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July 09, 2014


Luis Enrique

I'm not going to add Kilman's book to my too read pile, because I can no longer reach the top of it. But I'd be interested to know what he predicts next.

meanwhile you continue to be the only left winger that I am aware of who does not think that rate of exploitation by profiteering capitalists has not increased recently


"But what matters for companies is the money they actually spent on capital - that is, its historic cost; if you paid £10m for IT equipment that costs £8m a few years later, your profits haven't thereby increased."

No, what counts is how much of that capital your current profits will buy!!! You seem to be suffering from money illusion! If I bought a cabbage last week with my wages that cost £1, and this week a cabbage only costs £0.50, my wages go further. If last week, the £1 of profit I made would only buy 1 unit of productive capital, but today, because its price has fallen in half, that same amount of profit will buy me 2 units of capital, my real rate of profit has doubled.

That is why Marx insists that the rate of profit must be calculated on the basis of the reproduction cost of capital not the historic price.


The rate of profit globally quite clearly isn't low, but at historic highs. There is a simple proof of that. For Marxists, capital arises from an accumulation of surplus value. If surplus value is not produced, it cannot be accumulated, and so there can be no growth of capital. So, has capital been growing, and at what rate?

The answer is yes, capital has been growing and at very high rates. Some facts. According to the World Bank, fixed capital formation doubled from $7 trillion to $14 trillion in the first decade of this century. Global GDP almost doubled in the same period.

Over the last 30 years, the global workforce doubled, and in the first decade of this century it increased by around 1 third. According to Marx in Capital I,"increase in capital is increase in the proletariat".

During this period we have seen China arise from a peasant economy to the world's largest economy on PPP. A number of other economies have grown in similar fashion. A range of totally new industries in technology of various kinds has arisen over the last 30 years, and the capital of these industries has risen from being a few young people working in their parents garage, to being multi-billion dollar industries.

So, the simple question all those who argue that the rate and mass of profit has been falling have to answer is, where did all this capital come from???


Oh and I should have added that just as in similar conditions described by Marx and Engels in the 1840's when there was a massive rise in profits that sparked such an accumulation of capital, the rise in profits has been so great, that not all of it could even then be absorbed, and so presses down on the money markets to reduce interest rates, which then sparks speculation and financial swindles.

Global interest rates have been falling in a secular trend since 1982, and Marx sets out in Capital III, that interest rates are a function of the demand and supply of money-capital. In other words, here despite a growing demand for money-capital, both for productive investment and for speculation in fictitious capital, (in the 1840's it was the Railway mania) the mass of profit has been so great that it has still caused interest rates to fall to historically low levels.

As Marx points out in Capital III, those bourgeois economists who think that this can be brought about by simply printing money tokens, simply do not understand the difference between money and money-capital.


"Higher aggregate investments...precede greater earnings disappointments, lower short-window earnings announcement returns, and lower macroeconomic growth."

I can see if in aggregate businesses invest, they could end up competing with each other, all with new improved equipment, so no increase in profit (and they've incurred coat. But "lower macroeconomic growth." Does that mean that if all businesses stopped investing, we'd get increased growth? Sounds odd to me.

Luis Enrique

my comment above needs a double negative removed!



"Does that mean that if all businesses stopped investing, we'd get increased growth? Sounds odd to me."

You are quite right. It sounds odd, because its clearly nonsense. As Marx points out, there are two conditions under which additional investment can occur. One is that it occurs where the organic composition of capital remains constant. In other words, the quantity and value of means of production increases in proportion to the increase in labour employed. In other words, no change in productivity. Under those conditions there is no basis for any change in the rate of profit, Marx says, and so, you'd expect macro-economic growth to be unaffected.

