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

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Thu Mar 09 2006 - 15:22:15 EST

Hi Jerry,

You wrote:

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.

You will be able to verify that I was talking about "crises", not cycles,
these two are not the same thing. Generally, when Marx talked about crises,
he had in mind the commercial slumps occurring at 7-10 year intervals. Late
in his life, he wanted to study them mathematically, but Samuel Moore
convinced him that the data to do it, did not exist yet - it existed only
about 60 years later. Most economists would of course accept that
fluctuations in business activity are part of the ordinary functioning of a
market economy. They do not regards recessions as crises necessarily. But
there is much controversy about the causes of major depressions or
recessions, such as occurring from 1929 (the Great Depression) and from 1973
(the long recession). An economic depression is defined as an absolute
decline in real gross product for some years at least, a recession is
defined as a reduction in the real growth rate of gross product for more
than a few quarters (economists quibble about the exact duration). A cycle
may be regarded as endogenous, while a crisis is not - a crisis being viewed
as an extraordinary fluctuation rather than an ordinary one. The most
popular explanation of the 1970s recession was the "oil shocks".

You wrote:

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).

The point however is that the explanation given for why the adjustment
process does not occur rapidly is, that there are obstacles to efficient
market functioning - if these were removed, adjustment would occur, and the
faster they are removed, the quicker adjustment would occur. These obstacles
are typically regarded as "extra-economic" insofar as they are not internal
to market functioning or to the trading process. If you study Frits
Bolkestein for example, this is clearly his argument - if you have more
market activity, you have less Euroscelerosis. People have to be able to
trade with less regulation, then the EU economy would grow faster, that is
the argument. I might contest that argument in specifics, but I do
acknowledge he makes that argument. The regulation of trade is pictured as
an extra-economic (exogenous) factor, impacting on business activity,
constraining it.

You wrote:

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

"The passion which led Hayek to attack Keynes was only in part theoretical
disagreement with Keynes's new-fangled monetary theory. At its root was
Hayek's perception that Keynes was denying what for him was essential - the
idea that the market economy was capable unaided of adjusting to structural
shifts in demand. Hayek suspected that Keynes and the Cambridge school were
seeking theoretical justification for expanding the role of government and
abandoning traditional politicies of non-intervention" (Andrew Gamble,
"Hayek: the Iron Cage of Liberty". Westview Press, 1996, p. 152). Hayek's
idea is also the hallmark of neoliberalism, if it means anything - the idea,
that if you have "more market", recovery will occur spontaneously. It's a
belief in the efficiency of markets in allocating resources, and it is a
powerful one, since often people in their alienated state cannot conceive
how else you might allocate resources.

You wrote:

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.

Maybe they regarded profitability as an important indicator. But for Marx,
in his critical theory, the overriding economic motive of economic activity
in the capitalist system was the quest for extra-Mehrwert (more generic
profit). That idea is not shared by many economists. Profit might be
important, but businessmen could have a variety of motives beyond that,
which they undoubtedly do. For Marx, however, it did not really matter what
these other motives were, because systemically capitalism was driven along
by the quest for extra surplus-value, whatever else people might imagine in
their own lives. To say that profitability is the synthetic indicator of the
"health"of the capitalist system is itself a critical view - it is saying
that in reality, meeting people's needs is not the central purpose of the
capitalist system, the purpose of it is to make profits which translate into
net income for the propertied classes. In other words, this thesis says,
that the capitalist system is organised to meet the needs of the propertied
classes through obtaining profit from business activity. If it also meets
the needs of other social classes, that's fine and good, but it's an
incidental or contingent outcome or byproduct of business activity, the
overriding purpose of which is the enrichment of the propertied classes.
This idea would be hotly denied by capitalists who believe themselves to be
making life better for everybody, through constructively creating new wealth
in which all can share. They would regard the Marxist view of capitalism as
deformed, because for them capitalism isn't simply, or ultimately, about
making profits. The "bottom line" is not the only line there is.

You wrote:

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.

I'd be a bit careful what you say here, because Prof. Makoto Itoh does
distinguish between the "pure" theory, the "stages" theory and the specifics
of economic conditions for a country in a given time and place. Itoh for
example accepted there is evidence for a "profit squeeze" in Britain in the
later 1960s or early 1970s. But certainly you are correct, if you argue that
many different (and including non-Marxian explanations) for the TPRF have
been mooted. In dogmatic theories, the "law" of the TPRF is simply asserted,
but not investigated empirically. The trouble is really, that (1) people
often seek to define the "essence" of crises without linking that argument
to the empirical forms of appearance of those crises, or (2) try to
superimpose a very abstract idea directly on reality, or (3) assume that the
causal chain must be the same in every crisis, which may not be true.

You wrote:

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.

