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I had raised an objection to Fred's theory in 21987 and 99. I have found that Samuel Hollander makes a similar criticism of Marx in his classical Economics: The curve relating the profit rate and accumulation--whatever its slope--is continually shifting outward because of an increase in the purchasing power of profits, because the wants and greed for wealth increase, and because o f various institutional changes which ease the savings-investment process...With capital growing so rapidly, the notion of a supposedly falling growth rate of labour demand comes into question...But too rosy a picture of capitalistic development would not presumably have appealed to Marx. p. 397. Fred, You are probably correct, but here's what's been bothering me: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? If the mass of capital advanced is growing, then the mass of surplus value which is extorted can grow even if the rate of profit falls. If the rate of capitalisation of surplus value grows along with the mass of surplus value, then the demand for labor can remain sufficiently strong to absorb population growth, no? A falling profit rate does not ipso facto mean stagnation if by stagnation you mean rising levels of real unemployment. Investment demand (i.e., investment in constant and variable capital) may be strong enough in fact to require that the valorization base be enlarged through immigration. Strong enough in fact that even with the immigration the valorization base may not large enough to sustain investment demand in additional constant and variable capital going forward. Why can't capital accumulation thus founder on a shortage of labor--or at least labor available for accumulation--even if the rate of profit is falling? Jim says that this crisis was not preceded by a rising OCC; I know Shaikh and you have questioned whether K/Y is a good proxy for the OCC (and Shaikh relies on the work of one Victor Perlo here). But the OCC need not have been rising for profitability expectations to have dimmed. Capitalists may not have thought a sufficiently large valorization base would be available for sustained accumulation. They then curtailed their investments, which has then multiplied out into a recession. That is, a perceived shortage of labor may have paradoxically led to an oversupply of labor! I am not suggesting a wage led profit squeeze--unit labor costs which of course is not a good proxy for s/v did nonethless seem stable before the recession-- but a shortage of labor thesis. In fact it may have been the overwork of the population that suggested that the valorization base was coming up insufficient vis a vis the rate of accumulation. I know this sounds absurd in a world of apparent overpopulation but the population that was well placed and suited for exploitation may have been coming up short in the eyes of capitalists, no? If a perceived shortage of exploitable labor was the trigger of retrenchment in investment, then the capitalist way out would be to increase the supply of exploitable labor, e.g., by opening the border with Mexico and improving the investment and labor codes abroad to allow more foreign direct investment that is profitable. The success of the WTO would then be a crucial political battle for the capitalist class. Rakesh
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In a message dated 2/12/2002 2:18:34 PM Central Standard Time, [EMAIL PROTECTED] writes: I had raised an objection to Fred's theory in 21987 and 99. I have found that Samuel Hollander makes a similar criticism of Marx in his classical Economics: "The curve relating the profit rate and accumulation--whatever its slope--is continually shifting outward because of an increase in the purchasing power of profits, because the wants and greed for wealth increase, and because o f various institutional changes which ease the savings-investment process...With capital growing so rapidly, the notion of a supposedly falling growth rate of labour demand comes into question...But too rosy a picture of capitalistic development would not presumably have appealed to Marx." p. 397. In Volume 3 of Capital there is a Chapter titled "The law of the tendency of the rate of profit to fall" as opposed to "a supposedly falling growth rate of labour demand," whatever that means. Marx of course spoke highly of the epoch of capitalist development. This is know to anyone that has actually read Marx. Marx will continued to be criticized for things he never said. Melvin P.
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Patrick Bond wrote: Are you disaggregating the extremely high profits that derive from corporate interest earnings or financial-asset capital gains, as US firms hollowed out from the early 1980s and took higher earnings shares from their financial/treasury operations? They would have paralleled the interest-payments deduction? This would require doing a lot of work with SP Compustat data. Some enterprising team of professors and grad students would be ideally suited for the task. We've been through this before, but much of the profits that, say, Ford and GM earn from their finance subsidiaries come from financing cars and trucks. So it's not speculative profit - they're making the money the bankers used to make. The hollowing out story is complicated. Even something as hollow as Enron had power plants, water companies, and fiber optic lines. Reality wouldn't let them be as a hollow as they'd hoped. Or what about Amazon.com - it discovered it needed warehouses, fulfilment centers, and pickers packers. It couldn't be virtual, as everyone had hoped at first. Doug
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We've been through this before, but much of the profits that, say, Ford and GM earn from their finance subsidiaries come from financing cars and trucks. So it's not speculative profit - they're making the money the bankers used to make. Yeh, but it got bigger by an order of magnitude in the 1990s. I don't think that GE Capital makes most of its money by financing fridges and air-conditioners any more. And that's without getting into the profits Microsoft booked selling puts on its own stock dd ___ Email Disclaimer This communication is for the attention of the named recipient only and should not be passed on to any other person. Information relating to any company or security, is for information purposes only and should not be interpreted as a solicitation or offer to buy or sell any security. The information on which this communication is based has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. All e-mail messages, and associated attachments, are subject to interception and monitoring for lawful business purposes. ___
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Davies, Daniel wrote: We've been through this before, but much of the profits that, say, Ford and GM earn from their finance subsidiaries come from financing cars and trucks. So it's not speculative profit - they're making the money the bankers used to make. Yeh, but it got bigger by an order of magnitude in the 1990s. I don't think that GE Capital makes most of its money by financing fridges and air-conditioners any more. And that's without getting into the profits Microsoft booked selling puts on its own stock Yup. No question about it. But measuring the scope of it would take some work. Microsoft plays financial games, but they make software, and that's where most of their money comes from. So even they don't fit the hollow model perfectly. Doug
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Charles Brown wrote: Do you think this fundamental problem can be solved through reforms ? Fred writes: Charles, thanks for the clarity of your question. The short answer to your question is no, there is no reform - that I know of - that will solve the fundamental problem of insufficient profitability. According to Marx's theory, what is needed is one or more of the following: a devaluation of capital (through bankruptcies, write-offs, etc.), lower wages, and/or a reduction of unproductive labor. Marx emphasized the former. yes, those are important, but it should be noted bankruptcies and write-offs don't help the aggregate rate of profit unless the excessive capital equipment is scrapped; a bankruptcy can simply redistribute the ownership of existing capital equipment. Lowering wages can make realization crises worse, especially given the consumer debt load and rising unemployment rates these days. (There's no way consumer spending is going to hold up if unemployment rises to 6.5%) The ouster of unproductive workers -- i.e., one kind of lay-off -- also has this effect, as does the speed-up of the aggregate growth of labor productivity (output/(productive + unproductive labor)) that would result. Realization problems are made worse if productivity rises relative to wages. BTW, why aren't these reforms? The neo-liberals promise that their reforms will abolish unproductive labor (as they define it). So the reform that you seem to be most interested in - higher wages - will not solve this problem. Rather, it will make this problem worse. It would be nice if Jim's theory of insufficient demand for consumer goods were true. This is an excessively simple presentation of my theory. Among other things, as I've said before on pen-l, I don't think anyone can simply wish for higher wages and have their wish come true. BTW, in my theory the lack of conflict between capital and labor over wages (on a macro level) only applies in what I term an underconsumption trap and then only on the macro level. In that situation, business investment is blocked (by unused capacity, excessive debt, pessimistic expectations) and other sources of aggregate demand such as government deficits and positive net exports are ruled out. In this situation of low profits, individual capitalists try to pull the iron out of the fire by squeezing workers. But, given the blockage of other sources of aggregate demand, underconsumption forces apply directly, so that the profitability situation _gets worse_ as capacity utilization rates fall again. (There's micro/macro irrationality, of the sort that Marx referred to in the GRUNDRISSE, p. 420, Martin Nicholaus edition. It's also similar to the Keynesian paradox of thrift.) In this situation, and only in this situation, a mass effort to raise wages would force the capitalists to be more sane on the macro-level. However, they would fight it tooth and nail, because capitalists only truly understand micro-level rationality (i.e., the bottom line). Then there would be no inherent conflict of interests in capitalist economies, and no necessary inverse relation between wages and profit, as Marx (and Ricardo) emphasized. It would then always be possible to achieve higher wages and living standards for workers with endangering profits. But, alas, I don't think this theory is true. The inverse relation between wages and profits becomes especially clear in times of recessions, like today. The posited inverse relationship between real wages and profits assumes, among other things, something akin to Say's Law, i.e., that there are no realization crises. (Ricardo fell for this Law, but Marx did not.) But if aggregate demand increases (for whatever reason) so that capacity utilization rates rise -- e.g., as in the early 1940s or the 1960s -- it's possible for both real wages and profitability to rise. Further, ignoring realization issues, rising labor productivity allows the real wage to rise without necessarily squeezing profit shares or the rate of surplus-value. In a recession, individual capitalists _think_ that there's an inverse relationship between wages and profits. That's why they push down wages (along with speeding up and stretching out work). But that's only a microeconomic perspective (infected with what Marx termed the illusions created by competition or the fetishism of commodities). On the macro-level, a rise in wages could prevent a fall in consumer demand, as explained above. Jim Devine
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On Mon, 28 Jan 2002, Doug Henwood wrote: Devine, James wrote: the data that Fred Moseley and I are discussing is from the BEA and is available at: http://www.bea.doc.gov/bea/ARTICLES/2001/09september/0901ror.pdf or http://www.bea.doc.gov/bea/ARTICLES/2001/09september/ror.xls. These data are not disaggregated by industry. Ah, but their definition of profits adds interest back in. That's a useful measure for some purposes, but money spent servicing debt isn't available for investment or dividends. The rate of profit defined gross of interest is a broader measure of the return to capital for the capitalist class as a whole. The rate of profit defined net of interest is also affected by the division of the gross profit into non-financial profit and interest. Doug is right that, from the point of view of individual non-financial capitals, the money they pay in interest cannot be invested BY THEM. However, from the point of view of the capitalist class as a whole, the interest collected by financial capitalists can (and usually will) be loaned out and invested by someone else in one way or another. Doug is also right that the net rate of profit has increased slightly more than the gross rate of profit since 1982. This is because lower rates of interest in the 1990s have reduced interest payments and raised the net rate of profit relative to the gross rate of profit (i.e. nonfinancial capital received a larger share of the gross profit). However, from 1965 to 1982, the net rate of profit DECLINED MORE than the gross rate of profit, for the opposite reason (increasing interest rates and nonfinancial capital received a smaller share of the gross profit). So that, for the whole period from 1965 to 2001, the net rate of profit declined more than the gross rate of profit. According to my calculations (from the estimates in the SCB article by Larkin and Morris), the gross rate of profit in 2000 was 36% below the 1965 peak and the net rate of profit was 45% below the 1965 peak. And if reasonable estimates for 2001 are added, the declines for the whole period are 46% for the gross rate of profit and 59% for the net rate of profit. Thus, by either measure, there was a very significant decline in the rate of profit from 1965 to 1982, and a much smaller increase since then, so that the rate of profit today is about 50% below its 1965 peak. As I have said, the fundamental problem of insufficient profitability has not yet been solved. It has been masked by accounting tricks, including fraud (as Michael P. suggests), but it has not yet been solved. Fred
