Monday, February 22, 2016

Marx’s Tendency of the Rate of Profit to Fall: Analytically and Empirically Unproven

The trouble with this idea of Marx is that, as formulated in volume 3 of Capital, Marx has insulated it against empirical refutation. As Michael Heinrich has argued here, it collapses into an anti-empirical and analytic tautology, which cannot be proven by empirical evidence. For Marx, it becomes a long-run tendency so that even if we had 1,000 years of capitalism and there was no long-run tendency of the rate of profit to fall visible in the data, Marx can evade criticism by claiming that countervailing tendencies are at work thwarting the long-run trend, or that the “long-run” is really 2,000 years or 10,000 years away.

Thus it is in the same league as the highly tautological neoclassical law of demand which is insulated against empirical refutation or testing by the ceteris paribus assumption.

As Heinrich also notes, as we analyse Marx’s argument in theoretical terms, it has severe problems: even on its own terms, in the mathematical formula for the rate of profit both the numerator and denominator can change, and the long-run tendency is not certain.

What about empirical evidence?

Unfortunately, when individual Marxists desperately try and invoke empirical evidence to prove their theology, we find their empirical evidence is hopelessly contradictory.

Their various data sets and graphs on the average rate of profit are comically discrepant and contradictory (often because they cannot even agree on the correct definition of the profit rate), as even a cursory examination of their writings on this issue in the links below shows:
Husson, Michel. “La hausse tendancielle du taux de profit” [“The Tendency of the Rate of Profit to Rise”], January 2010
http://hussonet.free.fr/tprof9.pdf

Chris Harman, “Not all Marxism is Dogmatism: A Reply to Michel Husson,” International Socialism (2nd series) 125 (2010).
https://www.marxists.org/archive/harman/2010/xx/dogma.htm
Another blatant problem with the many graphs Marxists have constructed is probably that the rate of profit during the Second World War and in the immediate post-war years was unusually and abnormally high, given the massive interventions to stop wage rises, price inflation, and the massive demand for war material and other output during the war years, all of which would have tended to raise business profit rates.

So therefore a graph of profit rates from c. 1945 to 2016 – even if it did show a fall in the average rate of profit – does not prove that capitalism has a long-run tendency to a falling rate of profit, because such data would start out from a time when profit rates were abnormally high in the first place. In reality, we would need good, accurate and consistent data from the early 1800s to today in a large sample of capitalist countries to draw any legitimate conclusions about the long-run tendency of the rate of profit in capitalism.

And, of course, once we examine the reality of modern day capitalism, we discover that mark-up prices dominate most of the economy and here the rate of profit is often actively set by businesses as a mark-up on average unit costs of production.

There is, furthermore, no actual tendency to an economy-wide uniform rate of profit, not only because there are permanent, severe barriers to entry and free competition in many sectors of a real world capitalist economy, but also because the rate of profit mark-up in each industry and business will be determined by many factors such as custom, convention, different desires and needs for various profit rates, different levels of competition, and what mark-up the market will bear, etc., and these factors will themselves vary in different times and places (Lee 1994: 325–326). This activist creation of the profit rate by businesses and the severe barriers to entry and free competition in modern capitalism strongly imply that the long-run rate of profit is likely to be a random walk, and not subject to necessary, long-run tendencies, either up or down.

Further Reading
“Matias Vernengo on Marx’s Labour Theory of Value,” April 3, 2015.

“Sraffian Long-Run Equilibrium Prices of Production and Post Keynesianism,” April 11, 2015.

BIBLIOGRAPHY
Lee, F. S. 1994. “From Post-Keynesian to Historical Price Theory, Part I: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.

25 comments:

  1. Unrelated to this but I wanna ask, do you have any plan on doing a post about UK's Brexit?
    So far I know that Bill Mitchell it's in favour while Varoufakis and Geoffrey Hodgson are against it.
    Haven't heard the positions of Keen, Syll or Vernengo on the matter.

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    1. At some stage, yes.

