This article was prompted by Geoff Jones’ comments to our initial document “What Is the Cause of the Current Capitalist Crisis?”. This article is concerned with specifically answering the following points (highlighted in bold) from Comrade Jones:
“I comment on seven points in appropriate paragraphs, but my major problem is with its extraordinary abstract and rambling presentation, particularly in regard to the work of Andrew Glyn. Only when it comes down to practicalities do the most important questions arise. A general point: although Marx’ analysis is couched in terms of values, all figures quoted are in terms of prices.This problem of the transformation of values into prices (see for example Morishima & Cataphores (1)) may well have to be considered in any detailed discussion. I shall not deal with it here, but add a historical note at the end…
A historical note. Tony Cliff, Chris Harman and others set up the IS (later SWP) on the theoretical basis of the ‘permanent arms economy’ which meant an end to the capitalist boom-slump cycle. They got their ideas from work by a Prussian statistician Ladislaus von Bortkiewicz, who married Marx’ transformation of value into 4 prices(C III Part 1) to the two sector model of the capitalist economy (C II chXX). Von B added a third sector (Luxury goods) and showed that it was possible for the rate of profit in money terms to continue to expand, or at least not to decrease (see Sweezy(2)). Cliff and co. identified the luxury goods sector with the billions spent on armaments hence ‘permanent arms economy’. I’m not sure when they quietly ditched this position.( By the way, Von B’s analysis is fallacious because he only considered simple reproduction not expanded reproduction)….
[With reference to] Para 92 [the section under the sub-heading “Just a Tendency”?]. This is an extraordinary schematic depiction of ‘counter-tendencies’. Counter-tendencies are concrete processes rooted in the world economic and political structure. I assume that the comrades would accept that this has developed since Marx’ and Engles’ time. Two major changes that immediately spring to mind are the collapse of the Stalinist states and their immediate opening up as a source of cheap labour, and the capitalisation of the Chinese economy to produce cheap consumer goods. It is obvious that both will have a massive effect on capitalists’ rate of profit. As Trotsky(3) pointed out:
“As regards the large segments of the capitalist curve of development …., their character and duration are determined not by the internal interplay of capitalist forces but by those external conditions through whose channel capitalist development flows. The acquisition by capitalism of new countries and continents, the discovery of new natural resources, and, in the wake of these, such major facts of “superstructural” order as wars and revolutions, determine the character and the replacement of ascending, stagnating or declining epochs of capitalist development.””
- Michio Morishima & George Catephores: Value, Exploitation and Growth (McGraw Hill 1987)
- Paul Sweezy: Theory of Capitalist Development, (Dobson 1946)
- Leon Trotsky : The Curve of Capitalist Deverlopment www.marxists.org/archive/trotsky/1923/04/capdevel.htm
To summarise, the main points that Comrade Jones makes are the following:
- We do not consider the “transformation problem”.
- Bortkiewicz solved the “transformation problem” with a model that showed a rising rate of profit.
- The document is rambling and abstract in relation to Andrew Glyn.
- Our depiction of the counter-tendencies to the falling rate of profit is abstract and schematic.
- The restoration of capitalism in the former Soviet Union and China acted as a counter-tendency and “impacted” the capitalists’ rate of profit.
Why Reply to Comrade Jones?
The ideas put across by Comrade Jones are in fact stealth attacks on the core component of Marxism: the Law of Value. Grasping the Law of Value is essential for understanding how capitalism works, and is therefore essential in order to develop an insight into where capitalism is heading, which in turn informs the Party’s strategy and tactics. An understanding of capitalism that is not based on the Law of Value is likely to lead to the abandonment or revision of Marxism and erroneous political conclusions.
For example, the American economist Paul Sweezy, who Comrade Jones quotes above, became a Maoist after coming to the conclusion that the imperialist countries had fundamentally overcome falling profit rates, and so could afford to buy off the working class with an ever increasing “surplus”. Note that Sweezy did not use the Marxist term surplus value because he believed that the Law of Value, as explained in Capital, had been made redundant by the qualitative change in capitalism to “monopoly” capitalism at the end of the 19th century, as opposed to the “competitive” capitalism of Marx’s time.
Another example is the English economist Andrew Glyn, who was a member of the Militant in the 1970’s, but left in 1980 following a debate on the cause of the capitalist crisis and his rejection of Marx’s Law of the Tendency of the Rate of Profit to Fall. Such was his political degeneration that he co-edited Paying for Inequality (1994) with future Labour MP David Miliband, and gave a favourable analysis of the Scandinavian social-democratic model in his last book Capitalism Unleashed (2007). We will return to Andrew Glyn in more detail later on.
