Tuesday October 21st, 2014, 6:27 am (EDT)

Response to Heinrich—In Defense of Marx’s Law

It was Marx’s ultimate purpose, as stated in the preface to the first edition of Das Kapital, “to lay bare the economic law of motion of modern society.” It is clear that Marx regarded as his central achievement in this regard the “Law of the Falling Tendency of the Rate of Profit.” In vol.3, (p.303) he declares that: “The barrier of the capitalist mode of production becomes apparent:

  1. In the fact that the development of the productive power of labor creates in the falling rate of profit a law, which turns into an antagonism of this mode of production at a certain point and requires, for its defeat, periodic crises.
  2. In the fact that the expansion or contraction of production is determined…by profit and by the proportion of this profit to the employed capital—thus by a definite rate of profit—rather than the relation of production to social requirements, i.e., to the requirements of socially developed human beings. It is for this reason that the capitalist mode of production meets with barriers at a certain expanded stage of production which, from the human point of view, would be utterly inadequate.  It comes to a standstill at a point determined by the production and realization of profit, not by the realization of human needs…”

In the April 2013 issue of Monthly Review, Professor Michael Heinrich—in an article entitled “Failure of the Falling Rate of Profit Theory”—attacks Marx’s Law not on empirical but on very familiar [cf. Joan Robinson, Essay on Marxian Economics] theoretical grounds. Prof. Heinrich’s rejection of the “Law of the Falling Tendency of the Rate of Profit” enunciates two lines of criticism:  that the Law does not follow from the concepts and definitions of the Marxian theoretical system; and that even if such a tendency existed Marx would still be wrong to allege that it is important to “crisis theory,” ie., our understanding of the economic cycle.

Any “Crisis Theory” is an attempt to explain not only how but why the capitalist mode of production, throughout its history, exhibits—alongside its tendency toward secular expansion of the means of social production and of its output of  material goods and services as commodities—recurrent interruptions of that process in which substantial amounts of productive capacity (productive workers and machines) find themselves, after a period in which they had been fully employed, excluded from full participation in the process of social production. Thus a “Crisis Theory” is a theory of the cyclical movement of the capitalist economy.

It is elementary (and Marx was first to point out) that the key force in capitalist development is the accumulation of capital and that the key variable in the capitalist economic cycle is the rate of investment in the means and conditions of production.  It is equally clear that the central purpose of investment for any capitalist firm is the enhancement, or at least maintenance, of its profitability. Thus far all economists, Marxian or not, should agree.  Where Marxians and non-Marxians part company is the “Theory of Value.” For Marx, aggregate “profit” (comprising the categories of profit-of-enterprise, interest, rent, and executive compensation) consists of aggregate surplus value, the determinate (and, for each “ideally average”1 capitalist firm, “aliquot”) share of the total number of hours of socially-necessary labor time performed by the productively employed working class as alienated to and appropriated by the capitalist class. Net capital investment consists of the share of surplus value accumulated, rather than consumed, by the capitalist class: and so capital, as the stock of accumulated (capitalized) economic wealth of the capitalist class, consists of all the surviving (ie., not used up in the course of subsequent production) hours of surplus-labor time accumulated by the capitalist class as property embodied in the means and conditions of the productive system as a whole (including the necessary but nonproductive objects required for sales, administration, etc.).

What then is required of an adequate “crisis theory?” In essence, such a theory has to present a model of the cycle in which the conditions promoting a rate and amount of investment sufficient to assure expanding output, profits, and employment are transformed *by that very process of capital accumulation* into conditions promoting a generalized decline in output, profits, and employment (and, subsequently, the resumption of expansion into a renewed cycle). Every cycle is the concrete experience of a definite capitalist economic system in the real historical context of capitalist evolution on a world scale.  As Marx points out, the “the real crisis can only be educed from the real movement of capitalist production, competition, and credit—in so far as crisis arises out of the special aspects of capital which are peculiar to it as capital, and not merely comprised in its existence as commodity and money.” (Theories of Surplus Value, Ch. 14)

The dependence of capital investment on profitability, and the effect of periodic shortfalls in the profitability of expanded investment, are certainly among the foremost aspects peculiar to capital. But it is impossible to understand how Marx’s “Law” would work in determining capital’s real cyclical movement if one cannot properly formulate the “Law.” Since Heinrich shows himself completely unwilling (or unable?) to do that, we here have to start by doing it for him.

