19.11.2015
‘Revolutions in value’ and capitalist crisis
Despite the various criticisms, Marx’s analysis of profitability was basically sound, argues Nick Rogers
Confronted with the most intractable economic downturn since the 1930s, Marxist economics has made surprisingly little headway in establishing any kind of intellectual hegemony - least of all in explaining why capitalist economic crises happen.
In part this reflects the long-standing crisis of the workers’ movement, which, if it were stronger and more confident, would be better placed to promote alternative ideas. But it is also a consequence of a genuine crisis of Marxist economics itself: the more than one hundred-year consensus (broken only recently) that the final volume of Capital (volume three, edited by Friedrich Engels and published in 1894) contains flaws of logic that render Karl Marx’s key insights into the functioning of capitalism invalid. As each Marxist academic attempts a repair job on Marx’s theory, Marxist economics has fragmented. More damaging still, the confession of internal inconsistency has disarmed Marxist economics. For how can a theory that at a fundamental level does not work contribute to understanding contemporary events?
In recent decades the temporal single system interpretation (TSSI) has sought to rebut the allegation that Marx’s analysis lacks coherence. The interpretation allows us to evaluate afresh whether Marx’s writings have any bearing on subsequent economic history and today’s economic turmoil.
This and a further article discuss a contribution made four years ago by Moshé Machover,2 which raises important questions about Marx’s analysis of profitability. In responding to Machover’s critique, I draw on the work of Andrew Kliman,3 who, as a leading proponent of the TSSI, has done most in recent years to defend and advance the core of Marx’s project of political economy. Machover’s joint 1983 work with Emmanuel Farjoun, Laws of chaos,4 is also highly relevant to the discussion.
I go on to propose avenues of investigation and research that, by taking account of the totality of what Marx referred to as “revolutions in value”,5 point towards a coherent and multi-faceted explanation of capitalist crises and, more generally, of the dynamics of capitalism.
Capital’s hidden abode
What does Marx have to tell us about the kind of economic crises that capitalism continues to experience? An important starting point is Marx’s identification of two spheres of economic activity: circulation and production. In the sphere of circulation, commodities are bought and sold, money changes hands and complex marketing and financial strategies and institutions arise. It is in the sphere of production that the application of human labour creates the commodities which are subsequently circulated. This conceptual distinction shapes the structure of Marx’s major work on political economy, Capital. Volume one (the only volume published in Marx’s lifetime) deals primarily with production; volume two goes on to tackle circulation; and volume three examines “the process of capital’s movement considered as a whole”.
The buying and selling of commodities precedes capitalism by thousands of years. Generalised commodity production, on the other hand, in which the labourer’s ability to work itself becomes a commodity (Marx’s labour-power) on a wide scale and dominates the economy and society is the very definition of capitalism.
One-off economic bubbles and crashes have happened since at least the Dutch tulip mania of 1637 - some claim that economic crises in antiquity demonstrate similar features. However, economic crises that recur regularly and frequently - exhibiting pattern-like behaviour - have appeared only since the birth of industrial capitalism in the second half of the 18th century. The correlation of the emergence of regular crises with the beginning of the continuous productivity increases and economic growth that accompanied the first industrial revolution provides prima facie evidence that the cause of the cyclical return of crisis should be sought in the sphere that is uniquely capitalist - production.6
We need then to accept Marx’s invitation to accompany him into the heart of the production process (offered early in the first volume of Capital in pursuit of the source of surplus-value):
Let us therefore, in company with the owner of money and the owner of labour-power, leave this noisy sphere [circulation], where everything takes place on the surface and in full view of everyone, and follow them into the hidden abode of production, on whose threshold there hangs the notice, ‘No admittance except on business’. Here we shall see, not only how capital produces, but how capital itself is produced. The secret of profit-making must at last be laid bare.7
Capitalism is production for profit - ultimately, profit-making and the reinvestment of profit in order to expand capital is its one and only rationale. And for capitalists it is the rate of profit that is the key indicator. It tells them whether they have made a worthwhile investment. It warns them if their business is failing. It points to alternative lines of business that might be more profitable. It is also a measure of the extent to which their capital has self-expanded in the past. Marx’s discussion of the factors that determine the rate of profit and its trends is, therefore, likely to have a strong bearing on our understanding of capitalist crisis.
