Michael Heinrich’s ‘New Reading’ of Marx—A Critique, Pt 1

The April 2013 edition of Monthly Review published an article entitled “Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s” by German Marxist Michael Heinrich. This is the same issue that published John Bellamy Foster’s “Marx, Kalecki, and Socialist Strategy,” which I examined the month before last.

Michael Heinrich teaches economics in Berlin and is the managing editor of “PROKLA A Journal for Critical Science.” His “new reading” of Marx apparently dominates the study of Marx in German universities.

The publication of Heinrich’s article brought about a wave of criticisms on the Internet from Marxists such as Michael Roberts who base their crisis theory precisely on Marx’s law of the “tendency of the rate of profit to fall,” or TRPF for short.

Today on the Internet, partisans of two main theories of capitalist crisis—or capitalist stagnation—are struggling with one another. One theory attributes crisis/stagnation to Marx’s law of the TRPF that Marx developed in “Capital” Volume III. The rival theory is associated with the Monthly Review school, which is strongly influenced by John Maynard Keynes and even more by Michael Kalecki. Unlike the supporters of a falling rate of profit theory of crisis, the Monthly Review school, like Kalecki, puts the question of monopoly and monetarily effective demand at the center of its explanation of capitalist crisis/stagnation.

In addition to publishing Heinrich’s attempt to prove that there is in fact no tendency for the rate of profit to fall, Monthly Review Press published an English translation of Heinrich’s “An Introduction to the Three Volumes of Karl Marx’s Capital,” originally published in German under the title (in English) “Critique of Political Economy—an Introduction.”

Is Michael Heinrich a new recruit to the Monthly Review school? In fact, we will see later that the Monthly Review school and Heinrich have radically different views on the questions of capitalist monopoly and imperialism. So at this point, it is more a question of an “alliance” between the Monthly Review school and Heinrich’s “new reading of Marx” trend against the TRPF school, whose leading academic representative today is Andrew Kliman, a professor of economics at Pace University.

The first thing I must say about Heinrich is that it is clear that he knows his Marx at least as well as any writer whose works have been published in English. He is also a remarkably clear writer. This reflects the fact that he has thoroughly mastered his material. This does not mean that Heinrich agrees with Marx on all questions. Indeed, Heinrich is more than willing to express his disagreements with Marx. And as we will see, Heinrich disagrees with Marx on some very important issues.

Heinrich’s ‘new reading of Marx’ versus ‘world-view Marxism’

Heinrich advances the claim, hardly unique among academic Marxists, that even before the death of Marx in March 1883, his co-worker Frederick Engels (1820-1895) (1) was beginning to simplify Marx’s thought, laying the foundation for what Heinrich calls “world-view Marxism.” This “world-view Marxism” was to dominate the left-wing workers’ movement through the era of the pre-World War I Second International and then the Third or Communist International, and after Lenin died in 1924 came to be called “Marxism-Leninism.”

In the guise of Marxism-Leninism, “world-view Marxism” was to rule supreme in the left-wing workers’ movement at least up to the destruction of the Soviet Union during the 1980s and early 1990s. Are the roots of the disastrous events of the 1980s and 1990s perhaps to be found in “world-view Marxism”? And can Heinrich’s “new reading” of Marx form the foundations of a Marxism more in line with the spirit of Marx’s own thought and perhaps prevent similar disasters in the future?

Heinrich traces the roots of “world-view Marxism” back to Frederick Engels’ “Anti-Duhring,” first published in book form in 1878. A later “short edition,” as Heinrich calls it, was published in 1882 under the title “Socialism Utopian and Scientific” and remains to this day a popular introduction to Marxism. Engels’ work was a polemic directed against the otherwise long-forgotten German university instructor Eugen Duhring, who had developed his own system of political economy and socialism, and and was gaining influence during the 1870s in the German Social Democratic Party.

Heinrich blames Engels for supporting a simplified form of Marxism that under the banner of “Dialectical Materialism” and “Historical Materialism” was to form the foundation of “world-view Marxism.” Following the death of Engels in 1895, things only got worse when Karl Kautsky (1854-1938) emerged as the world’s most authoritative expert on Marxist theory. Things went further downhill beginning in 1914 when Lenin became the leading figure and thinker of the revolutionary wing of the workers’ movement that was breaking away from the reformists and centrists of the Second International.

