In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment.
The rate of profit depends on the definition of capital invested. Two measurements of the value of capital exist: capital at historical cost and capital at market value. Historical cost is the original cost of an asset at the time of purchase or payment. Market value is the re-sale value, replacement value, or value in present or alternative use.
To compute the rate of profit, replacement cost of capital assets must be used to define the capital cost. Assets such as machinery cannot be replaced at their historical cost but must be purchased at the current market value. When inflation occurs, historical cost would not take account of rising prices of equipment. The rate of profit would be overestimated using lower historical cost for computing the value of capital invested.
On the other side, due to technical progress, products tend to become cheaper. This in itself should, theoretically, raise rates of profit, because replacement cost declines.
If, however, firms achieve higher sales per worker the more they invest per worker, they will try to increase investments per worker as long as this raises their rate of profit. If some capitalists do this, all capitalists must do it, because those who do not will fall behind in competition.
This, however, means that replacement cost of capital per worker invested, now calculated at the replacement cost necessary to keep up with the competition, tends to be increased by firms more so than sales per worker before. This squeeze, that investments per worker tend to be driven up by competition more so than before sales per worker have been increased, causes the tendency of the rate of profit to fall. Thus, capitalists are caught in a prisoner’s dilemma or rationality trap.
This “new” rate of profit (r’), which tends to fall, would be measured as
r’ = (surplus-value)/(capital to be invested for the next period of production in order to remain competitive).
The profit percentage formula calculates the financial benefits left with the entity after it has paid all the expenses and is expressed as a percentage of cost price or selling price. Profit percentage is of two types: –
a) Markup expressed as a percentage of cost price.
b) Profit margin which is the percentage calculated using the selling price.
What are the 4 types of profit?
There are four levels of profit or profit margins:
- Gross profit.
- Operating profit.
- Pre-tax profit.
- Net profit.
How to work out the different types of profit
- Sales. So this entire process all starts with your sales. …
- (Minus) Cost of Goods Sold. …
- (Equals) Gross Profit. …
- (Minus) Overheads. …
- (Equals) Net Profit. …
- (Minus) Interest. …
- (Equals) Profit Before Tax. …
- (Minus) Tax.
Income minus all expenses. Example: Sam’s Bakery received $900 yesterday, but expenses such as wages, food and electricity came to $650. So the Profit was $900 − $650 = $250.
So if you sell a product for $100. And it cost you $40 to make and sell then you’ve made a $60 profit. And as long as your revenue is greater than your expenses. Then you’re making a profit if….
When the selling price and the cost price of a product is given, the profit can be calculated using the formula, Profit = Selling Price — Cost Price. After this, the profit percentage formula that is used is, Profit percentage = (Profit/Cost Price) × 100.
“Rate of profit” is a term introduced by Marx in Volume III of Capital for the ratio of profit to total capital invested in a given cycle of reproduction, or the proportion of value in any given commodity which constitutes profit for the capitalist.
ROP = profit/output × output/capital stock .
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You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
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A retail farm market manager knows that their business needs to make a certain gross profit percentage, in this case, let’s say 30%. What do they do? The manager takes the cost of the item and adds 30%. Does adding 30% markup to that item really mean you are making a 30% profit? Well, no. To determine the profit you made on an item, you need to take the markup amount and divide that by the sale price of the item and that will give you your profit margin.
Here’s an example. Let’s say an item in your store cost you $1.00 to purchase. You take that item and add 30% to it. Now, you sell the item for $1.30. You’ve made .30 cents on that item. You divide .30 by 1.30 and you will see you’ve made only 23% gross profit on that item. Think about every item in your market. If you were adding 30% to all your products and thinking you are making a 30% gross profit margin when in fact you are losing almost ¼ of your gross profits.
If we go back to $1.00 product cost, that product would need to sell for $1.44 to make a 30% profit on it. Again, take .44 (the profit made from the item) and divide it by the sale price of $1.44 and you get a 30% profit margin.
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Diminishing marginal returns are an effect of increasing input in the short-run, while at least one production variable is kept constant, such as labor or capital.
The law of diminishing marginal productivity states that when an advantage is gained in a factor of production, the productivity gained from each subsequent unit produced will only increase marginally from one unit to the next.
The exceptions to the law of diminishing marginal utility DMU, where this law doesn’t apply: This law is valid only for uniform units of a commodity, which are same in shape, size, length, etc. The law applies only in cases when the consumer doesn’t change his taste and fashion of the commodity remains same, which hardly is the case.
- Diminishing marginal productivity typically occurs when advantageous changes are made to input variables affecting total productivity.
- The law of diminishing marginal productivity states that when an advantage is gained in a factor of production, the productivity gained from each subsequent unit produced will only increase marginally from one unit to the next.
- Production managers consider the law of diminishing marginal productivity when improving variable inputs for increased production and profitability.
https://www.investopedia.com/terms/l/law-diminishing-marginal-productivity.asp
[noting that online sales of dairy products tends not to be the means by which one normally obtains such consumer goods]
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46 Marx,thisvolume,pp.322–3;Marx1981[Engels],p.320.
