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December 19, 2013



You really should read Andrew Kliman on this. He uses similar measures of the profit rate and comes to the same conclusion, but he points out that the increasing rate of "moral depreciation" (technical obsolescence) in the computer age is not often accounted for in the data. Once you remove this the 'rebounds' in the rate of profit fall to nothing and it may even have fallen further.

Luis Enrique

This one seems pretty muddled to me

1. Profit is to do with market structure (competition etc.). The marginal product of capital is a description of a physical production process, not marginal return (profit) or even marginal revenue. If you want to say all sorts of screwy things are happening so people sitting on existing capital are milking it but building more wouldn't be profitable, fine. But that's nowt to do with production functions.

2. Simple smooth, differentiable, aggregate production functions are obviously highly stylized modelling conveniences that, it is hoped, are useful or not too 'wrong' when looking at the economy from a great height. Nobody thinks they are what the economy looks like close up. If you want to say that the reality of lumpy heterogeneous investment means they are in fact too wrong and misleading even when used in that fashion, well maybe so, but you have to explain why and where aggregate production functions go wrong. You cannot just say reality is lumpy, production functions aren't, ergo they are hooey.


Luis Enrique,

Let's do a little recap.

Chris says that profits have increased, but investment hasn't (you haven't disputed that, btw).

He explains this on these grounds: "there's a discontinuity between past investments and future ones (...) It means capital can't be aggregated and that the idea of a smooth, easily differentiable marginal product of capital is hooey".

You don't agree ("This one seems pretty muddled to me") and go on explaining why.

Fair enough. But you don't advance any explanation of your own to the empirical facts.

Explain then why profits have increased but investment has not. Otherwise, "pretty muddled" or not, Chris' explanation is the only here.

Rakesh Bhandari

Yes, I think Marx was making exactly this point when he contrasted the high profitability on extant investments with the low profitability anticipated from new investments. His falling rate of profit argument is actually focused on declining profitability of new marginal investments, not the profitability of present investments which can be improved after all through rationalization, mergers, currency effects, even eating present capital.

Here is the passage that comes near the conclusion of the discussion in the third volume of Capital:

"The rate of profit, i.e., the relative increment of capital, is ***above all important to all new offshoots of capital seeking to find an independent place for themselves***. And as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out. The rate of profit is the motive power of capitalist production. Things are produced only so long as they can be produced with a profit. Hence the concern of the English economists over the decline of the rate of profit. The fact that the bare possibility of this happening should worry Ricardo, shows his profound understanding of the conditions of capitalist production. It is that which is held against him, it is his unconcern about "human beings," and his having an eye solely for the development of the productive forces, whatever the cost in human beings and capital-values — it is precisely that which is the important thing about him. Development of the productive forces of social labour is the historical task and justification of capital. This is just the way in which it unconsciously creates the material requirements of a higher mode of production. What worries Ricardo is the fact that the rate of profit, the stimulating principle of capitalist production, the fundamental premise and driving force of accumulation, should be endangered by the development of production itself. And here the quantitative proportion means everything. There is, indeed, something deeper behind it, of which he is only vaguely aware. It comes to the surface here in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself — that it has its barrier, that it is relative, that it is not an absolute, but only a historical mode of production corresponding to a definite limited epoch in the development of the material requirements of production."


I don't think Marx saw any difficulties, he predicted an ever greater concentration of wealth and growing inequality while postulating the tendency for the rate of profit to fall (along with the countervailing tendencies where it increases).
It would be quite possible to argue that the returns to capital are high and being concentrated because the bosses are winning the class struggle, and Marx recognised that many times.
Although as others have mentioned, there are several critiques of the profit stats that find rates declining, which would hint at explanations for low levels of investment.

Deviation From The Mean

The falling rate of profit, as the article says, was a big topic of debate for 19th century economists and Marx was basically putting forward his own theory, based on his law of value. Marx didn't really foresee some of the developments in technology, which cheapened constant capital. Marx was very good at foreseeing the technological advancement that capitalism could bring but he couldn't possibly have imagined some of the qualitative changes brought about by technological development. None of this invalidates Marx's theory about value creation etc but his predictions about the development of capitalism were not wholly correct. I also feel the reality of uneven development wasn't factored enough into Marx's work. I.e. Not all profit comes from surplus value, only now are we beginning to reach a point, I think, where surplus value is the primary vehicle for reproducing the system. So the data for the next 50 or so years will probably validate what Marx discovered.

Those on the left who think capitalism has long been sclerotic and not dynamic are wrong in my opinion. It is still a very dynamic system, and that doesn't appear to have changed, despite the recent crisis.

I think Rakesh pretty much hits the nail on head though, i.e. as a direct defence of Marx in regard to the rate of profit.

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