In volume three of Capital - where he introduces the concept of the rate of profit for the first time - Marx soon turns to exploring the problems that may occur at the heart of the “hidden abode” of the production process. Capitalists are driven to raise the productivity of their workers: ie, the quantity of use-values produced by each worker in every hour of the working day.8 Such rises in productivity tend to increase the quantity of constant capital (non-labour inputs into production) processed by each worker. For instance, a new machine might mean that 10 workers can now produce what previously took 20 to do. Obviously, fewer workers are now processing the same quantity of, say, cotton, steel or coal and the physical ratio of machinery to workers is likely to have increased.
The central lesson of the labour theory of value is that, while non-labour inputs transfer their existing value to the commodities produced in the production process, only labour (the work that workers do within the production process) adds new value to those commodities. This new value is the only source of profit - it also covers the wages of the workers, which is why there is a constant struggle over the division of the new value between capitalists and workers. Fewer workers therefore means less new value - as a proportion of total investment in production - and self-evidently has the potential to cause serious problems for capitalists. It becomes the prime suspect in the search for the cause of capitalist crises.
And, indeed, Marx’s most sustained discussion of the crises across the three volumes of Capital is in the context of this phenomenon’s “internal contradictions”.9
Marx is very specific about how the problems are manifested. A rise in the productivity of labour tends to increase the ratio between dead labour (the constant capital produced by workers in previous production cycles: ie, land, buildings, machinery, energy, raw material, etc) and living labour (actual workers employed in the current production cycle). Marx defines this ratio as the technical composition of capital.10 It has a direct bearing on the rate of the profit, which is so important to capitalists.
Marx’s rate of profit is equivalent to the capitalist concept of the return on investment. That investment includes the purchase of constant capital, which has its value preserved in the production process, but not expanded (its value remains constant), and the purchase of variable capital, the outlay on workers’ wages (variable because workers add new value to the sum of values that enter production). Marx defines the rate of profit as the ratio between surplus value (the new value created by workers that is available to capitalists, once the wage costs of workers have been deducted) and all the capital advanced - not just the capital consumed.
So not only circulating capital (wages and constant capital used up completely in a single production cycle) and that portion of fixed capital used up in each production cycle (wear and tear of machinery, a portion of the cost of replacing buildings and other infrastructure, when they reach the end of their useful life) is found on the denominator of the rate of profit calculation S/C+V (surplus value divided by constant plus variable capital), but the total investment in fixed capital that continues to play a role in production over multiple production cycles.
When the composition of capital rises - ie, when production becomes more capital-intensive - so the ratio between the new value created in production (by workers) against the value of the capital advanced falls. If the division of the new value between workers and capitalist - ie, the rate of surplus value - remains unchanged, the rate of profit must fall. Capitalism therefore carries within it a contradiction between its most dynamic and progressive feature - the release of the creative potential of what Marx calls “cooperative labour”, leading to dramatic increases in the quantity of things each worker produces - and its own core driving force: the production, on an ever expanding scale, of profit.
Debating the rate of profit
Moshé Machover, in a typically lucid 2011 article in the Weekly Worker,11 makes the case against this law of the tendential fall in the rate of profit (the LTFRP). Machover says he aims “to refute the traditional Marxist theoretical argument claiming to prove that the average rate of profit has a long-term tendency to fall”. He argues essentially that reductions in the physical quantity and value of constant capital involved in production reduce the composition of capital that labour-saving productivity increases may have raised and render the LTFRP invalid as a prediction of the course of the rate of profit or as an explanation of cyclical capitalist crises.
Machover’s argument can be divided into four propositions:
1. He accepts Marx’s basic premise that “the average rate of profit has an inverse tendency to that of the overall (economy-wide) organic composition”.12
2. However, capitalists strive to save on costs of constant capital as well as labour. The physical inputs of constant capital can fall. New production processes may require fewer raw materials and less energy (or alternative raw materials and energy sources that are cheaper), while producing greater output. New generations of productivity-boosting equipment may be cheaper and possibly physically less bulky than the equipment they replace.
