THE CONTINUING SAGA OF THE FALLING RATE OF PROFIT - A REPLY TO MARIO COGOY. Susan Himmelweit
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1 Kregel 12 - Himmelweit 1 Leijonhufvud, A. (1968) On Keynesian Economics and the Economics of Keynes, OUP Marx, K. A Contribution to the Critique of Political Economy, Dobb edition. Modigliani, F0(1944) 'Liquidity Preference and the Theory of Interest and Money', Econometrica (1963) 'The Monetary Mechanism and Its Interaction with Real Phenomena', Review of Economics and Statistics Robinson, J. (1933) 'The Theory of Money and the Analysis of Output, Review of Economic Studies. Shackle, C. (1955) Uncertainty in Economics, CUP Tobin, J. (1970) 'Money and Income: Post Hoc Ergo Propter Hoc, QJH THE CONTINUING SAGA OF THE FALLING RATE OF PROFIT - A REPLY TO MARIO COGOY Susan Himmelweit Surprised at the lack of comment in the last number of the Bulletin on Mario Cogoy's article, 1 I shall here attempt a refutation of some of the points he makes. He argues fierstly, cthat what Marx called the organic composition of capital is the ratio 'i-tti:not TT, and secondly, that because this ratio rises the rate of profit falls. While remaining agnostic on the question of which ratio Marx meant to be the organic composition. I shall also take it to be +rbecause this. is simply the ratio of dead labour to living labour used in production, and its value is a function merely of technical conditions of production at a particular point in time and is no affected by changes in distribution. It is certainly a more useful ratio than v. Cogoy then gives us a 'proof that a rising organic composition of capital implies a falling rate of profit whatever happens to the rate of exploitation. To do this he assumes that for a constant number of workers v+s, constant capital c grows at a constant rate u and the value of labour power v decreases at another constant rate 1. He thus makes the rates of change of c and v predetermined and independent of changes in the other and of anything else. This cannot be done, the rate of change of c depends crucially on the rate of surplus value in determining firstly, what surplus is available to be accumulated and, secondly, in what prop9min Isr capital must be divided between c and v. The rate of surplus value is V where s+v is the constant number of workers, and therefore necessarily changes when v does. Ignoring these interconnections leads to accumulation growing to amounts far Rbove the surplus produced in the previous year, for capital c+v at time n is c (1+*), + v(l-1) and so accumulation o =c n + v n - (c n-1 +v n-1 ) = n-1 u(l+u) n-1
2 Himmelweit 2 the left hand part of which tends to infinity while the right hand part shrinks to zero, thus the total grows without limit. On the other hand, total surplus s is limited by being less that s+v, the constant number of workers and thus cannot provide for the ever increasing accumulation of capital. Thus it is not possible for an economy to follow this path. It is possible to get round this problem by redefining the time periods involved, by letting the length of a period be just that time necessary for the required amount of surplus to be accumulated. Thus the time periods get longer and longer. This would not however, get over the fundamental objection to Cogoy's method that he lets the rate of change of c and v be determined independently of each other and of the rate of surplus value. The proportions into which the accumulated surplus is divided between c and v, will be affected by both technology, in determining the relation between values and physical quantities, and the class struggle over wages and the rate of profit. These cannot be assumed to work out in just such a way that c rises and v falls exponentially. Apart from this, whether these observed assumptions are realistic or not, they do impose a severe limit on the applicability of the proof. By putting in predetermined rates of change as algebraic letters, the level of generality of the argument is not raised much above that of a numerical example, What Cog2y wants to show is that his law holds whatever happens to c, v and a provided --;Ti s increases without limit. This is very easy to do for the rate of profit r - s < s+v_ 1 c+v C ( c ) s+v So if co, the rate of profit tends to zero. s+v 2 It is worth noting that c is the maximum rate of profit e. payable, for any given technology, for if wages are zero, v=o and so v* - v-- = s C v. So the maximum rate of profit is just the reciprocal of the organic composition of capital and the statement that a rising organic composition of capital implies a falling rate of profit comes down to saying (i) 1 r* 4- co by assumption (ii r is less than r* So r 0 i.e. the maximum rate of profit tends to zero, therefore so must the actual one. No causal mechanism is implied by such mathematics alone but if a causal mechanism is not intended, the assumption can be framed just as well in terms of the rate of profit itself as in terms of the organic composition of capital. Thus if Cogoy isto have shown more than that the rate of profit falls under the assumption of a falling rate of profit he must show a mechanism by which a rising organic compos-' ition of capital causes a falling rate of profit. What follows is an attempt to Show that the link that does exist between the organic composition of capital and the rate of profit in fact works in the opposite direction. The important point to recognise is that the rate of profit cannot fall except if wages rise. Where methods of production do not change, this is obvious and can be plotted as a wage-profit frontier. (see over) As accumulation proceeds we find "...the requirements of accumulation begin to surpass the customary supply of labour, and, therefore, a rise of wages takes place." 3 Thus movement is up the wage-profit frontier and the rate of profit falls. The organic composition of capital is unchanged.
