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A Saturday night Marx question

Brian Leiter

Now you know what I'm working on this evening.  Here it is in brief:  Marx thought technological innovation under capitalism would produce a falling rate of profit for capitalist enterprises, but he thought this because he accepted the labor theory of value, which is false.  Yet at the limit technological innovation under capitalism will produce a falling rate of profit because the elimination of human labor will reduce the total pool of consumers.  Is there a good discussion of this in the economic literature?  Thanks.

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12 responses to “A Saturday night Marx question”

  1. Anonymous Two

    Brian, Isn't the critical number a measure of total demand rather than the number of human consumers who also labor? Marx taught that the satisfaction of needs "leads to new needs" (The German Ideology, Tucker 2d ed. p. 156). The (asymptotic) elimination of human labor doesn't itself exclude an increase of human consumption at an equal or greater rate. Agreed, technological innovation should reduce the demand for human labor and thus reduce the rate of return to owners of labor power as their sole capital asset. But capitalism can make non-laborers consume by encouraging debt and penalizing saving. Up to a point. What is critical to the functioning of a capitalist economy at a nonzero average rate of profit is that wealth be in the hands of those who are disposed to spend rather than to hoard it. Or is that no longer capitalism?

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  2. William Ward

    It should be questioned as to whether Marx, in value theory terms, even thought that there would be a falling rate of profit. People tend to elide, in any case, what he called the countervailing tendencies (e.g. a rising rate of exploitation, s/v, investment in constant capital cheapening both variable and constant capital, and the creation of new markets whether by way of geographical expansion, new forms of commodification, and/or the advancement of science, bourgeois or no, cf. David Harvey). A falling rate of profit, for what it's worth, is also not at all incompatible with a growth in the mass of profits (with any depressed rate a mere artefact of an increase in the total monetary value of the investments on which a return is expected). Additionally, the expulsion of human labour from the production process can lead to the reintegration of human labour in that process as a fetter upon the development of the productive forces. An increase in the size of the reserve army of labour can, in other words, disincentivise investment in further automation. None of this, however, can simply be assumed, and the socialist case, with any luck, is not at all dependent on any form of economic theory. Doug Henwood, for one, would suggest that none of this really matters and is perhaps beside the point.

    More relevantly, Robert Brenner presents an non-value theoretic conception of the falling rate of profit in his 'The Economics of Global Turbulence' (2005), although this is predicated upon industrial overcapacity and not on a reduction in the sum total of worker-consumers (the bourgeoisie, after all, can sell its wares to itself).

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  3. OE

    It's very unlikely that there's much (or any) work on this in the widely respected economics literature.

    The only serious effort by an economist (albeit a non-mainstream one) that I'm aware of to defend the Marxian notion of a falling rate of profit is in the following book: http://www.amazon.com/Failure-Capitalist-Production-Underlying-Recession/dp/0745332390/ref=sr_1_1?s=books&ie=UTF8&qid=1429413990&sr=1-1&keywords=Andrew+Kliman (I've been told that this book's argument doesn't depend on the labor theory of value, but having read very little of it myself, I can't personally attest to the truth of that claim).

    You might also try contacting Duncan Foley for help with your question, since he seems to be the only really respectable Marxian economist alive today: http://www.newschool.edu/nssr/faculty.aspx?id=10284 .

    Reply
  4. Michael Acuña

    Brian,

    I would suggest reconsidering the validity of the labor theory of value and examining the recent empirical literature on the falling rate of profit. Andrew Kliman's Reclaiming Marx's 'Capital': A Refutation of the Myth of Inconsistency (Lanham: Lexington Books, 2006) and The Failure of Capitalist Production: Underlying Causes of the Great Recession (London: Pluto Press, 2011) are excellent texts to consult.

    Reply
  5. DJL

    How about Andrew Kliman's work? Would that be relevant? (I suspect you already know his work well, though).

    Reply
  6. ex-Marxist

    It seems to me that the limit of the rate of profit as time approaches infinity, and constant supposedly replaces variable capital, is 0; the rate *falls* steadily over time, it doesn't just start to do so "at the limit of technological innovation". In other words, as Anonymous Two said, the rate of profit is a decreasing function with an asymptote at 0. So the hypothesis you're floating has to hold that the rate of profit and the pool of consumers decreases steadily, not that all of this waits until "the limit of technological innovation" (there is, of course, no such point in time).

