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.