      I have no idea of the opinions of the people you mention, and can only speak for myself

      My view: the EU and Eurozone are catastrophic. Britain should leave as quickly as possible, to protect the UK's economic and political sovereignty, its democracy, its welfare state, its social services, and any hope for Post Keynesian-style economics. Also, it needs to take control of its borders again for important left-wing reasons, because the EU open borders policy is disastrous -- disastrous for the welfare state, the working class, the real wage, employment prospects of people and its very social cohesion.

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    2. Thanks for the reply.

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    3. Steve Keen says that he is 'ambivalent' (but someone has to leave) at 3:13 in this interview: http://www.bbc.com/news/business-35418946

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    4. Btw lk you have devunking marxism and debunking austrain evonomy sections but why you dont have debunking neoclassical economics section?

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    5. Anonymous as far as i know keen (he is my favourite post keynesian economist) he is for brexit.

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    6. My view: LK has no idea what he is speaking about. Without euroarea immigrants and without free trade with eurozone the UK will crash very hard. Anonymous, please don't confuse euro with EU. Don't make this idiotic blunder.

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    7. "Without euroarea immigrants and without free trade with eurozone the UK will crash very hard."

      And you can have free trade with the EU by joining the European Free Trade Association (EFTA), and any necessary extra labour by **controlled** immigration.

      If the nonsense Anonymous is speaking were true, Norway and Switzerland would have collapsed a long time ago, since neither is a member state of the European Union but both are part of the European Free Trade Association (EFTA).

      In short, don't fall for the EU propaganda and stupidity.

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    8. Just want to clarify, i'm not the same Anonymous who posted that last comment with his own view.
      Wanted to know what was LK's opinion and if he knew about the opinion of the other people mentioned as well on the subject (thanks also for that Daniel Marmur).

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  2. It's telling that Marxists who argue that the TRPF has empirical support have to tie themselves into contradictory knots to make the numbers fit. Kliman's supposed empirical vindication of the law (and the TSSI) in 'The Failure of Capitalist Production' suffers from methodological contradictions. To calculate his rate of profit, Kliman measures the fixed capital stock in the denominator net depreciation, despite asserting that advanced capital can't be revalued, being 'frozen' in historical time as it were. (even though it absolutely can be--indeed that is what depreciation does) Then he puts government revenue in the category of 'property income', which is clearly wrong, especially considering that the greatest burden on government finances is paying out public pensions, not investing in real estate. The net effect is to overstate the gross volume of profits, so that it's pretty easy to find pretty much any time period where profits are 'tending' towards decline.

    And then in his article "Pinning the Blame on the System" published in Volume 124 of the International Socialism Journal, he produces a graph using this rate of profit formulation that actually refutes his claims that the world economy never really recovered from the crises of the 1970s in terms of profit rates. (the graph in fact shows a dramatic rise in the rate of profit circa 2003, almost to post-war boom levels)

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  3. So therefore a graph of profit rates from c. 1945 to 2016 – even if it did show a fall in the average rate of profit – does not prove that capitalism has a long-run tendency to a falling rate of profit, because such data would start out from a time when profit rates were abnormally high in the first place.

    Load of tripe. Profits are always "abnormally high" after a crisis, due to capital destruction and related factors. The interventions you cite might affect the mass but certainly not the rate of profit -- with the exception of wage depression, but such contingencies are not unknown in history, and have no effect on the actual mechanism at play in the falling rate of profit (i.e., the growth of capital).

    You can dress it up with all the rhetoric you want, but at the end of the day, the general rate of profit calls for a flow in the numerator and a stock fed from that flow in the denominator. When the denominator grows faster than the numerator, the figure is going to fall.

    And nowadays, it's not even controversial that profitability is low. Deloitte has also discussed the trend in its Shift Index, and mainstream economists have in recent times begun tying falling rates of return to hypotheses of "secular stagnation."

    Finally, Rob G.'s arguments on The Failure of Capitalist Production are illicit; the former is a category error, the latter an outright mischaracterization ("property" != real estate). Both matters are discussed at length in the book, suggesting that he has not so much read it as seen the graphs and absorbed a few canned replies from others who haven't read it. (And there doesn't appear to be a graph in the article he references, either. Superb.)

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    1. “The interventions you cite might affect the mass but certainly not the rate of profit -- with the exception of wage depression,”

      Bingo: when wages are held down, this happens.

