http://hussonet.free.fr/histokli.pdf

http://hussonet.free.fr/h9tprof.pdf

(both in French)

The advent of the microprocessor showed the world that technology in late capitalism was now wiping out more jobs than it would ever create as opposed to earlier technological innovations of capitalist society that caused more new jobs to be created than they eliminated. That is to say, the weight of the constant element of capital hangs so heavily on capitalist production that the only thing a sensible capitalist can do currently is to entirely remove his capital from the messy productive process altogether and achieve profits through what could be called fictitious or speculative capital.

Even in my high school when I asked my leftist teacher about the falling rate of profit, which even in the eighties made a great deal of sense in explaining the crisis, the only answer I got was that rates of profit don’t fall, they go up. The trouble with this was that this only took into account the years of post-war prosperity, and conflated this forty year period of relative prosperity in a handful of imperialist powers to a universal constant that “disproved” the Law of Falling Rates of Profit.

A machine will consistently depreciate in value as soon as it is put into production. A commercial CNC board cutting machine, in order to pay for itself must produce a maximum amount of product in order to realize its value. This too causes the value of the machine to depreciate at an even faster rate. A worker can be laid off and rehired at a lower wage. The value of the machine starts to deteriorate through wear and tear from the day it first is put into use in production. I can see this tendency at work, where I work. It isn’t an abstraction. I would argue that it is an observable phenomenon that workers see and experience.

In light of this current outbreak of open crisis within capitalism that the detractors on the left were spectacularly wrong. The collapse of the USSR and the collapse of the US dollar today are a part of the same process in capitalist society, a tendency which has been at work and observable since the early seventies. Having global currency allowed US capital to have what is in essence the largest corporate welfare scam in history–the US dollar itself. This situation is coming to an end as are the post-Marxian certainties of bourgeois economic thought. I’ll never again be able to do anything other than laugh at those who used to tell me that the working class no longer existed or that rates of profit do not fall.

Me: No. Why would a bourgeois audience want to hear a Marxist-Humanist analysis, and why would a bourgeois publication want to publish one?

If popularity were my aim, I could perhaps repeat tired and threadbare tautologies about overaccumulation, overcapacity, and overproduction. Better yet, the MHI could turn its website into a porno site.

You: b) If you (or another) were to attempt a), would the following make sense to such an audience “Okishio’s rate of profit, the measure he used to try to prove Marx internally inconsistent, is not the rate of profit that Marx talked about” ” Okishio’s rate of profit is essentially a physical measure, not a monetary or value measure, and so it actually isn’t a rate of profit in any normal sense.” Perhaps you could further elucidate for me.

Me: What part of this don’t you understand?

You: c) For me the problem is compounded by “what capitalists in the real-world mean by “rate of profit,” namely their money profit as a percentage of the actual sum of money they’ve invested.” Surely this is an area in dispute eg Carchedi’s critique of Brenner in H M (?4) (Brenner symposium) has it that this definition is incompatible with Marxist analysis. For him the marxist rate of profit is c+v/s, and the bourgois c/s

Me: Huh? Who is “him”? And do you mean s/(c+v) and s/c? And why does it matter that something is in dispute? The theory that the Sun is the center of the solar system and the planets orbit around it was long in dispute. Does that make it incorrect? Or was it incorrect until it became correct when and because it became popular? And please READ what I wrote: “what CAPITALISTS IN THE REAL-WORLD mean by ‘rate of profit.’” Disputes about “Marxist analysis” are irrelevant to my point. Right?

You: d) You juxtapose “what capitalists in the real-world mean” with “the rise of money prices above real values” For capitalists value is given by price

Me: If “juxtapose” means “include in the same article,” I plead guilty. Otherwise, I’m innocent. I DISTINGUISHED, clearly and precisely, between “the actually observed rate of profit”—the one that capitalists in the real world know about—and “what I’m calling the ‘long-run’ rate of profit … the rate toward which the actually observed rate of profit tends in the long run, all else being equal.” And I’m quite aware that “[f]or capitalists value is given by price.” That’s why I wrote, that one of the “factors determining the value of the long-run rate of profit”—not the value of the actually observed rate—is “the rise in money prices above the real value of goods and services, which, ACCORDING TO MARX’S THEORY, is determined by labor-time.” Again, please READ what I wrote.