For Marx, the rate of profit tends to fall as an inevitable result of the increasing “organic composition of capital.”  Marx defines Organic Composition as the ratio between “dead labor” and “living labor.”: “A definite number of laborers corresponds to a definite quantity of means of production, [ie., the 'technical composition' of capital] so that a definite quantity of living labor corresponds to a definite quantity of labor already objectified in means of production.” (vol. 3, p.171) This crucial category is thus defined as the ratio between a stock and a flow, both denominated in hours of socially necessary average labor time, over the natural accounting period of one year. Accordingly, the “technical” and “organic” compositions, alike, represent as opposite (physical vs. value) sides the degree of development of productive forces accomplished, in its characteristic forms, by the capitalist mode of production at any given time. “The progressively higher organic composition of the social capital is, in another way, but an expression of the progressive development of the social productive power of labor).” (vol. 3, p. 248) 2

The (capital) stock is the total number of hours of socially necessary labor time (“dead labor”) accumulated over the past as surplus-value, objectified (capitalized) in the material forms of machines and structures (“fixed capital”), and inventories (“circulating capital”). The (“living labor”) flow is the total number of hours of productive labor performed by the working class over the year (“productive labor” for Marx is that commodity-producing labor—whether the commodity is material in form or an immaterial service consumed as a final product in the course of its production—alienated to capital and thereby productive of the surplus-value contained in the value represented by capital’s net output of goods and services).  This flow comprises two, and only two, fundamental parts: the value received as aggregate income by the class of productive workers; and that received as aggregate income by the class of capitalist exploiters. The ratio “s/v” between these two value-segments (“variable capital,” represented by the lower-case symbol v, and “surplus-value,” represented by the lower-case symbol s) of the social productive-labor year is the rate of exploitation (rate of surplus value), represented by the symbol s’.

How then is the Organic Composition (henceforward symbolized as Q) to be represented? Its formula is C/(v+s) or its algebraic equivalent, C/v(1+s’). The total capital stock which is to serve as the denominator for the average rate of profit comprises not only the amount of value invested in long- lived (“fixed”) means and conditions of production (“constant capital,” represented by the upper-case symbol “C“) but also the value embodied in the stock of circulating capital. One part of that stock consists of the inventory of finished and unfinished commodities destined for consumption by the class of productive laborers (“variable capital,” represented by the upper-case symbol “V “). The remainder of the inventory stock (intermediate products like unfinished goods or raw materials, etc., short-lived tools, or consumer goods destined for the consumption of unproductive workers and members of the ruling class) counts as constant capital and so is a constituent part of “C.” However “V,” the stock of circulating capital represented by the portion of consumer-goods inventories destined for productive workers, constitutes historically (because of both the increasing fixed-capital/labor ratio and the increase in the ratio of unproductive to productive laborers) a small and constantly diminishing portion of the social capital stock. Accordingly it distorts virtually nothing to simplify the definition of the overall rate of profit by abstracting from V. The rate of profit is thus best represented as s’v/C rather than as s’v/(C+V).

By substitution,

[ Q=C/v(1+s'), C=Qv(1+s')

and

p'=s'v/C. So p'=s'/Q(1+s') ]

the rate of profit, s’v/C, to be symbolized as p’, can thus be represented algebraically as

p’=s’/Q(1+s’).

Heinrich claims to substantiate his claim that the “Law” is theoretically invalid, because it cannot be logically developed from the basic categories and conceptions of the Marxian theoretical system, with an argument based on a formula that he mistakenly calls “value composition.” [cf. footnote two] In this, as in many of Marx’s illustrative examples in vol.1, it is assumed that the entire social capital is consumed and reproduced in the course of a single year—ie., that there exists no fixed capital. Thus he propounds as Marx’s “not explicit” expression for the rate of profit the formula “p=s/(c+v),” equivalent to “(s/v)/[(c/v)+1].” From this he argues that his “c” increases “precisely in the course of the production of relative surplus-value, which leads to an increasing rate of surplus-value…when Marx claims a fall in the rate of profit, then he must demonstrate that in the long term the denominator grows faster than the numerator. Yet there is no evidence whatsoever for such a comparison in the speed of growth.”