      So, wait, you actually admit that when wages are held down and significant price inflation occurs (as indeed happened in the WWII because of government suppression of wages and significant price inflation*), the business profit rate rises? And of course this is exactly what your own fellow Marxist Brenner’s data shows here:

      https://www.marxists.org/archive/harman/2010/xx/husson3.jpg

      So therefore, on the one hand, you admit I am correct, even though you then go on to claim I am not correct?

      How stupid are you, you f*cking Marxist halfwit?

      -----
      * US price inflation
      1941 | 5.0%
      1942 | 10.9%
      1943 | 6.1%
      1944 | 1.7%
      1945 | 2.3%
      http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

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    2. " the general rate of profit calls for a flow in the numerator and a stock fed from that flow in the denominator."

      Bullsh*t. The rate of profit in modern capitalism has nothing to do with Marx's mythological rate surplus of value or the crackpot mathematical formula Marx gives.

      The rate of profit for most industries is determined by the profit mark-up on total average unit costs in each industry, which will be determined by many factors such as custom, convention, different desires and needs for various profit rates, different levels of competition, and what mark-up the market will bear, etc., and these factors will themselves vary in different times and places (Lee 1994: 325–326).

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    3. "And nowadays, it's not even controversial that profitability is low. "

      That doesn't prove the Marxist tendency of the rate of profit to fall in the long run, since we are only looking here at a recent period. A random walk is perfectly consistent with some short run periods of a falling profit rate.

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    4. "Finally, Rob G.'s arguments on The Failure of Capitalist Production are illicit; the former is a category error, the latter an outright mischaracterization ("property" != real estate). Both matters are discussed at length in the book, suggesting that he has not so much read it as seen the graphs and absorbed a few canned replies from others who haven't read it. (And there doesn't appear to be a graph in the article he references, either. Superb.)"
      Actually Hedlund is correct on one thing: Kliman's graph appears in his work "The Persistent Fall in Profitability Underlying the Current Crisis: New Temporalist Evidence", not in "Pinning the Blame on the System".
      But as you'll see, it does indeed show that Kliman's rate of profit rises dramatically in the early 2000s, peaking in 2006 at a level on par with the 1950s. It's on p.24 here:
      https://static1.1.sqspcdn.com/static/f/25940/4491540/1256010108003/Persistent+Fall+whole+primo+10.17.09.pdf?token=AY4L3dwiIpqYfEp2QKkYh80SCGI%3D
      This large surge doesn't really fit the narrative of relative stagnation since the 1950s--the graph shows that even after the financial crisis and the great recession the rate of profit is still higher than it's been at any time since the 1950s.
      And perhaps Hedlund did not catch the snark in my remark about government finances. That is, "real estate" is a snarky synecdoche for income-bearing assets, the source of what Kliman would define as the net value added of US corporations minus compensation to employees. ('property income') The point is that in his 'property income' measurements he conflates government revenues with capitalist profits, as he includes in the category of property income “the money spent… to pay sales and property taxes”. (‘Failure’ 75-76) Government revenues and capitalist profits are self-evidently not the same thing. Especially considering that some of the biggest government expenditures are on pensions, benefits, forms of welfare, etc.—i.e., the social wage.
      And there is no category error. Kliman's measurements for the capital stock assume it must all be paid for at its purchase/historical price, *not* the price determined by the *current* socially necessary labor time required for its reproduction. (assuming there is such a thing as SNLT that influences or underpins or 'constrains' prices, contrary to the real world) But if you accept that the historical or purchase price can be revalued by depreciation, the argument that it is inaccurate to measure the capital stock at anything other than its historical/purchase price makes no sense, since depreciation revalues the historical/purchase price to the current price.
      His methodology is confused, because he has to tie it into knots in order to engineer empirical support for the TRPF. Which is sort of the point of the TSSI. Under ‘physicalist’ and ‘simultaneist’ readings of Marx the TRPF becomes logically invalid—the TSSI was more or less invented to try to preserve the TRPF. Marx dubbed it the most important of capitalism’s ‘laws’, after all—if it’s empirically irrelevant or logically invalid, it casts doubt on many of the other ‘laws’ he identified.
      And it’s a shame really—all that intellectual energy spent trying to hold onto the dream of an infallible Marx would have been much better spent treading new ground and fashioning new ideas in the field of economics/political economy.

