Archive for the ‘Profit Squeeze’ Category

David Harvey, Michael Roberts, Michael Heinrich and the Crisis Theory Debate

February 1, 2015

Recently David Harvey, the well-known writer on Marxist economics, criticized Marxist economics blogger Michael Roberts’ views on crisis theory. According to Harvey, Roberts has a “monocausal” crisis theory. What Harvey objects to is Roberts’ emphasis on Marx’s theory of the tendency of the rate of profit to fall (FRP for short) as the underlying cause of capitalist crises.

Harvey goes further than simply criticizing Roberts’ FRP-centered crisis theory. He says that he is skeptical that a tendency of the rate of profit to fall even exists. He indicates that he agrees with the views of the German Marxist economist Michael Heinrich on the invalidity of Marx’s theory of the falling rate of profit. Heinrich’s views are developed in “An Introduction of the Three Volumes of Karl Marx’s Capital” (Monthly Review Press, 2004). He elaborated them in this article.

In this work, Heinrich tries to demonstrate that Marx himself in the final years of his life moved away from his own theory of the tendency of the rate of profit to fall. Heinrich holds that an examination of Marx’s manuscripts that form the basis of Volume III of “Capital” show that Marx had moved toward a theory of crises centered on credit. Heinrich accuses Frederick Engels of editing the manuscripts in such a way as to hide Marx’s alleged movement away from an FRP-centered theory of crises to a credit-centered theory of crises.

In his defense of the falling rate of profit school from the criticism leveled by Harvey, Roberts makes an indirect reference to this blog: “… recently, one Marxist economist from the overproduction school called me a monomaniac in my attachment to Marx’s law of profitability as the main/underlying cause of capitalist crises (see Mike Treen, national director of the New Zealand Unite Union, at the annual conference of the socialist organization Fightback, held in Wellington, May 31-June 1, 2014, and a seminar hosted by Socialist Aotearoa in Auckland in November 10, 2014 http://links.org.au/node/4156).”

Mike Treen, a New Zealand Marxist, is indeed an organizer of the New Zealand trade union Unite (not to be confused with the U.S. trade union of a similar name, UNITE HERE, which also organizes fast food and other low-wage workers). The “overproduction school” Roberts refers to is actually the position of this blog, of which Mike is an editor.

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Michael Heinrich’s ‘New Reading’ of Marx—A Critique, Pt 2

August 4, 2013

In this post, I examine two questions: One is whether Heinrich’s critique of Marx’s theory of the tendency of the rate of profit to fall—TRPF—is valid. After that, I will examine Heinrich’s claim that Marx had actually abandoned, or was moving toward abandoning, his theory of the TRPF.

The determination of the rate of profit

If we assume the turnover period of variable capital is given and assume no realization difficulties—all commodities that are produced are sold at their prices of production—the rate of profit will depend on two variables. One is the rate of surplus value—the ratio of unpaid to paid labor. This can be represented algebraically by the expression s/v. The other variable is the ratio of constant to variable capital, or c/v—what Marx called the composition of capital.

Composition of capital versus organic composition of capital

The composition of capital will change if wages, measured in terms of values—quantities of abstract labor measured in some unit of time—changes. For example, if wages fall in terms of value, everything else remaining unchanged, there will be relatively more constant capital and less variable capital than before. The composition of capital c/v will have risen.

However, though less variable capital relative to constant capital will have been used than before, a given quantity of variable capital will now produce more surplus value. All else remaining equal, a rise in the composition of capital produced by a fall in the value of the variable capital will result in a rise in the rate of profit.

Suppose, however, that the capitalists replace some of their variable capital—workers—with machines. Remember, we are measuring the machines here in terms only of their value. Here, in contrast to the first case, we assume the value of variable capital and the rate of surplus value s/v remains unchanged.

Now, more of the total productive capital will consist of constant capital, which produces no surplus value, and less will consist of variable capital, which does produce surplus value. Since here, unlike in the first example, the rate of surplus value has remained unchanged, the fall in the portion of the capital that produces surplus value will produce a fall in the rate of profit.

In order to differentiate between these two very different cases, which produce opposite effects on the rate of profit, Marx called a rise in the composition of capital produced by a rise in the use of machinery a rise in the organic composition of capital.

Capitalist competition forces the individual industrial capitalists to do all they can to lower the cost price of the commodities they produce. The term cost price refers the cost to the industrial capitalist of producing a given commodity, not the cost to society of producing it. (1) The cost price represents the amount of (abstract) labor that the industrial capitalists actually pay for. It is in the interest of the industrial capitalists to reduce as much as possible the amount of labor that they pay for while increasing as much as possible the amount of the labor that the industrial capitalists do not pay for—surplus value.