‘Western Marxism’

Heinrich broadly identifies himself with the tradition of such “heterodox” Marxists as Karl Korsch, Georg Lukacs, Antonio Gramsci and Anton Pannekoek, as well as such Frankfurt school (2) thinkers as Max Horkheimer, Theodore W. Adorno and Herbert Marcuse. Left out of Heinrich’s list is another member of the Frankfurt school, who was actually the one most interested in economics, Henryk Grossman. Heinrich describes the views of these diverse thinkers, who often disagreed with each other, as representing a “Western Marxism.” Why Heinrich leaves out Grossman from his list of Western Marxists will soon become clear.

Since their views “widely diverge,” as he puts it, Heinrich’s “Western Marxists” cannot represent a coherent alternative to “world-view Marxism.” However, Heinrich clearly believes that the way forward can be found somewhere in the tradition of “Western Marxism,” and not in traditional “world-view Marxism,” which would include all the shadings of post-Lenin Marxism-Leninism and Trotskyism and their present-day descendants—including Maoism—that draw their inspiration from the traditions that grew out of the Russian Revolution.

Western Marxism, as Heinrich explains, has generally concentrated its criticism of “world-view Marxism” on its philosophical foundations, namely dialectical and historical materialism. Heinrich, in the spirit of Western Marxism, as he defines it, extends the criticism of dialectical and historical materialism to the sphere of political economy, which would establish him as the leading economic theorist of Western Marxism—replacing Grossman.

Did Engels misunderstand Marx’s economic theory?

Heinrich puts forward the thesis that Engels in his editing of Volume III of “Capital” failed to realize that Marx had largely given up on his law of the tendency of the rate of profit to fall, which was to become such an important fixture in “world-view Marxist” economics as well present-day attempts to develop a full Marxist theory of capitalist crisis. Next month, I will examine the evidence that Heinrich presents to support his claim that Marx revised his views during the 1870s on the tendency of the rate of profit to fall.

Why Western Marxist Heinrich failed to mention Henryk Grossman

We now see why Heinrich failed to mention Henryk Grossman, who was after all the leading economic thinker of the Frankfurt school among his Western Marxists. Grossman built an entire economic theory of “capitalist breakdown,” as he put it, on Marx’s law of the TRPF. Indeed, as far as I know, no major 20th-century Marxist put as much emphasis on the law of the TRPF as did the Western Marxist Henryk Grossman.

But as we will see, Heinrich takes strong objection to this theory and attempts to refute it, both in his Monthly Review article and in his introduction to the three volumes of “Capital.” If Grossman can be considered a “Western Marxist,” then Heinrich is determined to take Western Marxism down a very different path, at least as far as political economy is concerned, than did Grossman.

I will first examine the views of Heinrich as an economist and only at the end will I draw from that generalizations about the significance of Heinrich’s “new reading of Marx,” freed from the historical and dialectical materialism that forms the philosophical foundations of “world-view Marxism.” The reason is that before we can view Heinrich’s “new reading of Marx” from the heights of philosophy, it is necessary to descend into the trenches of economics.

Was Marx’s theory of value a ‘monetary theory of value’?

Heinrich makes the interesting claim that Marx’s theory of value is what he calls a “monetary theory of value.” He accuses other Marxist economists of failing to grasp this. As regular readers of this blog should realize by now, I, too, have devoted a lot of attention to Marx’s theory of money and the role it plays in Marx’s theory of value.

While a strong case can be made that I should begin with Heinrich’s “monetary theory of value” interpretation of Marx’s value theory, I will instead begin with the TRPF, if only because it has attracted so much attention from the opponents of the Monthly Review school who support the falling rate of profit theory of crisis. But rest assured, I will in due course get to Heinrich’s interpretation of Marx’s theory of value as a monetary theory of value.

The theory of the TRPF and its relation to crisis theory

Unlike many Marxists, including both the supporters of Marx’s TRPF and its opponents, which include Heinrich, I do not think it is correct to equate Marx’s TRPF with crisis theory. Though the historical tendency of the rate of profit clearly has implications for crisis theory, as well the ultimate fate of the capitalist mode of production, the study of the historical trend of the rate of profit is by no means identical to what causes cyclical economic crises that recur at more or less regular 10-year intervals. Let’s see why this is so.