The other condition is that it occurs under conditions of rising productivity, so the quantity and value of means of production increases proportionately more than the increase in labour-power. That may cause the profit margin to fall, but its unlikely to cause the real rate of profit to fall - the annual rate of profit - for the reasons Marx sets out. Firstly, the rise in productivity means that the rate of surplus value rises, which causes the rate of profit to rise. Secondly, the rise in productivity causes the value of means of production to fall, so as set out above, that means that any given amount of profit will be able to buy more means of production and labour-power, and so bring about greater accumulation and macro-economic growth, not less! Thirdly, in such a period, Marx sets out, there are many new industries being developed - for, example in technology and so on that we have seen over the last couple of decades - and these new industries always have much higher rates of profit and growth rates than the existing industries, thereby pulling the rate of profit up, and the growth rate. Fourthly, Marx points out that even where the rate of profit does fall, it is offset by the growing mass of profit, because for very large capitals, there can be ore accumulation with a low rat of profit than for a small capital with a high rate of profit. In fact, very small capitals with very high rates of profit may accumulate absolutely nothing, because the mass of profit itself is so low that its all consumed by the owner of the business for their own consumption needs! By contrast, Marx points out that the biggest accumulation is amongst those mammoth capitals, the joint stock companies of his day, whose shareholders simply receive a small rate of interest on the money-capital they advance.

But, also this higher productivity required for this situation causes the rate of turnover of capital to rise, which both releases capital that can be then accumulated, as well as increasing the annual rate of profit.

As for the "capital scrapping" referred to Marx only talks about the destruction of capital value as the means of raising the rate of profit, not scrapping the physical capital, which he says would actually result in less profit and thereby a lower rate of profit. The reduction in capital value, is itself a function of the rise in productivity, what Marx calls "moral depreciation", which is why in Marxist terms it is ridiculous to talk about a reduction in that capital value meaning a lower rate of profit.

It confuses two completely different things.

"if you paid £10m for IT equipment that costs £8m a few years later, your profits haven't thereby increased." but, your rate of profit HAS! Because the same amount of profit is now measured against a lower figure for capital value. That is precisely why Marx says that this moral depreciation causes the rate of profit to rise!

All that has occurred in the above example, is that the money-capitalist (be it the productive-capitalist who advances it themselves, or a bank, shareholder etc. that advances the money-capital to the productive-capitalist) has made a capital loss. But, for economists, Marxist or otherwise, capital gains and losses, are not at all the same thing as trading profits and losses!

Moreover, this capital loss is only significant if this particular capital was intending to stop trading at the end of the year! The assumption of marx is that capitalists do not invest large amounts of capital simply to stop at the end of the year. They invest on the basis of continuing and continuous production. On that basis, the fall in capital value is a definite boon to the productive-capitalist for the reason Marx sets out in Capital III, Chapter 6. It means a release of capital, a rise in the rate of profit, and as he sets out later probably a reduction in interest rates, as the demand for money-capital is thereby reduced.

Consider it from the perspective not even of a productive-capital, but of a money-capitalist, say a pension fund. They invest their money-capital over the long-term, year after year. If they invest £10m, in government bonds, and the value of these bonds falls to £8m they have made a capital loss of £2m, but, because they invest each year, the following year, the £10m they have coming in in contributions, buys 25% more bonds than it did the previous year. Moreover, the consequence of the fall in the value of the bonds is that the yield rises, so when they come to pay out pensions, they have a greater revenue stream to cover it.

As soon as you see the activity as a process, rather than a single event, then the real nature can be understood. The problem with the advocates of the historic pricing model is that they operate using a syllogistic logic, rather than dialectical logic.


Maybe I am talking nonsense, but I would have thought that the return on capital is at a premium to the risk-free rate, so if the latter is very low by historical standards........
Anyway, looks like there is a positive albeit not very steep trend since 2010, so not sure your fears are justified.
Also it seems to me you are too focussed on the supply-side, with depressed aggregate demand it is no surprise profits suffers too, but that could well be a result of exploitation to the extent that low aggregate demand is the results of decreasing real wages.

Socialism In One Bedroom


!If last week, the £1 of profit I made would only buy 1 unit of productive capital, but today, because its price has fallen in half, that same amount of profit will buy me 2 units of capital, my real rate of profit has doubled."

Don't we have to ask why the price fell before we can make such pronouncements?

And this brings me onto my second point, you seem to focus on production without mentioning the markets for the goods produced. Your focus seems one sided.

