Marxist Economics

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In the midst of one of history’s most severe crises of capitalism, there is no more apt time than the present to briefly survey the basics of Marxist economics. It would be beyond the scope of this short article to trace the development of the theory from the works of Marx up until the present day so hopefully it should suffice to lay out the basics of the Marxist analysis of capitalism and its approach to economic crises.

To start, all Marxists take the position that capitalism is inherently crises-prone, and that these crises are the realisation of fundamental contradictions within the capitalist system. This is not to say that we can glean much satisfaction from merely pointing to a contemporary crisis and saying ‘We told you so’. All crises are the products of different historical factors and the accumulation of varying contradictions. However, there are a number of basic contradictions in capitalism which come to the fore in varying degrees during a time of crises. It is vital that we understand them to get beneath the surface and unearth the true mechanisms of capitalism.

The nature of capitalist accumulation:
Unlike in the past, the purpose of commodity production under capitalism is not in the first instance for the creation of use-values. That is to say, the major stimulus for capitalists wishing to produce goods is not that they or other people need to use them, but that in selling those goods they will make a profit. It follows, therefore, that goods which are useful may not be manufactured because they are unprofitable to produce. It also follows that when production becomes unprofitable it will stop and the economy will enter a period of crisis. This can be demonstrated in abstract terms by the following schema, as done in a similar manner by Paul Sweezy in his work The Theory of Capitalist Development:

In simple (non-capitalist) production, the producer sells his product in order to purchase other products which satisfy specific needs or wants. He starts with Commodities, turns them into Money and then back into a different Commodity. In other words, C-M-C.
Under capitalism, the capitalist starts with Money, uses this money to purchase Commodities (labour power and means of production), and then after the process of production he sells the commodities for more Money: M-C-M.

However, if the value of M at the beginning and the end of production is the same then the whole process was pointless from the point of view of a capitalist. For production to take place, therefore, the value of M must be made larger. In other words, M-C-M1 where the value of M1 is greater than that of M.

Surplus value and the rate of profit:
In order to understand where this added or ‘surplus’ value comes from we must look closer at the process of production. In essence, it involves two elements: means of production (or constant capital, C) and labour power (or variable capital, V). However, as we have seen, if the value of the inputs (C+V) is equal to that of the output, then there is no point to production. There must, therefore, be another element involved.

For Marx, the importance of labour (V) as a commodity is that it produces value. A capitalist pays a worker a fixed wage for his labour power yet the commodities produced by labour exceed that value. In other words, the sum total of production in a fixed period is not merely C+V but C+S+V and from this surplus (S) derives profit.

When we factor in the costs of labour and of means of production in generating profit, we can simplistically express the rate of profit as S/(C+V). However, in Capital, Marx assumed that the whole stock of capital is used up in the production of a commodity. While this kept the calculations simple, it has led to some misunderstandings. When calculating the rate of profit, it must be remembered that the total constant capital (C) is not all used up because its composite elements have different lifespans. For example, a factory may last fifty years, a machine ten years and raw materials just a week. Furthermore, this formulation excludes rent. Nevertheless, it is necessary to accept such simplifications for the purposes of an overview.

The organic composition of capital:
As we have seen, V is the element which produces surplus value (S) when it interacts with C in the process of production. Therefore, if the proportion of C to V is altered, with values remaining constant, so is the amount of S. This proportion is known as the organic composition of capital, expressed as C/V in a single cycle or C/(C+V) if we consider total invested capital. In concrete terms, a change in this ratio manifests itself as a growth of machinery over that of labour. This occurs due to technological advancements, which necessarily spread throughout industries in the process of capitalist accumulation due to the pressures on firms to remain competitive.

The tendency for the rate of profit to fall pt.1:
As labour is the value-producing commodity in the process of capitalist production, it follows that its decline relative to that of constant capital leads to a gradual reduction in the amount of surplus value produced. This simple observation Marx called the tendency for the rate of profit to fall.