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Are you disaggregating the extremely high profits that derive from corporate interest earnings or financial-asset capital gains, as US firms hollowed out from the early 1980s and took higher earnings shares from their financial/treasury operations? They would have paralleled the interest-payments deduction? (I think Chris Niggle did a study on this during the 1980s but presumably Bob Pollin or Tom Schlesinger -- or Doug -- have updated the argument?) - Original Message - From: Fred B. Moseley [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Wednesday, January 30, 2002 12:49 AM Subject: [PEN-L:22073] Re: Re: the profit rate recession On Mon, 28 Jan 2002, Doug Henwood wrote: Devine, James wrote: the data that Fred Moseley and I are discussing is from the BEA and is available at: http://www.bea.doc.gov/bea/ARTICLES/2001/09september/0901ror.pdf or http://www.bea.doc.gov/bea/ARTICLES/2001/09september/ror.xls. These data are not disaggregated by industry. Ah, but their definition of profits adds interest back in. That's a useful measure for some purposes, but money spent servicing debt isn't available for investment or dividends. The rate of profit defined gross of interest is a broader measure of the return to capital for the capitalist class as a whole. The rate of profit defined net of interest is also affected by the division of the gross profit into non-financial profit and interest. Doug is right that, from the point of view of individual non-financial capitals, the money they pay in interest cannot be invested BY THEM. However, from the point of view of the capitalist class as a whole, the interest collected by financial capitalists can (and usually will) be loaned out and invested by someone else in one way or another. Doug is also right that the net rate of profit has increased slightly more than the gross rate of profit since 1982. This is because lower rates of interest in the 1990s have reduced interest payments and raised the net rate of profit relative to the gross rate of profit (i.e. nonfinancial capital received a larger share of the gross profit). However, from 1965 to 1982, the net rate of profit DECLINED MORE than the gross rate of profit, for the opposite reason (increasing interest rates and nonfinancial capital received a smaller share of the gross profit). So that, for the whole period from 1965 to 2001, the net rate of profit declined more than the gross rate of profit. According to my calculations (from the estimates in the SCB article by Larkin and Morris), the gross rate of profit in 2000 was 36% below the 1965 peak and the net rate of profit was 45% below the 1965 peak. And if reasonable estimates for 2001 are added, the declines for the whole period are 46% for the gross rate of profit and 59% for the net rate of profit. Thus, by either measure, there was a very significant decline in the rate of profit from 1965 to 1982, and a much smaller increase since then, so that the rate of profit today is about 50% below its 1965 peak. As I have said, the fundamental problem of insufficient profitability has not yet been solved. It has been masked by accounting tricks, including fraud (as Michael P. suggests), but it has not yet been solved. Fred
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I would reiterate that the denominator in the profit rate calculations is a very questionable figure. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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Rakesh Bhandari wrote: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? Low profits mean low investment, which means a slower rate of growth and reduced technical innovation. Profits are the main source of investment funds, and with profits expectations low, there's no reason to invest. And animal spirits wither. But surely everyone knows this? Doug
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Rakesh Bhandari wrote: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? Low profits mean low investment, which means a slower rate of growth and reduced technical innovation. Profits are the main source of investment funds, and with profits expectations low, there's no reason to invest. And animal spirits wither. But surely everyone knows this? Doug Well Marx himself says the opposite. 'All other things being equal, the power of a nation to save from its profits varies with the rate of profits, is great when they are high, less, when low; but as the rate of profit declines, al other do not remain equal...A low rate of profit is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England [note this is what my post was suggesting]...a high rate of profit by a lower rate of accumulation, relatively to the numbers of people.' Examples: Poland, Russia, India, etc. (Richard Jones, An Introductory Lecture on Political Economy) Jones is right to stres that , despite the falling rate of profit, the 'inducements and faculties to accumulate' increase. Firstly, on the account of the growing relative surplus population. Secondly, because as the productivity of labour gros, dos do the mass of use values represented by teh same exchange value, i.e., the material elements of capital. Thirdly, because of the increasing diversity of branches of production. Fourthly, through the development of the credit system, etc. and the ease with which the possessor of money can now transform it into capital without having to become an industrial capitalsits. Fifthly, the growth in needs and desire for enrichment. Sixthly, the growing mass of fixed capital, etc. (Capital vol 3, p. 374-5. Vintage.) rb
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Michael Perelman writes: Thank you, Rakesh. I have repeated a similar theme in almost all of my writings -- but with a little bit different twist. Low profits suggests heightened competition, which calls for more intensive investment. This investment goes unnoticed in the macroeconomic data because of the manner in which investments is reported. Duménil and Lévy argue that a low profit rate encourages capitalists to respond in a more extreme way to economic shocks. That makes sense to me. While gross investment may be higher during a boom, when profits are low companies intensively invest in improving their old capital stock. Most or all of what's described below is disinvestment, purging the oldest or most obsolete capital equipment. Unlike net investment, it doesn't create aggregate demand or help realize profits. It does have a beneficial supply-side effect for the capitalists. Part of the reason for the partial recovery of profitability in the United States from the 1980s to the 1990s was the shake-out of the 1980s, which involved disinvestment: very old steel mills, for example, were shut down, helping to create the rust belt. This set the stage for investment in more up-to-date mini-mills producing specialty steel and for the shift of the old-fashioned steel industry to places outside of the U.S. Here is a paragraph from my Keynes book: During the Depression, firms weeded out inefficient plant and equipment, creating a much newer capital stock (Staehle, 1955, p. 124). By 1939, one-half of all manufacturing equipment in the US that had existed in 1933 had been replaced (Staehle, 1955, p. 127). Thereafter, business produced as much output as a decade before with 15 per cent less capital and 19 per cent less labour (Staehle, 1955, p. 133). French productivity also improved noticably during the Depression (Aldrich, 1987, p. 98, citing Carr'e, Dubois and Malinvaud, 1972). Similarly, in the recessionary period of 1982-4, only 20 per cent of West German manufacturers replying to IFO's investment survey gave capacity expansion as their motive for investment; 55 per cent cited rationalization (Anon., 1985a, p. 69). Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
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- Original Message - From: Devine, James [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Monday, January 28, 2002 9:38 AM Subject: [PEN-L:22002] RE: Re: the profit rate recession Michael Perelman writes: Thank you, Rakesh. I have repeated a similar theme in almost all of my writings -- but with a little bit different twist. Low profits suggests heightened competition, which calls for more intensive investment. This investment goes unnoticed in the macroeconomic data because of the manner in which investments is reported. Duménil and Lévy argue that a low profit rate encourages capitalists to respond in a more extreme way to economic shocks. That makes sense to me. While gross investment may be higher during a boom, when profits are low companies intensively invest in improving their old capital stock. Most or all of what's described below is disinvestment, purging the oldest or most obsolete capital equipment. Unlike net investment, it doesn't create aggregate demand or help realize profits. It does have a beneficial supply-side effect for the capitalists. Part of the reason for the partial recovery of profitability in the United States from the 1980s to the 1990s was the shake-out of the 1980s, which involved disinvestment: very old steel mills, for example, were shut down, helping to create the rust belt. This set the stage for investment in more up-to-date mini-mills producing specialty steel and for the shift of the old-fashioned steel industry to places outside of the U.S. == Was it uncompetitive capital-labor ratio costs or the overvalued dollar or both that transformed the US steel industry? Ian
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Well, empirically speaking - which I know is embarrassingly vulgar - the best explanation for changes in investment is the change in profits. Marx's argument in this excerpt just doesn't sound right. Doug Rakesh Bhandari wrote: Rakesh Bhandari wrote: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? Low profits mean low investment, which means a slower rate of growth and reduced technical innovation. Profits are the main source of investment funds, and with profits expectations low, there's no reason to invest. And animal spirits wither. But surely everyone knows this? Doug Well Marx himself says the opposite. 'All other things being equal, the power of a nation to save from its profits varies with the rate of profits, is great when they are high, less, when low; but as the rate of profit declines, al other do not remain equal...A low rate of profit is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England [note this is what my post was suggesting]...a high rate of profit by a lower rate of accumulation, relatively to the numbers of people.' Examples: Poland, Russia, India, etc. (Richard Jones, An Introductory Lecture on Political Economy) Jones is right to stres that , despite the falling rate of profit, the 'inducements and faculties to accumulate' increase. Firstly, on the account of the growing relative surplus population. Secondly, because as the productivity of labour gros, dos do the mass of use values represented by teh same exchange value, i.e., the material elements of capital. Thirdly, because of the increasing diversity of branches of production. Fourthly, through the development of the credit system, etc. and the ease with which the possessor of money can now transform it into capital without having to become an industrial capitalsits. Fifthly, the growth in needs and desire for enrichment. Sixthly, the growing mass of fixed capital, etc. (Capital vol 3, p. 374-5. Vintage.) rb
Re: RE: the profit rate recession
Devine, James wrote: the data that Fred Moseley and I are discussing is from the BEA and is available at: http://www.bea.doc.gov/bea/ARTICLES/2001/09september/0901ror.pdf or http://www.bea.doc.gov/bea/ARTICLES/2001/09september/ror.xls. These data are not disaggregated by industry. Ah, but their definition of profits adds interest back in. That's a useful measure for some purposes, but money spent servicing debt isn't available for investment or dividends. Doug
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Well, empirically speaking - which I know is embarrassingly vulgar - the best explanation for changes in investment is the change in profits. Marx's argument in this excerpt just doesn't sound right. Doug, I am not necessarily disagreeing. I am saying that as long as a falling rate of profit is accompanied by a rising mass of profit, accumulation may indeed accelerate; however at some point a rising mass of profit may not compensate for the falling rate of profit. The anticipated mass of profit no longer compensates for a weak or falling rate of profit, which then discourages capitalists from making the level of investment (workers' wages are of course part of overall investment) that is needed to sell their product and realize profits. This may cause a shift of course to the innovatory investments that Michael P and Jim D are talking about. The question I am putting forth however is simple (and your empirical evaluation would be most helpful): did the capitalist class come to fear that high investment levels would outstrip the valorization base that was in fact available to them? That is, did the limit to accumulation become the shortage of easily exploitable labor? Overtime was reaching heights during the boom, it seems. May I underline that the shortage of labor theory is consistent of course with the labor theory of value? I am also not advancing a class struggle thesis of profit squeeze to which I think you, Jim O Connor, Negri and others are sympathetic. Though I may be inching towards it here. rb