3 Himmelweit 3 wage rate of profit "Once given the general basis of the capitalistic system; then, in the course of accumulation, a point is reached at which the development of the productivity of social labour becomes the most powerful lever of accumulation." 4 So techniques of production change. They can change either to techniques that were available previously or to ones that were not. If they were previously available they must not have been used earlier because they would have involved higher costs for "No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it may increase the rate of surplus value, so long as it reduces the rate of profit." 5 So because wages rise some techniques become more profitable than others that had previously been used. Thus the new wage-profit frontier must cut the old wage profit frontier from below wage r o rate of profit and movement is up the new frontier after wages have risen above w o and the rate of profit fallen below r o, If there is no reswitching, the new frontier must cut the profit axis at a lower maximum rate of profit than the old one and then the new methods of production have a higher organic composition of capital than the old ones. 6 During the change over to the new methods, i.e. while further accumulation is used purely for buying means of production, to increase the total constant capital to the new level, without expanding the demand for labour, neither wages nor the rate of profit changes. When the demand for labour does increase again, the rate of decline of the profit rate is slower than it would have been if the change over had not
4 taken place, since the new wage profit frontier is steeper than the old one. Himmelweit 4 If techniques change to ones that were not available previously, either because they were not known or because the necessary capital to exploit increasing returns to scale had not been previously accumulated, the rate of profit will rise, otherwise the technique would not be introduced. Wages may rise or fall according to what happens to the demand for labour, and the new technique may or may not have an increased organic composition. The only requirement is that the new wage profit frontier has a higher profit rate at the wage rate ruling at the time of the change over. It may or may not cross the old one. rate of profit Thus we see that accumulation produces three processes, the first, simple accumulation with no changes in technique, produces a falling rate of profit but no change in the organic composition of capital, the second, a change in the method of production to techniques previously available changes, and in general increases, the organic composition of capital and in so doing temporarily halts and then slows down the eventual decline in the rate of profit, and the third, a change to techniques not previously available, increases the rate of profit and may change the organic composition of capital in any direction. So the only times when the rate of profit falls, are just those when there is no change in the organic composition. Changes in the organic composition of capital, when they occur, either halt and then slow down or reverse the fall in the rate of profit. Thus the rising organic composition of capital, far from being a cause of ther'falling rate of profit, is itself a counteracting tendency to it. Both tendencies have a common cause in the accumulation of capital which leads to an increased ratio of capital to available labour force', this is an "incontrovertible fact" 7 of capitalist accumulation (assuming population growth is sufficiently slow), but this is not the same as an increased organic composition of capital. The organic composition rises because capitalists find techniques with a higher organic composition more profitable than previously employed techniques as'wages rise. It may be argued that, because of the "anarchy of production" under capitalism, the techniques that are chosen as most profitable on the basis of existing prices do not turn out to be so when competition, through cheapening the commodities for which methods of production have changed and thus changing prices ratios, re-establishes a general rate of profit. This of course, could not happen in a one-commodity world, since there are no relative prices involved. That it does not happen in general can be shown as follows: Let A be the input-output matrix and 1 the labour input vector of production, for the economy as a whole, at some point in time. Then if b is the vector of a worker's consumption (i.e. the wage in commodity terms), the equilibrium price vector p and