However, it must be stressed that it is only a tendency which logically follows from Marx’s labour theory of value. Due to the vast number of counter-acting tendencies which can flow both from the increase in machinery and from elsewhere, what is often misunderstood as a law can only accurately be described as a tendency. These counter-acting causes include raising the rate of exploitation (S/V), known in bourgeois economics as the productivity of labour, which allows labour to produce more surplus value than it would be able to do with lesser means of production. If the productivity gains of the new machinery outweigh their cost, the rate of profit will clearly fall slower or not at all.

Another counter-acting tendency is the fact that elements of constant capital (say, raw materials or new machinery), may become more numerous as production expands in certain industries, causing them to fall in cost. This drop may be substantial and cancel out any losses in profitability.
Most obvious to ordinary workers are attempts by capitalists to lengthen the working-day, introducing ‘scientific management’ or ‘Taylorism’, or to depress wages. The latter of which can occur, to give some examples, due to an influx of new labour into the labour market (through the reserve army of the unemployed or liberalisation of the labour market within a body such as the European Union) or through government policies such as income controls.

The tendency for the rate of profit to fall pt.2:
With these numerous counter-acting forces in play it is by no means determined that the rate of profit will continue to fall indefinitely in all cases. As Sweezy points out, an assumption of the tendency for the rate of profit to fall on account of a rising organic composition of capital presupposes a constant rate of surplus value (ie. the changes in technology will not affect how much surplus value is produced by the workers).

Marx made this assumption in parts of Capital in order to analyse one aspect of the tendency. In the real word (and in Volume III of Capital) the rate surplus value will be affected by the changing organic composition of capital. The introduction of new machinery, as we have noted above, can be considered a counter-acting force but there are definite limits to its ability to check a fall in the rate of profit (a point neglected in Sweezy’s analysis but noted by Nick Beam). As Marx put it himself, “Two workers working for 12 hours a day could not supply the same surplus value as 24 workers each working 2 hours, even if they were able to live on air and hence scarcely needed to work at all for themselves.” If the organic composition of capital is altered too much and the amount of variable capital reduced, it is not possible after a certain point to generate the same level of surplus value and thus of profit.

Thus, in keeping with the totality of Marx’s work, it is better to consider the rate of profit as a rate which can be altered by the movements of both variables (the organic composition of capital and the rate of surplus value), plus the other counter-acting tendencies at work, whilst noting the limits placed on an increase in the rate of surplus value being able to cancel out a fall in the rate of profit.
Finally, as Sweezy argues, the very process of capitalist expansion contains within it forces which will squeeze the rate of profit. We speak here of a growing economy’s increasing demand for labour which will raise wages and reduce the rate of surplus value. We might also mention the growth of the trade union movement or legal protection (however limited) for workers. Factors which resist this encroachment of profits might be the formation of employers’ organisations, monopolies to maintain high prices or state action designed to attack the living standards of the working class.

The effect of falling profits in crises:
We mentioned at the beginning the nature of production under a capitalist system. Very simply put, production is contingent on profitability. Furthermore, the capitalist (in general rather than personal terms) does not value wealth in the same way as a feudal aristocrat. For a capitalist, wealth begets more wealth as the increased value of M1 is thrown back into production to grow and expand his enterprise. This makes capitalism especially susceptible to crises.

The capitalist measures the success of a venture according to the difference between the wealth at the start (M) and that at the end (M1). Unless this difference (lets call it D) is positive the capitalist will have made a loss. Therefore, he is concerned with the fraction of D/M, or the rate of profit. Thus, a falling rate of profit removes the incentive to invest and expand and causes a crisis in one part of the system. Given the inter-relatedness of capitalist economies, it is possible for this crisis to become widespread, just as we have seen in recent years. If profit rates fall in all industries then nothing will be gained from moving capital from one to another and the result will be a crisis.