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There seems to be disagreement as to whether declines in profit rates are necessarily correlated with declines in investment. Wouldn't the first step be to test whether this is so by examining empirical data to see whether there is a consistent correlation of declines in profit rates with declines in investment and perhaps too the converse relationship of increasing profit rates and increasing investment. Has anyone examined such correlation for selected countries over a reasonably long period? Doug's post seems to imply that investment is a function of profit rates. Does empircal data support this? Cheers, Ken Hanly - Original Message - From: Doug Henwood [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Monday, January 28, 2002 12:33 PM Subject: [PEN-L:22009] Re: Re: Re: Re: Re: Re: Re: the profit rate recession Well, empirically speaking - which I know is embarrassingly vulgar - the best explanation for changes in investment is the change in profits. Marx's argument in this excerpt just doesn't sound right. Doug Rakesh Bhandari wrote: Rakesh Bhandari wrote: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? Low profits mean low investment, which means a slower rate of growth and reduced technical innovation. Profits are the main source of investment funds, and with profits expectations low, there's no reason to invest. And animal spirits wither. But surely everyone knows this? Doug Well Marx himself says the opposite. 'All other things being equal, the power of a nation to save from its profits varies with the rate of profits, is great when they are high, less, when low; but as the rate of profit declines, al other do not remain equal...A low rate of profit is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England [note this is what my post was suggesting]...a high rate of profit by a lower rate of accumulation, relatively to the numbers of people.' Examples: Poland, Russia, India, etc. (Richard Jones, An Introductory Lecture on Political Economy) Jones is right to stres that , despite the falling rate of profit, the 'inducements and faculties to accumulate' increase. Firstly, on the account of the growing relative surplus population. Secondly, because as the productivity of labour gros, dos do the mass of use values represented by teh same exchange value, i.e., the material elements of capital. Thirdly, because of the increasing diversity of branches of production. Fourthly, through the development of the credit system, etc. and the ease with which the possessor of money can now transform it into capital without having to become an industrial capitalsits. Fifthly, the growth in needs and desire for enrichment. Sixthly, the growing mass of fixed capital, etc. (Capital vol 3, p. 374-5. Vintage.) rb
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my guess: both. Was it uncompetitive capital-labor ratio costs or the overvalued dollar or both that transformed the US steel industry? Ian
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I wrote: the data that Fred Moseley and I are discussing is from the BEA and is available at: http://www.bea.doc.gov/bea/ARTICLES/2001/09september/0901ror.pdf or http://www.bea.doc.gov/bea/ARTICLES/2001/09september/ror.xls. These data are not disaggregated by industry. Doug writes: Ah, but their definition of profits adds interest back in. That's a useful measure for some purposes, but money spent servicing debt isn't available for investment or dividends. true. But it's interesting to note that the share of interest as a percent of profits+interest fell after its peak in 1990. This ratio started rising again in 1996, but it didn't return all the way to its 1990 peak in 2000. The profit rate that the BEA measures seems to be in the same general league as the marginal efficiency of investment of Keynesian theory (or Marx's rate of profit, for that matter). The MEI is compared to the interest rate, so if MEI i, the incentive to invest is there. If we exclude interest, this kind of comparison is harder. (Of course, the actual MEI would involve _expected_ profitability.) JDevine
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Devine, James wrote: The profit rate that the BEA measures seems to be in the same general league as the marginal efficiency of investment of Keynesian theory (or Marx's rate of profit, for that matter). The MEI is compared to the interest rate, so if MEI i, the incentive to invest is there. If we exclude interest, this kind of comparison is harder. (Of course, the actual MEI would involve _expected_ profitability.) If you really want to get snazzy, you've got to compute a cost of capital, which includes the cost of equity, via the capital asset pricing model. That's how the big boys do their capital budgeting. Doug
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weed[ing] out inefficient plant and equipment, creating a much newer capital stock isn't disinvestment? (after all, cleaning out the dead wood lowers the average age of the capital stock.) replacing 1/2 of all manufacturing equipment in the US may not be disinvestment, but it's probably not net investment, i.e. new investment. Raising productivity can occur either due to new investment or due to disinvestment. Rationalization might include disinvestment along with new investment. I don't know where you got the idea that disinvestment necessarily involves foreign investment. It can (as it does these days), but disinvestment simply means scrapping or dismantling part of the existing capital stocks, almost always the oldest vintages... Jim Michael Perelman writes: Jim, you are talking about something else. During the Depression, capitalists did not have the confidence to relocate abroad nearly as much as today. Instead, they did modernize and improve their capital stock -- if they were able to survive. It was not disinvestment. Here is a paragraph from my Keynes book: During the Depression, firms weeded out inefficient plant and equipment, creating a much newer capital stock (Staehle, 1955, p. 124). By 1939, one-half of all manufacturing equipment in the US that had existed in 1933 had been replaced (Staehle, 1955, p. 127). Thereafter, business produced as much output as a decade before with 15 per cent less capital and 19 per cent less labour (Staehle, 1955, p. 133). French productivity also improved noticably during the Depression (Aldrich, 1987, p. 98,citing Carr'e, Dubois and Malinvaud, 1972). Similarly, in the recessionary period of 1982-4, only 20 per cent of West German manufacturers replying to IFO's investment survey gave capacity expansion as their motive for investment; 55 per cent cited rationalization (Anon., 1985a, p. 69).
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weed[ing] out inefficient plant and equipment, creating a much newer capital stock isn't disinvestment? (after all, cleaning out the dead wood lowers the average age of the capital stock.) replacing 1/2 of all manufacturing equipment in the US may not be disinvestment, but it's probably not net investment, i.e. new investment. Raising productivity can occur either due to new investment or due to disinvestment. Rationalization might include disinvestment along with new investment. Jim D, this is a very helpful distinction (Webber and Rigby also have a typology of different forms of rationalization and productivity growth in their big book). If businessmen had come to believe that valorization base could not undergird a high rate of net investment and this in turn led to dimishing prospects of profitability, then a scrapping of labor intensive plants, along with new investments in less labor intensive ones, may brighten the profit outlook; however, this would then compound, or at the least not solve, the problem of unemployment which has presently resulted from the retrenchment in investment demand. This compounding of the problem of unemployment would indicate the perversity of the capitalist way out of crisis, as Makoto Itoh would underline. However, note that the crisis would be overcome not at all by raising the consumption of the masses! I don't know where you got the idea that disinvestment necessarily involves foreign investment. It can (as it does these days), but disinvestment simply means scrapping or dismantling part of the existing capital stocks, almost always the oldest vintages... James Galbraith and Wm Darity argue that recessions help the capitalist class coordinate scrapping and the making of new investments; recessions allow this to happen in an orderly way that prevents the outbreak of fraticidal competition. He also argues that scrapping is followed by the setting up of new plants, esp in Dept II, abroad. rb
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How you measuring accumulation? If you're measuring profitability in relative rather than absolute terms, shouldn't you measure accumulation relatively as well? Doug, I meant by accumulation what Jim D is (I believe) referring to as net investment. I think I agree with Jim that the overcoming of crisis need not involve in the first instance a rise in net investment. I am suggeting that what may have provoked the crisis was too high a rate of net investment not in relation to consumption demand as Jim D is suggesting (AS I UNDERSTAND HIM) but in relation to the available valorization base. I am also raising the possibility that a falling rate of profit need not have the trigger of the fall off in net investment or even disinvestment, as Fred M seems to be arguing. The trigger may have been a shortage of easily available, easily exploitable labor (along with cheap energy perhaps). This of course underlines that at its root the profitable expansion of labor depends on the exploitation of living lbor. Rakesh
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The profit rate that the BEA measures seems to be in the same general league as the marginal efficiency of investment of Keynesian theory (or Marx's rate of profit, for that matter). The MEI is compared to the interest rate, so if MEI i, the incentive to invest is there. If we exclude interest, this kind of comparison is harder. (Of course, the actual MEI would involve _expected_ profitability.) If you really want to get snazzy, you've got to compute a cost of capital, which includes the cost of equity, via the capital asset pricing model. That's how the big boys do their capital budgeting. I'm trying to lose weight, so as to avoid being too big a boy. JD
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- Original Message - From: Devine, James [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Monday, January 28, 2002 12:23 PM Subject: [PEN-L:22019] RE: Re: RE: Re: the profit rate recession my guess: both. Was it uncompetitive capital-labor ratio costs or the overvalued dollar or both that transformed the US steel industry? Ian Yeah, I keep forgetting the chicken-egg dynamic of so much causality in PE; shaking free of the linear-succession model is a constant practice. Ian
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Really it should be expected future profits, but the current profit rate is as good an indicator of expectations as we have. Robert Chirinko has probably done the most on investment as a function of profit. On Mon, Jan 28, 2002 at 01:33:48PM -0500, Doug Henwood wrote: Well, empirically speaking - which I know is embarrassingly vulgar - the best explanation for changes in investment is the change in profits. Marx's argument in this excerpt just doesn't sound right. Doug Rakesh Bhandari wrote: Rakesh Bhandari wrote: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? Low profits mean low investment, which means a slower rate of growth and reduced technical innovation. Profits are the main source of investment funds, and with profits expectations low, there's no reason to invest. And animal spirits wither. But surely everyone knows this? Doug Well Marx himself says the opposite. 