists, particularly those that find themselves trapped in low-profit industries, will begin to think seriously about upping stakes and moving to where the serious money can be made.

So the regulator of the division of labour within an unplanned economy is the rate of profit. Low profits in a sector cause exit while high profits attract new entrants. Capital flows are the way in which proportionality is established in an unplanned economy. Naturally the working of these capital flows is as chaotic on the surface as the day-to-day movement of prices.

  • Capitalists are guided in their investment decisions by expectations of profit.
  • The rate of profit thus serves as a regulator for the capitalist system as a whole.

 

Chapter 6: How capitalism evolves

The accumulation of capital

Don’t think for a moment that Henry Ford spent all the surplus value extracted from his workers on himself, on fine living. He lived well, as Upton Sinclair testifies. But the majority of that surplus value was accumulated, ploughed back into production. Any capitalist has to decide whether to consume the surplus unproductively or to accumulate it, and in what proportions. This decision is presented here as a choice. But really the individual capitalist and individual firm don’t have much choice. They must accumulate or go under. That is the lesson Henry Ford taught his rivals.

Under capitalism there is no natural limit to the rate of exploitation. Nor is there any limit to the accumulation of capital under the system. There is an impulsion upon the capitalists to accumulate most of the surplus value. Thus they are continually raising the level of productivity and, potentially, making us all richer. This is important. Romania remains a desperately poor country. In part this is the heritage of the rule of the boyars. Feudalism did not develop the productive forces in the way capitalism does. Capitalism has a completely different dynamic from previous forms of class society. It is the dynamics of the system that we are trying to outline here.

We have already seen that, in the hunt for higher productivity, capitalists are forced to accumulate the lion’s share of the surplus value as capital rather than spending it on their personal consumption.

It is obvious to the casual observer that the transition from weaving cloth by handloom weavers to the general use of power looms consists of a progressive replacement of human labour power by machinery in the production process. The transition of the Ford Motor Co. from Henry’s shed to the giant River Rouge plant opened to make the Model A Ford in 1928 is an instance of exactly the same trend.

As a result the scale of production in a firm is likely to expand and the number of firms in an industry to fall over time. Marx calls this the concentration of capital. Rather than the small-scale competitive capitalism that typified nineteenth century capitalism, the system in the twenty-first century is dominated by giant firms. These still compete against one another for market share, but quite often this rivalry may be pursued in different ways from just competing on price. Attempts at product differentiation which can lead to an advertising blitz are just one example of a different form of competition between capitalists.

Alternatively, large corporations can use their financial muscle to buy their rivals out. Big firms that supply one another and become interdependent may also form networks. These in turn can solidify into alliances pitted against other capitalist networks. Informal networks can also turn into friendly mergers or provoke hostile takeovers of rival firms.

Centralisation of capital means the merger of capitalist firms, the concentration of ownership rather than production. Whereas the driving force of the concentration of capital is the ever-increasing scale of production and the rising minimum efficient scale needed to produce and sell competitively in modern business, the centralisation of capital derives from the advantages of joint ownership. Production may be divided into different plants separated geographically, but unified by a common purpose which is drawn up by a common management team.

  • Raising the productivity of labour in an industry naturally produces a larger scale of production, bigger units of production and a smaller number of firms. This is called the concentration of capital.
  • Capital also becomes centralised through links of ownership rather than production.

 

The organic composition of capital

Henry Ford achieved his victories over his rivals by spending first and most on machinery in order to raise the productivity of labour. So the proportion of his capital laid out on labour power (variable capital) compared with that invested in plant and machinery (constant capital) was falling as production became more capital intensive. The natural accompaniment to the raising of the productivity of labour under capitalism is therefore the increasing capital intensity of production.

Marx explains that this is a general tendency in capitalist production, “Every advance in the use of machinery entails an increase in the constant component, that part which consists of machinery, raw material, etc., and a decrease in its variable component, the part laid out in labour power.”  (Capital Volume I p.578)

Marx calls this process the rising organic composition of capital. Readers may find it intuitively obvious that the proportion of dead labour to living labour tends to rise over the history of capitalism – that twenty first century workers usually have more machinery behind their elbow than nineteenth century workers. But Marx is not just referring to the mass of constant capital compared to the number of workers. He calls this the technical composition of capital. This ratio cannot be computed because, just as use values are incommensurable, we cannot compare a mass of machinery etc. of different types with a number of workers.

The organic composition of capital is expressed by the formula C/V, where C is constant capital and V is variable capital. It is calculated in value terms. Since price is here the monetary expression of labour time the organic composition of capital is the value of constant capital relative to variable capital, or how much the capitalist lays out on them respectively. The increase in capital per worker is known in conventional economics textbooks as capital deepening. Here are the figures given in Angus Maddison’s Contours of the World Economy 1-2030 AD, (p.305) for the UK and the USA. All figures are in 1990 dollars.

Gross Stock of Machinery and Equipment Per Capita

UK                       USA

1820           92                          87

1870         334                        489

1913         878                     2,749

1950      2,122                     6,110

1973      6,203                   10,762

2003    14,291                   32,240

These figures are, as we see, only a first approximation to the organic composition of capital. All the same they represent a triumphant vindication of Marxist analysis.