Finally, because individual capitalists are driven by the profit motive they will take only secondary account of what everyone else is doing. If the rate of profit drops in one industry, it is perfectly likely for a flood of capital to flow into another one leading to overproduction in that industry. If commodities become subject to overproduction their price will fall and this will cut further into the rate of profit. This is known as a ‘realisation crisis’ because the surplus value in commodities will not become fully ‘realised’ in the act of selling. This is because their new price will not reflect the old cost of production; this crisis stems from the fact that in capitalism sale and purchase are separated both in space and time. If a capitalist buys raw materials but is later unable to sell his commodities he will have ‘overproduced’.

Conclusion:
It is clear from the range of forces operating in the capitalist system that crisis can stem from any one or any combination of elements and it is the job of the economic historian and not of the abstract theorist to determine the root causes of a crisis. However, a clear theoretical perspective is necessary to avoid superficial analyses like the sort prevalent in the current bourgeois press. Of course, anything short of book-length cannot hope to cover all the necessary ground but hopefully this overview will serve as an elucidation and explanation of some of the most important concepts in Marxian political economy.

 

8 Responses

  1. krupskaya

    January 5, 2010 10:22 am

    1967, Marx is a great place to start in analysing the current crisis.

    So why start with Sweezy instead?

    Sweezy, in common with many Marxists especially of the post WWII period, had an innate desire to correct, improve or update Marx, and went up a blind alley doing so.

    There are too many errors here to correct them all. Just two will illustrate Sweezy’s misunderstanding.

    1. The tendency of the rate of profit to fall is both a law and a tendency; more properly a law which concerns a tendency. Analogously, gravity is a law governing the movement of the tides, but El Nino is a tendential periodic climate pattern, which might be offset by other patterns. Nevertheless it remains an inherent tendency of the climate. Marx’s analysis indentifies both, which is why he titled Part 3 of Volume 3 of Capital ‘The Law of the Tendential Fall in the Rate of Profit’.

    2. Sweezy reiterates and compounds a bourgeois notion of the role of wages crimping profits which was alien to Marx. Marx cites 6 factors which offset the law of the tendency of the fall in the profit rate. One of these is the reduction of wages below their value. Absolutely nowhere does Marx suggest the opposite is the case, that the tendency of the profit rate to fall is a function of the tendential rise in wages. This is because there is no such tendency for wages to rise. Even there were, there are 5 other factors to take into account regarding the actual trend in profits.

    There are other errors, such as Marx didn’t understand the concept of depreciation. On the contrary, he not only understood it, but called it capitalism’s great conjuring trick. I could go on, but you get the point.

    Please, don’t take my word for any of this. Marx has a fully rounded theory of crisis, in Part 3 cited above. It’s only about 60 pages (in my Penguin edition). Once read and studied a little, you’ll have Marxist crisis theory from the man himself.

    Reply
  2. nineteensixtyseven

    January 5, 2010 12:59 pm

    krupskaya,

    Thanks for your comments. I am aware that Sweezy made many errors, such as trying to reconcile Marxism with some sort of underconsumptionist theory of capitalist breakdown. I didn’t go into Sweezy’s breakdown theory or his discussion of Luxemburg, Hilferding, Grossman etc. What I did use was his explanation of the differences between simple commodity production and capitalist production which aren’t qualitatively different from Marx’s explanations in Volume I of Capital but which I believe are expressed quite clearly.

    One your first point, you are right that it is a law containing a tendency but I stressed the counter-veiling forces to the tendency just to clear up any misunderstanding. Some writers appear to be of the view that it is merely the expression of a changing organic composition of capital in all cases. The latter, of course, can have a change in the rate of surplus value if the variables are correct. However, I pointed out too where Sweezy goes wrong in this when he argues that the rate of profit is wholly contingent on both the organic composition of capital and the rate of surplus value because, as the quote from Marx shows, the introduction of machinery will only increase the rate of surplus value up until a certain point.

    I am slightly worried about the implications of your second point. There have been times in history where real wages have risen for a period (the post-ww11 period for instance) so, unlike in Capital where wages tend towards subsistence, that is a real possibility which has to be factored into our analysis. I did not argue that a rise in wages offset the tendency for the rate of profit to fall. On the contrary, I said that it cut into profits because it affected the rate of surplus value. You are confusing this with the counteracting influences such as the depression of wages below their value which has the opposite effect, as you have said.