As Heinrich himself points out in his introduction to Marx’s “Capital,” virtually all schools of political economy in Marx’s time assumed a downward historical tendency in the rate of profit. In those days, it was considered a simple empirical fact. The disagreements among economists did not involve the downward historical trend but why the rate of profit showed this downward tendency.

This seems to have been true, as Heinrich points out, because the history of the rate of interest, which in the 19th century was widely considered to be a proxy for the rate of profit, was indeed a downward one. If we assume the division between the rate of interest and the profit of enterprise has been more or less fixed, this implies that the historical trend of the rate of profit has been downward as well.

Marx, however, did not accept this view and believed that the rate of interest actually had a tendency to fall independently of the rate of profit. Therefore, the empirical fact of a downward tendency in the rate of interest does not itself prove that the trend of the rate of profit is downward. Even if the rate of interest falls over time, the rate of profit could either remain more or less unchanged as capitalism develops, or within certain limits the rate of profit could even have an upward tendency.

What the rate of profit does do is to establish an upper boundary beyond which interest rates cannot rise in the long run. If interest rates equal or exceed the rate of profit, the industrial as well as commercial capitalists will be able to make more money with less risk by turning themselves into money capitalists. More money will be lent at interest as opposed to being directly transformed into new productive capital—or invested in trading companies that deal in what Marx called commodity capital—causing the rate of interest to once again fall below the rate of profit. Therefore, the falling rate of interest observed by the economists both before and during Marx’s day hints at a downward tendency in the rate of profit but does not prove it.

The tendency of the rate of interest since Marx

Since Marx’s time, the general tendency of the rate of interest has continued downward, if we leave aside the spectacular spike of interest rates that resulted from the currency/stagflation crises that lasted from 1968 to 1982. The recent extremely low rates of interest (3) rival the extremely low rates that occurred during the immediate aftermath of the Great Depression, and therefore provide fresh empirical confirmation of Marx’s views on the downward historical tendency of the rate of interest.

Rate of profit as defined in Volume III of ‘Capital’

When Marx discusses the rate of profit, he means the ratio of the total mass of surplus value over the total mass of (advanced) productive capital. By productive capital, Marx refers to the means of production, raw and auxiliary materials, and labor power, as opposed to commodity capital—inventories of finished commodities—and money capital. If we take into account money and commodity capital when we calculate the rate of profit, that rate will be lower than if we calculate the rate of profit on productive capital alone.

Constant and variable capital

Marx divided the total productive capital into constant capital—all forms of productive capital except labor power, and labor power itself, which Marx called variable capital. Variable capital is often defined as the money that the industrial capitalists use to purchase workers’ labor power, or ability to work. But from the viewpoint of the industrial capitalists, the money they—or it, if the capitalist is a single corporation—use(s) to purchase the workers’ labor power is actually money capital, or the money form of variable capital. Real variable capital is the workers’ labor power after it has been purchased by an actual industrial capitalist. (4)

Fixed versus circulating capital

We have to distinguish between the productive capital that is used up in each turnover cycle and the total productive capital. As Heinrich explains in his “Introduction,” in addition to the division between constant and variable capital, there is the division between fixed and circulating capital. (5)

Circulating capital includes all the raw materials that physically become part of a commodity, as well as auxiliary materials such as the electrical power, for example, that powers factory machinery. As is the case with commodities that are physically transformed and become part of a new commodity, auxiliary materials, though they do not pass their physical substance into new commodities, do transfer their entire value all at once into the commodities that are being produced. Therefore, the raw and auxiliary materials represent capital that is both constant and circulating, and so is called circulating constant capital.

In addition, variable capital reproduces its own value—as well as producing an additional surplus value—within each turnover cycle. Variable capital along with circulating constant capital—raw and auxiliary materials—is also a form of circulating capital. The total circulating capital is therefore the sum of raw materials and auxiliary materials plus the labor power purchased by the industrial capitalists.

It important to realize that money capital, called by Marx capital of circulation, is not what Marx means by circulating capital. For example, the money that the capitalists use to purchase labor power is not “circulating capital” as defined by Marx. Circulating capital refers to real capital, not money capital.

Fixed capital is represented by factory buildings, machines, tools and so on that last beyond one turnover cycle. Instead of passing their value all at once to the commodities they help produce, they pass only a fraction of their value during each individual turnover cycle. If all goes well, these durable productive forces have only passed on all their value to the newly produced commodities when they are completely worn out and can no longer function as means of production.