    It's tempting to infer from this that the hypothesis of a falling rate of profit could be tested by looking at rates of profit over time and seeing if they fall. But it will depend on what you mean by "profit". Marx defined "profit" in terms of surplus value, and hence in terms of his labor theory of value. Any data you'll find on profit will of course be on accounting profit. It's true that Marx thought that in the long run, accounting profit and labor theory profit would converge. But still, at any given point in time, data about one don't straightforwardly inform us about the other.

    However, it sounds like you're not interested in Marx's notion of profit at all, since you say the labor theory of value is false. If you're understanding profit in the standard, accounting sense, then I do think that you could test your hypothesis by looking at rates of profit and consumption over time.

    Piketty is one person who has written about this, and he's argued that in a capitalist society, the rate of profit increases. (This is one reason I find it strange that multiple sources have claimed that Piketty's work somehow vindicates Marx.) Here's a blog post critiquing Piketty and reporting on studies that find a decreasing rate of profit:

    https://thenextrecession.wordpress.com/2014/04/23/a-world-rate-of-profit-revisited-with-maito-and-piketty/

    Reply
  7. ex-Marxist

    Sorry, Piketty thinks the rate of profit in capitalist economies remains constant; it's the share going to capitalists that increases over time according to him.

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  8. Joe Hatfield

    Why do you assume the labor theory of value is false? The best argument against it, the so-called 'transformation problem', was solved by Anwar Shaikh (New School) in his (1978) article "Marx's Theory of Value and the 'Transformation Problem'". Well, it isn't so much that Shaikh solved it, but rather that he showed how Marx had already solved it in Capital Vol. 3. You might also consult Shaikh's other writings on the falling rate of profit – there are many.

    BL COMMENT: Jonathan Wolff (UCL) has a very clean summary of the problems with the labor theory of value here: http://plato.stanford.edu/entries/marx/#3

    Reply
  9. AB

    Lots of very earnest defense of the labor theory of value, but not much about the literature in econ. Current economist, former philosophy student here:

    I don't think you'll find discussions of this in the economics literature because basically no one believes that anything like that will happen, one or two exceptions aside. Human and physical capital are complements in production and always have been. If you believe that eventually technology will replace all human input (or enough to make widespread unemployment a serious problem), your belief is probably informed by a model which is not well-identified given the data we have. (Basically – how would you determine (for example) the rate at which technology is going to permanently displace human labor over time when we have no observations of anything like that ever happening over the long or medium term?) Unemployment has not broadly trended upwards with technological progress over 200 years, so if you think it will start at some N years in the future, you'll need a really good argument – and we have already ruled out your having any data. (That would be an uphill/impossible battle in any seminar I've attended.) The composition of the labor force has also changed tremendously in that time period (consider the share of workers in agriculture, for example), without leading to any significant permanent increases in the rate of unemployment that I'm aware of. So I don't think this is a prediction most of us would make about the future.

    On the other hand, if your thought is that we won't see these effects for 500 or 1000 years, then I think most of us would say you're asking for predictions too far out of sample and too far removed from any data we have which is likely to be informative. At the same time, comparing 500 years ago to today doesn't make me think technology has made things worse for employment.

    For a (very preliminary) but also very current survey of the basic (empirical) facts about growth, you can see this: http://www.hoover.org/sites/default/files/jones-facts040.pdf which will be featured in the forthcoming Handbook of Macroeconomics. (If you don't know the series, the Handbooks are basically a broad over view of the state of the art and exist for many areas in the field.)

    There is a (somewhat related) literature about routine vs. non-routine work and how technology may affect the former. There may be trends whereby technology can decrease the need for workers doing routine (particularly defined) work over time. I don't know this literature very well myself. Here are two entries:

    http://economics.mit.edu/files/9758

    http://www.nber.org/papers/w20307

    Reply
  10. Will

    Around this time last year I listened to an interview with the economist Michael Hudson in which he went off on a memorable tangent about TRPF. Here's the relevant chunk of the transcript:

    —

    Karl [host]: So [Piketty] talks about a drift towards oligarchy, he’s pointing out this rising inequality. But in Marx’s theory, Michael, I just wanted you to try and clarify things because I like looking at these economic issues from different perspectives. And the one Marxist concept they say is the most important economic law of all is this tendency for the fall in the rate of profit.

