16.08.2012
Rooted in capitalism
Nick Rogers responds to Arthur Bough
In my review1 of Andrew Kliman’s The failure of capitalist production, I sought to set out the main lines of Kliman’s argument about the causes of the current economic crisis, explain some of the theoretical underpinnings of Kliman’s analysis, and link my discussion to issues that have been raised by other writers in the Weekly Worker (specifically Hillel Ticktin and Moshé Machover). In the latter part of the review I raised some reservations about Kliman’s treatment of the role of the devaluation of capital in the economic cycle.
Arthur Bough’s response2 takes issue with comments I made in two paragraphs of the original article. However, since these relate to questions of importance to Marxist political economy - the validity of the temporal single-system interpretation (TSSI) and the nature of current economic developments - Arthur deserves a reply.
TSSI
Turning first to Arthur’s critique of the TSSI, there certainly is no consensus among Marxist economists about how to interpret some very important features of Marx’s political economy. Arthur will be able to find many anti-TSSI quotes to add to the one he reproduced from Fred Moseley. The TSSI school is very much not part of the mainstream of Marxist economics.
The Moseley quote relates to how commodities and their inputs - specifically constant capital - should be valued. So does the passage from volume 3 of Capital that Arthur goes on to quote. It concludes (on p207 of my 1981 Penguin translation) with the sentence: “As the retrospective expression of more labour-time, this cotton adds a higher value to the product which it goes into as a component than it possessed originally and the capitalist paid for it.”
Marx is discussing here what happens to the value (and price) of existing stocks of cotton if the price (and value) of newly produced cotton rises. This is in the context of a chapter that tackles the impact on the rate of profit of changes in the value (or price) of constant and variable capital inputs into the production process. The principle Marx establishes is that if the value of constant capital falls the rate of profit will rise and if it rises the rate of profit will fall. Note that the quantity of profit is left unchanged - we are talking about changes in the denominator (rather than the nominator) of the calculation S/ (C+V), where S represents surplus value (profit), C constant capital (buildings, machinery and raw material) and V variable capital (wages).
This passage is often cited because it bears on the debate around whether the value of commodities is determined by the historic cost of inputs (the price capitalists paid for them) or current replacement costs of inputs (their current price on the market). Andrew Kliman argues in favour of pre-production reproduction costs - the costs of inputs at the time that they entered the production process. Kliman discusses this issue in his 2007 book Reclaiming Marx’s ‘Capital’ (pp95- 105), citing, as it happens, the very same passage of Marx as Arthur.
In one sense changes in values across time are precisely what the TSSI is interested in. The key question is how these changes should be captured in measuring the rate of profit.
Arthur illustrates the implications of the quoted passage from Marx with the equation C 1,000 + V 1,000 + S 1,000 = K 3,000, where K is the price of the commodity produced in a production process that absorbs 1,000 constant capital and 1,000 variable capital. New value of 2,000 (as the monetary expression of the labour-time expended) is created in this production process, leaving a surplus value of 1,000 (and a rate of profit of 50%).
I do not think I do Arthur a disservice if I point out that the equation can represent the production of a single commodity, or the output of a production line, an industry, one of Marx’s economic departments or the whole economy.
Arthur asks what happens if the value of the constant capital rises (after the capitalist has purchased it) to 2,000? He suggests that the TSSI approach would show the same value for the inputs of constant capital and variable capital, but value the output price at K 4,000. The capitalist would receive surplus value of 2,000 - 1,000 of which would not be attributed to the labour involved in the production process. Labour would not be the only source of profit - a non-Marxist conclusion.
Arthur’s alternative proposal is to retrospectively revalue the constant capital input and show C 2,000 + V 1,000 + S 1,000 = K 4,000 (a rate of profit of 33%).
In my view neither of these equations accurately reflects what has happened - or the position of followers of the TSSI school. Now I would argue (in opposition, I think, to Kliman’s position) that it is the aggregate price paid by capitalists for inputs (in other words, the historic cost) that determines the value of the constant capital transferred to the aggregate price of the output - and therefore forms the basis of the calculation of the rate of profit.
So, if every single producer of K has paid 1,000 for C, it does not matter if the price of C subsequently changes before, during or after the commodity (or aggregate output) has been produced: competition will ensure that K will reflect the price that was actually paid for C. Remember that for Marx it is competition that enables the law of value to be expressed (albeit only in the aggregate).
