Keynes and the falling rate of profit
Keynes, along with Adam Smith, Ricardo, Marx and even the “classical” marginalists, believed that the long-term trend of the rate of profit—marginal efficiency of capital in Keynes’s language—was downward. However, Keynes—and other marginalists—gave very different explanations than Marx for this tendency.
Marx applied his perfected law of labor value, which unlike the Ricardian version distinguished between (abstract) labor, the social substance of value, and the labor power purchased by the industrial capitalists. He showed how the tendency of the ratio of constant capital—fixed capital plus raw and auxiliary materials—to rise with capitalist development relative to variable capital would mean a fall in the rate of profit if the rate of surplus value—the ratio of unpaid to paid labor—remained unchanged.
Marx also demonstrated that even if the rate of surplus value increases, the rate of profit can still fall if the ratio of constant to variable capital—the organic composition of capital—rises sufficiently. In analyzing the effects on the rate of profit of a rising organic composition of capital, Marx abstracted a fall in the rate and mass of profit associated with problems of the realization of surplus value.
An inability to realize surplus value—either fully or at all—will cause a temporary fall in the rate and even mass of profit. In contrast, the long-term rise in the organic composition of capital will cause a permanent fall in the rate of profit.
Keynes, as we have seen, had no notion that surplus value is even produced in the production process, let alone that surplus value is produced by variable capital alone. Keynes, in the manner of vulgar economics, simply assumed that profits arise in the sphere of circulation due to the scarcity of capital.
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Keynes on the ‘trade cycle’
Keynes throughout the “General Theory” was concerned with explaining how his marginalist concept of “equilibrium”—marginal efficiency of capital = rate of interest—could correspond to mass unemployment. The industrial cycle itself was of secondary concern for Keynes. But in chapter 22, entitled “Notes on the Trade Cycle,” he does deal with the industrial cycle, or as he called it in the English manner, the “trade cycle” or “industrial trade cycle.”
When he did deal with the industrial cycle, marginalism hindered Keynes at every step. Unlike the classical economists and Marx, the marginalists do not distinguish between use value and exchange value. As a marginalist, even if an unorthodox one, Keynes therefore had problems in explaining how commodities could be overproduced yet be “scarce” at the same time.
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Keynes’s theory of surplus value
Over the last couple of weeks, we saw that Keynes denied that surplus value was produced by the unpaid labor of the working class. So how does surplus value—profit, interest and rent—arise, according to Keynes, if it is not produced by the working class?
“It is much preferable,” Keynes wrote in chapter 16 of the “General Theory,” “to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive—at least in the physical sense.”
The difference between the “aggregate value,” to use Keynes’s terminology, and the “supply price”—the cost to the capitalist of that asset—is the surplus value that “asset” yields—not produces, according to Keynes—to its owner. But where does this surplus value that is “yielded” come from if it is not produced—that is, if it does not arise in the sphere of production? As we saw over the last several weeks, Keynes accepted the “classical” marginalist postulate, or unproved assumption, that the worker does not produce any surplus value but simply reproduces the value of the worker’s wage.
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This is in response to a comment on my post entitled“The Phases of the Industrial Cycle.” Scroll to the bottom of that post to read the entire comment.
A friend commented, in part, as follows:
“[W]hen “there is an abundance of commodities of a certain kind in inventories then there is no social necessity for these commodities (from the bourgeois perspective—there may be an urgent need for that commodity to meet human needs). Then the socially necessary labor for their production is very low. Therefore anyone who tries to produce such commodities will end up using much more labor than the necessary, therefore will not be able to sell them at a profit and will end up losing money. On the other hand whoever produces gold doesn’t need to worry; he/she doesn’t need to sell their gold to get money, they already have money, gold is money. …
“Maybe I decide to produce the following commodity: a very complex camera, that can be mounted inside a refrigerator, record the contents of the refrigerator in infra-red spectrum, and live-feed it through wireless networks. This commodity will be expensive, but no-one will buy. This doesn’t matter for its value. It will still be high. Of course no capitalist would invest in such a camera. but if someone was stupid enough to do it they would lose a lot of money because the value of their unsold camera would be very high.
“Therefore the social needs and the ‘socially necessary labor’ are irrelevant. Then what does the phrase in question, ‘Prove that the labor … is indeed social labor’, mean?”
Our friend raises a very good question involving Marxist value theory. While my series of posts involves crisis theory rather than value theory, Marxist crisis theory does rest on the foundation of value theory.
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Ricardo and Marx versus Keynes
Ricardo, unlike Adam Smith, attempted to use the law of labor value consistently. He sensed that the law of labor value applied not only to simple commodity production but also to capitalism proper. Ricardo was not completely successful in this, but he was certainly on the right track. He realized that price is a relationship between two commodities, the commodities whose price is being measured and the money commodity—gold—in which the price of the commodity is reckoned.
According to the Ricardian law of labor value, market prices tend to fluctuate around an axis determined by the relative values of gold and the commodity whose value gold is measuring. Ricardo realized that a rise or fall in wages would affect the rate of profit but not the overall prices of commodities.
Marx developed Ricardo’s law of labor value further, resolving the contradictions that Ricardo himself was unable to overcome. However, even the Ricardian version of the law of labor value is quite sufficient to refute the claim of Keynes that wages determine prices.
As for Marx, he demonstrated in the first three chapters of volume I of “Capital” that price must always be measured in terms of the use value of the commodity that serves as the universal equivalent. Assuming gold is the money commodity, exchange value, or what comes to exactly the same thing, price, is always a certain quantity gold measured in terms of weight.
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