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The tendency of the rate of profit to fall (TRPF) is a theory in the crisis theory of political economy, according to which the rate of profit — the ratio of the profit to the amount of invested capital — decreases over time. This hypothesis gained additional prominence from its discussion by Karl Marx in Chapter 13 of Capital, Volume III,[1] but economists as diverse as Adam Smith,[2] John Stuart Mill,[3] David Ricardo[4] and Stanley Jevons[5] referred explicitly to the TRPF as an empirical phenomenon that demanded further theoretical explanation, although they differed on the reasons why the TRPF should necessarily occur.[6]
Geoffrey Hodgson stated that the theory of the TRPF “has been regarded, by most Marxists, as the backbone of revolutionary Marxism. According to this view, its refutation or removal would lead to reformism in theory and practice”.[7] Stephen Cullenberg stated that the TRPF “remains one of the most important and highly debated issues of all of economics” because it raises “the fundamental question of whether, as capitalism grows, this very process of growth will undermine its conditions of existence and thereby engender periodic or secular crises.”[8]
Marx regarded the TRPF as proof that capitalist production could not be an everlasting form of production since in the end the profit principle itself would suffer a breakdown.[9]
The central idea that Marx had, was that overall technological progress has a long-term “labor-saving bias”, and that the overall long-term effect of saving labor time in producing commodities with the aid of more and more machinery had to be a falling rate of profit on production capital, quite regardless of market fluctuations or financial constructions.[11]
Countertendencies
Marx regarded the TRPF as a general tendency in the development of the capitalist mode of production. Marx maintained, however, that it was only a tendency, and that there are also “counteracting factors” operating which had to be studied as well. The counteracting factors were factors that would normally raise the rate of profit. In his draft manuscript edited by Friedrich Engels, Marx cited six of them:[12] (Karl Marx, Capital, Volume III, Penguin ed. 1981, p. 339f.)
- More intense exploitation of labor (raising the rate of exploitation of workers).
- Reduction of wages below the value of labor power (the immiseration thesis).
- Cheapening the elements of constant capital by various means.
- The growth of a relative surplus population (the reserve army of labor) which remained unemployed.
- Foreign trade reducing the cost of industrial inputs and consumer goods.
- The increase in the use of share capital by joint-stock companies, which devolves part of the costs of using capital in production on others.[13]
Nevertheless, Marx thought the countervailing tendencies ultimately could not prevent the average rate of profit in industries from falling; the tendency was intrinsic to the capitalist mode of production.[14] In the end, none of the conceivable counteracting factors could stem the tendency toward falling profits from production.
The scholarly controversy about the TRPF among Marxists and non-Marxists has continued for a hundred years.[29] There exist nowadays several thousands of academic publications on the TRPF worldwide. However, no book is available which provides an exposition of all the different arguments that have been made. Professor Michael C. Howard [27] stated that “The connection between profit and economic theory is an intimate one. (…) However, a generally accepted theory of profit has not emerged at any stage in the history of economics… theoretical controversies remain intense.”[30]
http://davidharvey.org/2014/12/debating-marxs-crisis-theory-falling-rate-profit/
2. Paper: Crisis Theory and the Falling Rate of Profit by David Harvey
This is a draft of an essay to be published in 2015 in: The Great Meltdown of 2008: Systemic, Conjunctural or Policy-created? Editors: Turan Subasat (Izmir University of Economics) and John Weeks (SOAS, University of London); Publisher: Edward Elgar Publishing Limited.
3. Paper: Monomania and crisis theory — a reply to David Harvey by Michael Roberts
4. Blog Post: David Harvey, monomaniacs and the rate of profit by Michael Roberts
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http://www.dcs.gla.ac.uk/~wpc/reports/profit.pdf
The correlation coefficient is a statistical measure of the strength of a linear relationship between two variables. Its values can range from -1 to 1.
A correlation coefficient of -1 describes a perfect negative, or inverse, correlation, with values in one series rising as those in the other decline, and vice versa.
A coefficient of 1 shows a perfect positive correlation, or a direct relationship. A correlation coefficient of 0 means there is no linear relationship.
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It does not appear in any of the published works, and there is not a mention of it in any of the three volumes of Capital or the Theories of Surplus Value. Nor is it ever mentioned in the voluminous correspondence of Marx and Engels. If Marx had discovered that the tendency of the rate of profit to fall was “the most important law of modern political economy”, one might well ask why he never mentioned this “eureka” moment in any of his detailed correspondence with Engels, his closest collaborator, or anyone else for that matter.
The Grundrisse, a collection of rough notebooks, were only published after Marx’s death. They contain only the “first cut” of his ideas, so to speak. These ideas were as yet not fully worked out and were written only as notes for self-clarification. Because of this, Marx apparently contradicts himself on the tendency of the rate of profit to fall. Only a few pages after referring to it as “the most important” law, he then describes it as “the second great law”, among the “two immediate laws”.
The first law he describes as “surplus value expressed as profit always appears as a smaller proportion than surplus value in its immediate reality actually amounts to.” He underlines this sentence, by which to emphasise that the rate of profit is always smaller than the rate of surplus value. Consequently, “the rate of profit never expresses the real rate at which capital exploits labour, but always a much smaller relation.”8
The falling rate of profit is then referred to as the second great law. These apparent contradictions can only be explained by the fact that the Grundrisse was not a finished expression of Marx’s economic theories but a work in progress. Marx’s ideas were not yet completely crystallised. His final thoughts on the subject were expressed later in Capital in a far more complete form. But here, the reference to “the most important law of modern political economy” is dropped altogether. In other words, it is an isolated comment that has been taken out of context to prove something that cannot be proved. It was a casual remark, which Marx made in his preparatory writings for Capital. These represent his initial thoughts on the subject, which he later modified.
While the Grundrisse contains very valuable thoughts on many questions, they cannot be considered to represent the final expression of Marx’s economic theories. These are contained in Capital, especially in the third volume, where the theory of the falling rate of profit is explained at some length and in great detail. To tear out of context one isolated remark made in Marx’s notebooks and attempt to elevate it above the finished version of the theory in Capital volume three is neither scientifically rigorous nor particularly honest.