'All other things being equal, the power of a nation to save from its profits varies with the rate of profits, is great when they are high, less, when low; but as the rate of profit declines, al other do not remain equal...A low rate of profit is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England [note this is what my post was suggesting]...a high rate of profit by a lower rate of accumulation, relatively to the numbers of people.' Examples: Poland, Russia, India, etc. (Richard Jones, An Introductory Lecture on Political Economy) Jones is right to stres that , despite the falling rate of profit, the 'inducements and faculties to accumulate' increase. Firstly, on the account of the growing relative surplus population. Secondly, because as the productivity of labour gros, dos do the mass of use values represented by teh same exchange value, i.e., the material elements of capital. Thirdly, because of the increasing diversity of branches of production. Fourthly, through the development of the credit system, etc. and the ease with which the possessor of money can now transform it into capital without having to become an industrial capitalsits. Fifthly, the growth in needs and desire for enrichment. Sixthly, the growing mass of fixed capital, etc. (Capital vol 3, p. 374-5. Vintage.) rb -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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I never got that idea. You were talking about deindustrialization in an earlier post, which tends to be association with relocating production abroad. I only said that that process was not that common during the 1930s, compared with recent times. Devine, James wrote: I don't know where you got the idea that disinvestment necessarily involves foreign investment. It can (as it does these days), but disinvestment simply means scrapping or dismantling part of the existing capital stocks, almost always the oldest vintages... Jim Michael Perelman writes: Jim, you are talking about something else. During the Depression, capitalists did not have the confidence to relocate abroad nearly as much as today. Instead, they did modernize and improve their capital stock -- if they were able to survive. It was not disinvestment. Here is a paragraph from my Keynes book: During the Depression, firms weeded out inefficient plant and equipment, creating a much newer capital stock (Staehle, 1955, p. 124). By 1939, one-half of all manufacturing equipment in the US that had existed in 1933 had been replaced (Staehle, 1955, p. 127). Thereafter, business produced as much output as a decade before with 15 per cent less capital and 19 per cent less labour (Staehle, 1955, p. 133). French productivity also improved noticably during the Depression (Aldrich, 1987, p. 98,citing Carr'e, Dubois and Malinvaud, 1972). Similarly, in the recessionary period of 1982-4, only 20 per cent of West German manufacturers replying to IFO's investment survey gave capacity expansion as their motive for investment; 55 per cent cited rationalization (Anon., 1985a, p. 69). -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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But minimills are not necessarily specialty steel producers. They began with low-end steel and remained that way until the 1980s when automotive sheets were attempted with new technologies. They succeeded up to a point but the fixed costs per ton in a minimill was so low that the big producers with their obsolete and/or retrofitted technologies could not simply compete. Minimills are amenable to specialty steels because of small volumes, although even gigantic firms with plant capacities over 11 million tons can and do produce specialty steels (a chemical process extra to the process of good basic steel). Cheers, Anthony xxx Anthony P. D'Costa, Associate Professor Comparative International Development University of WashingtonCampus Box 358436 1900 Commerce Street Tacoma, WA 98402, USA Phone: (253) 692-4462 Fax : (253) 692-5718 xxx On Mon, 28 Jan 2002, Ian Murray wrote: - Original Message - From: Devine, James [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Monday, January 28, 2002 9:38 AM Subject: [PEN-L:22002] RE: Re: the profit rate recession Michael Perelman writes: Thank you, Rakesh. I have repeated a similar theme in almost all of my writings -- but with a little bit different twist. Low profits suggests heightened competition, which calls for more intensive investment. This investment goes unnoticed in the macroeconomic data because of the manner in which investments is reported. Duménil and Lévy argue that a low profit rate encourages capitalists to respond in a more extreme way to economic shocks. That makes sense to me. While gross investment may be higher during a boom, when profits are low companies intensively invest in improving their old capital stock. Most or all of what's described below is disinvestment, purging the oldest or most obsolete capital equipment. Unlike net investment, it doesn't create aggregate demand or help realize profits. It does have a beneficial supply-side effect for the capitalists. Part of the reason for the partial recovery of profitability in the United States from the 1980s to the 1990s was the shake-out of the 1980s, which involved disinvestment: very old steel mills, for example, were shut down, helping to create the rust belt. This set the stage for investment in more up-to-date mini-mills producing specialty steel and for the shift of the old-fashioned steel industry to places outside of the U.S. == Was it uncompetitive capital-labor ratio costs or the overvalued dollar or both that transformed the US steel industry? Ian
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On Fri, 25 Jan 2002, Doug Henwood wrote: Michael Perelman wrote: Doesn't fraud also accompany a falling rate of profit? I have thought about this relationship quite a bit, but I have seen relatively little written about it. As profit rates fall, companies resort to more and more risky behavior to compensate for the fall into rate of profit. In the process, they resort to first flaky and then fraudulent behavior. In the US, the profit rate rose from the early 80s until around 1997. Funny accounting also increased over the period - in bull markets, people don't want to hear bad news, and they want profits to grow rapidly forever. The bursting of a speculative bubble brings calls for tighter accounting. Doug, this may be misleading. The rate of profit certainly did not increase continuously from 1980 to 1977, and then decline. Rather, the rate of profit fluctuated up and then down in the 1980s, so that the rate of profit in 1992 (7.0%) was only slightly higher than it was in 1980 (6.2%). Similar fluctuations (with somewhat larger amplitudes) occurred in the 1990s, first an increase to 1997 and then a sharp decline to 7.1% in 2001). So that the rate of profit today remains only slightly above what it was in the trough of the early 1980s. My conclusion from these estimates, as I have said many times before, is that the fundamental problem in the US economy of insufficient profitability has not yet been solved and continues to causes recessions and stagnation. Best, Fred
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Fred B. Moseley wrote: Doug, this may be misleading. The rate of profit certainly did not increase continuously from 1980 to 1977, and then decline. Rather, the rate of profit fluctuated up and then down in the 1980s, so that the rate of profit in 1992 (7.0%) was only slightly higher than it was in 1980 (6.2%). Similar fluctuations (with somewhat larger amplitudes) occurred in the 1990s, first an increase to 1997 and then a sharp decline to 7.1% in 2001). So that the rate of profit today remains only slightly above what it was in the trough of the early 1980s. My conclusion from these estimates, as I have said many times before, is that the fundamental problem in the US economy of insufficient profitability has not yet been solved and continues to causes recessions and stagnation. Of course, nothing in social life goes straight up or down (except maybe Mariah Carey's record sales). But the trend in the 80s and most of the 90s was certainly up. We're working with different numbers. I'm using pretax profits from the NIPAs divided by the Fed's estimate of the capital stock from the flow of funds accounts (for nonfinancial corporations). My series bottoms in 1982, rises choppily to 1988, sinks a bit with the recession/credit crunch/debt hangover, bottoms in 1991, then rises pretty steadily to a peak in 1997. The dropoff since 1997 is quite sharp, giving back 2/3 of the rise between 1982 and 1997. This explains a good bit of the bubble bursting and investment dropoff. To bracket out that 15-year rise and imply that nothing much has changed would miss a whole economic era. By the way, Anwar Shaikh told me just the other day that he still thinks the U.S. is in a long upwave. Doug
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Doug, this may be misleading. The rate of profit certainly did not increase continuously from 1980 to 1977, and then decline. Rather, the rate of profit fluctuated up and then down in the 1980s, so that the rate of profit in 1992 (7.0%) was only slightly higher than it was in 1980 (6.2%). Similar fluctuations (with somewhat larger amplitudes) occurred in the 1990s, first an increase to 1997 and then a sharp decline to 7.1% in 2001). So that the rate of profit today remains only slightly above what it was in the trough of the early 1980s. My conclusion from these estimates, as I have said many times before, is that the fundamental problem in the US economy of insufficient profitability has not yet been solved and continues to causes recessions and stagnation. Fred, You are probably correct, but here's what's been bothering me: Why should capitalism be more vulnerable to recessions and stagnation simply because the profit rate is falling or low? If the mass of capital advanced is growing, then the mass of surplus value which is extorted can grow even if the rate of profit falls. If the rate of capitalisation of surplus value grows along with the mass of surplus value, then the demand for labor can remain sufficiently strong to absorb population growth, no? A falling profit rate does not ipso facto mean stagnation if by stagnation you mean rising levels of real unemployment. Investment demand (i.e., investment in constant and variable capital) may be strong enough in fact to require that the valorization base be enlarged through immigration. Strong enough in fact that even with the immigration the valorization base may not large enough to sustain investment demand in additional constant and variable capital going forward. Why can't capital accumulation thus founder on a shortage of labor--or at least labor available for accumulation--even if the rate of profit is falling? Jim says that this crisis was not preceded by a rising OCC; I know Shaikh and you have questioned whether K/Y is a good proxy for the OCC (and Shaikh relies on the work of one Victor Perlo here). But the OCC need not have been rising for profitability expectations to have dimmed. Capitalists may not have thought a sufficiently large valorization base would be available for sustained accumulation. They then curtailed their investments, which has then multiplied out into a recession. That is, a perceived shortage of labor may have paradoxically led to an oversupply of labor! I am not suggesting a wage led profit squeeze--unit labor costs which of course is not a good proxy for s/v did nonethless seem stable before the recession-- but a shortage of labor thesis. In fact it may have been the overwork of the population that suggested that the valorization base was coming up insufficient vis a vis the rate of accumulation. I know this sounds absurd in a world of apparent overpopulation but the population that was well placed and suited for exploitation may have been coming up short in the eyes of capitalists, no? If a perceived shortage of exploitable labor was the trigger of retrenchment in investment, then the capitalist way out would be to increase the supply of exploitable labor, e.g., by opening the border with Mexico and improving the investment and labor codes abroad to allow more foreign direct investment that is profitable. The success of the WTO would then be a crucial political battle for the capitalist class. Rakesh
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Fred writes: 3. The current recession was caused by a sharp decline in investment spending, beginning in late 1990. The main point of disagreement seems to be - whether or not the decline of investment spending that caused the recession was itself caused by the decline in the rate of profit since 1997. However, it has been widely discussed in the business press that investment collapsed in 2001 as a result of rapidly deteriorating profitability. As we have discussed, the rate of profit turned down in 1997, and has continued to decline ever since, and finally took its toll on investment spending in late 2000. I raise a single question (and Doug your reply would doubtless be most illuminating--am I way off here?): Why did the drop off in investment spending *lag behind* the drop in profitability? So far we have not mentioned the effect of interest rates. In the wake of the Asia Panic, Greenspan flooded the market with liquidity which led to an asset inflation. With low rates and an ease in raising equity capital in this Age of the IPO, many very questionable long term R D projects and what the Hayekians would call higher order projects were undertaken. However since Greenspan seems to want to follow sensitive commodity prices, he was later forced to play catch up as the price of the basket of sensitive commodities fell; Greenspan aggressively raised rates to maintain confidence in the value of the currency. The successive rate hikes took the floor away from what were inviable long term, R and D intensive projects which were counting on cheap capital before they were completed. The Nasdaq balloon was pierced. Investment in so called higher order industries collapsed. And the effects of that have multiplied out. Greenspan's reversal has not since restored confidence. Just guessing. Rakesh
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Rakesh Bhandari wrote: I raise a single question (and Doug your reply would doubtless be most illuminating--am I way off here?): Why did the drop off in investment spending *lag behind* the drop in profitability? The financial mania, of course. There were plenty of outside funds to tap, and animal spirits were busily tapping them. As they say on Wall Street, the stock market wasn't just discounting the future, it was discounting the hereafter. So despite the dip in profitability, expectations were for endless good times. The financing gap - the difference between capital expenditures and internal cash flow - is very high for a recession (and got unusually wide during the boom). Normally it comes close to 0; now it's about 2% of GDP. Doug
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I raise a single question (and Doug your reply would doubtless be most illuminating--am I way off here?): Why did the drop off in investment spending *lag behind* the drop in profitability? Doug writes: The financial mania, of course. There were plenty of outside funds to tap, and animal spirits were busily tapping them. As they say on Wall Street, the stock market wasn't just discounting the future, it was discounting the hereafter. So despite the dip in profitability, expectations were for endless good times. The financing gap - the difference between capital expenditures and internal cash flow - is very high for a recession (and got unusually wide during the boom). Normally it comes close to 0; now it's about 2% of GDP. even without the financial mania, personal savings, a government surplus, and the inflow of foreign funds (the current account deficit) can be tapped to allow businesses to continue to invest in fixed capital even when cash flow is insufficient. In recent experience it's the inflow of foreign funds that's been most important in allowing U.S. investment to continue after the profit rate fell. Jim Devine