  • The rising proportion of constant capital relative to living labour in the production process is called the increasing organic composition of capital.
  • The increasing organic composition of capital is a fundamental trend in capitalist production.

 

The tendency for the rate of profit to fall

As we pointed out earlier the rate of profit is calculated by the capitalist as the surplus gained (S) compared with the costs laid out on constant and variable capital (C + V). So the formula for the rate of profit is S/(C + V). Note that, in contrast to calculating the value of a commodity (C + V + S), in this case the whole of the constant capital outlaid is included as costs, not just the constant capital used up in the production of the commodities.

Now there is a fly in the ointment in the progressive rise in the organic composition of capital over time. For the surplus value on which the whole of the ruling class depends for its livelihood comes from the living labour added in the production process. Yet the proportion of living labour compared with dead labour in the production process will tend to fall as the organic composition of capital rises. This will produce a tendency for the rate of profit to fall.

In Part 2: The Marxist theory of crisis we show that in the Grundrisse Marx stated that the tendency for the rate of profit to fall is “the most important law in political economy”. This is not an isolated thought from an unpublished preparatory manuscript. In his economic manuscripts of 1861-3 he repeated this formulation almost word for word: “This law, and it is the most important law of political economy, is that the rate of profit has a tendency to fall with the progress of capitalist production” (Marx Engels Collected Works Volume 33, p.104).

We consider the working out of this law in much more detail in The Marxist theory of crisis. We discuss throughout the course of this book how to apply this basic principle of Marxist economic analysis to the current crisis.

As we have already established, all ‘laws’ in Marx’s sense are tendencies, that is to say they are forces pulling in a certain direction. They are not predictions that always yield a determinate result.

We know that the drive to raise productivity, and therefore for the worker to spend less time on paid labour and more on unpaid labour can raise the rate of exploitation. This rising rate of exploitation is an important counteracting factor to the tendency for the rate of profit to fall. For the moment, observe that the same force, the drive to raise the productivity of labour, which produces the tendency for the rate of profit to fall also produces its own counter-tendencies.

Secondly the same tendency to raise productivity and reduce the relative price that goes prevails in consumer goods industries such as car production (producing ‘wage goods’, the elements that variable capital is spent on) is also at work in the capital goods sector. Though the mass of constant capital per worker has risen enormously over time, the cost of each unit of constant capital will tend to fall. This fall in the price of constant capital is another important counteracting factor to the tendential fall in the rate of profit.

  • The rising organic composition of capital produces a tendency for the rate of profit to fall.
  • There are also counteracting factors generated by the accumulation of capital. How this tendency and the countervailing tendencies interact is discussed in Part 2.

 

The tendencies of capitalist production

Ford was progressively employing more and more workers as he grew to be an industrial giant. This is how the accumulation of capital proceeds. Marx deals with it in the long Chapter 25 of Capital Volume I: The general law of capitalist accumulation.

He opens the discussion by asserting that, “A growing demand for labour power accompanies accumulation if the composition of capital remains the same.” (p.762) Of course the accumulation of capital does not usually leave the composition of capital untouched. Theoretically the capitalists could open another wing to their plant or another plant in their firm with an identical organic composition of capital to the others and employing the same technology. Given the continual technical progress under capitalism, that is highly unlikely, except in a ‘mature’ or stagnant industry – and that is not where the biggest profits are to be made.

Though firms are likely to employ more workers as they grow, that leaves out of account the wider picture. Weaving firms employing power looms were no doubt taking on ‘hands’ in the early decades of the development of the new technology, but they were ‘displacing’ vastly greater numbers of handloom weavers. Nor was this process confined to the UK. Traditional handicrafts in India and elsewhere were laid waste by British machine-woven cloths with which the handloom weavers were incapable of competing. Handloom weavers were reduced to penury all over the world. The law of value is no mere theoretical construct. It strikes with the power of a hurricane.

Advances in productivity are an imperative under conditions of capitalist competition. They are expressed in a rise in the relative importance of machinery, in particular in the capital laid out by the magnates of industry. Ford’s early workshops could not possibly have competed with his own mass production plants a generation later. The accumulation of capital therefore is usually accompanied by “a relative diminution of the variable part of capital”, according to Marx (ibid p.772). Whether that leads to an absolute fall in the number of employed workers is uncertain. Marx goes on to explain how capitalism generates a reserve army of labour from its own dynamics.

Capitalism is an unplanned system. In this it resembles a creature with no brain, no central system for thinking and planning. The brontosaurus was such a creature. Unfortunately it is now extinct. In an unplanned system it is always possible that too little or two much might be produced. After all nobody knows how much ‘too little’ or ‘too much’ actually is.

Since the capitalists are actually interdependent, if too little is produced in one industry and too much in another that will cause problems for firms further down the supply chain. This dislocation could set off a more general crisis of the system if profits took a tumble. A crisis of overproduction occurs when capitalists cannot sell their commodities and therefore cannot realise the surplus value that has been produced. Under capitalism trade is not conducted by petty proprietors exchanging products for products for their own satisfaction but by capitalists who are only interested in profit.  It is ultimately because production is not to satisfy human wants but to make profit for capitalists, that a crisis of overproduction is an ever-present possibility.

