From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Sun Sep 30 2007 - 17:07:08 EDT
Remember Ajit I said that I have not read Brenner, so I was acting as devils advocate here, trying to make a coherent reconstruction from the summary that Gerry posted. In part what is at issue is a matter of how one defines profit. I agree that in the Ricardian view interest is paid out of profit, and is a share of profit. Marx would also agree that interest payments by capitalists are paid out of surplus value but he does not treat the latter as identical to profit, distinguishing between profit of enterprise and interest. Whilst at a high level of abstraction, concerning only the relationship between the major classes, it is legitimate to treat interest as a share of profit, at a lower level of abstraction the difference becomes significant as Steindl and Sweezy argued in the the 50s. High interest rates will reduce the ratio between dividends and capital stock, since less is available to distribute as dividends, thus the apparent profitability experienced by equity capital falls. ( in practice this would be expressed as a fall in the price of equities ). But we know that there has been a long term rise in the price of equities, and, over the last 20 years interest rates have been relatively low. But from Brenners perspective this might be seen as an aberation from the long term history of capitalism brough about by anxieties on the part of the Fed to avoid recession. Suppose that instead of the dollar being fiat money, it was still tied to gold. Would the Fed have been able to sustain these low interest rates? Would equity prices have continued to rise for so long? However the factor that Steindl focused on was the tendancy for the gearing ratio of industrial capital to rise, and thus for the amount of retained profits to fall. He argued that this can result in lower rates of accumulation. This cause is independent of the rate of interest since a higher gearing ratio means, at any given rate of interest, the rate of profit of enterprise will be lower. You say " What if you are investing your own savings only? the rate of profits takes interest into account." If you were that would be true, but one has to ask whether the dynamics of accumulation make that a typical case? I would say that accumulation out of a capitalists own savings whilst it may be the aboriginal condition, is not characteristic of a mature capitalist economy. Given that there is always a dispersion of profit rates relative to the rate of interest, the population of capitalists polarises into those whose current business, whilst profitable gives less than the rate of interests, and those whose rate of profit is greater than the rate of interest. The former group will tend to lend money at interest to the latter. So over time the former group transform into a class of rentiers, gaining their profits from interest rather than direct commericial profit. What happens then when the rate of interest rises - a section of the firms who had previously borrowed to accumulate will find that their current rate of profit not longer suffices to meet the interest payments. In order to continue operations they have to rely upon lines of credit extended by the banks, which in turn further raises their gearing ratio, making it harder in the future for them to carry out internal accumulation. I can conceed your point on the misleading nature of the ratio c/v, but my argument could be more clearly expressed by saying that the ratio of capital stock, evaluated in person years, to the current productive working population. If this rises, the rate of profit falls. I would anticipate that the Chinese economy, which has such a high rate of accumulation, and now, a relatively stable population, will be experiencing such a rise in capital stock relative to population. This will tend over time to reduce the rate of profit in China. I would doubt that net accumulation in the USA is currently fast enough to significantly act to reduce profit rates. ------------------------ > c) An increase in unproductive employment can > consume surplus value and lead > to a lower rate of profit. This may well have > been occuring recently. ____________________ How is surplus consumed cannot reduce the rate of profits; but, of course, it can reduce the rate of accumulation as Smith argued. -------------------------------- It depends on where the unproductive workers are employed. If they are just personal servants, yes it has no effect on profit, since they are paid out of distributed profits. If on the other hand they are advertising and sales staff for example, their wages appear in the accounts like any other employee even though, in aggregate, from the standpoint of the whole economy, they are unproductive. They will thus tend to lower the rate of profit by increasing the wage bill prior to profit being calculated. You ask, speaking of the surplus: --------------- If it is consumed one way or the other, how could it reduce aggregate demand? ---------------- I think one has to view Brenner as being in the Sweezy tradition and speaking of the reduction in aggregate demand that would occur were it not for remedial action by the state. Sweezy arguing that it was military expenditure, Brenner arguing that it was the extension of consumer credit. Whilst military expenditure can go on and on, consumer credit does have limits to its extension. As the level of personal debt rises, the incidence of default rises and the process must come to a halt. Paul Cockshott www.dcs.gla.ac.uk/~wpc -----Original Message----- From: OPE-L on behalf of ajit sinha Sent: Sun 9/30/2007 2:18 PM To: OPE-L@SUS.CSUCHICO.EDU Subject: Re: [OPE-L] Robert Brenner, "That hissing? It's the sound of bubblenomics deflating" At last something to bite on! --- Paul Cockshott <wpc@DCS.GLA.AC.UK> wrote: > Ajit, I think that there are more unbound variables > in the system than you allow. > > Consider first the issue of rate of profit. You are > quite right to point out that > one would expect this to be negatively correlated > with wages, so that lower > wages would tend to imply higher profit rates. But > there are several possible > confounding variables. > > You identify rent among these and say that this > would only be relevant in the case of > diminishing returns to agriculture. Well in an early > 19th century model this > would make sense, but today rent on commercial > premises