Machover cites the example of the print industry, where much cheaper electronic photo printers have replaced the hot-metal typesetting machines of old, dramatically reducing the cost of fixed capital in the industry. The technology is so cheap that it is sold directly to domestic users, who can now print off small runs themselves on their own printers at home without involving a capitalist or third party of any sort. So the new machine that allows 10 workers to do the work of 20 may be cheaper than the old machinery the 20 workers were operating.
Machover calls these “capital-saving technological changes” - in contrast to those that are “labour-saving”. He goes on to point out that labour-saving productivity gains (or savings on the physical inputs of constant capital) in Marx’s department 1 (that produces means of production) will reduce the value of inputs into the production processes of both departments 1 and 2 (that produces consumer goods).
Labour productivity increases in the production of steel, for instance, even if they raise the composition of capital in the steel industry, will lower the price of steel inputs into other industries and will tend to lower the composition of capital of those industries.
3. The combined effect of capital-saving changes and the impact of cheaper means of production feeding through to other industries is that the composition of capital can fall (ie, production can become less capital-intensive) as a result of technological progress. Consequently, since it has an inverse relationship with the composition of capital, the rate of profit can rise. In fact, there is no reason in theory to assume a rising trend for the composition of capital and therefore any tendency for the rate of profit to fall. Machover’s conclusion is that “the traditional Marxist argument for the historical tendency of the average rate of profit to decline is untenable”.
4. Machover’s implicit conclusion, since his article is a response to a discussion about the causes of the present crisis, is that the LTFRP cannot contribute to an explanation of capitalist crisis.
Machover raises very serious and valid points that call into question a simplistic application of Marx’s LTFRP to the discussion of capitalist crisis. It is my intention to show that it is precisely the phenomena that Machover describes that account for the inherent instability of capitalism. In fact they are an integral part of the LTFRP.
Machover’s first two propositions are undoubtedly true - the average rate of profit is inversely related to the composition of capital of the economy, but the composition of capital can fall (as well as rise), so it is possible for the average rate of profit to rise as a result of technological change. The extent to which the rate of profit shows a tendency to fall (proposition 3) requires empirical analysis to establish what has happened, alongside modelling of the relative impact of labour-saving and capital-saving changes, so that we can predict what is likely to happen in different scenarios. However, my thesis is that, even if the tendency of the rate of profit is indeterminate (and I will go on to challenge the idea that Marx was seeking to predict an ever-lasting fall in the rate of profit), Machover’s proposition 4 (that the impact of increases in the productivity of labour on the rate of profit is not relevant as a cause of capitalist crises) does not follow.
There are two reasons. First, a theory of capitalist crisis must explain the whole trajectory of the cycle. It is the cyclicity of capitalist crises that is critical. Not only why the reproduction of capital is periodically derailed, but how crisis is overcome and growth and accumulation restored: “Crises are never more than momentary, violent solutions for the existing contradictions, violent eruptions that re-establish the disturbed balance for the time being.”13 In other words, we must seek the seeds of the crisis within the recovery, and the seeds of the recovery within the crisis.
The need to explain the whole cycle is why Marx explicitly rejected the notion that the low wages of workers cause crises (the theory of underconsumptionism that remains the default explanation for anti-capitalists):
It is pure tautology to say that crises are provoked by a lack of effective demand or effective consumption … we need only note that crises are always prepared by a period in which wages generally rise, and the working class actually does receive a greater share in the part of the annual product destined for consumption.14
The demand for economic output provided by the wages of workers fails to explain either phase of the cycle, since it is immediately prior to the onset of a crisis that workers’ wages are generally highest, and it is in the depths of a recession (prior to the recovery) that workers’ wages are usually most tightly squeezed. Underconsumptionism can explain neither the outbreak of crisis nor how it is overcome.
So whether or not the LTFRP is intended to theoretically predict a long-term fall in the rate of profit (I do not think it is) has no bearing on the search for an explanation of capitalist crisis. A steady, continual decline in the rate of profit would not explain the cyclicity of crises under capitalism - if profits were continually falling, we would expect a parallel decline in the dynamism and health of the system rather than the boom and bust cycle that is capitalism’s actual behaviour. If the rate of profit is behind the regular return of crisis, we need to look for determinants of the rate of profit that could power a cycle similar to that of the capitalist economy.