What Does this Article Cover?
This article is divided into four parts. In the first section, it will give an overview of the Law of Value, providing background to points 1 and 2. In the second section, it will explain what the “Transformation Problem” is and why it is actually a non-issue, addressing points 1 and 2. Thirdly, it will explain the roots of Andrew Glyn’s ideas, why he was wrong and how this subsequently led him to reject Marxism, addressing point 3. Finally, the fourth section will address the issue of the counter-tendencies to the falling rate of profit, points 4 and 5.
The Law of Value
Classical Economics and the Labour Theory of Value
The “founder” of political economy, or what we would call classical economics, was the Scottish economist Adam Smith, born in 1723. In 1776 he published An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations. Here he developed what became known as the Labour Theory of Value, which states that the value of a commodity is determined by the quantity of labour used to produce that commodity. He wrote:
“The value of any commodity… is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.” (Wealth of Nations Book 1, chapter V)
Adam Smith accepted the Labour Theory of Value for pre-capitalist societies, but saw a flaw in its application to contemporary capitalism. He pointed out that if the “labour embodied” in a product equalled the “labour commanded” (i.e. the amount of labour/value that could be purchased by selling it), so that commodities exchanged with other commodities that had the same value, then where did profit come from? How was it possible for capitalists to make money out of fair and equal exchanges?
The economist David Ricardo (born 1772) responded to this paradox by arguing that Smith had confused labour with wages. “Labour commanded”, he argued, would always be more than the labour needed to sustain itself (wages). The value of labour, in this view, covered not just the value of wages, but the value of the entire product created by labour.
Karl Marx and Capital
Marx took the Labour Theory of Value as his starting point and realised that workers do not sell their labour, but rather their labour-power—their ability to work. Labour-power is a commodity like all other commodities, but it is entirely unique in that labour-power can create additional value beyond the value of wages required to sustain the labour-power (i.e. the cost of food, accommodation etc to sustain the worker). In other words, workers create additional, or surplus, value beyond the value of their wages.
In Capital volume 1, Marx argued that workers work for a part of each day creating the value required to cover their wages, while for the rest of the day they create surplus value which they are not compensated for. Therefore, the commodities the workers produce contain value derived from the material/machinery employed (known as constant capital), the paid component of the workers’ labour-power (known as variable capital), and the unpaid component of the workers’ labour-power, surplus value. Thus the value of the commodity produced can be expressed as the sum of three components: c+v+s.
When a capitalist sells this commodity, he is said to realise the value of the commodity, in money-form. He can then cover the cost of his means of production (c) and workers’ wages (v), allowing him to pocket the remaining surplus value (s). In monetary form, this surplus value becomes profit. Thus, Marx solved the mystery of profit and scientifically proved capitalism was a system inherently based on the exploitation of workers during production.
Socially Necessary Labour-Time
Marx asserted that the value of a commodity was determined by the value provided by the “inputs” (e.g. labour-power and capital) in producing the commodity, where value is measured in labour-time. In Capital volumes 1 and 2, Marx assumed that value was proportional to money-price, such that the value of a commodity was equal to its price, on average.
Does this mean that if a worker spends more time producing a commodity than average, her commodity has more value and thus can be sold at a higher price? Wouldn’t this simply encourage capitalists to employ the highest possible labour-time in production in order to drive up the value of the commodities produced?
No. Since the same commodity could be produced under a variety of different conditions, the value of a commodity is determined by the socially necessary labour-time required to produce the commodity. By socially necessary, this means the average conditions of production at the time. Therefore, even if workers spend double the average time producing a commodity, such that one would expect the commodity to have twice the average value, the commodity’s “social” value is still equal to the average, and so half of the value of the labour-power is wasted. The capitalist could attempt to off-set this by doubling the price of the commodity (remembering that price is proportional to value), but then why would buyers pay double for the same commodity that could be bought elsewhere? If such a capitalist continued to operate in this fashion, one would expect him to go out of business.
By the same measure, capitalists that employ more efficient (than average) production techniques, and therefore produce commodities under the socially necessary labour-time, are able to realise more value than was actually produced, and hence obtain more profit with each sale, assuming they priced the commodity at the average price or perhaps slightly below it in order to attract buyers. Thus socially necessary labour-time regulates the pace of production and the value of commodities.