Next month we will see what happens when things do not go well and the elements of constant capital lose a portion of their value before they have fully transferred their value to the commodity capital they help produce. As we will see, the latter situation is actually the rule and not the exception.

Two ways to calculate the rate of profit

We can calculate the rate of profit for each turnover cycle. We simply divide the total surplus value produced by the variable capital by the variable capital plus the circulating capital plus the portion of the fixed capital that is used up. This is sometimes called the “flow method.” Heinrich prefers this method—or even abstracts the fixed capital altogether for reasons that will become apparent in due course.

However, for the capitalists, it is the surplus value divided by the total productive capital that matters. Naturally, the rate of profit is considerably lower when we divide the surplus value over the entire productive capital stock as opposed to only the capital that actually turns over within a given turnover cycle. This latter approach is sometimes called the “stock method.”

When Marx developed his theory of the downward tendency of the rate of profit, he was referring to the ratio of the total surplus value produced by the working class over the total productive capital. This ratio is not actually the same thing as the rate of profit as calculated by the industrial and commercial capitalists. Why not?

In addition to the profit proper, the total surplus value includes ground rent. Profit is also divided into two sub-fractions—interest, which goes to the owners of money capital, and the profit of enterprise, which goes to the owners of productive and commodity capital.

This gives rise to four primary incomes: the rent of land, the interest on money capital, the profit of enterprise, and finally the wages of labor. From these primary incomes, there arise various derivative incomes.

For example, a landowner might purchase the labor power of servants—not to produce surplus value but to perform personal services. Therefore, some of the landowners’ rental income appears a second time in the form of wages of the landowners’ personal servants. The same thing is true of capitalists who in addition to purchasing the labor power of workers to produce surplus value also purchase the labor power of workers to perform personal services. Even better-paid productive-of-surplus-value workers might occasionally hire a maid to help out with household chores. The maid’s wages would be a derivative of the wages of the productive-of-surplus-value worker who hired her.

On a far larger scale, there are the labor powers purchased by the state, either out of taxes or borrowed money—the debt on which must be serviced with tax revenues—which range from the labor power of teachers, librarians, social workers to soldiers, police officers, “intelligence agents” and so on. When we calculate the rate of profit, we have to be careful to include all surplus value, including, for example, the portion of the rent that the landowner uses to purchase the labor power of a personal servant. However, it must be only counted once and not twice as rent and then again as the wages of the servant.

The other, far more serious, difficulty that confronts any attempt to empirically calculate the rate of profit is that we must calculate the profit on all capitals that are operating on the world market over a considerable period of time. Otherwise, we are only guessing at what the actual historical tendency of the rate of profit really is.

For example, if we calculate the rate of profit yielded by the productive capital used by U.S. Steel—before any rent, interest or tax payments—since its organization by J.P. Morgan in 1901 to the present, there is no way of knowing whether changes in the rate of profit yielded by this particular industrial capital will actually coincide with the changes in the average rate of profit yielded by all industrial and commercial capitals. Indeed, it almost certainly will not.

While attempts have been made to calculate the trend in the rate of profit since World War II or since the 1960s—the rate of profit in Britain and the United States, for example—we cannot be sure that a fall in the rate of profit in these countries that these studies generally document really reflects a fall of the general rate of profit on all the productive capital that operates on the world market. It might merely reflect the end of the historical monopoly that the U.S. and Britain had in industrial production, causing the rate of profit to fall in these particular countries.

The difficulty in calculating the evolution of the global rate of profit

Whether the rate of profit on the total global productive capital has risen or fallen in a given period is a quite different question. As far as I know, nobody has ever even attempted to calculate the evolution of the rate of profit globally. While it is possible in principle to test empirically whether the global rate of profit as defined above has actually fallen, risen or been essentially trend-less across the evolution of capitalism, to actually do this, given the problems of collecting reliable statistics, makes it to say the least virtually impossible in practice. To make a reasonable estimate, we would have to open the books of every industrial and commercial capitalist operating on the world market over a period of many decades—ideally over the entire lifetime or at least a substantial fraction—of the capitalist system. The reason why we must “open the books” is that we cannot trust the capitalists’ own estimates of their profits; we need to see their books. (6)

At best, only rough estimates can be made of the evolution of the global rate of profit, and these estimates are liable to huge errors. Therefore, unlike the evolution of the rate of interest, we can not actually observe the rate of profit as defined by Marx in Volume III of “Capital.” At most, we can say that the observable fall in the rate of interest hints at a downward historical trend in the rate of profit.