Heinrich is not wrong about the relation of the stock-of-constant-capital/labor-value-flow ratio (the Organic Composition) to the production of relative surplus-value. Increase of Q, for Marx, expresses “the progressive development of the social productive power of labor,” and increased productivity produces relative surplus-value by decreasing the labor-cost of production of labor power (the value of the real wage) and thus the paid portion of the given working day. Where Heinrich goes wrong is in his assertion that there is no reason for the rate of increase in the denominator (capital stock) to exceed the rate of increase in the numerator (surplus value). From examination of the correct formula for the Marxian rate of profit, p’=s’/Q(1+s’), it is clear that the rate of surplus value, s’, appears with a positive sign in both the numerator and the denominator but that the capital stock, C, appears only in the denominator. Evidently, in the course of the long-run evolution of capitalism the rate of increase of organic composition must tend to exceed the rate of increase in surplus-value resulting from it. (A more rigorous demonstration of this relationship is to be found on pages 147-151 of my 1963 dissertation, “The ‘Law of the Falling Tendency of the Rate of Profit': Its Place in the Marxian Theoretical System and Relevance to the US Economy, 1900-1960,” available online from http://archive.org/details/MagesDissertation)

Heinrich’s second charge against the logical derivation of the “Law” is that there is no systemic reason for organic composition to increase: “we do not know whether the denominator increases.” Suppose that labor productivity were to increase more rapidly in the “capital goods” industries than in those producing articles of working-class consumption. Then the organic composition could decrease (less value embodied in constant capital relative to the living productive labor set in motion by it) with the result of a rising rate of profit unless the overall technical composition would have increased more rapidly than the productivity of capital-goods-producing labor.3

For anyone with eyes open to look around him it is impossible to take this argument seriously—every great city is dominated by commercial structures employing no productive labor at all; every manufacturing industry is constantly displacing workers and replacing them with automated machinery; energy—which once employed millions of miners—is ever more entirely being provided by a relative handful of workers operating enormously capital-intensive nuclear power plants, hydrocarbon wells and pipelines, offshore oil platforms, wind-turbines, solar panels, etc. And all this is clearly but the latest stage of a process that has built steadily over some two centuries of capitalist economic development and is, if anything, accelerating. But, Heinrich might argue, this is merely “empirical reality,” and the place of technology in the materialist conception of history [footnote four] is merely “philosophy.” He would demand a “theoretical” demonstration that this unquestionably real capitalist development is a necessary consequence of Marx’s model of capitalism.

The reply might start with the point that a very large portion of the inputs to capital-goods industries (raw materials, labor-power, electricity, fuel, etc.) are identically inputs to consumer-goods industries. In particular, they account for virtually the entire cost of construction. Any hypothetical decrease in the value of these inputs would have the same effect in increasing productivity (decreasing unit value) in both types of production. So if capital-goods’ productivity were to increase faster than consumer-goods’ productivity, that increase would have to come entirely from their machine-building component. But surely the same applies to the inputs (except machines) for that machine-building component. And so forth ad infinitum. In the face of an infinite regress the hypothesis of rising relative productivity in the industries supplying capital goods simply collapses. Different individual branches of industry may develop labor productivity at different rates and at different periods of time, but over the historical course of capitalist development the average productivity of social labor in those two gross categories, capital goods and consumer goods industries, cannot be distinguished.

This is not, however, a theoretical demonstration that the Organic Composition must tend to increase. What is needed is to show how such a tendency follows from the necessary course of capital investment over the course of what, in Marxian terms, constitutes an “ideally average” economic cycle (an “ideal” cycle presupposes a closed—ie., abstracting from exchange with other economies—model). This schema involves three definite Marxian theories: that the industrial reserve army is the regulator of the supply and demand for labor power; that expected profitability is the decisive factor in capitalist decision making; and that the supply of credit is endogenous to the system (ie., the quantity of credit is determined by the monetary quantity of transactions to be financed, not the reverse as in the “quantity theory of money” where the aggregate value of transactions depends on an exogenously determined “money supply”).

The cycle can be taken as starting with the low point (“trough”) of its preceding cycle. The industrial reserve army (which Marx defines as the “pivot,” the regulator, of the supply and demand for labor power, ie., wages) has been replenished and production is at its nadir (unemployment is high and capacity-utilization low). Interest rates have fallen as a result of lowered demand for credit to finance inventories and capital investment. Replacement of worn-out capital equipment, deferred during the bottom phase of the former cycle, is needed by many businesses. Thus the upswing involves increasing output without increasing unit costs, raising profits. As it proceeds profits, capital utilization, prices, employment, real wages, interest rates, and new investment all increase until the cycle approaches its peak.