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Harvey (2015) Paper: Crisis Theory and the Falling Rate of Profit by David Harvey (pp6–8)
Marx derived the law under certain assumptions. He confined his theorizing throughout much of Capital, I have shown elsewhere, to what he called the sphere of law-like generality. He excluded any consideration of universal conditions (the vagaries of the relation to nature), particularities (distributional arrangements, class and other struggles over surplus value appropriation and the state of competition) and singularities (such as the whims of consumer fashion and the effects of state policies) from his 3 reasonings. He examined how capital functioned in what he considered a “pure” state. 4
The fact that Marx excluded so much in his magnum opus should not be taken to mean that he thought the relation to nature, the particularities of distributional and market arrangements and the singularities of human choice were irrelevant or in any way minor features of any social system. His more historical and political writings suggest the exact opposite. But the theoretical landscape he chose to explore in Capital, and which encloses his theory of the falling rate of profit, is far more restricted.5 Marx spelled out even more specific assumptions in constructing his “general law of capital accumulation” in Volume 1 of Capital.
First, capitalists have no problem selling their goods at their value in the market or re-circulating the surplus-value they gain back into production. All commodities trade at their value (with the exception of labour power); there is no problem in finding a market and no lack of effective demand.
Secondly, the way in which the surplus value is “split up into various parts….such as profit, interest, gains made through trade, ground rent, etc” 6 is excluded from consideration.
Thirdly, Marx states: “in order to examine the object of our investigation in its integrity, free from all disturbing subsidiary circumstances, we must treat the whole world of trade as one nation, and assume that capitalist production is established everywhere and has taken possession of every branch of industry.” 7
All these assumptions carry over to Marx’s derivation of the falling rate of profit in Volume 3. In both volumes Marx constructs highly simplified models of the dynamics of capital accumulation derived from the theory of absolute and relative surplus-value operating in a closed system characterized by perfect competition and no difficulties of realization or distribution of the surplus value.
While the two models reveal important features of capital’s dynamics, they cannot be accorded the status of anything close to the absolute truth of those dynamics when capital is viewed as a whole. Both models are only as good as their common assumptions allow.
The contradictory unity of production and realization is repressed as are the 4 contradictions between production and distribution, between monopoly and competition and much else besides.
This severely restricts the applicability of the laws derived. I am not criticizing Marx for dealing in such abstractions. He was a brilliant pioneer in teaching us how to come to grips with the complexities of capital accumulation by formulating abstractions and engaging in what we would now call modeling of economic systems.
While Marx scrupulously lays out his assumptions in Volume 1 he does not do so in the case of the falling rate of profit theory. This is understandable given the preparatory nature of the materials that have come down to us. Some proponents of the law of falling profits have, however, given a different and in my view unfortunate reading to Marx’s exclusions.
If Marx could ignore questions of distribution (in particular the role of finance, credit and interest-bearing capital) in his statement of the law of falling profits then this implies, they suggest, that financialization had nothing to do with the crash of 2007–8. This assertion looks ridiculous in the face of the actual course of events. It also lets the bankers and financiers off the hook with respect to their role in creating the crisis. 8
The draconian nature of Marx’s assumptions should make us cautious about pressing his theoretical conclusions too far. The production of an increasingly impoverished industrial reserve army in Volume 1 and the tendency of the profit rate to fall in Volume 3 are contingent propositions. Both tendencies are driven exclusively by the dynamics of technological change.
A reading of his original notebooks suggests that Marx increasingly viewed crises not as a sign of the impending dissolution of capitalism but as phases of capitalist reconstruction and renewal. Thus, he writes: “Crises are never more than momentary, violent solutions for the existing contradictions, violent eruptions that re-establish the disturbed balance for the time being.”`9 Crises that flowed from rising labour productivity did not disappear from his thinking, but they could and should be supplemented or 5 related to other contradictions, such as the periodic “plethora of capital” and the chronic tendency towards overaccumulation. 10
Michael Heinrich, one of the German scholars responsible for editing the original manuscripts, has caused a storm of controversy by suggesting that Marx was far less enthusiastic about the law of falling profits than Engels’ edited version allows. 11 The protests on the part of adherents to the law have been, to put it mildly, vigorous. 12 Since I do not read German I will leave it to the scholars to sort this out. But I find Heinrich’s account broadly consistent with my own long-standing skepticism about the general relevance of the law. We know that Marx’s language increasingly vacillated between calling his finding a law, a law of a tendency or even on occasion just a tendency.
Marx made no mention of any tendency of the rate of profit to fall in his political writings such as The Civil War in France. Even in Volume Three of Capital, where he did consider the two crises of 1848 and 1857, these crises were depicted as “commercial and financial crises” and were analysed in the chapters on banking, credit and finance. Only passing reference is made to the falling rate of profit in these analyses.13
We also know that Marx never went back to the falling rate of profit theory — in spite of its evident incompleteness and supposed importance — after 1868. 14 While we cannot say why this was so, it does seem passing strange that Marx would chose to ignore in the last dozen years of his research what he had earlier dubbed in the Grundrisse as “the most important law of political economy.”
“At the end of the 1870s,” Heinrich observes, “Marx was confronted with a new type of crisis: a stagnation lasting for years, which is distinguished sharply from the rapid, conjunctural up and down movement which he had hitherto known.” The idea of crises as “momentary” disruptions must have no longer seemed adequate.
“In this context, Marx’s attention is drawn to the now internationally important role of the national banks, which have a considerable influence upon the course of the crisis. The observations reported by Marx make clear that a systematic treatment of crisis theory is not possible on the immediate basis of the law of the tendential fall in the 6 rate of profit (as suggested by Engels’s edition of the third volume of Capital), but rather only after a presentation of interest-bearing capital and credit.”