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Michael Perelman wrote: Doesn't fraud also accompany a falling rate of profit? I have thought about this relationship quite a bit, but I have seen relatively little written about it. As profit rates fall, companies resort to more and more risky behavior to compensate for the fall into rate of profit. In the process, they resort to first flaky and then fraudulent behavior. In the US, the profit rate rose from the early 80s until around 1997. Funny accounting also increased over the period - in bull markets, people don't want to hear bad news, and they want profits to grow rapidly forever. The bursting of a speculative bubble brings calls for tighter accounting. Doug
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I don't disagree with you, except to the extent that I think that the real rate of profits has been declining since the late 1960s. It got a boost from the decline in regulation and in the power of labor, as well as from the opening up of new markets. None of these could be expected to continue to increase more. Of course, I can muster no specific numbers to support my theory, although Fred's work in does seem to lend some credence to it. Right, Fred? On Fri, Jan 25, 2002 at 07:24:07PM -0500, Doug Henwood wrote: Michael Perelman wrote: Doesn't fraud also accompany a falling rate of profit? I have thought about this relationship quite a bit, but I have seen relatively little written about it. As profit rates fall, companies resort to more and more risky behavior to compensate for the fall into rate of profit. In the process, they resort to first flaky and then fraudulent behavior. In the US, the profit rate rose from the early 80s until around 1997. Funny accounting also increased over the period - in bull markets, people don't want to hear bad news, and they want profits to grow rapidly forever. The bursting of a speculative bubble brings calls for tighter accounting. Doug -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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Hi Jim, I am sorry for my delay in responding to your last message of Monday, Jan. 14. A sick son, an overdue paper deadline, and classes starting next week have kept me otherwise occupied. I just have time for a few brief comments. We seem to agree on the following points (please correct me if I am wrong): 1. The rate of profit declined significantly from the mid-1960s to the 1970s, and this declining profitability was the main cause of the stagflation of recent decades. 2. If the rate of profit is examined from 1980 to 2002 (estimated), then there is little or no upward trend in the rate of profit over this period (and even a slight decline in the share of profit). The years 1980 and 2002 are appropriate end points for the estimation of the trend, because they are at the same point in the business cycle - the bottom of a recession. You have other arguments, using other end points and other selected years, that the rate of profit has increased since 1980. But you acknowledge that all these different measures show only a small increase, and that the rate of profit today remains significantly below its earlier postwar highs. 3. The current recession was caused by a sharp decline in investment spending, beginning in late 1990. 4. The current recession could be made worse because of a subsequent decline in consumer spending. The main point of disagreement seems to be - whether or not the decline of investment spending that caused the recession was itself caused by the decline in the rate of profit since 1997. I argue yes and you argue no. You argue that business investment decisions are not determined by short-run cyclical fluctuations in the rate of profit, but are instead determined by the long-run trend in the rate of profit, and also by the capacity utilization rate. However, it has been widely discussed in the business press that investment collapsed in 2001 as a result of rapidly deteriorating profitability. As we have discussed, the rate of profit turned down in 1997, and has continued to decline ever since, and finally took its toll on investment spending in late 2000. This is how business executives themselves have explained their reductions of investment spending. The investment cutback was probably also influenced by the long-run decline in the rate of profit since the mid-1960s. But the primary precipitating factor seems to have been the sharp decline in the rate of profit since 1997. The capacity utilization rate declined as a RESULT of the recession, it is not a cause of the recession. In the months ahead, the low capacity utilization rate will certainly have a negative effect on investment spending, and thus will make a recovery from the recession more difficult. But the low capacity utilization rate did not cause the initial decline in investment spending which caused the recession. Jim, I still don't understand what you think caused the decline in investment spending that caused the recession. The other crucial question is: what is necessary for a sustainable recovery from the current recession? I argue that a sustainable recovery requires an increase in investment spending, which in turn requires an increase in the rate of profit. One of the main ways to increase the rate of profit is to cut wages. This conflict between profit and wages is an unavoidable fact of life in capitalism, and it is intensified in recessions. However, cutting wages will also reduce consumption in the short-run, and thus will make the recession worse. This is especially worrisome at the present time, because of the unprecedented levels of debt of all kinds - business debt and household debt and US debt to foreigners. These high levels of debt make the economy vulnerable to a more serious downturn. Therefore, the current dilemma seems to be: that which is necessary to solve the fundamental problem of insufficient profitability (cutting wages) will make the current recession worse (by reducing consumer spending), and, because of the high levels of debt, runs the risk of a very bad recession. Jim (and others), do you agree or disagree with the above? Thanks again for the discussion. Fred
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On Mon, 14 Jan 2002, Doug Henwood wrote: Rakesh Bhandari wrote: yes what the previous collapse in basic memory chips suggests is that constant capital had cheapened so considerably (esp relative to consumer goods as is almost the case, I believe) that the rate of profit on the lower value of this constant capital can now be greater even if the rate of surplus value is not going to vary much one way or another. So the demand for constant capital is picking up (and therewith the prices of memory chips) not because consumption is higher (as a crude and even sophisticated unconsumptionist may think) but because profitability is being restored. Doug, you know i am an autodidact but isn't this the ABC's of the Marxian theory of the business cycle? You're too modest with the autodidact label. But I'm not speaking church Marxian - I was speaking vulgate, and bizcycle economics is about as vulgar as it gets. My only point was that if Hyman is right, then consumption won't be collapsing, and the recession is over, or almost over. And this recession had little to do with consumption - it was mostly profit and investment-led (at least in the U.S.). Doug Hi Doug, I agree completely that the causes of this recession have little to do with consumption (at least so far), and have mostly to do with falling profits and investment. This is the main point I have been arguing in my discussion with Jim D. Greenspan emphasized again in a speech last week that weak profits and investment is a reason for continuing concern about the economy. Fred
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On Mon, 14 Jan 2002, Doug Henwood wrote: Rakesh Bhandari wrote: At any rate, the crisis hit Dept I first. Consumption was not a problem. We also know Marx's famous vol II passge in which he criticizes underconsumption. Consumption will now give. We'll see. Wall Street's favorite economist, Ed Hyman, has a piece out today claiming the U.S. recession probably ended in November (citing, as most recent evidence, a decline in unemployment claims, higher-than-expected chain store sails, a 23% surge in DRAM prices over the last week, and several major positive profits surprises). And, he says, a synchronized global recovery is underway, citing higher Taiwanese exports, UK retail sales, Malaysian industrial production, and Canadian housing starts over only the last few weeks. Finally, in November, his composite leading indicator for the OECD had its biggest monthly increase in 18 years. For what it's worth, of course Doug Doug, are you agreeing with Hyman and this growing consensus? What about the recovery of profits and investment? If the cause of this recession is mostly falling profits and investment, as we seem to agree, isn't a necessary condition for recovery from the recession the recovery of profits and investment? How likely is a recovery of profits in the coming months? That would seem to be the crucial question. Does Hyman say anything about profits? What does Henwood say? Thanks, Fred
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I am having a problem with this discussion. Marx, for me, is wholistic. To say that profits, consumption, or investment causes a crisis seems problematical -- since all are interconnected and enmeshed with expectations. Am I missing something? -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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Fred M. writes: I agree completely that the causes of this recession have little to do with consumption (at least so far), and have mostly to do with falling profits and investment. This is the main point I have been arguing in my discussion with Jim D. actually, it's not an argument in the sense of a quarrel (and definitely not a contradiction à la Monty Python). It's a discussion. (In this thread, I had a argument with someone else. Or was it a contradiction? Whatever, it was a waste of time.) Greenspan emphasized again in a speech last week that weak profits and investment is a reason for continuing concern about the economy. Hasn't he also said that consumer spending is what's been holding up the U.S. economy? My point -- and that of Godley Izureta, who also go beyond surface appearances to think about the determinants of private-sector spending -- is that this prop can't last. Similarly, England's economy is doing well in the current world recession due to the role of consumption -- but this can't last. Michael Perelman writes:I am having a problem with this discussion. Marx, for me, is wholistic. To say that profits, consumption, or investment causes a crisis seems problematical -- since all are interconnected and enmeshed with expectations. Am I missing something? I agree with Michael: the capitalist economy, as Marx pointed out, is holistic. Pointing out one factor as a shock to the system (e.g., the fall in the rate of profit seen since the 1960s) is no substitute for a holistic theory. That's why I referenced my simple (Harrod-Domar) version of Marx's reproduction schemes, which brings the various components of aggregate demand and the full-capacity profit rate into a single equation. Now, no single equation could ever be a substitute for a holistic political-economic analysis, but I'm sketched that too: I view capitalism as having an inherent tendency toward over-accumulation. This abstract tendency is expressed differently on the concrete (empirical) level according to the regime prevailing (strong labor vs. weak labor). Given the state of the world economy these days -- an important part of the picture that's easy to forget if we focus on the U.S. non-financial corporate business rate of profit -- I believe that the weak labor regime prevails and thus affects the expression of the abstract tendency toward Jim Devine
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Fred B. Moseley wrote: Doug, are you agreeing with Hyman and this growing consensus? What about the recovery of profits and investment? If the cause of this recession is mostly falling profits and investment, as we seem to agree, isn't a necessary condition for recovery from the recession the recovery of profits and investment? How likely is a recovery of profits in the coming months? That would seem to be the crucial question. Does Hyman say anything about profits? What does Henwood say? Hyman sez profits will pick up with the recovery. He's probably right, but the big question is by how much. My guess is that the long improvement in profitability (in the U.S., that is - it didn't happen elsewhere) is over, and profitability has now plateaued. So the recovery is likely to be uninspiring. I'm tempted to draw a parallel between the present and the end of the 1960s boom, which also marked the end of a productivity and profitability surge and the beginning of more troubled economic times. I cite the likes of Hyman, though, because lefties always overstay the recession, and are among the last diehards clinging to recession. Doug
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Devine, James wrote: Hasn't he also said that consumer spending is what's been holding up the U.S. economy? My point -- and that of Godley Izureta, who also go beyond surface appearances to think about the determinants of private-sector spending -- is that this prop can't last. Similarly, England's economy is doing well in the current world recession due to the role of consumption -- but this can't last. You may be right. But I've heard this line many times before. Godley also said some dire things about the UK a decade ago, and the UK did get a big recession, but it recovered and expanded. As Wall Street permabear James Grant once had to concede, over the long term, the bulls do have a point. Doug