If productivity rises greatly won't that mean it could race ahead of the ability of markets to absorb this greater capital investment? Isn't this the basis of Marx's theory of crisis, production running faster than markets? Doesn't that put a question mark against all the scenarios you provided?


Hi Chris

I'd be really interested to read your response to Boffy's first comment above that it's the current cost of capital that matters.

It seems to me that both matter. The old rate will determine how much profit you've made, and the new one will determine how what you can buy with it.




Why the price of the constant capital fell is not really relevant to a calculation of the rate of profit, as Marx sets out in Capital III, Chapter 6. It could be because of technological development causing the value of existing machinery to be devalued due to "moral depreciation" of one sort, or it could be rising productivity that means its value falls due to moral depreciation of the second sort, or it could simply be a consequence of a fluctuation in demand and supply, which causes the current market price to fall.

As for the markets for the commodities, you are absolutely correct that rising productivity may and ultimately will cause output to run ahead of what the market can absorb. But, that really has nothing to do with the rate of profit as such. The resulting crisis, in fact, will be what causes the rate of profit to crash not just fall. But, as Marx sets out in Capital III, Chapter 15, the result of such a crisis of overproduction is then that the capital gets restructured, which raises the rate of profit, and capital gets moved into other lines of production, where there are new markets that are not overstocked.



The old value of capital has no more effect on the amount of value produced than does the current value, because the profit produced is a function of the labour-power exploited. A huge amount of value in means of production, may employ only a small amount of labour-power, and thereby produce only a small amount of surplus value, whereas a small amount of means of production may require a lot of labour-power to process it, and thereby create a large amount of surplus value.

What the amount and value of the means of production (constant capital)influences is not the amount, but the rate of profit.

Suppose I am a capitalist I have money in the bank, and I buy a machine costing £1,000. I also employ a worker with a wage of £500 to mind the machine, and process £500 of material. £500 of profit is produced, and so the rate of profit is 25%. If I accumulated all of this profit, it would take me 2 years to buy another machine.

Suppose the value of the machine falls to £500. I can now buy this machine with just 1 year's profit. From a Marxist perspective this is significant, because Marx argues that it is the physical amount of capital that is important, not its value, because it is the physical expansion of capital that determines how much more labour can be exploited.

So, now I buy 2 machines, and as a result, the turnover time of my capital is halved, i.e. I now am able to produce the required amount to be sent to market in half the time, so the capital I have to advance for circulating capital, materials and labour, is halved.

So, now, with these two machines, I still only have to advance the same amount of capital for material and labour, i.e. £500 each, even though the total amount of capital for materials and labour in the year now doubles. But, now the amount of profit in the year also doubles to £1,000, because 2 workers are being exploited.

The rate of profit is now £2,000 divided by the advanced capital, which is £1,000 for machines, £500 for materials, and £500 for labour. So, now the rate of profit has risen to 50%, and the amount of profit has also doubled.

The point about the historical pricing can best be seen from the following. Suppose I bought a house to rent 50 years ago. I paid £2,000 for it, and obtained a rent of £100 p.a., equals 5%. Today, the house has a market price of £200,000. The rent from it is now, £10,000 p.a. Calculated on today's value, this rent is also 5%. If I calculate the rent on the historic price, however, it is a return of 500% p.a.

Which, of these figures for the "rate of profit" gives the most accurate picture, and the most useful information? Clearly, it is the rental return based on the current value. If I am looking at what provides the best return for my investment, will I look for alternatives that provide better than 5%, or better only than 500%?

Clearly, the answer is I only have to obtain a return better than 5%. If I sell the house for its current value of £200,000, and invest that money in a government bond paying 6%, for example, I have already improved my position, because the return I now make is £12,000, not the £10,000 "profit" made from the house.

Yet, historic pricing would advise me that its only investments that provide a return better than 500%, that should persuade me to reallocate my capital! The same thing applies in reverse. If I had paid £200,000 for the house, and its current market price has fallen to £2,000, but I'm still getting £10,000 of rent from it, I'd be stupid to sell the house, take the £2,000 current value, and stick it in a bond even paying 20%, because my real "rate of profit" on the value of the house is is 500%!