The cost price of the commodity is, therefore, the capital—constant plus variable—that industrial capitalists must productively consume to produce a given commodity of a given use value and quality.

As capitalism develops, the amount of capital that is used to produce a given commodity of a given use value and quality progressively declines. But capitalist production is a process of the accumulation of capital. Leaving aside temporary crises, the quantity of capital defined in terms of value must progressively increase over the life span of the capitalist mode of production.

Therefore, the fall in the capital used to produce the individual commodities must be compensated for by a rise in the total quantity of commodities produced if the value of total social capital is to grow. Outside of crises and a war economy, the history of capitalist production sees a continuous rise in the total quantity of commodities produced. This is why the capitalists must find new markets or enlarge old ones if capitalism is to continue. Contrary to Say’s Law, the increase in commodity production does not necessarily equal an increase in markets.

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John Bellamy Foster’s Latest Attempt To Reconcile Marx and Kalecki

May 12, 2013

In the “Review of the Month,” entitled “Marx, Kalecki, and Socialist Strategy,” in the April 2013 edition of Monthly Review, John Bellamy Foster once again attempts to show that the views of economist Michal Kalecki (1899-1970) are fully compatible with Marx. Foster even quotes Marx’s “Value, Price and Profit” to show that Marx agreed with Kalecki—and Keynes—that higher wages lead to higher prices.

Foster writes, “Although a general rise in the money-wage level, Marx indicated, would lead to a decrease in the profit share, the economic effect would be minor since capitalists would be enabled to raise prices ‘by the increased demand.’”

Foster’s promotion of the theory that higher money wages cause prices to rise is so out of line with Marx’s whole body of work in general and “Value, Price and Profit” in particular that I could not let it pass without comment.

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Monetary crisis in Cyprus and the ghost of 1931

April 14, 2013

In recent weeks, a financial, banking-monetary and political crisis erupted on the small Mediterranean island country of Cyprus. Here I am interested in examining only one aspect of this complex crisis, the banking and monetary aspect.

The Cyprus banking crisis was largely caused by the fact that Cypriot banks invested heavily in Greek government bonds. Government bonds appeared to be a safe investment in a period of crisis-depression. But then these bonds fell sharply in value due to Greece’s partial default in 2012—the so-called “haircut” that the holders of Greek government bonds were forced to take in order to avoid a full-scale default. The Cyprus banking and financial crisis is therefore an extension of the Greek crisis. However, in Cyprus the banking crisis went one stage beyond what has occurred so far in either the U.S. or Europe.

The European Union, the European Central Bank and the IMF imposed an agreement on Cyprus that involved massive losses for the owners of large bank deposits, over 100,000 euros. Mass protests by workers in Cyprus forced the European Union and the European Central Bank to retreat from their original plans to have small depositors take losses as well.

Since the late 19th century, central banks, like the Bank of England, have gone out of their way when they wind up the affairs of failing banks to do so in ways that preserve the currency value of bank deposits for their owners. The officials charged with regulating the banks prefer instead to wipe out the stockholders and sometimes the bondholders.

Why are the central banks and other governmental regulatory organs—like the U.S. Federal Deposit Insurance Agency, which was created under the New Deal in hopes of avoiding bank runs in the United States—so eager to preserve the value of bank deposits, even at the expense of bank stockholders and bondholders?

The reason is that if the owners of deposits fear that they could lose their money, they will attempt to convert their deposits into hard cash all at once, causing a run on the banks. Under the present monetary system, “hard cash” is state-created legal-tender token money. Whenever depositors of a bank en mass attempt to convert their bank deposits into cash, the reserves of the banks are drained. Unless the “run” is quickly halted, the bank fails.

A bank facing a run in a last-ditch attempt to avoid failure calls in all loans it possibly can, sells off its assets such as government bonds in order to raise cash to meet its depositors’ demands, and halts additional loans to preserve cash. Therefore, if there is a general run on the banks, the result is a drying up of loan money capital, creating a massive contraction in demand. This causes commodities to pile up unsold in warehouses, which results in a sharp contraction of production and employment. Soaring unemployment can then lead to a severe social crisis.

This is exactly the situation that now confronts the people of Cyprus. University of Cyprus political scientist Antonis Ellinas, according to Menelaos Hadjicostis of CNBC and AP, “predicted that unemployment, currently at 15 percent, will ‘probably go through the roof’ over the next few years.” With official unemployment in Cyprus already at a Depression-level 15 percent, what will the unemployment rate be “when it goes through the roof”? Throughout the Eurozone as a whole, official unemployment now stands at 12 percent.