The renewed investment at the start of the upswing was mainly in inventories and replacement equipment. Output could increase without much need for expanded capacity, and employment-increasing (ie., capital-broadening, as against capital-deepening) investment was at its most profitable in comparison to labor-saving innovation. But then output-increasing investment starts to become ever more needed, older equipment becomes more costly to operate as it is worked more intensely, and labor-power becomes more costly as the reserve army is depleted. As new investment increases, the rising tendency of wages makes it become ever more biased toward labor-saving innovation—the higher the wage the more relative surplus-value is produced by every hour less labor time required to produce a given output. The peak of the cycle is characterized by a high level of capital-intensive investment, spurred on by the expectation of high profitability from maintenance of or increases in prices and demand. As the interest rate required to finance new investment increases (and, conversely, the “payout period” a firm requires to justify new investment shortens) the large investment projects previously begun start to come on line, putting intense competitive pressure on prices and so on less-productive older capitals. Realized profits fall short of what had been expected, inter-business debt payments are delayed for longer times, business failures with associated loan losses to the credit system increase and credit tightens, workers are laid off thus decreasing effective demand, and new investment, no longer seen as adequately profitable, falls off. The cycle thus has gone into reverse until, at its trough, a new cycle gets underway.

This abstract model—which tells us almost nothing at all about the concrete determinations of timing, expectations, foreign trade and foreign exchange, natural-resource costs and rents, market structure, speculation, politics, and class struggle—that shape every actual economic cycle and notably every crisis—nevertheless establishes the vital point at issue: capital accumulation (new investment) takes place predominantly at the height of the cycle when the cost of labor power is high and rising. It is therefore highly biased toward labor-saving technological change and this makes a cycle-to-cycle increase in the Organic Composition of Capital a necessary and fundamental component in Marx’s model of the “economic law of motion of modern society.”

Because every cycle thus involves an increase in the organic composition of the social capital, and because increase in organic composition involves decrease in the rate of profit, Marx’s abstract model of the cycle (his “crisis theory”) necessarily involves an effect of that decrease in the peak phase of the cycle. Marx explains it thus: “The rate of profit, ie., the relative increment of capital, is above all important for all new offshoots of capital seeking an independent location…[it is] the fundamental premise and driving force of accumulation.” (vol. 3, p. 304) This is not at all to assert that new investment necessarily becomes less profitable in operation than the previously-accumulated capital. The fall in profitability manifests as a decreasing “marginal efficiency of investment” for the social capital as a whole. The decline is principally felt by “older” capital, as commodities from newer more productive capital come onto the market, in the form of overproduction relative to demand at the existing price level. That overproduction, however, is crucial. The depressed market means that the return on new capital, and therefore the expected return on new investment, has fallen below the level on which the original investment decision was based. The realized payback period has lengthened beyond what had been projected and new projects are postponed. Thus the Law acts as a powerful constricting influence in every crisis, at the peak and recession phase of every cycle. It is, over the historical course of the capitalist mode of production, a “barrier,” a force repeatedly depressing the profitability of investment to ever lower levels. Marx, an ardent Balzacian, might well approve were we to call his Law capitalism’s Peau de Chagrin.

Defeating the Law. Faced with this historical tendency toward ever falling profitability of the social capital, painfully manifest in every period of crisis, each capitalist ruling class attempts to reverse it in various ways. These ways go outside the bounds of the closed-system model used to derive the Law. Marx outlines five such “counteracting causes”: raising the intensity of exploitation; cheapening the elements of constant capital; depressing wages below their value; relative overpopulation; foreign trade. Since the tendency to be counteracted expresses at any time given rates of exploitation and organic composition, the counteracting causes (which are not independent of each other) must take effect through raising the former or diminishing the latter.