You: e) Again “real value .. is determined by labour time” is the subject of much marxist debate (Diane Elson)

Me: Again, please READ what I wrote: “the real value of goods and services, which, ACCORDING TO MARX’S THEORY, is determined by labor-time.” Whatever Elson thinks or thought is irrelevant to my point, which is about what Marx thought. And please QUOTE me properly, without clever ellipses that serve to hide the fact that I was referring to Marx’s theory and therefore the fact that your point is irrelevant to it.

Once again, your strange notion that something can’t be correct if it is disputed rears its head. So let me repeat my questions: The theory that the Sun is the center of the solar system and the planets orbit around it was long in dispute. Does that make it incorrect? Or was it incorrect until it became correct when and because it became popular?

You: f) no-one experiences a tendency of the rate of profit to fall. The explanations about what is falling and whether it really is falling tend to get hopelessly convoluted. For instance ” Over the last 61 years in the U.S., this long-run rate of profit, which I’m calling the long-run labor rate, as distinct from the long-run money rate of profit, has been trendless, a constant 4% on average.”
Surely its either constant or else its fallingits falling

Me: How do you know that “no-one experiences a tendency of the rate of profit to fall”? Maybe they experience it and just aren’t aware that they experience it (and its effects). Most people weren’t aware that they experienced the gravitational force that the Sun exerts on the earth, but they kept orbiting the Sun year after year nevertheless.

“Vulgar economy actually does no more than interpret, systematise and defend in doctrinaire fashion the conceptions of the agents of bourgeois production who are entrapped in bourgeois production relations. It should not astonish us, then, that vulgar economy feels particularly at home in the estranged outward appearances of economic relations in which these prima facie absurd and perfect contradictions appear and that these relations seem the more self-evident the more their internal relationships are concealed from it, although they are understandable to the popular mind. But all science would be superfluous if the outward appearance and the essence of things directly coincided.” [Marx, Capital, vol 3, chap. 48]

And in this case, you quote me correctly, but for some reason don’t READ the distinction I made, EVEN THOUGH I USED THE WORD “DISTINCT”:

“Over the last 61 years in the U.S., this long-run rate of profit, which I’m calling the long-run labor rate, as distinct from the long-run money rate of profit, has been trendless, a constant 4% on average.”

And so you think I’m getting “hopelessly convoluted” and failing to understand that “its either constant or else its fallingits falling,” when the actual problem is that you haven’t READ carefully enough to notice that there is more than one “it” here. One “it” is the observed rate of profit, which has tended to fall. Another “it” is the actual but not directly observed “labor rate of profit,” which has also tended to fall. A third “it” is “the long-run labor rate,” which has been constant on average. That one thing is constant while other things are falling doesn’t count as an internal contradiction.

You: g) “the economy has never fully recovered from the slump of the 1970s, certainly not in the way in which it recovered from the Great Depression.” Surely the economy did not recover as a result of (the destruction of capital in) the Great Depression. It recovered as a result of rearmament and military expenditure

Me: Surely? My data indicate that the (observed) rate of profit in the US rose from -1.8% in 1932 to 9.1% in 1937, well before rearmament. And the postwar boom and recovery of profitability persisted well after the humongous amount of government borrowing to finance the war had ended. Federal government spending fell by 77% between 1944 and 1947, and national defense spending fell by 81%. Let me repeat that: IT FELL BY EIGHTY-ONE PERCENT. All kinds of war-related businesses had to shut down or switch to other lines of production. And yet the economy did not sink back into Depression or even into the kind of relative stagnation we’ve experienced (whether we’re aware of it or not) during the last third of a century. The observed rate of profit, according to my computations remained just as high, on average, between 1946 and 1956 as it was between 1941 and 1945.

You: Reverting to a) above, it appears that the concept of the tendency of the rate of profit to fall is too abstract, unobservable in everyday life, and subject to yoomuch dispute re categories and definitions, to be in any way useful as an explanatory model.