The second reason why Machover’s proposition 4 does not hold is that falls in the value of constant capital, especially fixed capital, destabilise those capitalists who experience the loss of value of their assets. They can also contribute to a fall in aggregate profit rates.
To see why this is the case we have to touch on the temporal single system interpretation of Andrew Kliman, Alan Freeman and others. The TSSI argues that the debates over the supposed inconsistencies of Marx’s Capital, kicked off by Böhm-Bawerk and Bortkiewicz in the late 19th and early 20th centuries in response to the publication of Marx third volume, have imposed an interpretation of the relationship between values and prices that was alien to Marx’s approach and manufactures ‘flaws’ that do not exist. The TSSI does not say that Marx’s theory is correct - simply that it should be evaluated on the basis of an interpretation that credits Marx with theoretical coherence.
The single system aspect of the TSSI argues that Marx was modelling a single value/price system - not a dual system of values and prices. The so-called “transformation problem” is based on a misunderstanding of Marx. Marx assumes that the cost price of a commodity is what capitalists actually paid for their constant and variable capital inputs. Only the surplus value emerging from the production process is transformed.
The temporal aspect of the TSSI argues that taking account of changes in value over time is the only basis on which the labour theory of value makes sense. Okishio’s theorem, on the other hand, which is widely assumed to prove that increases in productivity cannot lower the rate of profit (and that Marx’s LTFRP is therefore falsified - which, note, is not Machover’s thesis), bases its calculation on the equality of the prices of inputs to and outputs from the same production cycle. Time is abolished.
A simultaneist approach (such as followed by Okishio’s theorem) that readjusts the values (or prices) of inputs to production (the capital advanced) in the light the value of equivalent outputs at the end of the production cycle (ie, the current replacement cost of the inputs) will produce a measure of the rate of profit that varies from that measured temporally. Simultaneist valuation of inputs and outputs in effect tracks what happens to physical volumes (use-values) in the production process rather than values. Because productivity increases must increase the physical surplus, in the simultaneist world an increase in productivity can only increase the rate of profit.
The TSSI allows the values of outputs from the production cycle to differ from those of inputs. Changes in values over the course of the production cycle are an integral aspect of the model and do not require a repricing of the capital advanced (the historical cost of the advanced capital is measured). Temporal modelling therefore captures the impact of changes in productivity on values over the course of the production cycle. Time is reinstated. Even when the physical surplus increases (as it will have done when productivity rises), the value of the commodities that comprise the surplus may have fallen compared with the value of the same basket of commodities at the beginning of the cycle. The ratio of surplus value to advanced capital may fall. An increase in productivity may lead to a fall in the rate of profit, as predicted by Marx.
‘Moral depreciation’ and the business cycle
Most illustrations of changes in the rate of profit take account only of circulating capital. Yet, as Kliman explained when I interviewed him, the role of fixed capital in the formation of the rate of profit is much more important.15
When historical cost measurements are applied to fixed capital, the divergence from the current replacement cost are very sharp. The value/price of the fixed element of constant capital can undergo a very significant change over its lifetime. TSSI measures of the rate of profit do not spirit away the aggregate losses to capitalists as a result of the devaluation in the price of the means of production caused by the kind of improvements in their production and the appearance on the market of new, better and quite possibly cheaper means of production of the sort that Machover discusses.
Marx identifies this feature of technological change as a distinct phenomenon. He calls it “moral depreciation”:
But, in addition to the material wear and tear, a machine also undergoes what we might call a moral depreciation. It loses exchange value, either because machines of the same sort are being produced more cheaply than it was, or because better machines are entering into competition with it. In both cases, however young and full of life the machine may be, its value is no longer determined by the necessary labour time actually objectified in it, but by the labour time necessary to reproduce either it or the better machine. It has therefore been devalued to a greater or lesser extent.16
Kliman, in The failure of capitalist production, examines the role of the rate of profit in determining the course of the global capitalist economy since 1945. I think he provides a powerful explanation of the high growth rates during the post-war boom, why the ‘golden age’ ended and why the subsequent lower levels of growth heightened economic instability.17 Kliman is dealing with relatively long phases in the development of capitalism - 1945 to the 1970s and then 1982 or so onwards - that are sometimes characterised as ‘long waves’. In addition, however, there is a recognised short-term cycle in the behaviour of the economy labelled variously the industrial cycle, the economic cycle or the business cycle. It may last for between five and 10 years and involves an alternating cycle of boom and bust. It was the feature of the economy that Marx sought to explain in his discussion of crisis. It is what mainstream politicians mean when they talk about ‘balancing the books over the course of the economic cycle’.