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Jim D attempts to assure us: actually, it's not an argument in the sense of a quarrel (and definitely not a contradiction à la Monty Python). It's a discussion. (In this thread, I had a argument with someone else. Or was it a contradiction? Whatever, it was a waste of time.) But Jim D had also wrote: the capitalists recogizing that wage increases would be in their interests. It's true that social democracy in Europe was better for the capitalists there than neo-liberalism is Yet no self respecting Marxian or at least no Marxian who has even the most superficial sense of the history of Marxian debates about crisis should not argue forcefully with a social democrat which is what Jim D quite obviously is. Jim D's theory leads him straight to the conclusion that the contradictions of capitalism can be overcome or sufficiently attenuated even even if the institutions of private property and wage labor remain in tact as long as capital is hemmed in to some extent by social democratic institutions that tinker with the distribution of income. Which is exactly not to personalize the argument, but to politicize it. Yet Jim D seems unaware that he is taking an extremely provocative, i.e., revisionist, position, i.e., a Keynesian and national populist position. Which is fine. It is a respectable position but it is indeed in irresolvable conflict with Marxian theory. Greenspan emphasized again in a speech last week that weak profits and investment is a reason for continuing concern about the economy. Hasn't he also said that consumer spending is what's been holding up the U.S. economy? My point -- and that of Godley Izureta, who also go beyond surface appearances to think about the determinants of private-sector spending -- is that this prop can't last. It can last as long as the demand for for constant capital last since consumption is itself determined by employment in the means of production...so long as that demand endures. Again such are the ABC's of Marx. I agree with Michael: the capitalist economy, as Marx pointed out, is holistic. Pointing out one factor as a shock to the system (e.g., the fall in the rate of profit seen since the 1960s) is no substitute for a holistic theory. It's not a matter of pointing to one factor, it's about placing factors in a cause and effect relation. Some factors are effects which then can compound the underlying problem. Which is obviously what Fred said. He agreed that the crisis could be compounded by a weakness if consumer's demand which has already been mortgaged to the future. That's why I referenced my simple (Harrod-Domar) version of Marx's reproduction schemes, which brings the various components of aggregate demand and the full-capacity profit rate into a single equation. Now, no single equation could ever be a substitute for a holistic political-economic analysis, but I'm sketched that too: I view capitalism as having an inherent tendency toward over-accumulation. Yet the world is obviously undercapitalized--so in what sense have means of production been overaccumulated? Relative to demand? What kind of demand? Why has that demand weakened? Demand for new means of production weakens because profit cannot be made therewith. Why? Because consumption is not high enough. Can't be since investment demand picks up without rising prices and stronger demand. it may pick up with even greater difficulties on the consumption side. It picks up because constant capital has been cheapened, allowing for the rate of profit to be greater. Rakesh
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Rakesh, please don't try to classify others on the list. Let Jim speak for himself as to whether he is a social democrat or not, if he chooses to do so. As to untangling causes, it is hard to say. I recall that the CEO of Ford wondered how the industry could deal with overcapacity -- this was some time ago. That insight could suggest that he forsaw underconsumption, lower profits, this curtailing investment. Ultimately, I believe, that Marx emphasized profits as the final arbiter, but profits can be expected profits, not realized profits. That makes identification very difficult. Fred's approach of looking at profits makes a great deal of sense when looking at long swings, but in the short run -- as to what causes a particular downturn -- identification is still a problem. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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Rakesh, please don't try to classify others on the list. Let Jim speak for himself as to whether he is a social democrat or not, if he chooses to do so. michael, i quoted jim d saying that social democracy is best for the capitalists and thus can thus presumably be imposed on them for their own good and the good of the working class. if this is not what jim d meant by his own words, he should clarify because it sure reads as a very provocative position vis a vis revolutionary Marxian theory! As to untangling causes, it is hard to say. I recall that the CEO of Ford wondered how the industry could deal with overcapacity -- this was some time ago. That insight could suggest that he forsaw underconsumption, lower profits, this curtailing investment. economic theory only systematizes the conceptions and illusions of the actors caught up in the bourgeois system of production Ultimately, I believe, that Marx emphasized profits as the final arbiter, but profits can be expected profits, not realized profits. That makes identification very difficult. Fred's approach of looking at profits makes a great deal of sense when looking at long swings, but in the short run -- as to what causes a particular downturn -- identification is still a problem. yes but Fred was obviously not abstracting one aspect--difficulties in the *production* of surplus value--to exclusion of the others. He suggested that difficulties in production could then compound problems in the *realization* of surplus value. Jim's call for holisim implied too exclusive an abstraction by so called orthodox marxists of only one part of the concrete capitalist totality (the production part), but Fred was not failing to return to problems in the realization of surplus value. He said, as someone who understands Marx profoundly, that the real difficulties in the realization of surplus value could be best understood after the difficulties in production were first grasped. That is, Fred and Marxists argue that in order to understand capital one must first abstract production, not begin with the relations of exchange as bourgeois economists do. Then one can abstract from the capitalist totality the process of the realization of surplus value. It's a matter of ordering, not a matter of excluding. If one just calls for holism, then one cannot advance in the theoretical understanding of the concrete capitaist totality because you take all elements as jumbled together as they already are. That is the problem with holism that seems to be much vaunted on this list. Abstraction of parts and aspects has to be made for intensive analysis. Fred proceeds in a Marxian way, Jim D does not. Again this is not to personalize the argument but to clarify the theoretical differences so that we can have a theoretical, rather than a personal, debate. Rakesh
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I don't consider myself a social democrat, but I agree with Jim -- if I understand him correctly. SD is good for the capitalists. That does not make it the Valhalla for others. It is merely a social form that reduces conflict and thus improves efficiency. On Tue, Jan 15, 2002 at 10:03:26AM -0800, Rakesh Bhandari wrote: Rakesh, please don't try to classify others on the list. Let Jim speak for himself as to whether he is a social democrat or not, if he chooses to do so. michael, i quoted jim d saying that social democracy is best for the capitalists and thus can thus presumably be imposed on them for their own good and the good of the working class. if this is not what jim d meant by his own words, he should clarify because it sure reads as a very provocative position vis a vis revolutionary Marxian theory! As to untangling causes, it is hard to say. I recall that the CEO of Ford wondered how the industry could deal with overcapacity -- this was some time ago. That insight could suggest that he forsaw underconsumption, lower profits, this curtailing investment. economic theory only systematizes the conceptions and illusions of the actors caught up in the bourgeois system of production Ultimately, I believe, that Marx emphasized profits as the final arbiter, but profits can be expected profits, not realized profits. That makes identification very difficult. Fred's approach of looking at profits makes a great deal of sense when looking at long swings, but in the short run -- as to what causes a particular downturn -- identification is still a problem. yes but Fred was obviously not abstracting one aspect--difficulties in the *production* of surplus value--to exclusion of the others. He suggested that difficulties in production could then compound problems in the *realization* of surplus value. Jim's call for holisim implied too exclusive an abstraction by so called orthodox marxists of only one part of the concrete capitalist totality (the production part), but Fred was not failing to return to problems in the realization of surplus value. He said, as someone who understands Marx profoundly, that the real difficulties in the realization of surplus value could be best understood after the difficulties in production were first grasped. That is, Fred and Marxists argue that in order to understand capital one must first abstract production, not begin with the relations of exchange as bourgeois economists do. Then one can abstract from the capitalist totality the process of the realization of surplus value. It's a matter of ordering, not a matter of excluding. If one just calls for holism, then one cannot advance in the theoretical understanding of the concrete capitaist totality because you take all elements as jumbled together as they already are. That is the problem with holism that seems to be much vaunted on this list. Abstraction of parts and aspects has to be made for intensive analysis. Fred proceeds in a Marxian way, Jim D does not. Again this is not to personalize the argument but to clarify the theoretical differences so that we can have a theoretical, rather than a personal, debate. Rakesh -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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I cite the likes of Hyman, though, because lefties always overstay the recession, and are among the last diehards clinging to recession. Doug --- Where can I get ahold of his stuff? Christian
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Michael Perelman wrote: Fred's approach of looking at profits makes a great deal of sense when looking at long swings, but in the short run -- as to what causes a particular downturn -- identification is still a problem. What is the political importance of understanding the economics of a particular recession (or boom)? Marx's concern with crises, as with other features of capitalism, was primarily, it seems to me, focused on the question of whether capitalism was a natural or historical system, not on doing economic analyses of particular occasions (such as the present). Carrol
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Doug, that I think that the big capitalists do understand their interest. The small ones to whom the Wall Street Journal appeals on their editorial page do not. We were just discussing yesterday how major businesspeople appreciate Marxist analysis. On Tue, Jan 15, 2002 at 02:15:22PM -0500, Doug Henwood wrote: So why do they generally oppose social democracy? Don't they understand their own interests? -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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Michael Perelman wrote: Fred's approach of looking at profits makes a great deal of sense when looking at long swings, but in the short run -- as to what causes a particular downturn -- identification is still a problem. What is the political importance of understanding the economics of a particular recession (or boom)? Marx's concern with crises, as with other features of capitalism, was primarily, it seems to me, focused on the question of whether capitalism was a natural or historical system, not on doing economic analyses of particular occasions (such as the present). boy this utter theoretical annihilation of Marx just has to stop on pen-l My goodness, Carrol, the historicizing of both the categories of political economy and the capitalist economy had been accomplished before Marx--Steuart, Sismondi and Richard Jones (see Grossman, Journal of Political Economy, Dec 1943). Marx assumed this work and clarified it. Korsch refers to it as the principle of historical specificity (see Karl Korsch Karl Marx 1938). But Marx's wholly original tasks included: 1. to develop a general theory of transitions from one mode of production to another--the so called materialist theory of history which explains said transitions as a climax of an inevitable conflict between productive forces and the property relations of the society 2. to develop a specific theory of the objective developmental tendencies of the the historically specific capitalist system itself (the main task is to illuminate the law of motion as he says). 3. to clarify the singular role of the class struggle in effecting transitions in the mode of production, that is class struggle as the subjective vehicle of change. Carrol, we do not speak of the Marxian revolution in the same breath as the ones effected by Newton, Darwin and Einstein because he historicized economics! Rakesh ps. Doug, let me think about your question.