The Rate of Surplus Value (or Exploitation)
As we know, it is workers’ labour-power that creates all new value, both the value of the workers’ wages (variable capital) and the surplus value. Thus the new value created by labour-power can be expressed as v+s. The division of this value between the worker and the capitalist is known as the rate of surplus value, alternatively known as the rate of exploitation. The equation for the rate of surplus value is s/v.
The Organic Composition of Capital
Capitalists invest a portion of their surplus value into machinery, materials, new technology (constant capital) to make their existing workforce more productive, in order to produce under the socially necessary labour-time. Workers increasingly operate a greater number of machines and the productive process moves from being labour intensive to capital intensive.
As a result, the value of constant capital relative to the value of workers’ wages employed in the productive process rises. Marx referred to this as the organic composition of capital (OCC). More capital employed in relation to labour is described as a higher OCC. It is expressed as the equation c/v.
This rise in the OCC means that commodities contain relatively less value derived from workers’ labour-power (s+v) and relatively more from constant capital (c). In other words, the “rate” at which the capitalist produces surplus value falls. Since surplus value is the source of profit, this means that less profit is made per commodity sale.
The Rate of Profit
The rate of profit for an individual capital is the surplus value produced in a given production cycle divided by the total capital (both variable and fixed) employed in production, and is expressed as a percentage. The equation for the rate of profit is s/(c+v).
The rate of profit can also be expressed in another useful way if we divide the original equation through by v. We get the following: (s/v) / ((c/v) + 1).
Thus the rate of profit is determined by two factors: The rate of surplus value (s/v) in the numerator, and the organic composition of capital (c/v) in the denominator.
The “Transformation Problem”
By taking the Labour Theory of Value to its conclusion, Marx had turned the entire basis of contemporary political economy into anti-capitalist agitation by showing how workers were exploited, not simply in the general sense of the term, but also the strictly scientific sense. This confronted the ruling class with a problem. They could no longer hold to the Labour Theory of Value, and so frantically sought to falsify and discredit it, and ultimately replace it with an alternative theory. One of these attempts to discredit Marxism was the invention of the so-called “Transformation Problem”, which Comrade Jones believes “may well have to be considered in any detailed discussion”. And so this section will do exactly that.
Marx’s Method of Abstraction
In order to understand the three volumes of Capital and how they cohere as a whole, one has to understand Marx’s method of abstraction. Abstraction is an essential feature of the scientific method generally. It works by isolating particular phenomenon or relationships in the wider whole and drawing them out to be studied before reintegrating them.
Marx explained his method most fully in the 1857 Grundrisse, “the method of rising from the abstract to the concrete is the only way in which thought appropriates the concrete, reproduces it as the concrete in the mind. But this is by no means the process by which the concrete itself comes into being.” The importance of this method comes from the need to strip away the appearance of things to grasp at the essence of them and therefore to understand the necessity of them and their relations.
In this context, we can see that Capital Volume 1 started from the abstraction of commodity production of a single capital, Volume 2 covered purely the circulation of commodities in the market, and it is only in Volume 3, originally subtitled “Configurations of Capital”, where Marx brings the two previous abstractions together to reach a relatively more concrete, although still abstracted, view of capitalism as a whole.
It is important to bear this in mind when opponents of Marxism deem it to be “abstract” – they are in fact correct in the scientific sense! But it does not mean that Capital cannot be applied to reality – it is not abstract in the sense of “not being real”, for it is a scientific abstraction of reality itself. The beauty of Capital is that it deals with a “chemically pure” capitalism and thus lays bare the laws that govern the capitalist mode of production, whatever form it may superficially take (monopoly, democratic, fascist, “financialised” etc).
“Inconsistency” in Capital Volume 3
Failing to understand these different levels of abstractions, some readers of Capital could not understand something that occurred part way through Capital Volume 3. Marx had previously assumed that, on average, a commodity’s value was proportional to its price. Individual capitals would experience different rates of profit to each other, when measured in terms of value. However, as Marx noted in Capital Volume 3, in reality, capitalists within a given sector, and indeed across different sectors, experienced a common average rate of profit when measured in money terms:
“…differences in the average rate of profit in the various branches of industry do not exist in reality, and could not exist without abolishing the entire system of capitalist production. It would seem, therefore, that here the theory of value is incompatible with the actual process, incompatible with the real phenomena of production, and that for this reason any attempt to understand these phenomena should be given up.” (Marx, Capital volume 3)
As Marx realised, this seemed to contradict the idea that the value of a commodity was proportional to its price. How could different capitalists have different rates of profit when measured in value (due to different organic compositions of capital and rates of exploitation), but become the same when measured in money-price? If the price of a commodity was not determined by its value, didn’t this falsify the Law of Value?