Kliman’s explanation of this short-term cycle seems reliant on relatively chance factors. For him the crash of 2008 was the bursting of the interlocking bubbles (and unpayable debt) that had built up in response to poor profit rates over a couple of decades and was actually preceded by a rise in profit rates. This is a coherent explanation of this particular downturn, but it would be interesting to examine whether it mapped onto the underlying business cycle or was an essentially non-cyclical event.
I want to propose a hypothesis that differs in some respects from this schema. A Marxist theory of crisis needs to account for the short-term business cycle, which is more regular and more clearly cyclical than the longer-term economic trends on which Kliman focuses. I want to suggest that this cycle may be linked to a feature that Machover describes: the persistent fall in the price of fixed capital goods.
Marx linked the investment in fixed capital with the length (periodicity) of crises:
The result is that the cycle of related turnovers, extending over a number of years, within which the capital is confined by its fixed component, is one of the material foundations for the periodic cycle in which business passes through successive periods of stagnation, moderate activity, over-excitement and crisis. The periods for which capital is invested certainly differ greatly, and do not coincide in time. But a crisis is always the starting-point of a large volume of new investment. It is also, therefore, if we consider the society as a whole, more or less a new material basis for the next turnover cycle.18
So there are high levels of investment in fixed capital at the start of the upturn in the business cycle. Marx speculated that the downturn occurs when a critical mass of that fixed capital is coming to the end of its life.
I propose that the depreciation of fixed capital over and above expected wear and tear is critical to the periodicity of the short-term business cycle: ie, when the economic upturn bursts. A proportion of capital does not realise the surplus value that investors early in the cycle had counted on: the price of newly produced commodities reflects the depreciated, lower value of fixed capital and capitalists who paid a higher price for their fixed capital suffer.19
At a certain point in the cycle the situation for the capitalists affected becomes critical. It may be when decisions on replacing fixed capital are imminent (as Marx speculated) or it may happen earlier, when the realisation dawns on a sufficient number of capitalists that anticipated returns are never going to be achieved and they need to cut their losses. The capitalists either fail entirely (perhaps a loan cannot be repaid) and go bust, or they cut back their investment plans, reducing production. A sharp cut in investment demand initiates the downturn in the business cycle: it either leads directly to crisis or initiates the bursting of a financial or asset bubble.
In fact, Marx describes the interaction between moral depreciation and the LTFRP as having just this kind of destabilising impact:
The periodical devaluation of the existing capital, which is the means, immanent to the capitalist mode of production, for delaying the fall in the profit rate and accelerating the accumulation of capital value by the formation of new capital, disturbs the given conditions in which the circulation and reproduction process of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process.20
The losses of those capitalists suffering the sharpest depreciation of their capital are not necessarily picked up by aggregate measures of the rate of profit. In the aggregate the rate of profit may be stable or even rising. But the shock of a significant proportion of capitalists cutting back production or going out of business in relative synchrony may be sufficient to slow down the economy or tip it into crisis.
Although I argue that the fundamental causes of cyclical capitalist crisis are not to be found in the sphere of circulation, a sudden collapse in the market for a wide range of commodities (a break in the circulation of commodities) certainly describes what a crisis is. As Marx says,
Circulation bursts through all the temporal, spatial and personal barriers imposed by the direct exchange of products, and it does this by splitting up the direct identity present in this case between the exchange of one’s own product and the acquisition of someone else’s into the two antithetical segments of sale and purchase ... Hence, if the assertion of their external independence proceeds to a certain critical point, their unity violently makes itself felt by producing - a crisis ...21
The point is to explain the chronic economic factors that directly or indirectly prompt the acute collapse in demand. As Marx goes on to say after the preceding quote,
These forms [the break between sale and purchase] therefore imply the possibility of a crisis, though no more than the possibility. For the development of this possibility into a reality a whole series of conditions is required, which do not yet even exist from the standpoint of the simple circulation of commodities [emphasis added].
