Development of the law’s internal contradictions
by Mick Brooks
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 to The 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 capitalist economies 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.
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November 2007