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  4. Also casuation and correlation fallacy may be applied here becauae maybe there other reason for low profit rate like?

    1.Massive indebtness of households

    2.offshoring of jobs to third world

    3.techonolgy (capital) which replace labour.

    All of them put serious constrains on effective demand and if its so then the problem is not capitalism but wrong policy of the government.

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    1. Yes, any theory runs the risk of mangling correlation and causation. Hence why we must carefully consider the actual structural entities and their interrelations to determine whether it follows. This is what people who take science seriously are supposed to do.

      To this end, I urge you to have a look at the actual theories under discussion, rather than their twisted representation through the eyes of LK, who was convinced of their wrongness before ever so much as glancing at the topic and has done everything in his power to dishonestly affirm his cognitive bias.

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    2. I see the charm in this theory of marx,but can you pls explain me why more effective demand will simply not solve it?

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    3. Solve what? More people buying production's output can keep the game going and stem a crisis, certainly. It can keep total profits high. But can it restore a low rate of profit, i.e. per dollar spent? Probably not.

      Boosting purchasing power -- even in a progressive way, prioritizing the poorest -- targets distribution and exchange, but leaves production itself in a sort of "black box," operating much as it had before whatever event prompted the demand-side policy. More labor will be called for, more variable capital expended, and more of the "reserve army" will be absorbed, but this process is limited in ways the growth of constant capital is not. The latter outpaces the former, and the ratio of fixed assets to new value created continues to grow, along side which the rate of profit will only tend further downward, necessitating an even more severe crisis to destroy and devalue enough capital to restore it.

      Increasing effective demand essentially treats a symptom, but only compounds the contradictions that inhere. Now, could the symptoms be treated indefinitely, to prevent ever having to contend with a day of reckoning? We'd have to first assume a class-collaborationist society (which themselves have historically been short-lived). Fiscal injections would have to be ever larger and larger relative to new value created, to cope with the ever-expanding mass of capital, masking the problem with perpetual inflation. Plus, this would perpetuate the frenetic pace of our systems of production, with the attendant environmental and physiological impacts.

      The more fires the government works to put out (via price controls, income policies, buffers, environmental safeguards, direct job creation, writing off debts), the more one wonders exactly what service the owning class is providing to justify their privileged place.

      Why not, then, just do without social classes and castes and determine production on a democratic basis, giving workers and the earth alike a much-needed breather? Why not slow down, get our priorities in order, and produce for use (i.e., the needs of humanity) first and foremost rather than for exchange (i.e., an impossible dream of infinite, unbounded "growth")?

      It's not something that can be achieved overnight, but it's worth working towards.

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    4. "Why not, then, just do without social classes and castes and determine production on a democratic basis, giving workers and the earth alike a much-needed breather? "

      Such a communist system would still involve price controls, income policies, buffers, and all sorts of massive economic planning environmental safeguards, direct job creation, greenhouse gases, new classes of people based on bureaucracy and state privileged classes etc. etc.

      But it would massive violence and coercion to achieve.

      You're just a mad fanatic blind to what your cult actually entails.

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    5. Well Lk is right here my parents born in soviet union and its pretty good description of what happens when people try to impose marxiat ideas on society as a whole.

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    6. Can you explain, in your own words, why direct job creation requires "violence and coercion" under socialism but not capitalism?

      Because without more context, it sounds a lot like you've just been debating libertarians so long some of their dogwhistles have rubbed off on you.

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  5. Basically you are saying if i understand you right that there is capacity constrains like labour shortage or even capital shortage.

    Well it can be if indeed effective demand is high enough (which is not).

    But your assumptions correct me if i am mistaken based somehow on static analyze.

    Of course in the short run there is capacity constrains like labour and capital but in the long run you can make your labour force more productive and because of demographic growth you can get more labour in the future.

    So yes in the short run you cant growth limitlessly but in the long run i dont see a reason why not? (Except reason like shortage of natural resources).

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  6. Specially if you establish healthy effective demand policy

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