Farjoun and Machover present their own “tentative thesis”: “Is it possible that a crisis can be manifested not only by a fall in the average rate in real terms, but also by a considerable rise in the standard deviation compared to the average?” They note that, while during the crisis year of 1981 their measure of the average rate of profit shows little change from the average of non-crisis years, “the standard deviation is four times as big as the difference in the average would suggest in normal times: there is a much higher concentration of capital in the lower rates of profits”.22
My hypothesis on the impact of moral depreciation would be consistent with fluctuations in the standard deviation of the rate of profit across the lifetime of the cycle.
As the business cycle progresses and the effects of moral depreciation kick in, the divergence widens between the below-average profit rates of struggling capitalists (more often than not those who invested earlier in the cycle) and the above-average profit rates of those who are doing well (more often than not those who invested later). The downturn which this provokes clears from the market those capitalists who are burdened with fixed capital investments, on which they cannot recoup the value of the original investment (and perhaps are unable to pay back their debts). The remaining capitalists (and new entrants) are able to take full advantage of the cheaper technology, machinery, equipment, etc, to boost profit rates.
Thus the downturn serves to generalise across the whole economy the underlying fall in the value of fixed capital (and the consequent reduction in the economy-wide composition of capital). It will cause a narrowing in Farjoun’s and Machover’s standard deviation in the aggregate rate of profit - profit rates cluster more closely around the average, as those with lower profits are cleared from the market - and may (though not necessarily) raise the average rate of profit. This provides the basis for a new upturn.
The moral depreciation of fixed capital has been a feature of the current mode of production since Britain’s 18th century industrial revolution. The remorseless impact of moral depreciation on the profitability of real capitalists at specific points in their cycle of investment therefore coincides with the emergence of the capitalist business cycle and provides a plausible explanation of its regular return - whatever the impact of the fall in the value of the fixed component of constant capital on the composition of capital.
In other words, my hypothesis works as an explanation of capitalist crisis based on ‘revolutions in value’ in the sphere of production, even in the case of the entirely capital-saving productivity increases to which Machover draws our attention.
In the next article I explore the relationship between the business cycle, the rate of profit and longer-term phases in economic history.
Notes
1. . I thank Andrew Kliman for making the time to comment on an earlier draft of this two-part article. Even where we do not see eye to eye, his critique helped sharpen my analysis. Andrew bears no responsibility for the remaining weaknesses.
2.. M Machover, ‘Saving labour or capital?’ Weekly Worker October 6 2011.
3.. Particularly A Kliman Reclaiming Marx’s ‘Capital’: a refutation of the myth of inconsistency Lanham 2006; and The failure of capitalist production: underlying causes of the great recession London 2011.
4.. E Farjoun and M Machover Laws of chaos: a probabilistic approach to political economy London 1983.
5.. K Marx Capital Vol 2, London 1992, pp469-71.
6.. Which does not exclude the possibility of non-cyclical commercial and financial crises continuing to occur.
7.. K Marx Capital Vol 1, London 1990, pp279-80.
8.. See the discussion of relative surplus value in Capital Vol 1, chapter 12, pp429-38.
9.. K Marx Capital Vol 3, London 1981, chapter 15, pp349-75.
10. . Marx first introduces the concept of the composition of capital (and explains the distinction between the technical, value and organic compositions) in Capital Vol 1, p762.
12.. I think it is necessary to be more specific than Machover is about whether it is the technical or value compositions that are affected by the changes he discussed. I will return to this point in my second article.
13.. K Marx Capital Vol 3, p357.
14.. K Marx Capital Vol 2, pp486-87.
15.. ‘Crisis, theory and politics’ Weekly Worker September 27 2012.
16.. K Marx Capital Vol 1, p528.
17.. See my review of The failure of capitalist production: ‘Value, profit and crisis’ Weekly Worker July 5 2012.
18.. K Marx Capital Vol 2, p264.
19. . Kliman, when measuring rate of profit, deducts the loss of value of fixed capital from profits - following the accountancy procedure of the Bureau of Economic Analysis.
20.. K Marx Capital Vol 3, p358.