If the value of any stock of commodities (however large) reflected only the conditions of production of the most recent flow of commodities entering the market (however small), then in these circumstances profits could be made independently of the quantity of value created in production. Capitalists would receive K 4,000 as the aggregate price of their commodities when they had only paid C 1,000 + V 1,000 for the inputs. Surplus value would have doubled without any additional labour-time being applied to the production process. It appears to me that Arthur unwittingly demonstrates against the ‘current cost replacement’ theorists the very charge he levels against the TSSI.
For the purposes of the equation, Arthur (along with the majority of mainstream Marxists) can revalue the input C to 2,000 (irrespective of what was paid for it) if he wishes, but that does not change the reality of the situation - only 1,000 was actually paid.
Arthur argues that my approach amounts only to a subjectivist study of capitalists rather than an objective study of capital. But Marx make clear that aggregate prices equal aggregate values, aggregate profits (and interest and rent) equal aggregate surplus value and the aggregate rate of profit equals the aggregate value rate of profit. Marx’s economics is rooted in the world of real capitalists.
For instance, read on a few paragraphs from the passage in volume three of Capital we have been discussing: “Without going into the detailed effects of competition here, we may remark for the sake of completeness that (1) if there are substantial stocks of raw material in the warehouse, they counteract the price increase arising from the conditions of their production; (2) if the semi-finished or finished goods on the market press heavily on the supply, they may prevent the price of these goods from rising in proportion to the price of their raw material ….
“The smaller the amount of stock to be found in the production sphere and on the market at the end of the business year, at the time when raw materials are supplied afresh on a massive scale (or, in the case of agricultural production, after the harvest), the more visible the effect of a change in raw material prices.”
Is Marx not saying that prices are influenced by both the labour-time required to produce pre-existing stocks and the new supplies? Certainly, stocks of the raw material are revalued, but the price of newly created commodities is also affected. To my mind, none of the examples of Marx’s valuation of constant capital that Fred Moseley discusses in the article3 cited by Arthur contradict my interpretation.
Say half the mass of C was previously produced at a price of 1,000 and the other half newly emerges onto the market at a price of 2,000 (or rather their conditions of production entail differing expenditure of labour-time equivalent to these differing prices). Since the prices of all commodities of the same type tend towards an average, the price of C would be neither 1,000 nor 2,000, but would gravitate towards 1,500.
Thus Arthur’s equation should now be C 1,500 + V 1,000 + S 1,000 = K 3,500 (a rate of profit of 40%). 1,500 would be the average historic price paid for the constant capital input. In aggregate, the same new value (2,000 V + S) is being created as before and the same surplus value (1,000 S) is grabbed by capitalists. However, those capitalists who paid the lower price for their input of constant capital would gain a surplus profit, while those who were forced to buy the more expensive raw material will reap a rate of profit below the average.
Note the differing rates of profit in my calculation (40%) as against Arthur’s (33%) - both down from the profit rate of 50% before the price rise kicked in. What does Marx say about the impact of the revaluation of the stocks of constant capital on the rate of profit? On the very same page as Arthur’s original quote: “This revaluation can compensate the individual capitalist, or a whole particular sphere of capitalist production - even more than compensate, perhaps - for the fall in the rate of profit that follows from the raw materials rise in price.”
So the rise in the price of constant capital would be expected to lead to a fall in the rate of profit. However, those capitalists who bought stocks of the raw material before the price rise will not experience that fall. Sounds as if the historic price might just be relevant to the determination of the rate of profit after all.
I suggest that my proposed treatment of the results of an increase in the value of new supplies of constant capital not only takes account of the broader context of Marx’s understanding of the aggregate relationships between values and prices (the spirit of his work, if you like), but, in this case, the letter.4
State capitalism
Turning to the discussion of the economic crisis, it strikes me that Arthur determinedly grasps the wrong end of the stick. He takes issue with a paragraph where I dismiss the assumptions of the underconsumptionist explanation of the current economic crisis and weaves a tale in which my “view of capitalism seems stuck in an early 19th century neoclassical world” (classical, surely, if we are discussing the era of Adam Smith and David Ricardo).
