Measuring the mass and rate of profit
As Andrew Kliman correctly emphasizes, the rate of profit is the most important economic variable under the capitalist mode of production. Capitalist production is production for profit and only for profit.
But exactly how do we define profit, and in what medium is profit measured? As we will see, there is no general agreement among present-day Marxists on exactly what profit is and how it should be measured. And if we lack a precise definition of profit, we will obviously have difficulties in understanding the significance of the law of the tendency of the rate of profit to fall and the role that this historical tendency plays in real-world capitalist economic crises.
Should we use historical or current prices in calculating the rate and mass of profit?
Kliman strongly supports the use of historical prices rather than current prices to measure the rate of profit. But other Marxists believe that profits are more meaningfully measured in terms of current prices, or what comes to the same thing, replacement costs.
Suppose after an industrial capitalist has purchased the means of production that are necessary for him to carry out the production of his commodity, a sharp fall in prices of the means of production occurs. If we measure profits in terms of historical prices, we may find that our industrial capitalist has not made a profit at all but rather a loss.
However, since the purchasing power of money has risen relative to the means of production used by our capitalist, he will be able to purchase a greater quantity of the means of production than before. Therefore, in real terms he will be able to carry out production on an expanded scale. In that case, hasn’t our capitalist made a profit after all?
Suppose the fall in the level of prices reflects a fall in labor values of the commodities that make up the means of production. In terms of value—abstract human labor embodied in commodities measured in terms of time—he will be in possession of less value than when he started. In value terms, he will have made a loss, but in terms of material use values he will have made a profit.
As we know, capitalists are forced under the pressure of competition among themselves to maximize their accumulation of capital and not means of personal consumption, nor in terms of means of production used to produce means of personal consumption. Instead, each individual capitalist, according to Marx, is forced to maximize the accumulation of capital in terms of value.
Therefore, if an industrial capitalist is losing wealth as measured in value terms, won’t he be losing capital, not accumulating it? And if this continues, won’t he lose all his capital? That is, at a certain point won’t he cease to be a capitalist? Kliman, if I understand him correctly, would strongly agree with this argument.
However, not all economists would agree. For example, the “neo-Ricardians”—or “physicalists” as Kliman likes to call them—claim that labor values have no relationship to prices. The physicalist economists therefore deny that labor value has any importance at all to the capitalist economy. According to these economists, the accumulation of capital cannot therefore be measured in terms of labor values; it must be measured in terms of the accumulation of material use values.
Our physicalists would argue—and the physicalists here include not only “neo-Ricardians” but economists of the neo-classical and Austrian persuasions—that once the effects of deflation—falling prices—have been taken into account, our industrial capitalist has indeed made a profit.
A Critique of Crisis Theory 
I enjoyed this piece on Kliman v Underconsumptionists immensely. A question however:
I would query the extent to which you dichotomise the MR view with Kliman. If one reads the Bellamy Foster/Magdoff book on The Great Financial Crisis (MR Press), the argument seems to be as follows: sometime around the late 1960s/early 1970s, monopoly capital was no longer making sufficient profits from its investment in the ‘productive’ or ‘real economy’, simply because there were diminishing returns to investment in relatively saturated markets. Whilst they do not seem to use the term, falling rates of profits, this seems to be what is implied. Hence corporations, sitting on vast stocks of wealth, making meagre returns in the productive economy, decide to re-store profitability through ‘financialization’ and allows the profit rate to be thus restored.
Your piece treats the financialization process as if it was largely a voluntary act of state capture by financial capital and their political cronies (Reagan et al.). However the Bellamy Foster/Magdoff argument is that financializaton was an inescapable structural necessity due to saturatated markets in the real economy.
This would seem to undermine some of your portrayal of the ‘MR School’. Further I noticed that in your citations of the Monthly Review School you don’t cite too much direct material from that source (apart from the Sweezy quote taken from Kliman) and perhaps you could give your views on the MR thesis a separate post?
Best wishes,
NO’C
I have often wondered why it is so hard for Marxists to define profit. Profit is equal to revenue less costs. The rate of profit is profit divided by costs. If a capitalist sells a widget for $20 and the cost (paid by the capitalist) of producing the widget is $10, then the profit is $10 and the rate of profit is 100%. Marx uses this formula in Chapter 7 of Capital, Vol I.
If you then measure the rate of profit over time then you can see if there is a decline in the rate of profit.
The great discovery of Marx was that the $10 profit is really a part of cost which is not paid by the capitalist, i.e., the surplus value added by the worker.
Marx further demonstrated that this structure also exists for the economy as a whole. Using statistics from the BEA, for example, it can easily be shown that workers’ wages are less than the value of what they produce. This is supposed to be impossible, according to the capitalists.
The rate of profit. The Bureau of Economic Analysis provides the following statistics: the per unit non-labor cost, labor cost, profit and price of all gross domestic product of the non-financial sector of the economy. It is from the GDP National Income Accounts, 1.16. The BEA bases its calculation on the formula, Cost + Profit = Price, which assumes, as Marx argued, that profit is created in the production process and not in the market. The value of a product is therefore expressed through its price and not determined by its price. Based on these figures the rate of profit is Profit/Costs. The following is a graph of the rate of profit from 1929-2011:
http://i1197.photobucket.com/albums/aa433/Allan_Harris/rateofprofit1930-
Well, I tried to download a copy of the graph, but it didn’t work. The graph shows an uneven decline in rate of profit in the U.S. since 1929 from about 20% to 12%. The trend line shows a clear decline. If you take out the Great Depression and WW II the decline is even more pronounced. The GDP figures also, of course, show a huge increase in the mass of profit, along with the decline in the rate, exactly as Marx predicted.
Seems like u truly fully understand plenty with regards to this particular topic
and that shows as a result of this posting, termed “The
Failure of Capitalist Production’ by Andrew Kliman
— Part 2 | A Critique of Crisis Theory”.
Thank you -Paulina