    I have read most of the abridged Volume III and looked at Marx’s explanation of the tendency for the rate of profit to fall. However, I would not go as far as saying that he had a fully rounded theory of crisis within it for the simple reason that Volume III was not finished. The schema for expanded reproduction don’t really add up, hence the debates in the Second International between Luxemburg, Lenin, Bukharin, Parvus, Bernstein, Hilferding etc. I take your point though, for a basic overview Marx is the place to go and I drew much from reading Capital. I’ve also had a look at the arguments put forward by Joan Robinson, Alexander Konus, Maurice Dobb and Nobuo Okisio. I don’t think what I have discussed from other writers like Sweezy has been allowed to alter the basic points that Marx made.

    Reply
  3. krupskaya

    January 5, 2010 1:49 pm

    1967

    I probably didn’t express my point 2. clearly. I was trying to show that it is a notion of bourgeois economics, not shared by Marx, that rising wages are the cause of the tendency of the profit rate to fall. This, therefore, by no means rules out periods, even prolonged ones, where (real) wages rise. But the period you cite of rising wages, post WWII, was also the long boom, when there was tremendous surge in profits, wich only came to an end in the 1960s. Therefore, for the most readily identifiable period of rising wages, the post-War boom, we can also say that profits were also rising. That proves that rising wages are not the cause of the tendency of the profit rate to fall.

    So, to go back to my earlier point, which I think is actually Marx’s point, the ability to depress wages can be a factor in offsetting the tendency of the profit rate to fall. But rising wages (as per your example above) is not the cause of the declining rate of profit.

    My reading of Marx sugests two factors that DO determine the tendency, one of which is the growth in the organic composition of capital [although I accept the caveat you cite that 2 workers X 12hrs create less value than 2 workers X 12 hrs (think there was a typo in your quote)]. I think the closest term to this the capitalists use is ROCE; return on capital employed.

    The second is the growth in the stock of capital itself. Marx’s view was that booms are followed by busts, not as morality tale, but as a matter of arithmetic. In a boom, the stock of capital expands rapidly. At a certain point, the self-expansion of capital cannot be maintained at the same rate and the capitalist stops investing.

    This explains the current slump, the dot-com bubble and bust, the 1970s slump after the long boom, the Great Depresion after the Roaring Twenties, etc. It also explains why it is investment which leads the downturn, just as it has in Ireland, and elsewhere, currently.

    There is a good explanation here http://mpra.ub.uni-muenchen.de/5590/ of how Marx needs to be de-layered from his 20th century ‘explainers’ like Sweezy and his actual postion on the declining rate of profit.

    But, for anyone not already bored by this debate I really do strongly urge them to look up Vol. 3 of Capital and find out for themselves.

    Reply
  4. nineteensixtyseven

    January 5, 2010 5:11 pm

    “I probably didn’t express my point 2. clearly. I was trying to show that it is a notion of bourgeois economics, not shared by Marx, that rising wages are the cause of the tendency of the profit rate to fall. This, therefore, by no means rules out periods, even prolonged ones, where (real) wages rise. But the period you cite of rising wages, post WWII, was also the long boom, when there was tremendous surge in profits, wich only came to an end in the 1960s. Therefore, for the most readily identifiable period of rising wages, the post-War boom, we can also say that profits were also rising. That proves that rising wages are not the cause of the tendency of the profit rate to fall.”

    That is an excellent point and I wholly accept your corrective. One thing to note too is that given the chaotic nature of capitalism’s adjustments it was the case in Britain at least that a strong trade union movement throughout the 1970s managed to maintain wages in the face of falling profits, which sparked off an intense period of class struggle. We can see from the 1980s how the contradictions in capitalism resolved themselves temporarily with the state-backed destruction of the unions. So while rising wages are in no way the beginning of any chain of causation, would you accept that they can play a role in depressing the rate of profit once a boom begins to break down?