Rate of turnover of capital and the rate of profit

Heinrich points out that the rate of turnover plays an extremely important role in determining the rate of profit. What he overlooks in his “Introduction”—which doesn’t mean he is unaware of it or didn’t deal with it somewhere else, of course—is that it is the turnover of variable capital alone that influences the rate of profit. This goes counter to the way individual industrial or commercial capitalists look at it. (7)

From the perspective of everyday capitalists engaged in the daily battle of competition, it is the speed of turnover of the total capital that counts, and not simply the turnover of the variable capital. And the view of the everyday industrial or commercial capitalists engaged in competition is also the view of the (bourgeois) economists.

The reason things appear as they do to the everyday capitalists—and the economists—is the equalization of the rate of profit. Competition among individual capitals tends toward the situation where equal capitals yield equal profits to their owners in equal periods of time. However, if we calculate the rate of profit in terms of value—or direct prices—as opposed to prices of production that equalize profits, we find that it is only the variable capital that yields a profit to the collective global capitalist. The rate of profit on the constant capital—assuming that the value of the constant capital is fully transferred to the commodities it helps produce—is exactly zero. No matter how many times you multiply the rate of turnover by zero, you get zero.

The rate of profit is measured over a certain period of time, generally on an annual basis. Therefore, the faster the turnover of variable capital the higher the annual rate of profit, all other things remaining equal.

What determines the rate of turnover of variable capital?

The rate of turnover of capital, including variable capital, is determined both by technical factors of production, including transportation, and the state of business. For example, fine wines as opposed to cheap wines may have to be aged for many years. The turnover of capital, including the variable component of the capital that is used to produce fine wines, is extremely slow compared to most other branches of production. While the quantity of labor necessary to produce fine wines may be no more than the quantity of labor necessary to produce cheap wines, the production period is far longer for fine wines than for cheap wines. This is why the price of fine wines is so much higher than it is for cheap wines.

In order for a given quantity of capital invested in the production of fine wines to yield the same annual rate of profit as a quantity of capital invested in the production of cheap wines, fine wines have to sell at a higher price. Therefore, while the direct price of the fine wine may be no higher than the direct price of cheap wine, the price of production of the fine wine will be higher than the price of production of the cheap wine.

Ricardo and his supporters, who failed to distinguish between values and prices of production, were stumped by this fact. It seemed that wine was acquiring value independently of the labor that was used to produce it. This fact was used by the opponents of the Ricardian law of (labor) value and continues to be used by some modern opponents of Marx’s theory of value who fail to understand how Marx’s theory value differs from Ricardo’s theory of value.

The turnover period of capital, including the turnover of variable capital, is also affected by the time the commodity takes to make the journey from its place of production to the hands of the final consumer. Shortening the period of transportation, which is part of the production period of commodities—for example, faster trains and the shortening of shipping routes by building canals such as the Panama and Suez canals—increases the number of turnover periods of variable capital in a given period of time, which with all other things remaining equal will raise the rate of profit on an annual basis.

The other factor that determines the turnover period of variable capital is the pace of business. During a period of more or less depressed business, the time that commodities spend sitting in warehouses and on store shelves increases compared to a period of booming business when commodities are “flying off the shelves.” This largely explains the difference between the depressed profit rates of the crisis-depression phase compared to the high-profit-rate boom phase of the industrial cycle—though the fluctuations of market prices around prices of production play an important role here as well.

When analyzing changes in the rate of profit that occur within a 10-year industrial cycle, it is important to keep the effect of the technical factors on the turnover of variable capital compared to the effects of the state of business on that turnover separate in our minds.

The turnover of capital in Keynes and Kalecki

Keynes and Kalecki, who had no notion of value and surplus value in the Marxist sense, believed that the key to increasing profits is to increase the turnover of capital through increasing monetarily effective demand. The more the capitalists and their dependents; the productive workers; and the government and its dependents collectively spend—making up aggregate demand—the stronger the pace of business will be, both Keynes and Kalecki believed, and therefore the higher the rate of profit will be as well. Keynes and Kalecki saw here that something was being multiplied, but they didn’t understand what was being multiplied, namely surplus value—the unpaid labor of the collective worker.