This would explain why the crises of 1848 and 1857 are called “commercial and financial crises” and examined in the chapters on banking and finance. If, however, “the national banks play such an important role,” says Heinrich, “then it is very doubtful whether the credit system can be categorically presented while excluding an analysis of the state. The same holds for the world market.”15
Marx evidently found it necessary to abandon the formal assumptions within which he had earlier confined his derivation of the law of falling profits in order, presumably, to make it relevant to the dynamics of accumulation actually occurring. He also left the level of generality behind and incorporated the particularities of distribution (the credit system in particular) and market competition into his theorizing. 16
Heinrich concludes that “a systematic treatment of crisis theory cannot….follow immediately from the ‘law of the tendency of the rate of profit to fall,’ but only after the categories of interest-bearing capital and credit have been developed.” 17
How seriously we should take Marx’s apparent vacillation and ambivalence depends not only upon what we make of his draconian assumptions but also on the strength and generality of the counteracting tendencies he identified. Proponents of the law typically downplay the counteracting tendencies. Marx lists six of them in Capital but “two of these (foreign trade and an increase of stock capital) fail to conform to his initial assumptions (a closed economy and a concept of surplus value that precludes the facts of distribution).”18 But under real crisis conditions we cannot afford, as his commentaries on the crises of 1848 and 1857 show in Volume 3, to exclude questions of finance and stock capital since they play such an important part in the form of appearance if not the underlying causes of crises.
Nor can we afford, on the evidence offered in the chapters on money and finance to ignore the vacillating influences of foreign trade imbalances (bullion drains as they were then referred to). Marx emphasizes of course the two counteracting 7 influences given by Roberts, but adds “depression of wages below the value of labour power; and an increase in the industrial reserve army” which protects certain sectors from the ravages of technological progress by lessening the incentive to replace labour power by machines (technologies invented in Britain were not deployed there, he points out in volume 1 of Capital, because of surpluses of labour power but were used in the United States where labour power was scarce). 19
In the Grundrisse, Marx lists a variety of other factors that can stabilize the rate of profit “other than by crises.” If the profit rate is to be resuscitated then one way a crisis can do so is to produce a massive devaluation of the existing constant capital (the fixed capital in particular). But Marx also mentions, ‘the constant devaluation of a part of the existing capital (by which I presume he means premature obsolescence and devaluations particularly of fixed capital equipment as a result of technical change), the transformation of a great part of capital into fixed capital which does not serve as agency of direct production (investment in public works and urbanization, for example, all of which could circulate in return for interest only without any regard for profit of enterprise) and unproductive waste (such as military expenditures, which Marx considered equivalent to making commodities to be ditched in the ocean).
He also importantly notes that the fall in the rate of profit can be “delayed by creation of new branches of production in which more direct labour in relation to capital is needed, or where the productive power of labour is not yet developed.” And finally, monopolization is treated as an antidote to the falling rate of profit presumably because of the reduced competitive pressure to innovate.20
This is “a somewhat motley array of factors” to be taken into account. 21 Some of them (such as monopolization and the opening up of new production lines) could be of overwhelming significance. Others, such as investment in fixed capital on the land and urbanization more generally are, as I have also tried to show elsewhere, crucially connected to crisis formation and resolution to the point where they are now playing a critical role (as was 8 most obviously the case in 2007–8).
The state-monopoly capitalism theorists of the French Communist Party towards the end of the 1960s considered the circulation of collective fixed capital in return for interest only as one of the major means for offsetting the falling rate of profit (it meant elements of collective constant capital could circulate at a discount as it were). 22
The history of getting out of crises by “building houses and filling them with things” in the United States is well-known (and was crucial in the 1960s) and is now being replicated in China where a quarter of the recent growth in GDP has been attributed to housing construction alone. Conversely, property market crashes are a familiar trigger for more general crises (with 2007–8 the most obvious recent example but 1928 in the USA being a critical and overlooked historical example).23
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JE Stiglitz · 1993 · — Post Walrasian and Post Marxian Economics by Joseph E. Stiglitz. https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.7.1.109
The ideas of contested exchange, as well as other developments in modern economic theory, including those associated with the “economics of information,” have necessitated major changes in economists’ view of the economy: as Bowles and Gintis correctly point out, post-Walrasian economics is markedly different from Walrasian economics.
But it remains more problematic whether the theory of contested exchange, or the other information-based theories, necessitate a more radical alteration of economic structures. The critique of information economics can also be interpreted in more conservative terms — that while markets are imperfect, the appropriate response is a limited reliance on a relatively small number of well-designed government interventions, taking into account the limitations of government, including its limited information, with each intervention carefully aimed at a particular market failure. At the very least, the case for radical alteration of the economy or the views of mainstream economists remains unproven.
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Walras’s law is an economic theory, which states that the existence of excess supply in one market must be matched by excess demand in another market so that both factors are balanced out. Walras’s law asserts that an examined market must be in equilibrium if all other markets are in equilibrium. Keynesian economics, by contrast, assumes that one market can be out of balance without a “matching” imbalance elsewhere.
- Walras’s law implies that, for any excess demand oversupply for a single good, a corresponding excess supply over demand exists for at least one other good, which is the state of market equilibrium.
- Walras’s law is based on equilibrium theory, which states that all markets must be “cleared” of any excess supply and demand to be in equilibrium.
- Keynesian economic theory stands in contrast to Walras’s law, by stating one market can be in imbalance without another market being out of balance.
- Walras’s law works on the principle of the invisible hand; where there is excess demand, the invisible hand will raise prices, and where there is excess supply, the invisible hand will decrease prices, until equilibrium is reached.