Me: In contrast to, say, the heliocentric theory of the solar system, which is not abstract, can be directly observed in daily life, and which was never the subject of dispute “re categories and definitions” (see Kuhn—part of what the theory’s opponents MEANT by “earth” was something that doesn’t move)?

You: why not then something along the lines of […] In “late capitalism” the industrialist makes a profit making cars. He cannot convert the profit in the from of cash into productive capital by expanding production – there is already over production of cars and overcapacity in existing plant. So he has to find other ways of converting cash profits into capital that (is expected to) expand its value at or above the av rate of interest.

Me: Here’s why not: “overproduction” and “overaccumulation” are not explanatory concepts. They are mere tautologies.

When there’s an economic slump, guess what? Stuff doesn’t sell. Gee, must be because of overproduction (compared to what can sell – during the slump). Must be because of overaccumulation (compared to can profitably be employed – during the slump). No question-begging here. No smuggling in of the slump in an attempt to explain the slump. No, siree. Just good ol’ common sense. The outward appearance and the essence of things directly coincide; all science is superfluous. Quick, call the Guardian!

Why don’t you throw in “inadequate effective demand” for good measure? When there’s an economic slump, guess what? Stuff doesn’t sell. Gee, must be because of inadequate effective demand (… during the slump). Might as well say that opium puts people to sleep because of its dormative power. That’s something your bourgeois Guardian audience can make sense of right quick.

But I suspect that there’s what Marx called “the semblance of a profounder justification” lurking in the background of your remark. There is such a semblance in Baran and Sweezy’s Monopoly Capital: underconsumptionism.

“That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence ….” [Marx, Capital, vol. 2, chap. 20]

If you want to discuss that, I’ll be happy to tell you why I think underconsumptionism rests on a dogma for which there’s no empirical or logical support, and why it makes no sense.

As for the rest of your theory, let me simply ask the following. You write, “the disproportion between on the one hand overaccumulation, overcapacity and overproduction, and on the other hand falling value of each unit of ouput and inelastic demand, are expressed in this tendency. But the categories descibed are all tangible and a part of everyday discourse.”

“Inelastic demand” is part of everyday discourse? And it’s tangible, right? So can you please take a picture of it and send it to me?

You: So any answers to a) above?

Me: Yeah. All science would be superfluous if the outward appearance and the essence of things directly coincided. But they don’t. So I have work to do, and if you’re done toying with me, may I suggest that you toy with Edward Witten (http://www.sns.ias.edu/~witten/) instead? Bet he’d get a big chuckle out of
* “make sense to such an audience,”
* “no-one experiences,”
* “Surely,”
* “Surely,” (again),
* “too abstract, unobservable in everyday life, and subject to yoomuch dispute re categories and definitions, to be in any way useful as an explanatory model,”

and, last but not least,

* “the categories descibed are all tangible and a part of everyday discourse.”

b) If you (or another) were to attempt a), would the following make sense to such an audience “Okishio’s rate of profit, the measure he used to try to prove Marx internally inconsistent, is not the rate of profit that Marx talked about” ” Okishio’s rate of profit is essentially a physical measure, not a monetary or value measure, and so it actually isn’t a rate of profit in any normal sense.” Perhaps you could further elucidate for me.

c) For me the problem is compounded by “what capitalists in the real-world mean by “rate of profit,” namely their money profit as a percentage of the actual sum of money they’ve invested.” Surely this is an area in dispute eg Carchedi’s critique of Brenner in H M (?4) (Brenner symposium) has it that this definition is incompatible with Marxist analysis. For him the marxist rate of profit is c+v/s, and the bourgois c/s

d) You juxtapose “what capitalists in the real-world mean” with “the rise of money prices above real values” For capitalists value is given by price

e) Again “real value .. is determined by labour time” is the subject of much marxist debate (Diane Elson)

f) no-one experiences a tendency of the rate of profit to fall. The explanations about what is falling and whether it really is falling tend to get hopelessly convoluted. For instance ” Over the last 61 years in the U.S., this long-run rate of profit, which I’m calling the long-run labor rate, as distinct from the long-run money rate of profit, has been trendless, a constant 4% on average.”
Surely its either constant or else its fallingits falling

g) “the economy has never fully recovered from the slump of the 1970s, certainly not in the way in which it recovered from the Great Depression.” Surely the economy did not recover as a result of (the destruction of capital in) the Great Depression. It recovered as a result of rearmament and military expenditure