The answer is that there is no contradiction, and Marx explains in Volume 3 how values were transformed into prices of production, which I shall outline below. Unfortunately, vulgar bourgeois economists jumped on this apparent “inconsistency” and used it to claim the Law of Value invalid. Even some so-called Marxists, unable to solve the “problem” of transforming values into prices, effectively disowned the contents of Volume 3 (including the Law of the Tendency of the Rate of Profit to Fall), and instead base their analysis of capitalism from only the first two Volumes. For Comrade Jones to even raise the “Transformation problem”, it would seem he fits into the latter category.
Explaining the Average Rate of Profit
To recap, the problem faced by Marx was to explain how, for example, multiple capitalists, producing the same commodity (or indeed different ones), using different organic compositions of capital (OCC), could receive the same rate of profit in monetary terms, despite the value of the commodities differing.
Let’s assume that capitalist A has a labour-intensive production process and therefore a low organic composition of capital, and capitalist B has a capital-intensive production process and so a high organic composition of capital. Since labour-power is the source of all new value, capitalist A produces more value than capitalist B, and so one would expect capitalist A to receive a higher rate of profit than Capitalist B. Yet under conditions of competition, both capitalists receive the same rate of profit in money-terms, regardless of the organic composition of capital.
This is possible due to the three aggregate equalities that Marx identified:
- The total amount of value in society is equal to the total sum of prices
- The total amount of surplus value is equal to the total sum of profit
- The total rate of profit measured in value is equal to the total rate of profit measured in money
Therefore, individual capitalists can have money prices or profits that diverge from their values, but in the aggregate these equalities prevail.
Both capitalists A and B contribute towards the aggregate surplus value in society in accordance to their organic composition of capital. In this example, Capitalist A contributes more surplus value than Capitalist B. Both capitalists then withdraw their money-profit from the total surplus value on the basis of the total average rate of profit, that is, in proportion to their own monetary costs of production. Regardless of their organic composition of capital, both capitalists receive the same return on their investment.
Capitalist A withdraws less surplus-value-as-profit than he produced due to his lower production costs. Capitalist B withdraws more surplus-value-as-profit than he produced because his costs of production are greater due to all that new expensive machinery he invested in.
At this more concrete level of abstraction, the price of a commodity is not determined by input costs (c+v) plus surplus value (v) as assumed in Capital volume 1. We shall refer to this as direct price, where the value of the price of the commodity is identical to the value of the commodity itself, which in practice does not occur.
Instead, price is determined by input costs (c+v) plus the average rate of profit. This price is known as the price of production. A commodity does not exchange at its direct price, but rather its price of production. Therefore, although its price is not directly proportional to its value, it is ultimately still determined by its value at the aggregate level and thus regulated by the Law of Value.
So the capitalists with a higher than average OCC sell their commodities at their production prices, above the direct prices of their commodities, while those with a lower than average OCC sell their commodities at prices of production below their direct prices. As a result, the total surplus value is redistributed from capitalists with a lower OCC towards those with a higher OCC, tending to equalise the rates of profit.
This explains the tendency of capitalists in the same society and/or sector to receive the same monetary rate of profit, and that therefore a fall in the general rate of profit must be due to trends at the aggregate level of society (such as the rising organic composition of capital), rather than simply the operations of individual firms. No individual capitalist would employ new machinery if they knew it would directly lower their own rate of profit, but if all capitalists across a given sector did this, it would have exactly this effect.
The Prussian economist Bortkiewicz was the first to create the concept of the “transformation problem”. Whereas Marx saw capitalism as an unstable, dynamic system that tends towards crisis, Bortkiewicz, as part of the neo-classical school of economics, saw capitalism as a steady, elegant equilibrium system which could be represented by simultaneous mathematical equations.
Bortkiewicz questioned that, given newly produced capital good commodities later became inputs for another capitalist, if the “output price” from production (the price of production) of a commodity then becomes the “input price” for a new production process, how would this add up? Additionally, these new outputs may then become more inputs for other process, and so on. Bortkiewicz’ simultaneous equations broke down, and he declared an error in Marx’s Law of Value. The “transformation problem” was born.