I have no theoretical quarrel with that. But I do not really subscribe to
the idea of economic cycles other than as an econometric artifact. Marx
seems to have thought, that periodic crises occurring in 7-10 year intervals
were due basically to fluctuations in fixed investment, affecting the rhythm
of the accumulation process. It's not just that capitalism is "growth prone"
though, but that it cannot survive without economic growth, because it is a
system where production of output is conditional on the accumulation of
capital. I've discussed this in a quick wiki here:
http://en.wikipedia.org/wiki/Reproduction_%28economics%29 Marx does seem to
refer very occasionally to the "trade cycle", but his causal scheme really
refers to the process of (expanded) economic reproduction.

You wrote:

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

The trade "cycle" is a construct of econometric measurement, yielding the
observation that clusters of variables are statistically consistently
related over longer periods of time, suggesting a recurrent causal sequence
of events. Kondratiev did propose the long wave as a long-term cyclical
movement in history, rather mechanistically. However, other authors such as
Ernest Mandel explicitly dissociated themselves from the idea that long
waves were "cycles". Angus Maddison typically refers to "phases" of faster
and slower growth. Mandel argues that the tendency of the boom period to end
in decline is systemically endogenous, but that the recovery involved
exogenous (extra-economic) factors, because it is in part the outcome of how
the conflicts between social classes fighting about their incomes are
resolved politically.

You wrote:

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? )

Well I have more regard for Gordon as econometrist than Mandel. Mandel
typically offered some bold hypotheses to stimulate research, with some
success. But he did not do careful econometric research himself. Mandel's
aim was more to show that you could in principle explain the long waves in a
Marxist framework, but that is not to say, that he necessarily really
explained them. Mandel lived in the epoch of the "cold war", where Marxism
was mainly Stalinist dogma, constantly reiterated. Mandel was trying to get
people to look at the facts, to do some real research in the tradition of
Marx. But his own work always has a strong ideological dimension as well, he
was very concerned with the "overall coherence" of the Marxist doctrine, as
he put it. A "multi-causal" analysis of the type Mandel favored, is
perfectly acceptable, provided that you show how the various causes
interrelate empirically, in reality. But typically Mandel did not get that
far, he just postulated these different causes. And that invites the
accusation that within his framework, justabout anything can cause anything
else, depending on what the question is, i.e. that it is more an eclectic
interpretation, rather than a genuine explanation showing or proving why
events A, B,C necessarily lead to events X, Y, Z. The interpretative
framework might be suggestive, but it yields no definite "hard" proofs or
explanations with strong predictive power. It's more in the realm of
prophesy, and if the prophecies seem to come true, it's more because they're
based on a lot of journalistic knowledge of economic trends and theories. If
you apply yourself, and acquaint yourself thoroughly with the details of a
discipline and what people are saying about it, you can make predictions
which come true, even if a solid theoretical basis is lacking, i.e. even if
the predictions are not truly, demonstrably and consistently derived from a
definite theory. Psychologists have often noted that some people have a
facility for making true predictions, without being able to genuinely
explain the rational basis for the predictions. It's just that, if you
immerse yourself deeply into a subjectmatter, you can develop a "feel" for
how things will go, going beyond being able to explicate the reasons for
that in a scientifically acceptable manner.

You wrote:

(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.)

That's probably true. I was merely emphasizing that Marx's rate of profit is
an industrial rate of profit, i.e. a rate of profit on real production, not
on trade or asset speculation. In social accounts of course, justabout
anything counts as "production" if (1) it generates new income and (2) it
involves inputs being transformed into outputs. But Marx's rate is only one
facet of capital accumulation. I might add that (simplistic example) if e.g.
a yearly net output of let's say $100 billion grows by 5%, and 20 years
later, due to recessive conditions a net output of $300 billion grows by
only 2.5% a year, then even if you have achieved slower annual growth
meantime, it's still an extra value of $7.5 billion a year, compared to $5
billion a year previously. In other words, though the proportional yield on
capital productively invested might decline, the growth in the masses of
(more concentrated or centralised) capital accumulated meantime ensures
that, despite the lower yield, net incomes still increase, and that the
profit volume is bigger than it was before.

In general, the term "crisis" is an overused word, and a loaded term. What
crisis? For whom? One could argue that there is a permanent crisis in the
world, to the extent that millions do not get enough to eat, and if they
don't get food, they die. Marx only offered a picture of the "deep
structure" of the capitalist mode of production though. It is not the
complete story. Ever since the first World War, Marxists have typically been
doomsayers, on the look-out for signs of the impending collapse of the
capitalist system. They usually believe that Marxism is about (1)
propagating Marxist ideology, and about (2) casting skepsis on the
potentials of capitalism. I do not think so, and consequently I do not label
myself as a Marxist either, to save myself confusion. I think capitalism
offers both progress and regress, and I think a type of ideology which is
counterproductive to a successful life is no good for anybody. If I was
incapable of seeing any progress in the world, I would be an eternal
pessimist. But I don't consider pessimism to be conducive to a satisfying
life. And if you get no satisfaction out of life, you might as well be dead.



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