Reverting to a) above, it appears that the concept of the tendency of the rate of profit to fall is too abstract, unobservable in everyday life, and subject to yoomuch dispute re categories and definitions, to be in any way useful as an explanatory model.

why not then something along the lines of

In “classic capitalism” the industrialist made a profit making scythes. He would convert the profit in the from of cash into productive capital by expanding production, installing more steam hammers and selling
more scithes at home and abroad

In “late capitalism” the industrialist makes a profit making cars. He cannot convert the profit in the from of cash into productive capital by expanding production – there is already over production of cars and overcapacity in existing plant. So he has to find other ways of converting cash profits into capital that (is expected to) expand its value at or above the av rate of interest. Hence profits are channelled not into expanded production,but into mechanisms that boost consumption in various ways – through gnmt bonds, mortgages, private credit etc (fictitious capital). Which leads to the exponential expansion of credit.

Here streams of revenue that are to be generated in the productive economy tomorrow, are to be used up to realize the value of the outputs of the productive economy today. When tomorrow comes the purchasing power necessary to realize the value of tomorrows outputs will have in part been used upto realize todays outputs. The problem (production without regard to the market through which the value of outputs is to be realized) is here deferred and exacerbated

There comes a time when the expansion of credit looses touch with the steams of revenue actually generated in the productive economy, at which time the scrip becomes worthless, and (fictitious) capital is destroyed, credit is no longer available, and the economy implodes

None of this is in opposition to “the tendency ………to fall” – in fact the disproportion between on the one hand overaccumulation, overcapacity and overproduction, and on the other hand falling value of each unit of ouput and inelastic demand, are expressed in this tendency.
But the categories descibed are all tangible and a part of everyday discourse.

So any answers to a) above?

1. Actually, my argument is not that “a drop in profitability leads to economic slowdown and the resulting problems (debt, asset bubbles etc.).”

My argument is rather that the drop in profitability has led to rising debt and asset bubbles. It could be that policy has been orienting to restoring profitability directly rather than restoring economic growth. I’m not saying that this is so, I don’t know. The point is just that my argument doesn’t stand or fall on a direct relationship between profitability and growth of GDP and/or investment.

Also, one facet of my argument is that the increasing indebtedness pumps up economic growth and profitability artificially. So I wouldn’t *necessarily* expect to see a slowdown in economic growth here as a result of the drop in profitability (though average annual per-capita GDP growth in the U.S. was about 25% less in the 1973-2003 period than in the 1950-1973 period).

An appropriate empirical test would look at what the relationship between movements in the rate of profit and movements in what economic growth *would have been* in the absence of the debt expansion. That’s a very tricky thing to try to get at.

2. One thing that does seem clear is that changes in profit have caused changes in investment, not vice-versa. Using BEA figures, I computed the correlations between the annual change in before-tax profits and the annual change in gross investment (for all corporations) between 1948 and 2003.

The correlation between THIS year’s change in investment and THIS year’s change in profits is 0.39.

The correlation between THIS year’s change in investment and NEXT year’s change in profits is -0.11. So it doesn’t look as though changes in investment spending have caused changes in profit.

The correlation between THIS year’s change in investment and LAST year’s change in profits is 0.52. So changes in profit do seem to have been a factor causing changes in investment spending.

3. You ask, “do we know for certain, is it quantitatively proven, that investment growth and aggregate economic growth is profitability-led? It sure seems logical (in Marxian theory), but is it true for all economies all the time?”

I don’t know how anyone could know what’s true for all economies all the time. I’m certainly making no such claims. I’m trying to explain the phenomena that *have* taken place, not say what *must* take place.

The reason why the link between profitability and capital accumulation is logical is that, BY DEFINITION,

(cap. accum. rate) =
(share of profit accumulated) x (rate of profit)

So if the rate of profit falls, then–all else being equal–the rate of capital accumulation will fall. But it’s not possible to say that this must be true at all times in all places, not would I expect it to be true at all times in all places. That’s because, if the rise in the share of profit accumulated is greater, in percentage terms, than the fall in the rate of profit, then the rate of capital accumulation will rise.