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Are Keynes and Marx Compatible?

October 24, 2010

In the October 2010 issue of Monthly Review, John Bellamy Foster has an article that praises once again the work of John Maynard Keynes. In this article, Foster presents evidence that perhaps the most important ideas that distinguished Keynes of the “General Theory” from the traditional marginalist economists of the time were inspired by Karl Marx himself. Foster’s latest article has drawn criticism from some corners of the Internet to the effect that Foster and Monthly Review are advocating Keynesian ideas rather than Marxism.

This is not a new charge against the Monthly Review School. Paul Sweezy, the founder of Monthly Review, never hid the fact that he was strongly influenced not only by Marx but by Keynes. Foster’s article in the October 2010 Monthly Review―and other recent articles by Foster along the same lines―combine with two other developments that raise anew the relationship between the economic theories of Marx and Keynes.

The first of these developments is the expected sharp gains of the U.S. Republican Party in the congressional, state and local elections scheduled to be held on Nov. 2. Along the same lines is the recent string of large gains by far-right anti-immigrant parties in Europe.

The second development is the apparent decision of the world’s central banks, headed by the U.S. Federal Reserve System, to engineer a new increase in the quantity of token―paper―money, dubbed by the media “quantitative easing,” in a bid to jump-start the stumbling recovery from the “Great Recession.” In anticipation of a new surge in the supply of token money, the dollar price of gold has been surging on the open market. It seems that a new wave of inflation-breeding currency devaluations may have begun, though in late October 2010, apparently alarmed by the spike in the dollar price of gold, the governments and central banks appear to be making efforts to dampen a bit the speculation regarding a new wave of currency devaluations.

While I have already written on Keynes and his relationship to Marx in my main posts, questions by readers and events demand that I take another look at the relationship between these two economic thinkers. This reply is therefore the first in a series of monthly posts on this subject.

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Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 1

August 15, 2010

[The following is the first of a two-part reply to a reader’s question. Since the reply had to be broken into two parts due to its length, part 2 will be posted two weeks after this part appears. My plan is to return to a monthly schedule after that.]

A while back a reader asked what I thought about the work of Andrew Kliman. Kliman is the author of a book entitled “Reclaiming Marx’s ‘Capital,’” published in 2007. In this book, Kliman, a professor of economics at Pace University, attempts to answer the claims by the so-called “neo-Ricardian” economists that Marx’s “Capital” is internally inconsistent. According to the “neo-Ricardians,” Marx was not successful in his attempts to solve the internal contradictions of Ricardo’s law of labor value.

The modern “neo-Ricardian” school is largely inspired by the work of the Italian-British economist and Ricardo scholar Piero Saffra (1898-1983). But elements of the “neo-Ricardian” critique can be traced back to early 20th-century Russian economist V. K. Dmitriev. Other prominent economists and writers often associated with this school include the German Ladislaus von Bortkiewicz (1868-1931) and the British Ian Steedman.

The Japanese economist Nobuo Okishio (1927-2003), best known for the “Okishio theorem”—much more on this in the second part of this reply—evolved from marginalism to a form of “critical Marxism” that was strongly influenced by the “neo-Ricardian” school.

In the late 20th century, the most prominent “neo-Ricardian” was perhaps Britain’s Ian Steedman. While Sraffa centered his fire on neoclassical marginalism, Steedman has aimed his at Marx. His best-known work is “Marx after Sraffa.” The “neo-Ricardian” attack on Marx centers on the so-called transformation problem and the Okishio theorem.

The Okishio theorem allegedly disproves mathematically Marx’s law of the tendency of the rate of profit to fall. The transformation problem is more fundamental than the Okishio theorem, since it involves the truth or fallacy of the law of labor value itself. I will therefore deal with the transformation problem in the first part of this reply and the Okishio theorem in the second part. However, Andrew Kliman seems to be more interested in the Okishio theorem for reasons that will soon become clear.

I have already dealt with the transformation problem in an earlier reply. But here I will take another look at it in the light of Kliman’s work.

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The Greek Workers Show the Way

May 23, 2010

A reader wants to know how the crisis that has developed in European and world financial markets will affect the current economic and political situation.

In the first week of May, renewed panic hit world financial markets. This time the crisis was centered in Europe and the European government debt market. The immediate cause of the crisis was the fear that the government of Greece would not be able to meet payments on its bonds that were coming due later in the month.