- Critics claim that it is difficult to quantify utility, which influences demand, making Walras’s law difficult to formulate as a mathematical equation.
In practice, observations have not matched Walras’s theory in many cases. Even if “all other markets” were in equilibrium, an excess of supply or demand in an observed market meant that it was not in equilibrium. Walras’s law looks at markets as a whole rather than individually.
Economists who studied and built on Walras’s law hypothesized that the challenge of quantifying units of so-called “utility,” a subjective concept, made it difficult to formulate the law in mathematical equations, which Walras sought to do. Measuring utility for each individual, not to mention aggregating across a population to form a utility function, was not a practical exercise, critics of Walras’s law argued. According to them, if this could not be done, the law would not hold, because utility influences demand.
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Leinfellner, Werner, “Foundations Of Microeconomics Including A Model Of Marx’s Microeconomics” (1976). Transactions of the Nebraska Academy of Sciences and Affiliated Societies. 406.
ES2: The protomodel of value creation consists of the following presuppositions: All economic actions are defined as purposeful individual evaluative behavior which may serve for decision making under risk and uncertainty and are based on production, exchange and distribution of values if the following conditions are fulfilled:
2.1 Actions require an image of a desired state (end), a technological plan and/or procedure to arrive at this end.
2.2 Desired ends presuppose that the future state is more satisfactory for the individual as well as for his society.
2.3 More satisfactory states can only be achieved by value creating means. Means are the created manufactured goods or factors of production (artificially produced by man’s labor or available from nature).
2.4 The means to achieve the desired ends are always scarce.
2.5 The ranking of final ends as well as the means to achieve desired ends change according to the changing efforts, time and technical (technological) procedures constantly developed.
The whole paradigm 2 boils down to the primitive model that things which are momentarily scarce have to be created, realized. The realization, creation of an end product or good gives the final end product a value, i.e. creates values.
It seems that man in and within his/her society is not primarily striving for maximization of his utility or satisfaction, but tends to produce, create new goods which are scarce. 2.3 and 2.4 replace therefore the utilitarian maximization of utility. 2.4 introduces at the same time a minimal Pareto condition.
Marx’s version can easily be obtained from ES2.
ES3: If in a protomodel described in ES2 values can only be created by labor, then it is called a Marxian protomodel of economics. Marx’s version is therefore a restriction since it does not take into account that, e.g., exchange distribution of values has to be considered at least as value changing, i.e. increasing or decreasing the labor value. In a next step the neo-utilitarian version of the protomodel ES2 will be described.
ES4: A neo-utilitarian protomodel of microeconomics is obtained if we add the following conditions to the primitive model described in ES2:
4.1 Evaluations and decisions can only be done by individuals (agents) which decide rationally, i.e. by using a well formed conventionally established decision or value theory prescribing how to evaluate and to decide in a formal sense.
4.2 More satisfactory decisions are obtained only by maximization of the agents’ expected utility, or simply of his utility. 4.1 demands that interpersonal utility has to be established between decision makers partaking in a common decision procedure. From 2.2 it follows that any compromises (e.g. minimax strategies) are permitted. It should depend completely on the reader and economist which one she regards — ES2, ES3 or [S4 -’ as her protomodel, paradigm in the sense of Kuhn or simply as background knowledge on which the economic theories are founded.
Finally, to conclude the foundations by laying bare the methodological presuppositions of microeconomics, a model M will be discussed by means of an axiomatization published in extended form by the author elsewhere. From this axiomatized model both the neo-utilitarian version and the Marxistic version of microeconomics can be obtained.
[…]
With respect to C9 the Marxian interpretation and the neo-utilitarian differ. ES4 regards the profit as the motor of all business and economy since it satisfies in an ideal way the maximization of individual utility (See ES4). In Marx’s interpretation (ES3) the profit is regarded as a surplus value not created by labor (therefore called dead labor value). Marx has to applicate his socio-political protomodel of classes together with his dialectic proto- model of development to explain C9. Consequently the neo-utilitarian (e.g. Keynes) regards economy as self regulating, because of the law of supply and demand (C9), but Marx has to impose planning control, which he deliberately takes from its socio-political model, since he abandoned the supply and demand structure of the market, (see ES3)
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1. Law of Falling Tendency of Rate of Profit:
The rate of profit has a tendency to fall, as the accumulation of capital goes on.
Total Value = c + v + s
Where, c means constant capital which “does not in the process of production undergo any quantitative alterations of value”. Constant capital remains constant as machine transfers its value to the product but does not increase in value.
v stands for ‘variable capital’ meaning thereby that the value of such capital increase in the process of production. Value of labour power “reproduces the equivalent of its own value, and also produces an excess, a surplus value which may itself vary, may be more or less, according to circumstances”.
Therefore, V is the value paid to labour, S is the surplus value — excess of the value produced over value paid to labour. Value paid to labour stands for subsistence wage. S is the value appropriated by capitalists and is called profit. The rate of profit would be equal to P. S/C+V, where P is the rate of profit, C+V stands for the value invested by the capitalists.
Now S/V is the rate of exploitation or rate of surplus value appropriated. This may be denoted by
P. C/C + Vis the organic composition of capital, i.e., the ratio of constant capital to total capital. It may be represented by q.
P = P (2 — e).
As the accumulation of capital takes place, constant capital increases in relation to capital or q increases. With e remaining the same as q increases, p must fall. This follows from our equation. Hence, in the process of capitalist development, the rate of profit must decline. This is the falling tendency of the rate of profit. With a decline in the rate of profit, the capitalists struggle to regain their old rates of profit, and hence class conflict emerges.