Those Marxists who want to derive crises and the lesser fluctuations in business activity directly from changes in the rate surplus value and the ratio of constant capital to variable capital sometimes seem to overlook the huge influence that the pace of business has on the rate of profit. Other Marxists, for example, John Bellamy Foster in the article that I criticized the month before last, make a far more fundamental mistake.

Keynesian Marxists like Foster “forget” that it is surplus value—the unpaid labor of the working class—that is being multiplied by the rate of turnover of variable capital. This “forgetting” led Foster in his article that appeared in the April 2013 issue of Monthly Review to draw the false conclusion that industrial and commercial capitalists have common interests in raising the wages of the working class. This erroneous view led Foster to draw completely false political conclusions.

In order to analyze the evolution of the rate of profit in the way that Marx did in “Capital” Volume III, we have to abstract changes in the rate of turnover that are caused by fluctuations in the pace of business. We have to assume that the rate of turnover is determined only by the technical conditions of production. In other words, we have to abstract all fluctuations in business, including the most dramatic of all fluctuations—crises. This is why the study of the historical tendency of the rate of profit is by no means the same thing as crisis theory.

Marx’s assumptions about the value of variable capital

In order to isolate the effect of a rise in the organic composition of capital—the ratio of constant to variable capital—it is necessary to assume, at least initially, that the rate of surplus value and the value of labor power remain unchanged.

The Okishio theorem

One school of criticism of Marx’s law of the tendency of the rate of profit to fall, called “neo-Ricardians,” base their rejection of this law on the so-called Okishio theorem. The supporters of the Okishio theorem replace Marx’s assumption of a constant value of labor power and an unchanged rate of surplus value—the ratio of paid to unpaid labor—with the assumption of a constant real wage. The Okishio theorem then goes on to prove that under these assumptions, completely different than those made by Marx, the industrial capitalists will never select a method of production that will result in a lower rate of profit but only select methods of production that result in a higher rate of profit.

The assumption of an unchanged real wage is completely different than the assumption of an unchanged value wage and rate of surplus value. As Andrew Kliman has pointed out in his ”The Failure of Capitalist Production” and his earlier work “Reclaiming Marx’s Capital,” these Marx critics perform their calculations not in terms of an embodied quantity of abstract human labor as Marx did but in physical terms.

The assumption of a constant real wage cannot be scaled up to the real world over an extended period of time, because the material use values that make up the real wages of the workers change with the development of the productive forces. For example, TVs, microwave ovens, smart phones, and tablet computers were not part of the real wage of workers in the days of Marx, because such material use values had not yet been invented. You cannot compare quantitatively the different use values of commodities.

What mid-19th-century commodity—remember the telephone hadn’t been invented—would compare to a present-day Android smart phone? I won’t be saying anything more about the Okishio theorem in this critique, because Heinrich is not a neo-Ricardian and does not use the Okishio theorem in his critique of Marx’s TRPF.

Next month—Heinrich’s critique of Marx’s law of the tendency of the rate of profit to fall.

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1 Marx and Engels agreed on a general division of labor. Marx concentrated on studying and criticizing bourgeois political economy, while Engels emphasized philosophy and the study of natural science. These included the major discoveries that were made in the natural sciences during the 19th century, the most important of which was Darwin’s theory of the origin of species through natural selection and the implications this has for the origin of our own species.

Many “intellectual” Marxists—the creators of what Heinrich calls “Western Marxism”—have claimed that Engels’ ideas on philosophy—dialectical and historical materialism—were at odds with Marx’s own ideas. However, if this is so, Marx, who was Engels’ closest personal friend, failed to notice it, or at least comment on it in any known written document. Marx and Engels did have occasional disagreements but not as far as we know on any basic philosophical questions.

2 The Frankfurt school is named after the University of Frankfurt in Germany where the Institute for Social Research, which provided employment to the members of what became known as the Frankfurt school was originally based. After the rise to power of Adolf Hitler, the Institute for Social Research re-located first to Geneva, Switzerland, and then in 1935 to Columbia University in New York City.

3 In recent weeks, long-term interest rates have begun to rise again as the central banks led by the U.S. Federal Reserve Board are attempting to end their “quantitative easing” policies without triggering a renewed economic crisis. If the attempts to withdraw from the quantitative easing policies do lead to renewed recession, or in the case of Europe a deepened recession over the next year or so, long-term interest rates might well fall below their recent lows.