The resulting panic drove the interest rate on Greek government bonds well into the double digits, while stock markets plunged around the world. The crisis began to spread from the bonds of Greece to the bonds of other weaker European powers such as Portugal, Spain and Ireland.

Both Washington and the European governments fear that a major new contraction in credit could set in that would end the weak economic recovery that has been visible since the middle of last year, and renew the worldwide economic downturn—perhaps transforming the “Great Recession” into Great Depression II.

After a round of frantic emergency meetings over the weekend of May 8-9, the European Union, the International Monetary Fund and the U.S. Federal Reserve announced a round of emergency measures to raise almost a trillion dollars aimed at propping up the global credit system and bailing out the holders of Greek government debt—not the Greek people—while preventing the collapse of the euro.

The situation was so grave that French President Nicolas Sarkozy canceled a scheduled visit to Moscow to celebrate the surrender 65 years ago of Nazi Germany. During the frantic meetings, German Finance Minister Wolfgang Schauble collapsed and had to be hospitalized.

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Factors that Limit the Life Span of the Capitalist System

December 6, 2009

In this final post in the series that began in January 2009, I will summarize the various factors that make impossible the permanent existence of the capitalist system of production.

First, let’s examine the effects of the tendency of the rate of profit to fall. Many Marxists see this tendency as the crucial factor that dooms the capitalist system to perish in the long run.

Capitalism is above all a system of production for profit and only profit. But Marx showed that with the growth of the productivity labor—expressed under capitalism by a rise of the organic composition of capital—the rate of profit tends to fall. A major contradiction of capitalism is that though it is a system of production for profit its very development tends to lower the rate of profit. Doesn’t this make the downfall of capitalism inevitable sooner or later.

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Does Capitalist Production Have a Long Cycle? (pt 4)

July 24, 2009
The Great Depression that began in 1929 and lasted until World War II holds a unique place in economic history.
“The Great Depression,” wrote bourgeois economist J. Bradford DeLong, “has central place in 20th century economic history.” He explained: “In its shadow, all other depressions are insignificant. Whether assessed by the relative shortfall of production from trend, by the duration of slack production, or by the product—depth times duration—of these two measures, the Great Depression is an order of magnitude larger than other depressions: it is off the scale. All other depressions and recessions are from an aggregate perspective (although not from the perspective of those left unemployed or bankrupt) little more than ripples on the tide of ongoing economic growth. The Great Depression cast the survival of the economic system, and the political order, into serious doubt.”
The economic crisis of 1929-33 though it was in some ways just another cyclical crisis of overproduction clearly involved other factors that converted a “normal” cyclical economic crisis into something quite different. What was it? In order to distinguish the crisis of 1929-33 from normal capitalist cyclical crises, I will call it the super-crisis.

The Great Depression of the 20th century

The Great Depression that began in 1929 and lasted until World War II holds a unique place in economic history.

“The Great Depression,” wrote bourgeois economist J. Bradford DeLong, “has central place in 20th century economic history.” He explained: “In its shadow, all other depressions are insignificant. Whether assessed by the relative shortfall of production from trend, by the duration of slack production, or by the product—depth times duration—of these two measures, the Great Depression is an order of magnitude larger than other depressions: it is off the scale. All other depressions and recessions are from an aggregate perspective (although not from the perspective of those left unemployed or bankrupt) little more than ripples on the tide of ongoing economic growth. The Great Depression cast the survival of the economic system, and the political order, into serious doubt.”

The economic crisis of 1929-33 though it was in some ways just another cyclical crisis of overproduction clearly involved other factors that converted a “normal” cyclical economic crisis into something quite different. What was it? In order to distinguish the crisis of 1929-33 from normal capitalist cyclical crises, I will call it the super-crisis.

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Crisis Theories: Profit Squeeze

January 30, 2009

Basic formula of capitalist production

The basic formula of capitalist production is M-C..P..C’-M’. An industrial capitalist begins with a sum of money M. He or she must then find on the market the elements of productive capital—both constant capital in the form of factory buildings, machinery, and raw and auxillery materials and labor power, the only commodity that produces surplus value. The productive capital, both constant and variable, is represented by C.

Next, the industrial capitalist must bring the elements of C together in the act of production, represented by the letter P. It is during the process of production that the capital of the industrial capitalist is expanded through the absorption of surplus value. Marx called this the “self-expansion of capital,” or in some translations the “valorization” of capital. Remember, the actual “self-expansion of capital” comes from the variable capital alone.

When the process of production has been completed, the capitalist possesses a sum of commodities that have a greater value than either M, the money capital, or C, the commodity elements of the productive capital that the industrial capitalist started out with.

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