Re: [OPE-L] Falling Rate of Profit as Science Fiction?

From: Jerry Levy (Gerald_A_Levy@MSN.COM)
Date: Tue Mar 07 2006 - 09:19:14 EST

Hi Jurriaan,

Thanks again for your thoughts.  I'll pick-up on a few points.

1. Marxian and Non-Marxian theories of cycles

>  The main difference between
> Marxian theories and non-Marxist theories is that Marxian theories regard
> capitalist economic crises as system-immanent (basically due to endogenous
> causes), and non-Marxist theories typically attribute them to exogenous
> (or non-economic) factors.

A review of the literature on business cycles will show, I think, that most
*non-Marxian* theories -- whether they are heterodox or mainstream --
attribute cycles to *endogenous* factors.

> If you truly believe that markets, left to
> themselves, will rapidly balance supply and demand, any crisis can only
> occur because of external factors impeding the efficient operation of
> markets.

With the exception of Walrasian theory, most mainstream economic theories
do not accept the belief that the adjustment process will necessarily occur
rapidly.  Austrian theory, for instance, is about as pro-market as theories
come but they do not accept the above premise (nor do they attribute cycles
to exogenous factors).

But, you are telling a story that I have heard many times before.  This
leads me to wonder what the genesis of this common interpretation is.  My
initial supposition is that this perception is based on either Keynes's
mis-reading of  what "the classics" had in common and/or a story told
and re-told by "Keynesians" (especially in different textbooks) of various

2. Profitability and the Critics of the TRPF

> When you go on to write:  "At best Marxian economics has convincingly
> argued
> that profitability is the synthetic, overall indicator of the 'economic
> health' of the capitalist system ...." you are stating a conclusion that
> just about all of the *critics* of the TRPF would *agree* with: to claim
> that profitability is an important indicator of 'economic health' of
> capitalism is a profoundly uncontroversial claim.
> Not sure about that. According to the doctrine of consumer sovereignty,
> the
> economy is ruled by what consumers want, and if consumers are judged to be
> getting what they want, then the system is "healthy". Or, according to the
> doctrine of equilibrium, the economy is healthy, because it is in balance,
> according to some criterion. For true market fanatics, the economy is
> healthy, if there are free markets as such; any non-market economy cannot
> be  healthy.

Consider both  non-Marxian 'classical' (e.g. Bohm-Bawerk) and 'modern'
(e.g. Steedman)  critics of the TRPF and Marxian critics (too numerous to
list): *none* of these challenge the idea that profitability is an important
indicator of the 'economic health' of capitalism.  What they challenge
instead -- among other things -- is the alleged connection between changes
in profitability and the "law" as understood by Marx.

For instance (to take one example),  Makoto accepts the analytical
importance not only of profitability but also of the rate of profit as
understood by Marx.  But, he attributes a fall in the general rate of
profit to a periodic  slackening of the demand for labor-power rather
than to an increasing OCC.  So, there are theories of a falling rate of
profit which are _not_ based on the TRPF.

3. The meaning of "crisis-prone"

> To say that the capitalist economy is inherently crisis-prone means in the
> first instance to reject  Say's Law, i.e. it means saying that it is
> impossible for that form of economy to maintain balanced growth and
> economic stability for an indefinite time. This is admittedly not
> specifically a
> Marxian theory however - Hyman Minsky or Joseph Schumpeter among
> others also argued that.

OK.  But, again, I will respond with the retort that the claim that
capitalism is crisis-prone is consistent with the claim that it is
growth-prone  if put in the context of cycles.

> But it is not a tautology.

Fair enough.

> Also, it means rejecting the idea
> that crises can be attributed simply to exogenous (extra-economic)
> factors.

See  (1.) above.

4. Cycles

> The concept of economic "cycles" is more controversial, it is often more
> an
> artifact of econometric measurements. You have recurrent peaks and troughs
> in economic activity; a sort of spasmodic development, but the idea of a
> "cycle" suggests a repeated (causal) sequence of events, which may not be
> the case at all. A slippage frequently occurs, from observed correlations,
> to imputing a recurrent causal sequence.

I think this is a good question.  Is the trade cycle really a cycle?  Are
'long waves' cycles?

The question of periodicity is both a  theoretical and empirical issue.
It is a theoretical issue in debates on crisis theories, for instance (see
Makoto's claims about what he views as problems with the TRPF
explanation of crisis).  It is also an empirical issue e.g. in relation to
long-wave theory (is there "slippage" in the sense that you mean above
to Mandel's  or  D.M. Gordon's explanations? )

> Generally, I think, Marx intended to show, that the forces promoting
> economic growth in capitalism necessarily turned into their opposite,
> causing economic crises, and that the same concatenation of events
> repeated itself at every level. However, he appeared to think economic
> crises could only be understood at the level of the world market, and
> that they expressed
> all the contradictions of this form of economy, in combination. You could
> interpret so-called "globalisation" (expansion of foreign trade and trade
> liberalisation) as a method to stem the tendency of the profit rate to
> fall (indeed Marx mentions foreign trade as one of the "counteracting
> factors").