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Doug Henwood wrote: And when are those contradictions of capitalism that Rakesh is talking about really going to bite? I mean something more than a nibble. The phrase has been around for what, like a century? They've been biting every second of every day for several hundred years. What else would make capitalism so radically different from other social systems, and so radically different from itself yet always the same. What is your conception of politics anyhow? I don't really understand this lust for a crystal-ball foundation for political thought. Carrol
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Rakesh Bhandari wrote: At any rate, the crisis hit Dept I first. Consumption was not a problem. We also know Marx's famous vol II passge in which he criticizes underconsumption. Consumption will now give. We'll see. Wall Street's favorite economist, Ed Hyman, has a piece out today claiming the U.S. recession probably ended in November (citing, as most recent evidence, a decline in unemployment claims, higher-than-expected chain store sails, a 23% surge in DRAM prices over the last week, and several major positive profits surprises). And, he says, a synchronized global recovery is underway, citing higher Taiwanese exports, UK retail sales, Malaysian industrial production, and Canadian housing starts over only the last few weeks. Finally, in November, his composite leading indicator for the OECD had its biggest monthly increase in 18 years. For what it's worth, of course Doug yes what the previous collapse in basic memory chips suggests is that constant capital had cheapened so considerably (esp relative to consumer goods as is almost the case, I believe) that the rate of profit on the lower value of this constant capital can now be greater even if the rate of surplus value is not going to vary much one way or another. So the demand for constant capital is picking up (and therewith the prices of memory chips) not because consumption is higher (as a crude and even sophisticated unconsumptionist may think) but because profitability is being restored. Doug, you know i am an autodidact but isn't this the ABC's of the Marxian theory of the business cycle? Rakesh
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Rakesh Bhandari wrote: yes what the previous collapse in basic memory chips suggests is that constant capital had cheapened so considerably (esp relative to consumer goods as is almost the case, I believe) that the rate of profit on the lower value of this constant capital can now be greater even if the rate of surplus value is not going to vary much one way or another. So the demand for constant capital is picking up (and therewith the prices of memory chips) not because consumption is higher (as a crude and even sophisticated unconsumptionist may think) but because profitability is being restored. Doug, you know i am an autodidact but isn't this the ABC's of the Marxian theory of the business cycle? You're too modest with the autodidact label. But I'm not speaking church Marxian - I was speaking vulgate, and bizcycle economics is about as vulgar as it gets. My only point was that if Hyman is right, then consumption won't be collapsing, and the recession is over, or almost over. And this recession had little to do with consumption - it was mostly profit and investment-led (at least in the U.S.). Doug
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Rakesh Bhandari wrote: At any rate, the crisis hit Dept I first. Consumption was not a problem. We also know Marx's famous vol II passge in which he criticizes underconsumption. Consumption will now give. We'll see. Wall Street's favorite economist, Ed Hyman, has a piece out today claiming the U.S. recession probably ended in November (citing, as most recent evidence, a decline in unemployment claims, higher-than-expected chain store sails, a 23% surge in DRAM prices over the last week, and several major positive profits surprises). And, he says, a synchronized global recovery is underway, citing higher Taiwanese exports, UK retail sales, Malaysian industrial production, and Canadian housing starts over only the last few weeks. Finally, in November, his composite leading indicator for the OECD had its biggest monthly increase in 18 years. For what it's worth, of course Doug let me rephrase for clarity (hope this helps): yes this form of constant capital (memory chips) had cheapened so considerably (esp relative to consumer goods as is almost the case, I believe) that the rate of profit on the lower value of this constant capital can now be greater even if the rate of surplus value is not going to vary much one way or another. So the demand for constant capital (memory chips) is finally picking up again (and therewith the prices of these memory chips) not because consumption is higher (as a crude and even sophisticated unconsumptionist may think) but because profitability is being restored. rb
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Was anybody able to read Fred M's profit rate graphs? -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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Fred Moseley writes: Over, the weekend I read with interest Jim D's explanation of the millennium crisis (i.e. the current recession) on his website, which was discussed last week on PENL. I also read his RRPE 2000 paper on the rise and fall of stagflation. I mostly agree with the latter and strongly disagree with the former. thanks for your comments, which definitely help raise the intellectual level on pen-l. The last time I discussed this issue, the discussion developed to a stage where one individual asserted that my politics stink. Luckily, it got to that low level only off-list.[*] Jim, as I understand it, you argue that the main cause of the current recession was an INCREASE in the rate of profit from 1982 to 19[97]. My emphasis was on the _trend_ rise, which occured from 1981 or so to 2000. It's true that the cyclical peak was in 1997, though other estimates besides the US government's disagree about the timing. As noted in the paper that I put on-line, I believe that there's no big correlation between the short-term fluctuations of the profit rate and macroeconomic behavior, so I don't care that much when the peak occurred. Instead, I emphasize the trend. (I said: ... in terms of the way in which the [rate of profit] affects both the supply of funds for fixed investment and the incentive to engage in such accumulation, it's most likely not the current profit rate but the trend profit rate that powers the economy. Instead, the trend profit rate indicates the presence or absence of a structural problem, blocking or encouraging accumulation. A low trend profit rate discourages accumulation and demand-side growth.) (I should acknowledge that if I recalculate the trend profit rate in a few years, the trend will probably be different, maybe even falling down in 1997 or so. That would change my view. But I'm trying to give the best interpretation I can given the information I have.) It is not entirely clear to me how an increase in the rate of profit could cause a recession, but the argument seems to something like the following: The increase in the rate of profit was in large part caused by an increase in the share of profit, which in turn was caused workers' wages increasing slower than the value added of the output. However, the slower wage growth, which caused the share and the rate of profit to increase, also caused problems of insufficient demand for consumer goods (i.e. problems of underconsumption), which eventually caused the recession. Jim, is this roughly correct? Please correct or elaborate. Gladly, because there's no way I can do any real work when I'm totally fatigued (from flying back from the economics meetings). A. The rise in the income share of profits didn't cause the stagnation of wages relative to labor productivity as much as reflected it. But that's a very trivial point. Rather, my view is that this kind of stagnation _encourages_ stagnation of consumer demand, but that latter stagnation does NOT automatically happen immediately or automatically pull the economy down. The growth of consumer credit can delay the effects of stagnant wages on consumption. This delays recession, but eventually leads to increasingly unbearable debt, which makes the economy more prone to recession. B. Being prone to recession is not the same thing has having a recession, however: unlike the underconsumptionists (surveyed in Michael Bleaney's excellent book), I don't see working-class consumption as the be-all and end-all of aggregate demand. There are several obvious substitutes for consumer demand. (1) capitalist accumulation, which is in fact encouraged by profit rates trending upward. (2) capitalist luxury spending, which is encouraged by the same force. (3) government deficits. (4) positive net exports. Numbers (3) and (4) are ruled out in the current era (so far). In fact, the world-wide stagnation of wages relative to productivity would make it very hard for the US to run a trade surplus _even if_ the dollar exchange rate were more appropriate. So, along with worker debt accumulation, (1) and (2) explain why the US economy grew _despite_ stagnant wages. But these, like worker debt accumulation, are quite limited solutions which make the economy more and more fragile. (1) capitalist accumulation can accelerate out of step with consumption (as with Tugan-Baranowsky's idea of fixed investment being justified by the increased demand for machinery) but it ends up being a little like a Ponzi scheme: for the process to continue, accumulation has to continue to accelerate. (This is made worse if fixed capital becomes more productive, i.e., fixed capital/output ratios fall, as they did in the trend after 1982.) The greater role of accumulation in aggregate demand also implies that aggregate demand as a whole becomes increasingly unstable (because, as is well known, fixed investment is more volatile than most consumer spending). Further, there is a greater likelihood of
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thanks for your comments, which definitely help raise the intellectual level on pen-l. The last time I discussed this issue, the discussion developed to a stage where one individual asserted that my politics stink. Luckily, it got to that low level only off-list.[*] jim, this is childish, i was being silly; i also called you a scaredy cat--does this sound like serious charges were being made. stinky, scaredy cat--these are not abusive terms. you insisted that we have this debate offlist; now you are forwarding out of context remarks to the list. and if we are going to do this, why don't you tell the whole list how you were spreading the rumor that rajani kanth is paranoid to me. of course you said that you were above such backbiting, but there you were letting me in on gossip about a person i don't even know. Rakesh
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so accumulation can indeed proceed on the tugan path that is (however) dependent on volatile fixed capital accumulation and capitalists' luxury consumption, overcoming shocks along the way (say the Asia Financial Crisis, the Russian default, Japan's recession after the value added tax and the bankruptcy of the LTCM) and keeping workers' incomes just high and rising enough to manage mortgage and credit card debt, until such tugan accumulation cannot overcome a shock. I may be missing the causal explanation, but maybe it was hidden in Jim D's comments on Aristotle's theory of four causes. Rakesh
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Me: Isn't it worth getting some indication of the role of circulating (M) as well as fixed (K) capital, roughly, that (change in) ROP = (change in) K/Y+M/Y+S/Y? Jim: fine, do it. But I think that the rate of profit on fixed capital is more important in determining the ratio of net investment to fixed capital, which in turn is crucial to determining the fluctuations in aggregate demand. In other words, I accept Keynes' emphasis on fixed investment. Fair enough. If I can figure out where/how to get numbers for M, I'll try to answer my question. Bill Burgess
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I am on a poor telnet connection, so I will be brief. Marx said that mechanization began in consumer goods and then moved to producer goods. In the first stage K/L should autmatically increase; in the second, it is indeteriminate. On Sat, Dec 29, 2001 at 08:38:06PM -0800, Devine, James wrote: Bill Burgess writes: I wondered about Jim D. not including circulating constant capital (basically materials) in explaining the change in the ROP, especially since this is an area there have been productivity gains. I wrote: shouldn't an improvement in inventory management techniques help labor productivity and profits (all else constant) and thus raise the rate of profit? So it wouldn't be ignored altogether. It is partly included, and (probably) raised the ROP. But as I understand it, in 'explaining' the ROP, you are assuming that K/Y moves with the OCC (and that S/Y moves with the RSV?). S/Y moves with the rate of surplus-value (as I measure the latter), but the K/Y _does not_ move with the OCC. The K/Y reflects both changes in mechanization (K/L, where L is labor) and the productivity of labor (Y/L). That is, it reflects both changes in the OCC _and_ changes in one of the crucial counter-tendencies to the rising mechanization/falling profit rate theory. This is a countertendency that typically comes as a _result_ of mechanization. Isn't it worth getting some indication of the role of circulating (M) as well as fixed (K) capital, roughly, that (change in) ROP = (change in) K/Y+M/Y+S/Y? fine, do it. But I think that the rate of profit on fixed capital is more important in determining the ratio of net investment to fixed capital, which in turn is crucial to determining the fluctuations in aggregate demand. In other words, I accept Keynes' emphasis on fixed investment. I cited a series that breaks down US industrial output into three 'stages' of production (materials, intermediate goods and final goods), noting that the first two make up half of total industrial output. I wrote: I don't get how half of value-added is accounted for by materials and intermediate goods since the cost of materials and purchased intermediate goods is subtracted from total revenues when calculating a company's value-added (since they are part of another company's total revenues and we don't want to double-count). If you look at retail, intermediate goods would swamp value-added altogether. I wasn't very clear. I cited the breakdown by stage of production to note that, to the degree that the materials and intermediate goods are inputs to the final goods, M is large. It is typically? larger than one year's K, i.e., there is lots of quantitative room here for 'non-K, non-S' changes to affect the ROP. maybe, but materials and intermediate goods are not a big chunk of fixed costs and thus don't represent something that capitalists are stuck with. They are imbalances that are gotten rid rather quickly. A capitalist cuts back on the demand for the raw materials or intermediate goods, but is stuck with the fixed capital that was installed in years previous. Bill had written: Subcontracted inputs have become more important. While I suppose that in principle the accounting in separate business units should not affect the aggregate shares of fixed capital, profits, etc., I wonder if this is really is true. For example, is subcontracting an important vehicle for transferring profit from subcontracters to their oligopolistic customers. Even if the overal capital-output ratio does not change, who gets the profits does change, through unequal exchange. Also, is it prossible that more subconstractors means that more profit is taken in the form of profits rather than big salaries for managers? I wrote: I interpret these changes in terms of changing relations of production -- including intracapitalist relations -- which has an effect on the aggregate level. Do you mean, *no* effect on the aggregate level? no, I meant it as I wrote it. Jim Devine -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
