Michael Roberts — Marx’s law of profitability at SOAS

Last week I gave a lecture in the seminar series on Marxist political economy organised by the Department of Development Studies at the School of Oriental and African Studies (SOAS). The Marxist Political Economy series is a course mainly for post-graduates and has several lecturers on different aspects of Marxian economics. Course Handbook – Marxist Political Economy 2019-20 (8)
Mine was on Marx’s law of the tendency of the rate of profit to fall. Not surprisingly, the department team has noticed that I am apparently ‘obsessed’ by this law, at least according to critics of it.
Anyway, I thought it might be useful to go through my lecture in a post, with the accompanying slides referred to. So here goes....

Michael Roberts Blog — blogging from a marxist economist
Marx’s law of profitability at SOAS
Michael Roberts

See also

Short summary of Karl Marx's view of property relations.

Most interesting:

 Karl Marx sought to further distinguish between the personal possession of (mainly) consumer goods, which he termed “personal property”, and the absentee ownership of capital goods, which he somewhat confusingly termed “private property”. Marx then went on to critique the exploitation that arises structurally when the means of production are privatised.

Hence we arrive at the first problem with private property, in that there exist two conflicting interpretations, neither of which has gained universal acceptance. That said the broader Lockean take tends to prevail in common usage, which can be somewhat problematic when discussing the abolition of exploitative arrangements arising from private property.... 

The phrase "private property" is ambiguous. In the terminology of John Locke it includes personal property. In the terminology of Karl Marx it doesn't. When Marx spoke of the need to abolish private property to put an end to capitalist expropriation of surplus value from workers, he meant changing the relations of production. He excluded personal property from the category of private property and he was not advocating collectivizing a tradesperson's tools, for example.

Here, Marx was making a connection between capitalists as absentee owners and the landlords of feudalism that either owned slaves or collected rents.

In the industrial age under capitalism, factories and machines became the dominant mode of production rather than agricultural land, which was the dominant mode of production in the agricultural age that was characterized politically by feudalism. 

Marx sought to show how surplus value was the "rent" that capitalists extracted from hired workers and not having contributed to production.

Thus, in this view both feudalism and capitalism are related forms of oligarchy that stand in opposition to liberal democracy. Under capitalism, land was simply folded in to capital.

Black Cat Workers Collective
The problem with private property

Is Falling Investment Spending The Last Nail In The Coffin? — John T. Harvey

I have been reporting for months that the indicator we should all be monitoring is Real Gross Private Domestic Investment....

Forbes — Pragmatic Economics
Is Falling Investment Spending The Last Nail In The Coffin?
John T. Harvey | Professor of Economics, Texas Christian University

The debt delusion — Michael Roberts [book review]

Michael Roberts reviews and critiques The Debt Delusion by John Weeks.

Michael Roberts Blog — blogging from a marxist economist
The debt delusion
Michael Roberts

The trouble with capitalism — Chris Dillow

Are the faults of capitalism curable, or are they instead symptoms of a chronic disease? This is the question posed by Martin Wolf:

What we increasingly seem to have…is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.

There is much to admire in this piece. But I fear it understates the problem with capitalism....

Falling rate of profit?

Stumbling and Mumbling
The trouble with capitalism
Chris Dillow | Investors Chronicle

Michael Roberts — A profits recession?

Falling aggregate profit rate?

As James Montier, the post-Keynesian economist at GMO, the large asset fund manager, points out, real earnings growth in the corporate sector has been below the rate of real GDP growth even after the significant boost from the financial engineering from share buybacks. According to Montier, when you dig down into the market you find that a staggering 25-30 per cent of firms are actually making a loss.

In Montier’s view, “the US is witnessing the rise of the “dual economy” — where productivity growth is reasonable in some sectors, and totally absent in others. Even in the sectors with good productivity growth, real wages are lagging (wage suppression is occurring). All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like.”...

Looks like yet another manifestation of the uneven lackluster recovery from the financial crisis that has favored mostly a few.