    Thank you very much for this debate, by the way. I wrote the article in the most part to attempt to clarify my own understanding of this complex topic so your comments have been invaluable. Many thanks also for the link, I will read it tonight!

    Reply
  5. krupskaya

    January 6, 2010 2:28 pm

    1967

    Yes I do accept rising wages can depress profits, but I think we are agreed, they are in a no way the cause, or even a cause, of the tendency of the profit rate to fall.

    I hope you found the piece valuable. It is a very good ‘resoration job’, in my opinion.

    Thanks too, for the comradely spirit in which this deabte has been conducted.

    Reply
  7. donagh

    January 8, 2010 1:46 pm

    I’m surprised that no one has mentioned the thread on Crooked Timber which started out from John Quiggin’s question about whether Marxist economics was missing in action – now there is a loaded question.

    Anyway the thread has lots of links to a wide range of Marxist economists, more than just the Paul Sweezey school that Krupskaya can’t abide.

    http://crookedtimber.org/2010/01/06/marxian-economics-mia/#comments

    The Marxist/Socialist/Blogs/Links on the sidebar of Dublin Opinion also has a good few. http://dublinopinion.com

    Anwar Shaikh is mentioned a few times on the CT thread. His Economic Policy in a Growth Context: A Classical Synthesis of Keynes and Harrod is definitely relevant. http://homepage.newschool.edu/~AShaikh/Shaikh%20-%20Policy%20in%20Growth%20Context.pdf.

    Finally, one comment from John Quiggin I thought was interesting considering the discussion here:

    The obvious candidate for a specifically Marxian perspective is the claim (contra my post) that the rate of profit really is declining, that capital destruction is required, and that this explains the crisis. I’ve been pointed to something by Andrew Kliman taking that line, but I find it totally implausible.

    This generated this response from JW Mason:

    I’m sorry, which part do you find implausible? It’s certainly plausible—in fact, it’s true—that the profitability of nonfinancial corporations (in the US at least) was declining prior to the crisis. Why don’t you think this could have played a role in the crisis?

    The secular tendency of the rate of profit to decline that Marx—and other classical economists—expected may not have been borne out. But the tools that Marxists have used to analyze this tendency can be applied just as well on a cyclical timeframe—that’s exactly what several of papers I linked to above, especially the Kotz and Bakir-Campbell, do.

    A core insight, I think, is that stable expansion of a capitalist economy requires a particular distribution of income between sectors and classes, but there are no equilibrating forces that reliably maintain that distribution. So for instance you can have a profit-squeeze crisis if the wage share rises too much, or a realization crisis if it falls. In either case, the crisis itself eventually helps right the imbalance—by demoralizing workers and restoring the reserve army of labor in the one case, and by forcing the retirement of excess capacity on the other—but if the crisis is a severe one some new constellation of social and political institutions will be needed as well.

    Along the same lines is the idea you can find in (Marxist) Michael Perelman’s work (but also in Schumpeter) that an economy with large fixed capital investments needs the right degree of monopoly. Too little and you have fratricidal competition as prices are driven toward marginal cost; too much and you have stagnation and lose the competitive pressure toward innovation.

    (Jim Crotty has also written a lot about this issue of correspective versus fratricidal competition; a recent paper is here.)

    Or along the same lines again, Anwar Shaikh’s stuff on international trade, where he argues that neither exchange rates nor relative prices adjust to maintain current account balance, even in the long run, with the result that trade is governed by absolute rather than comparative advantage. There’s a concrete, empirical claim that you won’t find in the mainstream.

    The common thread here is the idea that the reproduction of a capitalists system requires certain balances, but there are no automatic mechanisms to maintain them. You can find a limited form of this insight in Keynes, in that the rate of investment is essentially unanchored, but it’s much more fully developed in the Marxian tradition.

    .

    I was surprised that Michael Perelman’s books weren’t mentioned before then. His Railroading Economics is definitely worth reading to see how capital and the state work together to maintain a near monopoly situation is in place to cover fixed capital costs. Its also very interesting on welfare capitalism.

    Reply

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