Last Saturday, Chris asked what my thoughts are on Marx's law of the tendency of the rate of profit to fall, and he then provided this link to a short article by Michael Roberts. The next day, Dr. Andrew Blais echoed Chris's interest. Herewith a response.
Chris and Andrew are really asking two questions, though they may not realize it. I have an answer to the first one [which, I suspect, Chris will not like.] About the second question, to which the linked article is relevant, I have no opinion at all, nor do I have the technical skills to form one. If I may use contemporary terms of art from the field of Economics to express myself concisely, the first question belongs to Microeconomics and the second question belongs to Macroeconomics.
The classical political economists, of whom Marx was the last and the greatest, engaged in microeconomic reasoning. They made certain assumptions about the goals, knowledge, and rationality of agents in a legally free market capitalist economy and then sought to deduce a variety of conclusions about how such an economy would function. They all agreed that in such an economy, over time, competition and a series of rationally self-interested choices by producers and consumers would establish a consistent system of relative prices and a single economy-wide rate of return on invested capital, or profit rate.
What happens when a more profitable capital-intensive technique is introduced into one line of production by an innovative capitalist? First of all, his [let us suppose] profits rise, a fact noticed by his competitors. Since he can produce more cheaply, he can afford to undersell those competitors and still reap a super-profit. In response, the competitors over time shift to the new capital-intensive technique pioneered by the adventuresome innovator, and profits rise generally in this sector, relative to other sectors. Over more time, capitalists in other sectors switch their investments into the more profitable sector, resulting in increased output in the more profitable sector and a decline in output in the less profitable sectors. The mismatch of supply and demand has the effect of adjusting prices, and hence profits, upward or downward until once again an economy-wide rate of profit emerges.
I keep writing "over time," by the way, because there is a certain amount of friction or stickiness in any economy, as a result of investments in fixed capital, and so forth. All of the classical political economists understood that.
Well, what happens to the rate of profit. Does it settle at a higher or lower level after the shift to a more capital-intensive technique?
Marx believed himself to have demonstrated that profit is the money form of the surplus labor extracted from the workers by the capitalists in the sphere of production. From this conclusion, and other considerations, he deduced the further conclusion that as capitalists substitute more capital-intensive for more labor-intensive techniques of production as a way of securing, at least momentarily, an increased profit, the long-run and unintended effect of this series of choices of technique will be a tendency for the economy-wide rate of profit to fall.
Marx was in fact wrong in thinking he had demonstrated that profit is the money-form of surplus labor [as I demonstrated in my book, Understanding Marx and my article "A Critique and Reconstruction of Marx's Labor Theory of Value"]. What is more, his microeconomic claims concerning the tendency of the rate of profit to fall are false, as was demonstrated by a Japanese economist, Okishio, in [I believe] 1961, and independently by my old colleague at UMass, Samuel Bowles, roughly twenty years later. The truth is that after things settle down, the introduction of the more capital-intensive technique will result in a rise in the global rate of profit
So the answer to the microeconomic version of Chris's question is, Marx was wrong.
But after a while, post-classical [or neo-classical, if you wish] economists started asking a series of quite different questions about the movement of certain aggregate economic quantities and the statistical laws, such as they may be, expressing the movement of those quantities -- aggregate capital, aggregate profits, gross domestic product, and all the other wonderments of modern economics. They made no effort to deduce these magnitudes or their movements from assumptions about the knowledge conditions and rationality of individual agents. Instead, they constructed formal models of the economy with dummy variables representing various aggregate quantities. They then collected vast amounts of data which they organized in time series, and made projections on the basis of those time series of future probable trends.
The second question asked by Chris and echoed by Andrew is this: From a macroeconomic perspective, on the basis if available data, is the global rate of profit falling? Michael Roberts, in his very interesting short piece, reports calculations he has made that show the global rate of profit falling, then reversing and peaking, and then falling again. Roberts quotes work by others, based on somewhat different methods of aggregation, showing a relatively steady decline in the global rate of profit extending over a century.
Let me repeat: I have absolutely no competence to judge the soundness of Roberts' assertions, so I propose to accept them on face value. At least until someone steps forward to disagree who does have some technical competence in these matters, let us agree that the global rate of profit is falling, and has been doing so for a good long time.
I hope it is obvious to everyone that this fact, which we are stipulating, constitutes no sort of confirmation at all of Marx's argument. If that is not obvious, I suppose I shall have to write another post explaining why, but surely it is manifest. To put the matter simply in terms of really old fashioned logic, the truth of the conclusion of a syllogism does not in any way demonstrate the truth of the premises. Indeed, even the truth of the premises and of the conclusion does not demonstrate the validity of the syllogism. [All Republicans are scoundrels. Some red wines are overpriced. Therefore all giraffes are tall.]