Marx and Accounting
If there is a “transformation problem”, doesn’t this render Marxist value theory obsolete? More recent research from R.A Byer and his paper “Marx, accounting and the labour theory of value: a critique of Marxist economics” (2005) shows that Marx’s labour theory of value was actually derived from normal capitalist accounting methods of the time, thanks to help from his business expert Engels! Byer shows that individual capitalists themselves transformed value into prices on the principle that the socially necessary labour-time of a commodity is what determined its market price. The paper is quite long, but it is necessary to quote several of the sections to highlight the point made:
“Now confident that capitalists accounted for cost and profit as forms of value – as though cost equalled the money value of socially necessary labour time and profit equalled surplus value – [Marx] could simplify the presentation by initially assuming that this value equalled price at the level of the firm. In short, he knew that the theory of value developed in Volumes 1 and 2 worked when the money value of socially necessary labour time and price were not equal under competition. This knowledge would allow Marx to claim confidently that “The laws thus found…hold good no matter how the surplus value is later divided among the producer, etc” (Marx and Engels, 1988, p.23), like practical accounting which is, by the fact that it is ‘practical’, indifferent to the process which sets prices. It would explain why Engels confidently taunted Marx’s critics to solve the transformation problem before he published Volume 3.”
The paper concludes that “…to understand the general solution that [Marx] gave us, we must understand his theory of accounting for the individual firm to follow him down into production and then out to the market and social capital. The unifying principle is Marx’s insight that, as the market price of all identical commodities is equal, the same must be true of its components, socially demanded profit and socially necessary cost. Marx certainly ‘asserted’ that what was equal between commodities was the money value of the socially necessary labour time they contained. Direct evidence for this can only come from the practices of capitalists, that is, from their accounts. The evidence is that accounting compels capitalists to follow the ‘law of one cost’, however imperfectly in practice, to keep the accounts so that within the firm the cost of identical commodities is equal, and across firms the tendency for all firms to produce at or below the socially necessary cost. Based on this paper and earlier work showing that traditional accounting practices conform to Marx’s theory (Bryer, 1998, 1999a, 1999b), scholars need look no further for a rich source of evidence in support of the coherence and relevance of his labour theory of value than accounting…
As Marx did, we can use capitalist accounts to calculate the rate of surplus value, the organic composition of capital, the rate of return on capital, observe the globalisation of capital, the spread of productive labour, and measure the real wealth of capitalist economies, etc – confident that we are handling fragments of value created by labour.”
Temporal Single System Interpretation
If the “Transformation Problem” was actually a non-problem, how come Bortkiewicz couldn’t balance his simultaneous equations, where the total input prices were supposed to equal the total costs of production? Bortkiweciz’s problem stems from two false assumptions: simultaneism and physicalism.
Simultaenism is the belief that the costs of the output will instantaneously change the cost of the inputs. In short, it abstracts away time! For example, capitalist A buys a machine from capitalist B for £1000. A week later, capitalist B produces the same machine using less labour-time as before and sells the machine at £800 each. We now have a situation where the input cost for capitalist A is £1000, yet the cost of production a week later is now £800. Bortkiewicz does not allow for this scenario, and instead assumes that capitalist A’s machine would instantaneously devalue to £800 in order to balance his simultaneous equations! Unfortunately for Bortkiewicz, that capitalist A had bought the machine for £1000 was an unalterable historic fact, even if newly produced machines later cost only £800.
Marx differentiated between the time when the machine’s price of production was £1000 and when it was £800 as different production periods. The cost of production of commodities produced in one production period becomes the input for the next production period (not the same production period, as Bortkiewicz essentially assumed). Thus the correct interpretation of Capital should be temporal, that is, with regards to time.
Physicalism is the belief that the value of commodities is proportional to its mass. For example, two machines are worth double the value of one machine. Yet as we showed above, the value of a machine changes over time, across different production period. Bortkiewicz’s model for capitalism was based only on simple reproduction, which assumed that no physical growth of commodities occurred, which in turn meant no growth in value.
However, production under capitalism is generally expanded reproduction, i.e. to expand in value. Each production cycle, the commodities produced from the previous production cycle becomes the new inputs, which are added to the already existing inputs. This is a key factor in the rising organic composition of capital and subsequently the tendency of the rate of profit to fall, which Bortkiewicz rejected.
