The Ideas of John Maynard Keynes (pt 6)

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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