Correction: first line above should read "The old value of capital has no more effect on the amount of surplus value"


"Suppose I am a capitalist I have money in the bank, and I buy a machine costing £1,000. I also employ a worker with a wage of £500 to mind the machine, and process £500 of material. £500 of profit is produced, and so the rate of profit is 25%. If I accumulated all of this profit, it would take me 2 years to buy another machine."

I should also have pointed out here, that as a capitalist with money in the bank, when the value of this machine falls from £1,000 to £500, I thereby make a £500 capital loss. However, because the money I have in the bank will now buy 2 machines for the previous price of 1, I make a £500 capital gain (and more depending upon how much money I have in the bank waiting to buy such machines) because the exchange value of the money has risen relative to the machines.

The problem with the historic pricing model is that because they operate with a formalistic logic rather than dialectical logic, they fetishise the money form, and thereby suffer money illusion. They recognise the changes in money prices of capital, but do not recognise that this implies equally changes in the exchange-value of money.

Because they fetishise the money form, they do not recognise that Marx points out in Capital II, that M - C...P...C' - M', is only the circuit of newly invested money-capital. The circuit for already functioning productive-capital is P..C' - M'. M - C...P. As Marx points out later in Capital III, M is only a moment in this circuit, not a terminal point. The expansion of productive-capital, which is what Marx says the rate of profit is, can then only be measured by examining the expansion as a result of production of the value of P, the productive-capital.

But, productive-capital is comprised of commodities, as Marx points out, whether those commodities are machines, buildings, materials, or labour-power. As such the value of those commodities is not determined by the historic price, i.e. how much labour-time was required for their production at some time in the past, but by their reproduction cost, i.e. how much labour-time is currently required for their production.

An Alien Visitor

I had trouble following your example, let me state it in my terms and then please advise!

£1000 for machines
£500 for material
£500 for wages

Total = £2000

You assume profit is £500
Rate of profit = 500/2000 = 25%

Then new machine is bought so we have following:

£2000 for machines
£1000 for material
£1000 for wages

Total = £4000
You assume profit is £1000
Rate of profit = 1000/4000 = 33%?



I find it quite fortunate that you Chris should bring this subject of the tendency of the **rate** of profit to fall.

Philip Pilkington ("a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University" and an apparent expert on Marx) would beg to disagree.

Using American data in **US$** (hopefully, constant), he says:

"In 1960 corporate profits stood at $31.1bn and by the end of the decade in 1969 they stood at $56.7bn. That’s an increase of around 80%. Meanwhile in 1970 they stood at $51.5bn and in 1979 they stood at $211.1bn. That’s an increase of nearly 200%. Not bad for a period that Henwood characterises as being one of profit stagnation!"

(Check also his two FRED charts)

To expertly conclude:

"Anyway, all that considered let’s reformulate the question: is Marx relevant for understanding the world today? Frankly, I don’t think so."

Is there anything wrong with his expert analysis?


Alien Visitor,

No, that's wrong. £1,000 was the cost of a machine, before the price fell in half. So, then £1,000 represents two machines.

These two machines require 2 workers whereas previously only 1 was employed, and they process twice as much material. So wages for the year amount to £1,000 and material for the year amounts to £1,000. However, because 2 machines and 2 workers are now employed the rate of turnover of the capital is doubled.

Previously, let's say the output was produced and sold in a year. Now, that level of output is produced in just 6 months, and then sold. So, the advanced capital is returned, and can be advanced again, with no additional capital requiring to be advanced.

In other words, the capital advanced for material for this 6 months is £500, and the amount advanced for wages is also £500. I'm assuming no circulation time for the commodities for simplicity. The commodities are then sold, so this advanced capital is returned to the capitalist, and can be advanced again for the production in the second half of the year.

So, the only capital that had to be advanced for the year's production, as opposed to the capital laid out for the year, is £1000 for machines (their current value), plus £500 for material, plus £500 for wages. The profit for the year is double what it was, because now 2 workers are exploited rather than 1.