  • Raising the intensity of exploitation. This is conceptually distinct from the systemic economic tendency for increasing organic composition to produce relative surplus-value. Exploitation is also increased by extraction of absolute surplus-value, through intensification of the labor-process itself by forcing laborers to work harder and faster for the same wage. The intensity of work, which the working class always tries to minimize and the capitalist class to maximize, is itself on average the resultant of the balance of class forces. To raise it, thus, requires capital to win a battle in the class struggle. For that advantage to be durable, not to be reversed by the working class when the next prosperity-phase restores its bargaining power, means that a new social norm of intensified work would have been established. Thus even were the total amount of surplus-value, and hence the rate of profit, to be durably increased, that would constitute only a one-time gain. Starting with the next cyclical upswing all the forces tending to reduce profitability would return to full operation.
  • Cheapening the elements of constant capital. As shown above, this cannot by itself have any tendential effect on organic composition. What is involved is circulating, rather than fixed, capital. Such cheapening works to reduce the value of the inventory component of the capital stock, and to that extent it lowers organic composition and raises profitability. But unless they express increasing average productivity of labor (in which case it would, as has been shown, merely reflect increasing organic composition) such instances of cheapening are merely one-off gains that do not effect the long-run tendency of profitability to fall.
  • Depressing wages below their value. The value of the real wage signifies the cost of reproduction of labor-power. This value declines tendentially with growth in labor productivity, even though real wages have tended to increase over the long course of capitalist development (a tendency that Lenin called a “law of increasing requirements”). To depress wages below their value, at any given time, means to depress the real wage below its historic social norm—to depress the standard of life of the working class. Economically, the only barrier to this is the level at which immiseration directly impacts labor productivity, and presently in advanced countries there seems to remain a considerable margin before that point is reached. The real obstacle is always the power of the working class to resist immiseration, for popular unrest is always at its most explosive when living standards are under attack. It is this point which gives Marx’s Law its most pointed political relevance, especially in the present context of systematic attack on popular living standards throughout the Western capitalist systems.
  • Relative overpopulation. Long-term increase in the industrial reserve army, through recruitment of workers from low-productivity or noncapitalist lines of production (like subsistence farming), both depresses real wages and provides labor-power for lines of production with low organic composition. This is perhaps the most visible of all the counteracting factors, in the form of mass immigration from colonial or semi-colonial societies (Latin America, Africa, Eastern Europe) into the advanced Western economies or, in China, India, Brazil, etc., from an impoverished peasant hinterland into mushrooming industrial cities. Though this process can persist long-term there also are definite limits: demographic (decrease of potential recruits), economic (local industrialization), and social (popular resistance to the disruptive effects of large-scale migration). Moreover, as migrants assimilate they become a full part of the working class and so disappear as an independent counteracting factor.
  • Foreign trade. This sustains profitability in two ways: the Ricardian mechanism of specialization in high relative productivity industries; and the availability of cheap consumer goods and raw materials. These are basically instances of raising relative surplus value, either by raising average physical productivity or through lowering the value of the real wage and of material inventories. But they are short-term factors. Trade among capitalist systems can never negate the long-term tendencies at work in every one of those systems. Even a totally globalized, frontier-free, capitalist system would merely combine each system’s own law of the falling tendency of the rate of profit into a law of the whole world system.

Aggravating factors. Over the century-and-a-half since Marx formulated his Law, three tendencies far more important than all the counteracting causes put together have manifested to intensify the consequences of the Law. They are the ecological crisis of the planet (especially global warming), the depletion of essential natural resources (fisheries, land, fresh water, and minerals), and the bureaucratization and financialization of the capitalist economy. This is not the place to detail their vast scope. Suffice it to state that they impose enormous and unaccounted costs from natural disasters and cleaning up (or, worse, not cleaning up) pollution; multiply natural-resource rents to parasites like the Russian ex-nomenklatura, the Gulf monarchs, or the Koch brothers; and divert resources on the largest scale to unproductive activities and unproductive capital. As surplus-value is swept into rents and interest and executive loot the amount left for profit-of-enterprise, the source and motive of new productive investment, is constantly diminished while the real (environmental) cost of production is forced ever higher. Even as technology increases the gross productivity of labor, its net productivity comes under always-increasing pressure. The peau de chagrin continues ever to tighten.

Notes

  1. Heinrich is very insistent, and rightly so, that Marx’s abstract model presents capitalism in its “ideal average.”
  2. In vol. 1 Marx says that “The organic composition of capital is the value composition of capital insofar as it reflects the technical composition of capital.” The value composition is defined as the ratio C/v. It is the technical, not the value, composition that determines the development of the Organic Composition. Over historical time all these compositions necessarily increase. The “value composition,” C/v, ceases to reflect organic/technical composition because v represents only the paid portion of the performed productive-labor-hours, and it is fundamental for Marx that the continual creation of “relative surplus value” tends over time to reduce the paid portion of working time. Accordingly, “V,” the stock of circulating capital represented by the portion of consumer-goods inventories destined for productive workers, constitutes a constantly diminishing portion of the social capital stock. This justifies our simplifying the definition of the overall rate of profit as (s’v)/C rather than as s’v/(C+V). The only distortion involved in abstracting from V would be a very slight underestimate of the actual decline in the rate of profit.
  3. It should be noted that, insofar as a piece of capital equipment is significantly innovative and therefore unique, the very concept of “labor productivity” in its manufacture is problematic. What sense does it make to say that the labor involved in manufacture of a Boeing Dreamliner is more or less productive than that in a Boeing 727? At any rate, market price cannot be used as an indicator of “real” output because that can be done only for commodities of comparable use-value to the various purchasers. Capital equipment is purchased only for its utility as a means of producing surplus-value in the specific economic context of another producer, not for its utility to a final consumer. The US central bank, correctly, does not use capital-goods prices in its estimates of inflation but relies only on the personal consumption expenditure (PCE) deflator.
FacebookRedditTwitterEmailPrintFriendlyShare

Essays in this series…

FacebookRedditTwitterEmailPrintFriendly