    Michael: Oh my God, there’s nothing that is more misunderstood than that. What Marx said was that as capital increases relative to labour in production, as you mechanise production and buy capital, more and more of the return to capital is going to be taken in the form of depreciation that is a return of capital, not as a profit. He was talking about cost accounting. The example he uses is – and he’s criticising the Physiocrats and Quesnay there.

    When Quesnay made the Tableau Economique he talked about the circulation of income in the economy and what landlords did with the rent they got, and they spend some of it, they invest some of it. What they left out was the amount of rental income that has to be used as seed grain, to buy the new seed grain. Marx says that in a factory and under industrial capitalism if you’re going to spend $1million building a factory with machinery and you want to make a profit on that, you’ll not only get the profit on the $1million – let’s say at 5%, $50,000 a year – you also get your $1million back. So of the price they charge the price includes not only the $50,000 a year profit, it includes enough money to pay back the $1million they put into the factory in equipment as it wears out or as it becomes obsolescent.

    So there’s a misinterpretation of almost all people who have not read Marx or read his theories of surplus value where he explains the falling rate of profit. I explain all of this in my book, The Bubble & Beyond, I go into what Marx meant by this. But when a non-Marxist talks about Marx and talks about the falling rate of profit you should just sort of walk away, because they don’t have a clue as to what they’re talking about.

    Karl: So it’s part automation, it’s part competition pushing down the price, but also you’re saying it’s a depreciation element that is wound up to hide the profits, in a way, so that these aren’t taxed?

    Michael: In the case of real estate it becomes more bizarre. In the United States you’re able to pretend that while your real estate is going way up in value, the building is actually losing value because it has a lifetime and the landlord is allowed to recapture the capital as if real estate, which in effect means the land, as if real estate somehow wears out, like a machine, or becomes obsolescent, like you buy a computer and after three years you have to upgrade it and buy a new computer. But that’s nonsense.

    In New York City, where I live, the older the building, the more valuable it is because it doesn’t wear out, it’s maintained – most landlords spend about 10% of their income on maintenance and repairs. So the pretence is landlords pretend that their building is like a machine, wearing out, they charge depreciation and because of that they say “I didn’t make any profit, this is a return of capital”. And as soon as they’ve depreciated a building in full they then sell it among themselves or they buy it all over again and start the whole process all over, so you can depreciate the same building, say it’s 100 years old, you can keep depreciating it again and again and again and again as if it’s worn out all these times, and it’s the same building. But the owners and the next owners and the next owner and the next owner doesn’t have to pay any tax on this.

    Karl: Right, so that’s why when this law is critiqued and people say “Look, the falling rate of profit can’t continue for hundreds of years, this is wrong” you’re saying really it is still a valid analysis for the wealth gap?

    Michael: Marx was talking about the composition of EBIT, of cash flow. Cash flow is earnings before interest, taxes, depreciation and amortisation. And Marx said within cash flow, to the extent that industry becomes more capital-intensive with machinery, you will have a rising role of depreciation relative to what’s left as profit. So it’s the relationship between the return of capital and the return to employing labour and other expenses.
    http://michael-hudson.com/2014/04/pikettys-wealth-gap-wake-up/

    Reply
  11. Will

    And here's a more developed account from chapter 4 of his book The Bubble and Beyond:

    The Falling Rate of Profit as Distinct from Financial Crises
    Focusing on profit as reflecting the industrial exploitation of wage labor, many students of
    Marxism have read only Vol. I of Capital. Many make an unwarranted leap from his analysis of wage
    labor to assume that he was an underconsumptionist. The capitalist’s desire to pay employees as little
    as possible (so as to maximize the margin they would make by selling their products at a higher price)
    is taken as a proxy for the financial dynamics causing crises, discussed in Vol. III of Capital.
    Marx’s analysis did note the problem of labor’s inability to buy what it produces. “Contradiction
    in the capitalist mode of production,” he wrote: “the labourers as buyers of commodities are
    important for the market. But as sellers of their own commodity — labour-power — capitalist society
    tends to keep them down to the minimum price.”19 To avoid a glut on the market, workers must buy
    what they produce (along with industrialists buying machinery and other inputs). Henry Ford quipped
    that he paid his workers the then-high wage of $5 per day so that they would have enough to buy the
    cars they produced. But most employers oppose higher wages, paying as little as possible and thus
    drying up the market for their products.
    This was the major form of class warfare in Marx’s day, but it was not the cause of financial
    crises, which Marx saw as being caused by internal contradictions on the part of finance capital
    itself. Interest charges on rising debt levels absorb business and personal income, leaving less
    available to spend on goods and services. Economies shrink and profits fall, deterring new
    investment in plant and equipment. Financial “paper wealth” thus becomes increasingly antithetical to
    industrial capital, to the extent that it takes the predatory form of usury-capital — or its kindred
    outgrowth, financial speculation — rather than funding tangible capital formation.
    In developing his model to analyze the flows of income and output among labor, capital and the
    rest of the economy, Marx’s starting point was the first great example of national income accounting:
    Francois Quesnay’s Tableau Économique (1758) describing the circulation of payments and output in
    France’s agricultural sector, labor, industry and the government. As a surgeon to the king, Quesnay
    saw this circulation of income as analogous to that of blood within the human body. However, his
    Tableau neglected the need to replenish stock — the seed and other output that needed to be set aside
    to plant the next season’s crop. Marx noted that much as rural cultivators needed to defray the cost of
    replenishing their seed-corn, industrialists needed to recover the cost of their capital investment in
    plant, equipment and kindred outlays, in addition to receiving profits.
    This recovery of capital outlays is called depreciation and amortization. Marx expected it to rise
    relative to profits, in order to reimburse investment in capital equipment (and by logical extension,
    research and development). This is what he meant by the falling rate of profit. Just as bondholders
    recover their original capital principal (a return of financial capital) quite apart from the interest, so
    capitalists must recover the cost of their original investment.
    Marx expected technology to become more capital-intensive in order to be more productive. His
    “falling rate of profit” referred to the rising depreciation return of capital to reflect this recovery of
    costs. Plant and equipment needed to be renewed as a result of wearing out or becoming
    technologically obsolete and hence needing to be scrapped even when it remains physically
    operative. As Joseph Schumpeter emphasized in his post-Marxist theory of innovation, technological
    progress obliges industrialists either to modernize or be undersold by rivals.
    This rising capital-intensiveness is not a cause of crises. As Marx argued in Book II of Theories
    of Surplus Value against Ricardo’s views on the introduction of machinery, it creates a demand for
    more capital spending and hence employs more labor, averting an under-consumption crisis.
    However, financial crises still occur (Marx pointed to eleven-year intervals in his day) as a result of
    the interest-bearing savings of the wealthy lent out to government, business and (mainly since Marx’s
    day) real estate and individuals, erupting when debtors are unable to pay this self-expanding financial
    overhead of “anti-wealth.”
    No concept has confused students of Marxism more than this seemingly straightforward idea.20
    At issue is the shifting composition of cash flow: earnings before interest, depreciation and
    amortization (ebitda). To the extent that depreciation and amortization rise (or as industry becomes
    more highly debt leveraged), less profit is reported to the tax authorities and recorded in the National
    Income and Product Accounts. Marxists who attribute a crisis of capitalism to declines in reported
    rates of profit overlook the fact that the real estate, mining and insurance sectors wring their hands all
    the way to the bank with tax-deductible cash flow counted as “depreciation.”
    How Real Estate, Mining and Debt-Leveraged Business Exemplify a Pseudo-Falling Rate of Profit
    The largest sector in today’s economies remains real estate. Land is the single largest asset, and
    buildings report most depreciation. To be sure, this is a travesty of economic reality inasmuch as it
    reflects a distorted set of tax laws that permit absentee investors to depreciate buildings again and
    again, as if they wear out and lose value through lack of upkeep (despite landlords being legally
    required to maintain rental properties intact), or by obsolescence (even as construction standards
    cheapen). These depreciation writeoffs occur at rising prices each time a property is sold at a capital
    gain (most of which reflects the land’s rising site value).
    This pretense — along with the tax deductibility of interest — has enabled real estate investors to
    declare virtually no taxable income for more than a half century since World War II. It is as if a bondor
    stock-holder could avoid paying income tax on interest and dividends by getting a tax credit as if
    the bond or stock were becoming worthless — and for each new buyer to repeat this charge-off, as if
    the asset loses value with each sale even as its market price rises! To cap matters, “capital gains”
    (some 80% of which typically occur in the real estate sector) are taxed at only a fraction of the rate
    levied on “earned” income (wages and profits), and are not taxed if they are spent on buying yet more
    property.
    These tax dodges benefit property owners — and behind them, bankers, because whatever the tax
    collector refrains from taking is “free” to be paid as interest for yet larger mortgage loans. This
    makes financial interests the ultimate beneficiaries of distorted tax accounting. Such tax favoritism for
    the FIRE sector is fictitious tax avoidance, capitalized into “capital” gains. This obviously is not
    what Marx meant by the falling rate of profit. In his day there was no income tax to inspire such “junk
    accounting.” The aim of permitting buildings to be depreciated again and again is not to reflect
    economic reality but to save real estate investors from having to declare taxable earnings (“profit”).
    And thanks to the notorious depletion allowance, the oil and mining sectors likewise operated free of
    income taxation for many decades. Insurance and financial companies are permitted to treat the
    buildup of liquid reserves as an “expense” against hypothetical losses. The function of these
    giveaways is to shift the fiscal burden off land and minerals, oil and gas, real estate and debtleveraged
    industry.
    When an ostensibly empirical statistical map (or the economic theory behind it) diverges from
    reality, and a tax policy diverges from broad social objectives, one invariably finds a special interest
    at work subsidizing it. In this case the culprit is high finance as untaxed property revenue is free to be
    capitalized into larger debts. And as it has regressed to what Marx described as usury capital, it has
    allied itself with real estate and rent-extracting monopolies. Instead of nationalizing them or taxing
    their economic rent and “capital” gains, today’s tax system favors rentiers.