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I am on a poor telnet connection, so I will be brief. Marx said that mechanization began in consumer goods and then moved to producer goods. In the first stage K/L should autmatically increase; in the second, it is indeteriminate. I think Marx did think it was indeterminate, strictly speaking, but I think he thought the tendency of rising OCC would over time and in a zig zag manner prevail over the counter-tendencies. Marx was interested in why the rate of profit did not fall in rapid straightline fashion as one may have predicted from Ricardo's dismal model. Grossmann worked in this Marxian tradition by preparing to date the most elaborate study of counter-tendencies. Marx thought that it was only in *certain cases* that the mass of constant capital would increase while their total value remains the same or falls. As I have noted before, the cheapening of ever more powerful computers is most often adduced in the analysis of capital saving innovation, but if one looks at the computer industry itself as a whole--including the chip business--it seems that the very thing that has made computers cheaper is the reduction in capital costs per unit made possible by enormous (if not mindboggling) upfront outlays of capital in chip and computer production. Cheaper capital goods in themselves do not prove that technical change is neutral because what distinguishes and drives capitalism is the development of means of production with which to produce those cheaper means of production. That is, the development of a Department Ia is where the action is. We hear of the ever cheaper end product of the computer but not about what's happening in chip production or the industries that equip those building chips and computers. And it does not seem to me that the mass of constant capital employed in these Dept Ia industries has remained stable,much less lessened, in terms of value? When will have 5 or 10 billion dollar fabs?! Rakesh
RE: Re: the profit rate recession
Bill Burgess writes: Yes, I did find your talk interesting. Do you have any similar numbers for other countries, or when you compare your trends for the US with profit trends in other countries, what are the differences? I don't have that data, though the OECD used to publish them. It's clearly a relevant avenue of research. I generally agree with your focus on fixed capital and using 'conventional' profits rates, but I also wonder if something important is not being missed when circulating constant capital (raw materials and other non-fixed-capital inputs) is left out of the analysis of the reasons for the trends, especially about the role of the organic composition of capital. If I remember correctly, Fred Mosely also leaves out circulating constant capital from his profit rate [ROP]. Several questions come to mind. yes, he leaves circulating capital out of both his Marxian and conventional ROPs. My impression from the business press is that faster throughput and reducing waste in transforming materials have been a key element of productivity changes in recent years. This element of change in the organic composition of capital is ignored when the profit trends are expressed as yearly profits over the stock of fixed capital alone. shouldn't an improvement in inventory management techniques help labor productivity and profits (all else constant) and thus raise the rate of profit? So it wouldn't be ignored altogether. A useful series by the US Federal Reserve (see (www.federalreserve.gov/releases/G17/ip_notes.htm) shows that more than half of industry (roughly manufacturing and mining) value-added is accounted for by materials and intermediate goods, as opposed to final goods. The materials share of total industry value-added has been rising. This breakdown of industry by the stage of production underlines the *quantitative* significance of circulating constant capital. Or, am I misunderstanding something? I don't get how half of value-added is accounted for by materials and intermediate goods since the cost of materials and purchased intermediate goods is subtracted from total revenues when calculating a company's value-added (since they are part of another company's total revenues and we don't want to double-count). If you look at retail, intermediate goods would swamp value-added altogether. Anyway, my focus is on the aggregate level (or close to it, since my numbers are not truly macro-level). Subcontracted inputs have become more important. While I suppose that in principle the accounting in separate business units should not affect the aggregate shares of fixed capital, profits, etc., I wonder if this is really is true. For example, is subcontracting an important vehicle for transferring profit from subcontracters to their oligopolistic customers. Even if the overal capital-output ratio does not change, who gets the profits does change, through unequal exchange. Also, is it prossible that more subconstractors means that more profit is taken in the form of profits rather than big salaries for managers? I interpret these changes in terms of changing relations of production -- including intracapitalist relations -- which has an effect on the aggregate level. As we all know, measures of fixed capital are always a problem. In a comparison of productivity trends in US and Canadian manufacturing, Andrew Sharpe of the Centre for the Study of Living Standards (http://www.csls.ca/pdf/lanc.pdf) notes that all of the 1990-1997 increase in US manufacturing productivity (and almost all of the difference between Canada and the US) is concentrated in industrial machinery and electronic equipment sectors alone. He seems to question how accurate the US data is, but more to the point here, the boom in this sector suggests that a lot of machinery and computers has been scrapped and replaced with the latests and greatest, but probably before passing on its value. I agree with the view that US productivity growth during the new economy period was exaggerated. The rate of depreciation sped up, so as Dean Baker shows, the rate of growth of real net domestic product -- and of net product per worker -- was not spectacular. You note the decline in K/Y is related to the shake-out in manufacturing but, for example, while computer prices have declined massively, the fixed capital numbers may not reflect their service life. I don't think that the role of PCs is very large as part of the total K. It only has an effect as part of a welter of different forces affecting K/Y. Another question - how much of computer-type purchases are counted as fixed capital? I'm pretty sure they count as short-lived fixed capital, but I don't know for sure. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Re: RE: RE: Re: the profit rate recession
Devine, James wrote: Rakesh writes: Doug H and Fred M have both argued that spike of profit rate (as conventionally measured) especially in the 90s was a result influx of foreign capital, which reduced borrowing costs. I missed this. I don't know what Doug and Fred argue here, but I think Marx's theory that the profit rate is determined independently of -- and largely constrains -- the interest rate is a good one. Since I see the profit rate as determined by accumulation, technological change, class struggles, etc., I don't see how a temporary spike in interest rates could determine the profit rate. BTW, the profit rate I use has both interest and non-interest profits in the numerator. JD I missed that too. I think the reason for the rise - it was much too long and extended to be a spike - in the profit rate from 1982-97 was the result of wage cuts, speedup, quicker turnover time, outsourcing, etc. etc. Most of the things in Marx's countervailing factors were in play, and successfully. The big question is whether the downturn over the last few yeqrs - which has given back around 2/3 of the rise - is just cyclical, and will recover when the economy does, or whether we're now back in a troubled period like the 70s. Doug
Re: Re: RE: RE: Re: the profit rate recession
Devine, James wrote: Rakesh writes: Doug H and Fred M have both argued that spike of profit rate (as conventionally measured) especially in the 90s was a result influx of foreign capital, which reduced borrowing costs. I missed this. I don't know what Doug and Fred argue here, but I think Marx's theory that the profit rate is determined independently of -- and largely constrains -- the interest rate is a good one. Since I see the profit rate as determined by accumulation, technological change, class struggles, etc., I don't see how a temporary spike in interest rates could determine the profit rate. BTW, the profit rate I use has both interest and non-interest profits in the numerator. JD I missed that too. I think the reason for the rise - it was much too long and extended to be a spike - in the profit rate from 1982-97 was the result of wage cuts, speedup, quicker turnover time, outsourcing, etc. etc. Most of the things in Marx's countervailing factors were in play, and successfully. why not cheaper circulating capital, raw materials in particular--as Prabhat Patnaik argues? of course that makes us think out of the national box; maybe if capital is a global social relation, a national rate of profit has no more significance as to the state of the system as a whole than would the profit rate in global shoe or oil industry. am i wrong that you have often said that much, if not most, of the increase in the profit rate as you were measuring was the result of a decline in interest costs? Rakesh
RE: Re: the profit rate recession
Title: Re: [PEN-L:20980] the profit rate & recession concerning mynotes that I posted on-line (at http://bellarmine.lmu.edu/faculty/jdevine/FROP/sacramento.htm),Rakesh writes:1. you have confused changes in vcc with changes in occ. I don't care, since what's important is the change in K/Y (the fixed capital-output ratio). It's via this ratio that changes in the vcc and/or the occ play a role in determining the rate of profit. If the vcc and/or occ rise and don't raise K/Y, they're irrelevant. 2. You don't say anything about the effect of interest rates. Doug H and Fred M have both argued that spike of profit rate (as conventionally measured) especially in the 90s was a result influx of foreign capital, which reduced borrowing costs. But in the last few years borrowing costs have risen considerably for weaker and highly leveraged firms. Does this increased interest burden play any role in your explanation of crisis? Yeah, I also didn't discuss Mattick or the price of tea in China. I agree that interest rates play a role, especially in the short run (though I don't have much faith in the power of Alan G. the Fed). Look at the other papers I put on my web-site (http://bellarmine.lmu.edu/faculty/jdevine/papers.htm#research). But in the paper at hand, I had to limit myself. So Iput my emphasison the longer term. I focus on the rate of profit -- what Keynes might have called the "average efficiency of capital" -- as the main determinant of private domestic fixed investment (outside of housing). In econ-lingo, my emphasis in this paper was on _shifts_ in the IS curve rather than on _movements along_ it. The increasedinterest burden does play a role, though I didn't emphasize that as much as the burden of debt relative to income. The two explanations go together; they're complementary. 3. Aren't you arguing that there is a tendency for ex ante saving to exceed ex ante investment? But why in the face of underconsumption isn't there just more building of mills for the sake of building mills? I didn't deal with the saving/investment nexus _at all_.However, since I reject Say's Law, the fact that ex ante investment sometimes falls below ex ante saving should go without saying. Inmy papers that I cite in the bibliography, I talk about the "more building of mills for the sake of building mills," which I call either the "Tugan-Baranowsky Path" or "bootstrap growth" or "profit-led growth." Indeed, as suggested by the last name listed, I argue that rising profit rates and shares _encourage_ such craziness. The problem, as I argue, is that as this kind of boom persists, the economy becomes increasingly unstable (prone to collapse). I won't bother you with the details of the arguments. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~JDevine"From the east side of Chicago/ to the down side of L.A.There's no place that he goes/ We don't bow down to him and pray.Yeah we follow him to the slaughter / We go through the fire and ash.Cause he's the doll inside our dollars / Our Lord and Savior Jesus Cash(chorus): Ah we blow him up -- inflated / and we let him down -- depressedWe play with him forever -- he's our doll / and we love him best."-- Terry Allen.
RE: RE: Re: the profit rate recession
Title: Re: [PEN-L:20980] the profit rate & recession Rakesh writes: Doug H and Fred M have both argued that spike of profit rate (as conventionally measured) especially in the 90s was a result influx of foreign capital, which reduced borrowing costs. I missed this. I don't know what Doug and Fred argue here, but I think Marx's theory that the profit rate is determined independently of -- and largely constrains -- the interest rate is a good one. Since I see the profit rate as determined by accumulation, technological change, class struggles, etc., I don't see how a temporary spike in interest rates could determine the profit rate. BTW, the profit rate I use has both interest and non-interest profits in the numerator. JD
Re: RE: Re: the profit rate recession
Title: Re: [PEN-L:20986] RE: Re: the profit rate recession concerning mynotes that I posted on-line (at http://bellarmine.lmu.edu/faculty/jdevine/FROP/sacramento.htm),Rakesh writes: 1. you have confused changes in vcc with changes in occ. I don't care, since what's important is the change in K/Y (the fixed capital-output ratio). It's via this ratio that changes in the vcc and/or the occ play a role in determining the rate of profit. If the vcc and/or occ rise and don't raise K/Y, they're irrelevant. don't agree. it's good to distinguish analytically between crisis induced effects on vcc and effects of technical change (labor or capital saving) on occ. Due to the latter alone the VCC may have risen. Inmy papers that I cite in the bibliography, I talk about the more building of mills for the sake of building mills, which I call either the Tugan-Baranowsky Path or bootstrap growth or profit-led growth. Indeed, as suggested by the last name listed, I argue that rising profit rates and shares _encourage_ such craziness. The problem, as I argue, is that as this kind of boom persists, the economy becomes increasingly unstable (prone to collapse). I won't bother you with the details of the arguments. please excerpt your analysis of why this kind of boom becomes unstable. i ask this sincerely because as duncan foley notes in understanding capital one cannot but agree with luxemburg's sarcastic dismissal of the tugan vision, yet her dismissal seems predicated on the equally untenable assumption that the purpose of capitalist production is consumption. Yeah, I also didn't discuss Mattick or the price of tea in China. oh so the funny stuff is on list. let me think more about how interest costs play into all this. Rakesh