Therefore, crises follow in the presence of this tendency of profit rate to fall. Marx has described that crises arising out of this tendency in Capital Volume III, in the chapter entitled “Unraveling die Internal Contradictions of the Law,” in the following words: “It (a fall in the rate of profit) protnotes overproduction, speculation, crises, surplus capital along with surplus population”.
Again he writes, “The barrier of the capitalist mode of production becomes apparent…. in the fact that the development of the productive power of labour creates in the falling rate of profit a law which turns into an antagonism of this mode of production at a certain point and requires for its defeat of periodical crises. Maurice Dobb in his book ‘Political Economy and Capitalism’ regards this law to be the sole cause of crises to the complete exclusion of other theories.
But before we lay the blame on this law we must note the following:
(a) First, there is a contradiction in this law. Marx assumes that the rate of surplus value (p’) remains constants or, in other words, the extra productivity due to capital accumulation is proportionately divided between labourers and capitalists. There is an increase in the wages (or value) paid to workers, according to this assumption, which contradicts with his other theory of subsistence wage to labour. If subsistence wage is to be paid to the labour, the whole extra output will go to capitalists and change the ratio to S/V.
The rate of surplus value would increase, if subsistence wage is paid, and the rate of profit may not decline as the Organic Composition of Capital rises. This can be seen in the equation
P = P’ (1 — q).
If q increases, p will decline provided p’ remains constant.
If q increases, p’ increases, p may or may not decline.
There is an inconsistency in Marxian law of falling rate of profits. Therefore, we cannot rely upon this law as a cause of crises.
(b) Secondly, with a fall in the rate of profits, the investment does not decline, as in Marxian system; the inducement to invest is the maintenance of capitalist position by each capitalist. If a capitalist diminishes his investment, he is driven out of the class of capitalists by sheer competitive forces. The higher or lower rate of profit has no impact on the rate of investment.
Therefore, the law of falling rate of profit cannot cause crises. The true significance of this law lies in aggravating the class conflict present in capitalist society. The Capitalists on finding that the rate of profit is declining attempt to increase exploitation and thus impinge severe measures on the workers. This law is just another contradiction in a capitalist society, which works for the doom of capitalism.
[c] Thirdly, rise in organic composition of capital is slow and hence the tendency of falling rate of profits is perceptible though inherent, only in the long run. The rate of profit falls over a very long period and this periodicity may not coincide with periodic crises (trade cycle) with which we are familiar today. But Marx had given the theory of capitalist development embedded with the periodic crises.
He believed that the capitalist development takes place in cyclical waves. Those cycles were caused due to exhaustion of reserve army of labour and re-creation of reserve army by technological changes. This type of cyclical revolutions resembles the trade cycles of today. As soon as the unemployed labour force is exhausted and they tend to get higher wages, the capitalists shift to more capital intensive methods, thus creating unemployment once more.
Therefore, the Law of Falling Rate of Profit cannot be the cause of crises. The above law assumed that all commodities sell at equilibrium values, but the decline in profit may be due to the fact that commodities do not sell at their values. The essential difficulty is that of realising the value, which is already in a physical sense embodied in finished commodities. The crises can arise for lack of realisation of values.
The under-consumption and disproportionality theories are theories of “realisation crises”. Paul M. Sweezy states the difference between realisation crises and crises arising out of the tendency of falling rate of profit, in the following words: “The practical capitalist is unlikely to see any difference; for him the trouble is always insufficient profitability from whatever source it may arise. But from the point of view of causal analysis, the two types of crises present divergent problems.
In the one case, we have to do with movements in the rate of surplus value and composition of capital, with the value system remaining intact. In the other case, we have to do with as yet unspecified forces tending to create a general shortage in effective demand for commodities, not indeed in the sense that it is insufficient to buy all the commodities offered, but that it is insufficient to buy them all at a satisfactory rate of profit.
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Jonthan Nitzan and Shimshon Bichler (2014), ‘Can Capitalists Afford Recovery? Three Views on Economic Policy in Times of Crisis’, Review of Capital as Power, Vol. 1, №1, pp. 110–155. https://bnarchives.yorku.ca/414/3/20141000_nb_can_capitalists_afford_recovery_web.htm
Can Capitalists Afford Recovery? Three Views on Economic Policy in Times of Crisis, Jonathan Nitzan and Shimshon Bichler [1]
The Tendency of the Rate of Profit to Fall
Profit for Marx is the source of accumulation. As a class, capitalists can only reinvest what they appropriate in profit; so if the rate of profit tends to fall, so must the maximum rate at which capital can accumulate. Now, according to Marx, and here we come to the first theory, this downward tendency is built into the very logic of capitalism.
To see why this is so, let us review the basic Marxist accounting in Equations 2–8 below. Begin with c, v and s, which are measured in terms of socially necessary abstract labour time. (SNALT)
If we denote constant capital by c, variable capital by v and surplus value by s, we can express the following three relationships.
The organic composition of capital θ is the ratio of c/v;
the rate of surplus value ξ is the ratio of s/v;
and the rate of profit π is the ratio of s/(c+v).
If we now divide the numerator and denominator of the rate of profit by v, we can express the rate of profit π as a ratio between the rate of surplus value ξ and the organic composition of capital θ plus 1.[6]
This framework, says Marx, enables us to understand one of the key built-in limitations of capitalism. Competition compels profit-maximizing capitalists to constantly mechanize their production, and this relentless process causes the organic composition to rise over time. Capitalists are also driven to raise the rate of surplus value (although it is not entirely clear why, under competitive conditions, they should succeed in doing so).