I agree with this.

> As I emphasized in my short wiki entry, inspired by something Dr Carchedi
> wrote, the tendency of the rate of profit to decline as such wasn't a
> specifically Marxian idea, and I might add in fact Marx himself was well
> aware of this. Indeed, that is precisely why he could say it was "the most
> important law of political economy", i.e. many political economists had
> referred to it, or noticed it already. The scientific challenge, however,
> was to explain why the decline necessarily happened, and certainly Marx
> believed it wasn't a matter of accident, but a necessary consequence of
> the specifically capitalist mode of development. Prof. John Weeks among
> others has tried to explicate how the law of value asserts itself,
> precisely through crises.

I agree with this but I think it is confusing.  When Marxists refer to the
TRPF,  we are not mean Physiocratic, Smithian or Ricardian interpretations
of the "law".   When in the literature there is a reference to the TRPF it
is short-hand for Marx's law of the tendency for the general rate of
profit to decline (LTGRPD).

> However, as I mentioned, the TRPF is a generalisation which is difficult
> to
> prove definitively, in a scientific sense. The economic evidence can
> be read in different ways, using different theoretical frameworks.
> Therefore, the debate really concerns which theoretical perspectives have
> the most explanatory power, in the light of the observable evidence. But
> obviously the debate isn't purely "scientific" either, but also
> ideological,
> inasmuch defenders of capitalism are motivated to accentuate some factors,
> while its opponents accentuate others, even regardless of logic or
> evidence.
> Capitalism is a system based on competition between many different
> interests, and that gets in the way of an objective view of things; the
> scientific debate is typically distorted by moral notions and what Marx
> called "the furies of private interest".

Agreed again.

5. The current period.

> I personally think that the data available shows that average industrial
> profitability 1973-2006 is lower than 1947-1973, and that real net output
> growth since 1973 is roughly half or less of what it was in 1947-73. I
> think, that this had the consequence of an exit of capital from the sphere
> of industrial production,

(Perhaps, but unlike what is assumed in the TP, capital in practice doesn't
enter and exit branches of production in search of higher rates of profit
if that is meant to mean s/c+v.  Instead, (money) capital enters and exits
branches of production in search of higher rates of  return on investment
(RRI).  If there is fictitious capital and resulting bubbles then there can
be a significant disparity between rates of profit and RRIs.)

> as well as a furious "rationalisation" and global
> restructuring process, in which the working class suffered big defeats, in
> terms of its organisational capacity and losing previous gains. The
> corollary of that, is that a much larger portion of business income
> nowadays
> takes the form of interest, rent, capital gains and royalties (property
> income) rather than industrial profit from production. The macroeconomic
> problem then is how, given stagnating real wages for the majority, you can
> nevertheless expand markets, and ultimately, that is a question of
> globally
> integrating more people into markets that were not so integrated before.
> That is, however, a process which takes time, often cultural and political
> obstacles have to be overcome, but the hope is, that with better global
> credit facilities, you can "tide things over" meantime, and create demand
> where it did not exist before, and thus, that eventually things will turn
> around. The problem though is that, in this "meantime" or transitional
> epoch, the inequalities of income and assets are becoming ever more
> extreme,
> in consequence of marketisation, i.e. a critical mass of people are not
> able
> to "trade up" as fast as is desirable in terms of their real income. That
> creates social instability and discontent, which in turn reacts back on
> the
> ability to extend more credit. The longer the lines of credit become, the
> more the credit system depends on social trust (cf. Fukuyama, who
> articulates this point ideologically; others refer to social capital), and
> the more easily the financial system can be severely shaken up by a
> breakdown of social trust. Terrorism in this context is an important
> issue,
> not so much because of the relatively few direct casualties of it (far
> more
> people die in e.g. traffic accidents), but because it causes a breakdown
> of
> social trust and panics, which can seriously upset a dodgy financial
> structure. Hence leading policy makers are nowadays agreed on the central
> importance of promoting beliefs of public confidence and trust, for the
> future of the economy, regardless of whatever current financial problems
> may
> be. They can be solved, provided you have sufficient cooperation, and
> getting/maintaining that cooperation is the trillion dollar question (a
> trillion dollars is what the world's governments spend on arms each year).
> Obviously, the snag is that if the masses of the people find that they
> cannot make significant gains, they are more likely to be cynical and
> distrustful, rather than confident. Somehow, people have to be maneouvered
> into a position where they deserve credit, literally and figuratively...
> and this becomes a dominant theme in popular culture as well.

I don't have time to respond more now (I've got to go to work and teach!)
but I'd be curious to know whether other listmembers agree with your

In solidarity, Jerry

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