So, the profit is £1,000 (in the original above I typed £2,000 by mistake), and the advanced capital, which is what the annual rate of profit is measured by, is £1,000 for machines, £500 materials, £500 wages = £2,000, so the mass of profit has doubled, and the rate of profit has also doubled.

The profit margin IS measured by the laid out capital not the advanced capital, which is why those who argue there has been a falling rate of profit also get confused, because they one sidedly take into consideration a rise in productivity causing a rising organic composition of capital, but fail to take account of the fact that the same rise in productivity causes an equal rise in the rate of turnover of capital, which causes a release of capital, and rise in the annual rate of profit.



That data seems to CONFIRM Marx's position not contradict it! In Capital III, setting out his "Law of the tendency for the rate of profit to fall" as opposed to that of Ricardo, Mill and others, Marx emphasises that this tendency MUST involve a continual rise in the MASS of profits (apart from temporary fluctuations), because what is behind it is a rise in social productivity, which means that more capital is employed, including more labour-power, and, therefore, more surplus value.

He emphasises this also in Theories of Surplus Value, in Part II, where he sets out his Theory of Crisis, precisely to reject the catastrophism implied in Ricardo's theory of Falling profits, which suggested that at some point the mass of profits must fall, bringing Capitalism to an end. Marx emphasises that there are no such permanent crises.

(I've described all this on my blog, and in my article a couple of weeks ago in the Weekly Worker.)

The fact that the mass of profit has been continually rising is fully in line with Marx's analysis, therefore, as is the fact that a greater mass of capital is being accumulated, and the size of the global workforce is rising along with it. But, the point about Marx's law here is that this rising MASS of profit doesn't tell you anything about the RATE of profit, because that depends upon the value of productive-capital required to produce that mass of profit. If the value of the productive-capital required to produce it has risen faster than the mass of profit, the rate of profit will have fallen, and vice versa.

As I describe, in the Weekly Worker article, and as I've described at more length on my blog in various posts, this is further confused by the fact that its impossible to derive a Marxist annual rate of profit from National Income and expenditure data for two reasons.

Firstly, as Marx describes in relation to the mistake of Adam Smith, the value of output comprises c + v + s. But, at a national level, c does not appear in the data, because it produces no revenue, and the data is data on revenues, i.e. the incomes received from wages, profits, interest, rent and taxes. So, the data presents only v + s, the new value created by labour. If you calculate the rate of profit on this basis, as basically some form of property income versus the total value of output, you have really only calculated the rate of surplus value, because this data does not include c.

Some calculations like Henwood's include the value of the fixed capital stock, but this still does not take into consideration the circulating constant capital, changes in which are most significant where the value of that are falling, and where the amount advanced is being reduced as a result of increasing rates of turnover of capital.

The second reason, is that in order to calculate a Marxist annual rate of profit, you need to know how much capital is advanced as opposed to laid out. A rate of profit calculated on the laid-out capital only gives a rate for the profit margin. To calculate the annual rate of profit you need to know the rate of turnover of the social capital, and there is no data providing that information.

An Alien Visitor

Ok, if i separate this out into two 6 monthly periods I get back to your 50%.

However, if the machines have fallen in value wouldn't this ultimately (forget short term fluctuations) have to be due to the machines becoming relatively less productive? And therefore the whole scenario you paint is irrelevant because new machines will be required to replace the now old technology?


No, the machines fall in value because productivity has risen so that less labour time is required for their production.

I have assumed no change in the actual productivity of the machines themselves. In reality, the productivity of the machines themselves would be likely to rise by the same process, which thereby reduces the value of older machines by moral depreciation, but also means that the rate of turnover is increased, so the annual rate of profit would then rise even further.


Thanks Boffy

I agree. But there is an easier way to argue that: Pilkington is speaking of profits (in US$) not rates of profits (which are measured in %).

But, there you have it, those are the experts on Marx.



Don't get me started on experts on Marx. Give me a bumbling amateur any day.

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