in city centers and > rent obtained from mineral rights are probably more > significant, and in > both cases diminishing returns probably do apply - > both to oil production > and due to congestion in central business districts > to office rents. _______________________ First of all, let's be clear that at least in Ricardo 'high rent is not the *cause* of low profit. There is no causal connection between rent and the rate of profits. Rate of profits fall because of rise in the value of wages. The rise in the value of wages is caused by extension of cultivation on inferior land or diminishing returns on the extension of capital and labor on given land. So from this perspective one will have to show that value of wages are rising due to diminishin returns in oil production etc. This has not been established yet. Secondly, my hunch is that rising prices of oil and buildings etc. have actually increased the rate of profits in these sectors at least. I'm not sure how to draw a one to one relationship with modern day real estate sector with Ricardian agricultural sector. In these cases rise in rent may be just a consequence of rise in profits in these sectors. ____________________________ > > But there are 3 other possible confounding factors > that spring immediately to > my mind: > a) changes in the organic composition of capital > could lead to lower rates of > profit despite higher rates of exploitation. ________________________ First of all, it seems you are following Marx's formula for the rate of profits as r = S/(C+V). Now, we all know that this formula of the rate of profits is incorrect. Thus we will have to make the argument in the context of correct rate of profits. Secondly, the measure C/V as the measure of organic composition of capital, which is sometimes used in Marxist literature as the coefficient of technology, is not a good measure. Given the same technology and the same labor-values of commodities, if you reduce V it immediately leads to rise in C/V (even though no change in technology has taken place only real wages of the workers have been reduced) implying that there is a simultaneous tendency from the technology perspective for the rate of profits to fall. But within the framework of labor theory of value this shouldn't be possible. _________________________ From > empirical work we did years > ago on the UK, this did seem to be the case there > during the 1970s and 1960s. > But for this to occur you do need a very rapid > rate of accumulation to build > up the capital stock - something that Brenner > says is absent. Well it may > be absent in the US , but it is certainly present > in China where accumulation > is currently standing at around 50% of GNP - a > quite astonishing figure. ____________________ I'll let it pass. However, you would agree that Chinese economy is booming, which would be a problem for Mr. Brenner. _______________________ > b) Changes in the share of surplus value going as > profit can also be due to > interest payments making up a larger share of > surplus value. It depends on > whether he is talking about gross profit or > profit net of interest. If the > gearing ratio has risen, then a larger share of > surplus may be going as interest > rather than what Marx called profit of > enterprise. _________________________ Within Marx's economics (and for that matter economic theory in general, I would say) rate of interest is nothing but a share of profits given as interest to finance capital. What if you are investing your own savings only? the rate of profits takes interest into account. _____________________ > c) An increase in unproductive employment can > consume surplus value and lead > to a lower rate of profit. This may well have > been occuring recently. ____________________ How is surplus consumed cannot reduce the rate of profits; but, of course, it can reduce the rate of accumulation as Smith argued. _____________________ > > Why might there be a sustained deficit in aggregate > demand? > > Well if the money rate of wages does not rise as > fast as the growth of productivity (in > money terms), then the excess product must either > be: > > 1) accumulated > > 2) consumed unproductively > > 3) consumed by the working class on credit > > I have not read Brenner, but it is at least possible > to argue that options 2 and 3 have > been what has occured since the 90s. _______________________ If it is consumed one way or the other, how could it reduce aggregate demand? Take a given net output, push the real wages down, it will increase the profits but why should it lead to fall in aggregate demand? The problem with Brenner and other Marxists is that they mix long-term trend analysis with short-term fluctuations. Let us suppose you have a downward long-term trend and along this trend you find a short-term cycles. Now, the cause(s) for the long-term trend and the cause(s) for the short term cycles may be completely independent. When people want to explain a downward cyclical movement by the long-term downward trend, as Brenner is trying to do, they invariably introduce serious theoretical confusions. First of all, if the cyclical downturn could be explained by long-term downward trend, then how do you explain the cyclical upward trend? The Keynesian idea of deficiency in 'effective' or 'aggregate demand' was designed for explaining a specifically short-term phenomenon, such as resession or dpression. We all know that such deficiency in aggregate demand cannot be 'permanent' as real balance effect etc. come into play. In my opinion, it is a serious mistake to introduce the idea of lack of aggregate demand in the growth context, which is what most of the Marxists and some post-Keynesians often do. If you listen to Indian Marxists and post-Keynesians talking about present day Indian economy, you will come out with a distinct feeling that Indian economy was going through a serious depression! They start from data on poverty, low wages and unemployment. Conclude from here that the aggregate demand is low and thus potential for growth is simply lacking. The Keynesian deficiency of effective demand, however, has nothing to do with poverty or low wages as such, it basically rests on the disconnect between savings and investment. But enough said. Cheers, ajit sinha ____________________________________________________________________________________ Got a little couch potato? 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