Now, Arthur says he is not an underconsumptionist, but I do not think his protests can be taken at face value, for he also says: “The basic contradiction of capitalism is that it expands production faster than it can expand the capacity to consume that production at prices that ensure the capital consumed can be reproduced: ie, at a profit.” Sounds like a fairly unambiguous statement of the underconsumptionist case to me.
The trouble is Arthur has not been paying very close attention to what I wrote and I am far from convinced he has read Kliman’s The failure of capitalist production at all. In the book Kliman is debating those Marxist economists who measure a sharp rise in the rate of profit, but a relatively slow rise in growth rates, through the 1980s and 90s.
Arthur’s statistics establishing that economic growth rates and profit rates have risen between 2000 and the crash do not disprove Kliman’s thesis. As I mentioned in my review, Kliman measures just such a rise, attributing it to the credit and asset price boom of those years. And Arthur’s evidence about corporations hoarding profits since the crash is precisely the behaviour we would expect in a period of recession.
For that matter, citing one analysis of trends in the rate of profit (that of Michael Roberts) is neither here nor there. Much of The failure of capitalist production is devoted to explaining why the way the rate of profit is measured is crucial in determining the results. Kliman admits that his rate of profit only partially captures the phenomenon Marx was interested it (crucially, missing the rate of turnover of capital that Arthur takes up), so is provisional. But that is the case with all other attempts by Marxists to measure the rate of profit, including Michael Roberts’.
I have not analysed the US statistics on profit rates myself (so I am neutral on the trends they may display, although broadly sympathetic with Kliman’s temporal methodology), but I think it is implausible to maintain that, while profits in the productive sectors were at a historic high, investment in those sectors stagnated. If there were a lack of demand for the output of the productive sector, that would have reduced the profits capitalists could have realised. Kliman’s argument that economic growth (ie, the rate of accumulation) was low because profit rates were low is logically a stronger explanation.
Logically sound, but, in Arthur’s eyes, evidence of a failure to take account of moves away from free-market capitalism. Such an accusation certainly cannot stand against Kliman, whose thesis is predicated on governments (in the “state capitalism” that emerged in the first half of the 20th century) blocking the wholesale devaluation of capital that alone would allow an escape from ongoing crisis.
For Arthur, my crime was that I suggested capitalists do not have sufficient foresight to accurately predict future levels of demand. Apparently, we live in a world of planned capitalism. While planning undoubtedly takes places within large capitalist companies, and cartels and states seek to establish a secure and predictable space for capital on a wider scale, the results of such efforts are far from perfect.
There is a process of ongoing concentration and centralisation of capital and an increasing role for the state in advancing the interests of national capitals. But from time to time existing industrial behemoths tumble and new ones rise to take their place. New fields of competition between corporations and states are thrown up.
If that were not the case, then “the decline of the law of value” (in Hillel Ticktin’s words) would be complete. It is ironic that Arthur, who in other writings sets himself up against the concept of the decline of capitalism, in this article makes the case for the view that competition is all but extinguished.
In that case, the drive to both profit maximisation and technological innovation would be severely weakened. The dynamics of capitalism identified by Marx - such as a (very tendential) equalisation in the rate of profit and any tendency for the rate of profit to fall - would no longer apply. Capitalism would have reached a state of almost complete cartelisation.
However, Arthur’s view that profit maximisation today is orientated to the longer term is hardly compatible with the reality of short-term speculative booms and sharp economic crises.
The crash of 2008 is a striking example of the inability of capitalists to very accurately foresee the future or buck the cycle of boom and bust. It is proof that capitalism today is an amalgam of planning and anarchy and that its basic contradictions remain acute.
That is why I maintain that, a century and a half on, Marx’s project of political economy can continue to help us understand the social system we seek to overthrow.
Notes
1. ‘Value, profit and crisis’ Weekly Worker July 5.
2. ‘Stuck in the neoclassical world’ Weekly Worker July 26.
3. F Moseley, ‘The determination of constant capital in the case of a change in the value of the means of production’: www.mtholyoke. edu/~fmoseley/CONCP.htm.
4. I must admit that I fail to grasp Arthur’s point in his philosophical digression on the impossibility of fixing a single point in time. Surely Arthur does not believe that time is an irrelevance in Marxist political economy? What is volume 2 of Capital if not an extended treatise on the multitude of ways in which capital in its various manifestations interact over time?