In Marx’s opinion — which he himself was never completely convinced of — the organic composition tends to rise, and it tends to rise faster than the rate of surplus value, assuming that this rate trends upward as well (on Marx’s life-long attempt to grapple with this process, see Heinrich 2013; for contesting views, see Heinrich et al. 2013). The progressive growth of the organic composition is offset by counter-tendencies; but according to Marx, over the longer-haul the former process is stronger, causing the rate of profit to trend downward. Over time, therefore, accumulation tends to decelerate, crises multiply and capitalism becomes ever more difficult to sustain.
The problems with these propositions are legion, and here we highlight three (for a more detailed account, see Nitzan and Bichler 2009a, Chs. 6–8). The first problem is with the unit of measurement. Labour values, which Marx’s variables are denominated in, cannot be observed or examined directly, making their empirical inquiry difficult if not impossible.
The second problem is that mechanization per se can tell us nothing about labour values. Even if we accept Marx’s value scheme, it is entirely possible for technical change to devalue constant capital faster than the rate at which capitalists augment their ‘physical machinery’ (however measured). If that happens, the organic composition will fall rather than rise.
Third and finally, for Marx, the economy is bifurcated into productive and unproductive activity. The former produces surplus value, while the latter uses it — yet there is no objective basis to deciding which economic activity is productive and which is not.
The consequences of this last problem are illustrated in Figures 7 and 8, which pertain to the United States. Since labour values cannot be observed, in both charts we assume — as most Marxists do in their empirical analysis — that these values are more or less equal to market prices. Of course, if this assumption is incorrect, the estimates we present here are meaningless.
Figure 7 takes a naïve perspective. It is naïve because in this chart we do not pretend to be able to distinguish productive from unproductive labour, and instead assume, contrary to most Marxists, that all economic activity is productive of surplus value. The dashed line approximates the organic composition of capital. It is estimated by taking the ratio between the current (replacement) dollar cost of all non-residential fixed assets and the dollar value of employee compensation. The solid line measures the Marxist rate of profit, computed as the ratio of net operating surplus (which is net domestic product less employee compensation) and the sum of the current dollar cost of fixed assets and employee compensation.[7]
Now, on the face of it, the current crisis seems consistent with Marx’s theory. We can see that, since the early 2000s, the organic composition has risen and the rate of profit has dropped. Moreover, this inverse relationship seems to hold — at least cyclically — for the entire period since the 1930s.
Technically, this inverse cyclicality is not entirely surprising. Since fixed assets appear in the numerator of one ratio (the organic composition) and the denominator of the other (the rate of profit), their variations will cause the two ratios to move inversely, by definition.
The difficulty with this figure lies in the longer-term trends. The rate of profit in the chart seems to trend downward, in line with Marx’s theory. But this decline is supposed to be caused by a rising organic composition of capital, whereas in the chart this composition seems to have fallen over time. In other words, the long-term decline in the rate of profit — assuming we accept its definition here — must have been caused by factors other than the organic composition of capital.
Now, adherents of the falling tendency theory would likely contest our naïveté here. In order to properly compute the organic composition and the rate of profit, they would argue, we must first differentiate between productive activity that produces surplus value and unproductive activity that uses surplus value. This, though, is easier said than done. And since nobody knows exactly which labour activity is productive and which is not, Marxists take a shortcut. They identify entire sectors that they deem to be productive and separate them from all other sectors, which they classify as unproductive (see, for example, Shaikh and Tonak 1994; Carchedi 2011).
Figure 8 follows this standard Marxist practice. It identifies four sectors as the productive core of the U.S. economy: agriculture, mining, construction and manufacturing.[8] The remaining sectors are considered unproductive. With this bifurcation, the organic composition of capital is calculated not for the economy as a whole, but only for the four sectors that produce surplus value. Part of this surplus value is appropriated by capitalists in these productive sectors; the rest is appropriated by the capitalists and workers of the unproductive sectors. To calculate the overall surplus value we subtract from net domestic income the wage bill of the productive sectors.[9] We then divide this surplus value by the sum of the fixed assets and wages of the productive sectors, to get the rate of profit.
Now, unlike in Figure 7, in this chart the organic composition trends upward, as it should — but, then, so does the rate of profit!
In Marxist terms, this relationship means that there are counter-tendencies that more than offset the long-term impact of the rising organic composition. Proponents of this theory may again contest that our particular choice of productive and unproductive sectors is inappropriate, and maybe they are right.
Unfortunately, though, there is no way to objectively delineate the two sectors, and this inability creates the temptation to choose the particular bifurcation whose results happen to be consistent with the theory. Finally, we should reiterate that (1) we are using neoclassical price data rather than (unavailable) Marxist labour values, so what we see in these charts might have nothing do with Marx’s theory to begin with; and (2) since labour values remain unknown, there is no way to know whether our findings support or undermine Marx’s theory.
https://bnarchives.yorku.ca/414/3/20141000_nb_can_capitalists_afford_recovery_web.htm
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Moseley (2016) Marx’s 1864–5 manuscripts
Because M — C — M’ is the form peculiar to merchant’s capital, industrial capital and in the abridged form M — M’, to interest-bearing capital, Marx concludes that M — C — M’ is the general formula for capital in the sphere of circulation.
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“Income Inequality: Piketty and the Neo-Marxist Revival by Thomas H. Mayor” https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2015/2/cj-v35n1-4.pdf
Well, is the system rigged in favor of the wealthy at the expense of
the general public? The short answer is no, not even close. To show
why, let us examine the Piketty argument in more detail. Although the book is quite lengthy, its main points are succinctly summarized in the author’s concluding chapter (Piketty 2014: 571) where he states the following:• The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g.
• The inequality r g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.