But why should I care whether something is true at all times in all places? It’s not true at all times in all places that if you drop an object, it will tend to fall.

BTW, nothing above is meant to endorse the notion that economic growth has ever, anywhere, been led by aggregate demand rather than profitability. I don’t know that this is so and, in fact, I don’t even know what it means. If economic growth is growth of GDP, and aggregate demand is GDP (or GDP minus inventory accumulation), then the “fact” that changes in aggregate demand lead to changes in economic growth is either a tautology or extremely close to one.

anyway, to put it briefly: my main problem is that I don’t see a precise model of HOW a drop in profitability leads to economic slowdown and the resulting problems (debt, asset bubbles etc.).
Now I know that this particular article is for a wider audience, and this is not a scientific journal, so it would be silly of me to demand a quantitative model here…but, my problem is that I’m unaware of any such quantitative macroeconomic models in Marxian studies. This may very well be my own limitation, since I’m basically a newcomer to the whole field…
So, once again, the question I would ask is: do we know for certain, is it quantitatively proven, that investment growth and aggregate economic growth is profitability-led?
It sure seems logical (in Marxian theory), but is it true for all economies all the time? (post-keynesians/Kaleckians talk of stagnationist and exhilarationist economies…the former (if I understood it correctly) are not profitability-led (or not profit-share-led, which is not quite the same, but similar))
It seems, there are at least certain cases, when they are not: recently I read some studies by PK economists Ö Onaran and E Stockhammer where they analyse the growth patterns of the Turkish economy and find that it is not primarily led by profitability, rather by aggr. demand…this also seems to be true for certain developed European economies.
So: even if the LTRPF is correct, I’m not sure if pointing out a fall in profitability is necessary to explain economic slowdown and the emergence of crisis tendencies.

Thanks,
Mihaly Koltai (Hungary)

1. You refer to “the NFC (money) profit rate.: I assume “NFC” stands for non-financial corporations.” But the data in my article are for all U.S. corporations, financials and non-financials combined.

2. You write that you “don’t see [in my article] a causal model of HOW a drop of say 1 or 2% in the NFC (money) profit rate HAS TO lead to a severe recession. [T]hat’s still a missing link.” You don’t see this in the article because it isn’t there. I didn’t argue that a fall in the rate of profit was the direct and immediate (proximate) cause of the crisis.

What I argued (in the text between the 1st 2 graphs was this:

“the rate of profit … tends to fall over time. This situation persists unless there’s sufficient ‘destruction of capital.’ … But there was insufficient destruction of capital in the economic crises of the mid-1970s and early 1980s. Rather than allowing there to be a depression (and subsequent boom!), policy-makers have continually encouraged excessive expansion of debt. This artificially boosts profitability and economic growth, but in an unsustainable manner; it leads to repeated debt crises.”

Then there are three paragraphs in the article (right below the Hoover-Mellon figure) that elaborate on this:

“the economy has never fully recovered from the slump of the 1970s, …

“The result is a relative sluggishness of the economy. But the sluggishness has continually been papered over by an ever-growing mountain of debt. For instance, reduced corporate taxes … for by $2.5 trillion of additional public debt[, ... and] lost revenue resulting from reduced individual income taxes [that has] propped up consumer spending and asset prices artificially. Similarly, easy-credit conditions have led to inflated home prices and stock prices, and this has allowed consumers and homeowners to borrow more and save less. …

“Thus, … there have been recurrent upturns that have rested upon debt expansion. For that reason, they have been relatively short-lived and unsustainable. And the excessive run-up of debt has resulted in recurrent crises, such as the savings and loan crisis of the early 1990s, the East Asian crisis that spread to Russia and Latin America toward the end of the decade, the collapse of the dot-com stock market boom shortly thereafter, and now the biggest crisis of all, brought on by the busting of housing market bubble.”

So while it seems to me that you’re right to insist on an intermediate link between the tendential fall in the rate of profit and the outbreak of economic crisis, I don’t agree that such a link is “missing.” The article identifies *several* such links: sluggishness, fiscal and monetary policies, growing debt (and debt and more debt), and recurrent bubbles and the bursting of these bubbles.