In a footnote to Capital, Chapter 4 (p.254), Marx highlights this confusion in the outlook of an apologist of capitalism:

“‘The inextinguishable passion for gain, the auri sacra fames,’ (accursed love of gold) ‘will always lead capitalists.’ (MacCulloch: ‘The Principles of Polit. Econ.’ London, 1830, p. 179.) This view, of course, does not prevent the same MacCulloch and others of his kidney, when in theoretical difficulties, such, for example, as the question of overproduction, from transforming the same capitalist into a moral citizen, whose sole concern is for use values, and who even develops an insatiable hunger for boots, hats, eggs, calico, and other extremely familiar sorts of use values.”

Crisis is inherent in capitalism because it is an unplanned system where production is for profit and not human wants. The purpose of this essay is to outline the dynamics of capitalism. We are mainly concerned with the long term trends rather than the fluctuations of boom and slump, which we shall deal with separately. To sum up these trends in a single phrase they are, “the abolition of the capitalist mode of production within the capitalist mode of production itself.” (Capital Volume III, p.569) Capitalism is preparing the material conditions for a higher mode of production – socialism.

  • As it accumulates, capitalism naturally tends to generate a reserve army of labour.
  • Capitalism naturally produces crises. This is because it is an unplanned system where production is for profit.

 

Tasks of the working class

But socialism will not emerge of its own accord. It must be fought for. Socialism can only come about by the destruction of capitalism, which has to be the conscious act of millions of working class people. What will cause this questioning of capitalism in the minds of the workers?

There was no revolution against the boyars in Romania, though the serfs lived lives that in many ways were incomparably poorer and more wretched than those of twenty-first century wage workers. Conditions were stagnant, and we can assume that consciousness stagnated as a result. How different is the capitalist system and the lives of the mass of workers who live under it! Capitalism is unprecedentedly dynamic and continually shakes up the lives of its wage slaves. That was the story of the Shutts who lived through the Great Depression of the 1930s, and it’s the same today. Capitalism is incapable of offering its workers a secure existence.

Since being determines consciousness, changes in consciousness are likely to be triggered in changed conditions. This essay is being written as the world is dominated by the effects of a gigantic recession.  Coming after a long period of relatively full employment and rising living standards for most workers in Britain and other advanced capitalist countries, this recession is bound to produce a profound questioning and criticism. Capitalism stands revealed as a system that squanders human and material resources and where the ruling class always strives to make the workers bear the burden of the crisis and other flaws of their system. It is hoped that this essay will contribute to an understanding of the alternative and how to achieve it.

We have seen that the law of value acts as a natural force like a tsunami, disrupting and ruining people’s lives over and over again in good times and (specially) in bad. Capitalism has developed the productive forces enormously. It has taken us to the threshold of abundance, and then slammed the door firmly in our face.

Capitalism also develops a mass working class, who can and will act as its gravediggers. Even now, more than ever, millions of peasants, handicraft workers and small traders are being drawn into the maw of wage labour. There are now more than a billion wage workers. They, together with their families, outnumber the peasantry for the first time in the history of the world. They are an absolute majority of the globe’s population.

The working class, unlike the isolated peasantry of Wallachia, are concentrated together by the concentration of capital. The technology of mass communication developed by capitalism keeps them informed of movements elsewhere and helps them to plan their own resistance. They find that the small victories they win against the boss are achieved by unity in action. They are schooled in solidarity. The world’s working class, faced with the failure of capitalism, will increasingly turn to the ideas and programme of socialism.

  • Capitalism is an unprecedentedly dynamic form of class society.
  • Capitalism developed the productive forces, and so produced the conditions for a higher form of society – socialism.
  • Capitalism also created a mass working class, who can and will carry through the socialist transformation of society.

 

The historical tendency of capitalist accumulation

What are the general tendencies of capitalist production in broad historical terms? Where are they taking us? Marx sums up his analysis in Chapter 32 of Capital Volume I, entitled The Historical Tendency of Capitalist Accumulation.  After dealing with the process of primitive accumulation, he continues (ibid pp.928-9):

“As soon as the labourers are turned into proletarians, their means of labour into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialisation of labour and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the labourer working for himself, but the capitalist exploiting many labourers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself, by the centralisation of capital. One capitalist always kills many. Hand in hand with this centralisation, or this expropriation of many capitalists by few, develop, on an ever-extending scale, the cooperative form of the labour process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labour into instruments of labour only usable in common, the economising of all means of production by their use as means of production of combined, socialised labour, the entanglement of all peoples in the net of the world market, and with this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated…

“The transformation of scattered private property, arising from individual labour, into capitalist private property is, naturally, a process, incomparably more protracted, violent, and difficult, than the transformation of capitalistic private property, already practically resting on socialised production, into socialised property. In the former case, we had the expropriation of the mass of the people by a few usurpers; in the latter, we have the expropriation of a few usurpers by the mass of the people.”

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