• The consequences for the long-term dynamics of wealth distribution are potentially terrifying, especially when one adds that the rate of return on capital varies directly with the size of the initial stake.
Well, there you have it. According to Piketty, Marx was right after all.2The free market is rigged in favor of the wealthy, and the future
of a system of free and voluntary cooperation, is “terrifying.” But is
Piketty right? Let us answer this question by first examining the logical basis for his r> g inequality.footnote 2
Many readers of Piketty will interpret his book as an attempt to rehabilitate the basic ideas of Marx. He surprisingly credits Marx with proposing “the first scientific analysis of capitalism and its collapse,” concluding that “economists today would do well to take inspiration from his example” (Piketty 2014: 9–10). On pages 227–28, he argues that Marx’s view that wages could not increase under capitalism was understandable because when he formulated his theories he did not have sufficient evidence of productivity increases. But Piketty is clearly wrong on this point. Marx was fully aware of the enormous advances in productivity that were taking place in the 19th century. In fact, such recognition plays a central role in his early writings such as The Communist Manifesto (1848) as well as his later writings such as Das Kapital (1867). The Communist Manifesto (p. 10), for example, states “the bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together.” While showering all of this praise and absolution on Marx, Piketty (p. 5) refers fleetingly to Adam Smith as having “political prejudices.” Smith, of course, probably contributed more to our current knowledge of economics than any other person. His ideas concerning scientific economics are at the core of modern textbooks. Marx’s ideas are long discarded. For a discussion of Marxist influence in the Piketty book, see Goldberg (2014)
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The difference between the two approaches lies in the reasons they give for the crisis and whether or not it can be averted. Mainstream economists root crises in imperfections, distortions and misguided intervention that can be solved or counteracted by adequate policy (primarily deregulatory), whereas Marxists claim that crises are built into the conflictual class logic of capitalism and therefore are difficult to fix and impossible to eliminate. But both agree on what constitutes a crisis in the first place: a sharp decline in real economic activity and income.
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Chapter IX
The organic composition of capital depends at any given time on two circumstances: first, on the technical relation of labour power employed to the mass of the means of production employed; secondly, on the price of these means of production. This composition, as we have seen, must be examined on the basis of percentage ratios. We express the organic composition of a certain capital consisting 4/5 of constant and 1/5 of variable capital, by the formula 80c + 20v. It is furthermore assumed in this comparison that the rate of surplus-value is unchangeable. Let it be any rate picked at random; say, 100%. The capital of 80c + 20v then produces a surplus-value of 20s, and this yields a rate of profit of 20% on the total capital. The magnitude of the actual value of its product depends on the magnitude of the fixed part of the constant capital, and on the portion which passes from it through wear and tear into the product. But since this circumstance has absolutely no bearing on the rate of profit, and hence, in the present analysis, we shall assume, for the sake of simplicity, that the constant capital is everywhere uniformly and entirely transferred to the annual product of the capitals. It is further assumed that the capitals in the different spheres of production annually realise the same quantities of surplus-value proportionate to the magnitude of their variable parts. For the present, therefore, we disregard the difference which may be produced in this respect by variations in the duration of turnovers. This point will be discussed later.
The general rate of profit is, therefore, determined by two factors:
1) The organic composition of the capitals in the different spheres of production, and thus, the different rates of profit in the individual spheres.
2) The distribution of the total social capital in these different spheres, and thus, the relative magnitude of the capital invested in each particular sphere at the specific rate of profit prevailing in it; i. e., the relative share of the total social capital absorbed by each individual sphere of production.
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Moseley p.200
It should in general be noted — as in the previous case — that if variations
occur, brought about either by economies in the use of constant capital, or by fluctuations in raw material prices, and do not affect wages in any way (hence do not affect the rate and quantity of surplus-value), they never the less do affect the rate of profit, one way or the other.151 It is therefore completely immaterial here — as distinct from what we found in considering surplus-value — what the spheres of production were in which these changes take place; whether the branches of industry in which they occur produce means of subsistence or constant capital for the production of those means of subsistence, whether they produce for the workers or not. The argument developed here is equally valid when these changes occur in luxury production, by which we mean all production that is not required for there production of labour-capacity.
Moseley p.249:
In all these cases, therefore, a change in the magnitude of the
capital applied must be accompanied by a simultaneous change in the rate of profit, as long as other things remain equal.
An increase in the rate of profit always stems from a relative or absolute
increase in the surplus-value in relation to its costs of production, i.e., it is
increased in relation to the capital advanced, or there is a reduction in the
difference between the rate of profit and the rate of surplus-value.
Fluctuations in the rate of profit that are independent of organic changes in
the components of capital or independent of the absolute magnitude of the
capital are possible if the value of the capital advanced, whatever might be
the form — fixed or circulating — in which it exists, rises or falls as a result of
an increase or decrease in the labour-time necessary for its reproduction, an increase or decrease that is independent of the capital already in existence, since the value of any commodity — thus also of the commodities of which capital consists — is determined not by the necessary labour-time it itself contains, but by the socially necessary labour-time required for its reproduction.
This reproduction may differ from the conditions of its original production by taking place under easier or more difficult circumstances. If the changed circumstances mean that twice as much time, or, conversely, half as much time, is required for the reproduction of the same capital, then, given an unchanged value of money, this capital, if it was previously worth 100 thalers, would now be worth 200, or if 250 originally, now 125. If this increase or decrease in value affects all parts of the capital equally, the profit is also expressed accordingly in twice or only half the number of thalers. If it is only the monetary value of the capital advanced that rises or falls (as a result of an alteration in the value of gold) the monetary expression of the surplus-value will rise and fall in the
same proportion. The rate of profit will remain unchanged.>