3. You write, “why does it have to be ONLY the LTRPF [law of the tendency of the rate of profit to fall] that explains the crisis?” It doesn’t have to be, and I don’t think it is. I don’t see how the above analysis can be accused of being a monocausal explanation.

4. I agree with you about the most important “demand-side problems.” I didn’t have space to discuss them all in this article, which combines a couple of short talks I gave last week. But I have discussed them elsewhere. In “A Crisis for the Centre of the System,” which was published last fall in the International Socialism journal, I discussed in detail the *proximate* causes of the current crisis–without even mentioning the law of the tendential fall in the rate of profit, since I was just focusing there on the proximate causes. And I have discussed the links between the tendential fall in the rate of profit and the crises that I sketched above in somewhat more detail in “‘The Destruction of Capital’ and the Current Economic Crisis.” For instance, in the latter article (a slightly revised version of which will appear this summer in Socialism & Democracy), I write, “the effects of declining real wages have until recently been mitigated by easy-credit conditions and rising prices of homes and stocks, brought about by Federal Reserve policies and other means.” This is substantially identical to what you wrote above. (Both of the papers cited here can be accessed at http://akliman.squarespace.com/crisis-intervention.)

5. The KEY point in all this is that “demand-side” problems and “supply-side” problems (i.e., the tendential fall in the rate of profit) are not two separate things. I think you do separate them in your comment above. I.e., you treat them as separate but co-contributory causes of the economic crisis.

I don’t think this is right. And I especially don’t think it makes sense to COUNTERPOSE a “Minsky crisis” to a “Marx crisis”–as Fred Moseley does (see the 8th paragraph of the above article). As I have noted in another article (”Debt, Economic Crisis, and the Tendential Fall in the Profit Rate: A temporal perspective,” accessible at the same page of my website):

“By emphasizing the excessive increase in indebtedness – speculative and ‘Ponzi’ financing – that takes place in tranquil times, [Minsky’s 'financial instability hypothesis'] offers highly valuable insights into the conditions that permit ’shocks’ to the economy to develop into a full-blown crisis. Yet the excessiveness of the debt burden is itself left unexplained. With reference to *what* has it become excessive? Just as writers like Brenner and Greider need to explain why demand cannot keep pace with production, finance-based accounts of crisis need to explain why the economy’s ability to absorb credit cannot keep pace with its creation. Again, what determines the growth of demand, and what determines the volume of debt that is sustainable? Only by answering such questions does one move from tautology to explanation. …

“what makes debt burdens excessive is debt expansion that is too great *in relation to* the new value generated. The same imbalance likewise makes Ponzi finance a destabilizing factor, rather than something sustainable in the long term.”

And so we return to the “supply-side”–the production of value–not as something *opposed* to the “demand-side” problems, not as the monocausal explanatory factor–but as something that helps create the “demand-side” problems, something that *conditions* and *sets limits* upon the growth of demand in the long-term.

6. In 1986, Raya Dunayevskaya wrote an insightful analysis, “Capitalist Production/Alienated Labor,” on this issue that is still worth reading (and re-reading). It’s a critique of the notion, put forward at the time especially by Peter Drucker, that employment was becoming uncoupled from production, financial capital movements were becoming increasingly uncoupled from real capital investment, and industrial production was becoming uncoupled from the whole economy.

I think the current crisis shows that she (and Marx) were right: although the relationships between these “opposites” are very mediated, not direct, and although these relationships may not be immediately apparent, they cannot, when all is said and done, be “uncoupled.”

Thus Dunayevskaya wrote that the new phenomena (robotization, financialization, “post-industrial” economy) were “hiding the essence, but not in order to dismiss them as “inessential” or *reduce* them to the essence: “It is necessary to work out the new and concrete forms as they appear.”

They need to be worked out precisely as “forms of appearance,” i.e., not as something counterposed to or separate from the essence, but as the forms in which the essence makes its appearance. That’s what I’m trying to do.

Sorry if I’ve gone on too long. These are not simple matters.