    Reply
  12. Dan Dennis

    I question whether it is the case that the set of capitalists would become worse off subsequent to great technological advance (which might be just around the corner, though admittedly it’s been around the corner for over thirty years). That might rest on the assumption that the capitalist makes profit on a ‘per unit of sales’ basis. Then it is the case that the more units that he sells the more profit he makes, and the more consumers there are with a decent disposable income the more units sold, and the more workers there are on a decent wage the more consumers there are with a decent disposable income, therefore the more workers there are on a decent wage the more profit he makes.

    However if we think of having lots of wealth as the ability to get what you want, then clearly it can be the case that if there is a leap in the effectiveness of technology – robotics etc – then the wealthy will be able to get what they want whilst fewer people will be employed and able to get what they want.

    Imagine a situation where all the world’s natural resources (including all the land, of course) are owned by a certain set of wealthy people (perhaps a million of them). Imagine also that they each ensure they have access to a varied selection of natural resources (so they have all that they are likely to need in producing things for their own consumption and in exchange for the labour of others). And imagine they use self-replicating, self-repairing robots to make whatever they want. (Think of 3-d printing as one way this might go).

    They then employ a few people to do those things the robots cannot do, for example, engineers to make improved robots and fix things the robots cannot fix, those involved in the arts, doctors, butlers, concubines… To employ a person means the wealthy person gets his robots to use those natural resources owned by him to make stuff that those employed want in exchange for their labour, and to lend them land to live on.

    Other employees, consumers etc are not needed. Thus the chronic oversupply of labour will lead the price paid by the wealth to those employed being very low.

    One step in forestalling such a situation is for each person to inherit an equal portion of natural resources. No one is responsible for the existence of natural resources (including land) so no one has a special claim to more than anyone else, so we should all be entitled to an equal portion. This view is commonly associated with left-libertarianism, but there is no reason why all the main philosophical positions should not assent to it. It can be kept separate from the more contentious issue of whether a person’s labour is his own, and the arguments surrounding whether some of it and its products should be redistributed to others. I explore and argue for this in ‘Property Rights, Future Generations and the Destruction and Degradation of Natural Resources’
    Published in 'Moral and Political Philosophy' (forthcoming, available online here)
    http://www.degruyter.com/view/j/mopp.ahead-of-print/jmpp-2013-0007/jmpp-2013-0007.xml
    For those without institutional access, instructions for how to get free access to this journal during 2015 are here:
    http://www.degruyter.com/view/j/mopp

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