Michael Roberts Blog — blogging from a marxist economist
A profits recession?
Michael Roberts

Michael Roberts — Back to Front

Marx's economic theory is based on his theory of the commodity and how profit is extracted as surplus value based on commodification. Thus, profit (along with profit rate) is the economic driver, which Marx expresses in the expression, M - C - M', meaning that financial investment of money–M–is used to produce commodities for consumption–C– that leads to return on investment as profit extracted as surplus value from the process–M'. Since this is not earned through productive work it is "economic rent" in the sense of classical economics, in which economic rent figured prominently. Marx did not come up with the idea. Rather, he sought to produce a more rigorous account of it.

Conventional monetary policy is based on keeping the interest rate lower than the profit rate, so as not create liquidity preference that overly encourages saving and stifles productive investment. While this may be a factor, it is not the factor, or even the most important factor, which is a reason that monetary policy doesn't work very well if relied on as a policy tool.

Michael Roberts argues that Keynesian fiscal policy that takes demand as the driver as is not necessarily successful either, since the driver isn't money rather than the interest rate. Rather, according to Marxian analysis, the issue is the inherent contradictions in the structure of capitalism as a modification of feudalism. Ownership of capital was substituted for, or melded with ownership of land as a source of rent extraction.

In this view, what is required is a entirely fresh approach based on removing the bias introduced by flawed institutional arrangements, especially bourgeois property ownership, that found the current system on expropriating surplus value as economic rent. 

Such a system is not only unfair to workers, but it is also dysfunctional as an economic system. This dysfunctionality leads to political problems, which Marx believed could only be addressed through revolution, since the ownership class as he knew it then would never acquiesce to reform through the political process. But not much has changed in this regard, other than the appearances. The system still depends on rent extraction. What's new is financialization, digitization, and some of the forms that monopolization takes.

While may have conditions have changed drastically since Marx wrote, his analysis of capitalism and its discontents still holds the day, since it is a work in political economy rather than economic theory.  Macroeconomics deals with socio-economic systems that involves much more than abstract economic relations since they are historical and dynamic. 

Marx and other classical economists like Smith understood this. But the other classical economists were products of their class and remains essentially true to it. Marx, however, broke the mold in claiming that class was the problem. He concluded that an inherently dysfunctional system would either change or be changed. He did not think that the owners of the system would be up for change it themselves, based on noblesse oblige, for example.

Interestingly, Marx lived shortly after the American and French revolutions, which were still lively in memory and certainly shaped his thinking, especially since he was historically inclined having been trained in Hegel. 

Now we see the uprising in France where La Marseillaise is again being sung in the streets, this time not against feudal rule but neoliberal.

Michael Roberts Blog
Back to Front
Michael Roberts

Tony Norfield — Finance, Imperialism and Profits

Last Friday I took part in a panel to launch a new book, World in Crisis: A Global Analysis of Marx’s Law of Profitability, published by Haymarket Books, edited by Michael Roberts and Guglielmo Carchedi. The presentation was at this year’s Historical Materialism conference in London.

My presentation was on ‘Finance, Imperialism and Profits’, in which I stressed the need to develop Marx’s theory in order to explain the world today. I argued that an accurate measure of a rate of profit (in Marx’s sense) could not be gleaned from official statistics and that, among other things, this was because of the nature of the imperialist world economy. Also I noted that for some adherents of Marx’s ‘falling rate of profit’ theory, this theory was somehow consistent with their calls to nationalise banks and regulate finance. This expunges the revolutionary content of Marxist theory, shows a naïve faith in the capitalist state and makes concessions to nationalism.

This was a lot to cover in the twenty minutes available, so could only be done in summary form in the presentation (see below), but there was more time in the Q&A....

While Tony Norfield holds a PhD in economics, he is a veteran of the City of London and the author of The City rather than being an academic, so he writes from hands-on experience with global finance.