5 Himmelweit 5 profit rate.r is given by (i) p(a+b1)(1+r) =p. A change to a'new technique in the production of Commodity,i, will be made by an individual capitalist if (ii) (p(a'+blfl) i < (p(a+13m i =.,,from (i). where A' and 1 are the input-output matrix.and. labour input vector which include the new technique. Since A' and l' differ from A and 1 only in their ith column and component respectively, we have p. (iii) (p(a'+b1')) = (p(a+b1)) - for all j i Now consider the standard commodity x' of the new system.. It is an eigen-vector of A 4-ble which satisfies x' (A'+b1. )x. = (l+r') where r' is the general rate of profit that becomes established when the new technique becomes the usual one for the production of commodity i, assuming that consumption per worker remains unchanged at b. From (ii) and (iii) so p(a'+b1')x' px' (l+r") < px' (l+r) px' (l+r) and so r (ipx,v0 since all non-zero components' of b enter into x, so if px =0; then the wage is. zero, which is not. an interesting case.)... Thus if a technique is chosen by an individual capitalist, as being the most profitable', its adoption will not decrease the general rate of profit. (It will actually increase - the rate of profit if the new technique'is.in the production of a basic commodity' and. will leave the rate of profit unchanged if the, commodity is non-basic). So the capitalist class as a whole does not behave differently from an individual capitalist.when.it comes to. choosing techniques of productiorl Thus accumulation lowers the rate of profit, when techniques do not change The Organic'composition. of capital does not change unless techniques do. Techniques are only changed if'they reverse, halt or slow down the, fall in the rate of profit. TheSe. are*therefore the only circumstances in which the organic composition rises. These'processeS. can of course all be happening Simultaneously in different sectors. The reason for separating them out is just to show that Whenever the tendency of the organic composition to rise is manifested, it is as a counteracting influence to the tendency of the rate of.profit to fall. So what has happened to Cogoy's argument; We have,seen that whenever the organic composition of capitalincreases, the maximum.rate of profit r*, decreases. This.however has no downward effect on the actual rate Of profit and cannot be used to argue that being an upper bound 'on the, rate of profit; a decrease in r* must imply an ultimate decrease in r, since the change in r* has only occurred because.r is, already. sufficiently low to make the changeover to a new technique more profitable. So while r* is mathematically an upper bound'on r, it never. acts as such, since r* only decreases to values still above the general rate of profit: r'.
6 Hare 1 Himmelweit 6 Thus there is no causal content in Cogoy's argument, which must be seen as purely tautological. The rising organic composition is not a cause of the falling rate of profit. It is one, among many, of the counteracting influences to it. The only cause of the falling rate of profit is, through rising wages, the over accumulation of capital. NOTES 1. Mario Cogoy, "The Fall of the Rate of Profit and the Theory of Accumulation" - "A Reply to Paul Sweezy", CSEB, Winter 1973, pp Here and throughout this paper, c, v and s are to be taken to be the values of. these variables that would obtain if both production and consumption were of commodities whose range of organic compositions was proportionate to that of the standard commodity. Thus these values are then independent of what is produced and just reflect technological and distributional factors. It is only be adopting this definition that we can have r = s/(c+v). If commodities exchange at their values, all organic compositions of capital are equal at any point in time, and thus the actual s, c and v produced would satisfy the definition as above. This is the assumption that I would assume Cogoy is making. 3. Karl Marx, Capital Vol I, Moscow 1954, p ibid., p Karl Marx, Capital Vol III; Moscow 1962, p The assumption that commodities exchange at their values would rule out reswitching. 7. c.f. Karl Marx, Theories of Surplus Value, Vol II, Moscow 1968, p.364, and David Yaffe, "The Marxian Theory of Crisis, Capital and the State." CSEB, Winter 19721:, p.17 (in order of appearance). SKILLED LABOUR IN THE MARXIST SYSTEM - A COMMENT P.G. Hare The reduction of skilled labour to its equivalent in terms of unskilled labour has always been a serious problem for adherents to the Marxist labour theory of value. For it has long been recognised that the use of relative market wage rates to weight labour of different types introduces a fundamental circularity into the theory, since the whole object of the labour theory of value is to derive labour values for commodities which are independent of the currently observable income distribution. If there is only one type of labour in existence then the difficulty disappears, but until recently there has been no unambiguous solution to the general reduction problem. WeizsUcker (2) suggested that the most logical solution would be to measure labour of any type of skill by the total labour time expended. This certainly provides a measure of total labour outlays which is independent of relative wage rates, and so constitutes a possible solution to the problem. But Rowthorn (2) has produced a
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