4 Strictly speaking, the industrial capitalists purchase the workers’ labor power with credit, not money. Only after the workers have finished their work—or to put it differently, after the industrial capitalists have consumed their labor power—do the capitalists pay the debt to the workers they incurred when they purchased the workers’ labor power on credit. This is an example of money being used as a means of payment as opposed to a means of purchase. The same is true when the capitalists purchase the labor power of workers for reasons other than the production of surplus value.

It is not unknown for capitalists claiming bankruptcy to purchase the labor power—whether for the production of surplus value or for some other reason—and then fail to pay the debts they owe the workers.

5 Classical political economy did not distinguish between constant and variable capital. Indeed, it treated all constant capital as variable capital in the final analysis, because if you go back far enough, all constant capital is reduced to variable capital. Classical political economy then “explained” that capital consists of the means of subsistence of the workers! Marx completely rejected this approach.

The classical economists did, however, distinguish between fixed and circulating capital.

6 The industrial capitalists don’t even really know what their real rate of profit actually is in any particular year. Why is this so? Every industrial capitalist sets aside an allowance for bad debts—that is, accounts receivable that will not be collected because of the bankruptcies of the capitalist’s debtors. But the industrial capitalists can only make an educated guess on what portion of their debtors will actually go bankrupt in a given year. According to basic accounting principles, the capitalists and their accountants are supposed to assume the worst case possible when determining the size of their allowances for bad debt. The reported profit both in terms of the mass and rate of profit will then actually be below the actual profit.

This is fine as long as things are going well. But what happens when capitalists facing possible bankruptcy are eager to pull the wool over the eyes of their creditors in order to hide their own difficulties. Then they have a strong incentive to underestimate the allowance for bad debts in order to hide losses.

Another difficulty involves an estimate—and that is all it really is—of the depreciation of fixed capital. Anybody who has ever worked in an industrial enterprise knows that there are many machines in the factory that were completely depreciated on the books years, and sometimes decades, earlier but are still being used. The depreciation of fixed capital on the books is therefore at best an approximation of the actual depreciation of fixed capital and is often a fiction that has little relationship to actual economic depreciation of the fixed capital. Very often, the depreciation of fixed assets is calculated in a way to minimize taxes, and not to make a realistic estimate of the mass and rate of profit.

Capitalist corporations often have massive incentives to issue misleading profit reports. For example, they may deliberately understate profits in order to minimize taxes, and when unions are strong, to prevent workers from demanding wage increases. At other times, corporate managements are under great pressure to overstate profits in order to “beat their numbers on Wall Street and other stock exchanges.” If they don’t “beat their numbers,” the stock of their corporations will plunge on the stock exchange, setting the stage for either a rebellion by the board of directors or a hostile takeover that ends in managements’ ouster.

By manipulating the estimates of the depreciation of fixed capital, the allowance for bad debts, and expected sales, the managers of corporations can produce widely differing estimates of total profits and rates of profit.

Therefore, official profit reports from publicly traded corporations—non-public companies do not even have to issue profit reports—have to be taken with great caution in estimating the current stage of the industrial cycle and general state of business, let alone in trying to demonstrate Marx’s law of the tendency of the rate of profit to fall.

7 Bourgeois Marx critics often claim that Marx made a mistake when he assumed that prices equal values—or more precisely prices equal direct prices. They claim that Marx simply overlooked or was unaware of one of the most basic laws of economics, the tendency of competition to equalize the rate of profit among different branches of production.

If Marx had made such an elementary mistake, this would show that he was at best an uneducated amateur when it came to economics. In fact, Marx knew exactly what he was doing when he assumed that prices equal values in Volume I as well as in Volume II of “Capital.” By making this admittedly unrealistic assumption, Marx was able to probe far deeper into the essence of the capitalist economy than if he had assumed from the beginning that prices equal prices of production.

Not only was he able to show the real origins of surplus value in the unpaid labor of the workers—something that would not have been possible if he had assumed prices of production—but he was able to uncover the fact that it is only the turnover of variable capital that affects the rate of profit. But if we use prices of production, it appears that all parts of capital produce surplus value. If all parts of capital produce surplus value, then the turnover rate of all parts of capital would affect the rate of profit.