Economics of Imperialism
Finance, Imperialism and ProfitsFinance, Imperialism and Profits

Tony Norfield

Michael Roberts — Stock market crash: 1987, 2007 or 1937?

Michael Roberts looks at past stock market declines from the POV of the profit rate. Different conditions applied in each case, and the contemporary situation is different, too.

Michael Roberts Blog
Stock market crash: 1987, 2007 or 1937?
Michael Roberts

Keynes.

Stumbling and Mumbling
Emergence in stock markets
Chris Dillow | Investors Chronicle

Markets in financial instruments are comprised of two principal cohorts. The first cohort is comprised of "investors," who buy to hold longer term. The second is comprised of traders, who buy to sell shorter term.

Prices in markets are based on changes at the margin. Total capitalization is based on the most recent price. This is obviously unrealistic, since all units cannot be sold at this price even though they are valued at it.

Traders are generally a predominant influence on margin price. Their incessant incremental activity to extract gains based on price fluctuations makes markets liquid, relatively stable, and efficient.

Major turning points involve buying and selling pressure from both traders and investors converging to create buying or selling pressure depending on the ratio of "greed and fear."

Roberts's analysis focuses more on investors, and Dillow's analysis more on traders. It's the melding of the two that make the market at the margin.

Michael Roberts — US rate of profit update

The latest data for net fixed assets in the US have been released, enabling me to update the calculations for the US rate of profit a la Marx up to 2016.

Last year, I did the calculations with the help of Anders Axelsson from Sweden, who not only replicated the results to ensure their accuracy (and found mistakes!), but also produced a manual for carrying out the calculations that anybody could use.

As I did last year and in previous years, I have also updated the rate of profit using the method of calculation by Andrew Kliman (AK) that he first carried out in his book, The failure of capitalist production. AK measures the US rate of profit based on corporate sector profits only and using the BEA’s historic cost of net fixed assets as the denominator.

I also calculate the US rate of profit with a slight variation from AK’s approach, in that I depreciate gross profits by current depreciation rather than historic depreciation as AK does, but I still use historic costs for net fixed assets. The theoretical and methodological reasons for doing this can be found here and in the appendix in my book, The Long Depression, on measuring the rate of profit.…

Michael Roberts Blog
US rate of profit update
Michael Roberts

Pedro Nicolaci da Costa — Inequality is getting so bad it's threatening the very foundation of economic growth

Income inequality has been rising so rapidly in the United States and around the world that it threatens to make economic growth less durable, according to research from the International Monetary Fund.

"While strong economic growth is necessary for economic development, it is not always sufficient," four IMF economists write in a new blog.

"Inequality has risen in several advanced economies and remains stubbornly high in many that are still developing," they added.

"This worries policymakers everywhere for good reason. Research at the IMF and elsewhere makes it clear that persistent lack of inclusion—defined as broadly shared benefits and opportunities for economic growth—can fray social cohesion and undermine the sustainability of growth itself."

That's because growth that excludes large portions of the population reinforces inequality in a variety of ways, like access to education, technology, resources and even social connections that help individuals land jobs and remain relevant in the labor market....

Business Insider
Inequality is getting so bad it's threatening the very foundation of economic growth
Pedro Nicolaci da Costa

Michael Roberts — Capital.150 part two: the economic reason for madness

Critique of David Harvey's reading of Das Kapital.

Michael Roberts Blog
Capital.150 part two: the economic reason for madness
Michael Roberts

Michael Roberts — Capital.150 part one: measuring the past to gauge the future

Marx on capitalism and the profit rate.

Michael Roberts Blog
Capital.150 part one: measuring the past to gauge the future
Michael Roberts

ProMarket — The Rise of Market Power and the Decline of Labor’s Share

The two standard explanations for why labor’s share of output has fallen by 10 percent over the past 30 years are globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots). Last year, however, a highly-cited Stigler Center paper by Simcha Barkai offered another explanation: an increase in markups. The capital share of GDP, which includes what companies spend on equipment like robots, is also declining, he found. What has gone up, significantly, is the profit share, with profits rising more than sixfold: from 2.2 percent of GDP in 1984 to 15.7 percent in 2014. This, Barkai argued, is the result of higher markups, with the trend being more pronounced in industries that experienced large increases in concentration.

A new paper by Jan De Loecker (of KU Leuven and Princeton University) and Jan Eeckhout (of the Barcelona Graduate School of Economics UPF and University College London) echoes these results, arguing that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power....

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
The Rise of Market Power and the Decline of Labor’s Share
Asher Schechter

Michael Roberts — The profitability of Marxian economics

I was recently interviewed on my book, The Long Depression, and on other economic ideas, by José Carlos Díaz Silva from the Economics Department of the National University of Mexico (UNAM) where I have been invited next March 2018 to deliver a series of lectures. In the first part of this interview, posted over a week ago, Jose questions me on the basic themes of my book.

In this second part of an interview, we discuss the importance of profitability in understanding the state of capitalist economies and whether Marxist economics can be attractive to economics students.

Michael Roberts Blog
The profitability of Marxian economics

Michael Roberts

David F. Ruccio — Essays in persuasion

In my view, neither neoclassical nor Keynesian economics turns out to have the intellectual or political resources to effectively respond to the issues that motivate and resonate within contemporary populism. If anything, they have served to create the problems that have brought right-wing nationalist populism to the fore.

For good reason, both wings of mainstream economics have ceased to be persuasive.

Occasional Links & Commentary
Essays in persuasion
David F. Ruccio | Professor of Economics, University of Notre Dame

See also

“Dictator craze”

Michael Roberts — From R* to r

A Marxian approach to the macro problem.

Michael Roberts
From R* to r

David F. Ruccio — Capital on strike?

As Professor Ruccio observes, investment is responsive to the profit rate. It seems to me that it's not so much that capital is "on strike" as much as the profit rate has fallen because of an economic contraction resulting from the financial crisis and debt overhang, along with firms attempting to increase their profit rate, e.g., by downsizing and offshoring.

New money enters the economy in only two ways — either non-government borrows creating deposits (M1) or government spends, creating deposits (M1). Credits to M1 deposit accounts are saving created by money creation that becomes available for spending on either new investment or consumption to the degree it is not saved, including financial investment, or used to retire outstanding debt. 

BTW, the amount credited to deposit accounts is saved within the banking system as a whole or as cash in circulation until the bank loan that created the deposit is repayed or the tax credit created by government spending is destroyed through being used to meet a tax obligation.

The problem is effective demand. The capacity to supply exceeds the appetite to buy based on income as the ability to repay debts incurred that create new money. The options are then either drawing down savings or selling assets.

Fiscal austerity has exacerbated the problem since when non-government is reluctant to borrow, if government does not make up the difference between output capacity and purchase of output, then either unplanned inventory will build up, which cannot go on for long, or firms will idle capacity, the economy as whole will underperform, firms will not invest in hiring, inventory, or new capital goods.

Reducing wages to spur investment is a fool's errand since this just reduces purchasing power of consumers, and the US economy, for example is made up of about 70% consumption and 30% investment.

The solution? Government putting purchasing power in the pockets of those most likely to consume promptly rather than to save, including paying down outstanding debt. This means providing enough stimulus to reduce the debt backlog sufficiently to stimulate new spending.

Occasional Links & Commentary

Capital on strike?

David F. Ruccio | Professor of Economics, University of Notre Dame

David F. Ruccio — Marx for beginners

Correcting misconceptions about the falling profit rate due to increasing capital intensity. Marx's argument in chapter 3 of Kapital was cet. par. In chapter 4, he brings in conditions in which the rate will not fall.

Occasional Links & Commentary
Marx for beginners
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Matt Bruenig — Piketty on Marx

Piketty contests Marx's falling rate of profit.

MattBruenig | Politics
Piketty on Marx
Matt Bruenig