Because Bortkiewicz believed in the “transformation problem”, he also rejected the aggregate equality that stated the total rate of profit measured in value was equal to the total rate of profit in money. He believed that there were two different rates of profit, and so adhered to a dual systems interpretation of Capital. On the other hand, we have shown the “transformation problem” to be a non-problem, and therefore adhere to a single system interpretation of the Law of Value. Thus, we have a coherent understanding of the Law of Value in the form of the Temporal Single System Interpretation (TSSI). The main proponents of the TSSI are Andrew Kliman and Alan Freeman, amongst others.
Permanent Arms Economy
On the basis of the “Transformation Problem”, Bortkiewicz attempted to “correct” it within the Marxist framework. Based on his (false) assumptions, he showed it was possible to obtain the profit rate and the relative prices in a model economy that had three departments. Marx’s basic model assumed two departments, one that produced means of production, and a second that produced consumption goods. The third department that Bortkiewciz added was one that produced luxury goods, i.e. consumption goods exclusively for capitalists.
Paul Sweezy picked up on this model and it formed the thrust of his arguments in Monopoly Capital (1966), which stated that the problem facing modern US “monopoly” capitalism was that it was too productive and had to find outlets for the mass of surplus. This outlet was Bortkiewicz’s 3rd, luxury goods department, in the form of arms production. Sweezy reasoned that, since the value of the armaments produced were not reinvested in the other two departments, the state investment and production of arms offered a way to expend excess surplus without raising the organic composition of capital. This had the effect of off-setting the tendency of the rate of profit to fall, continuing the post-WW2 boom and postponing the next crisis of capitalism. Tony Cliff’s International Socialist (IS) group adopted this basic premise, further developed by their theoretician Michael Kidron, as the theory of the permanent arms economy.
However, when the crisis of 1973/4 hit, fundamentally brought about by the falling rate of profit, they were forced to revise their theory. They realised that state investment in arms production was an integral part of the cycle of capital accumulation (i.e. not just private capital) and thus investment in arms production did in fact raise the organic composition of capital, lowering the average rate of profit. Their conclusion was that the post-WW2 boom had not taken place as a result of the permanent arms economy, but despite it. The fundamental premise of the permanent arms economy, that state military spending could offset the falling rate of profit, was rejected, although the IS tradition still hold on to a modified version of the permanent arms economy.
This section has shown the dangers inherent in the acceptance “transformation problem”, such as rejecting the tendency of the organic composition of capital to rise and the tendency of the rate of profit to fall. This section highlighted the case of the IS’s flawed theory of the permanent arms economy, based on a false interpretation of Capital. The next section will show how the incorrect ideas of Andrew Glyn also led him to false conclusions.
Comrade Jones feels we have been “extraordinary abstract and rambling presentation, particularly in regard to the work of Andrew Glyn”. Whilst the eleven comrades did further elaborate on Glyn’s flawed profits squeeze theory in our second document “In Defence of Marx’s Law of the Tendency of the Rate of Profit to Fall”, which Comrade Jones did not read prior to his comments, this section will get to the root of Glyn’s rejection of Marxism once and for all.
Glyn argues against rising OCC “as the real, underlying, basic cause of all capitalist crises”
In an article of the 1972 “Bulletin of the Conference of Socialist Economists” Glyn made his case against the idea that a rising technical composition of capital (i.e. physical mass of capital) necessarily led to a rising value composition of capital. Glyn rejected Marx’s assumption:
“I call the former the value-composition, the latter the technical composition of capital. Between the two there is a strict correlation.” (Marx, Capital Volume 1, Chapter 25)
Glyn rejected this assumption because he believed that an increase in productivity would decrease the value of capital goods produced, which in turn would lower the value of capital employed in production in relation to labour-power. However, Glyn makes the same mistake as Bortkiewicz: simultaneism!
In the 1973 “Bulletin of the Conference of Socialist Economists”, Robin Murray came back on Glyn’s corn model that he used to prove his theory:
“In the corn model, the organic composition of capital is shown to remain constant (and even fall) when the technical composition of capital and productivity rise as the result of (i) inputs being valued at current productivity levels (i.e. in accordance to the socially necessary labour-time established after the productivity increases), and (ii) the value of labour-power remaining constant. When real wages are held constant and the value of labour-power therefore falls with the increase in productivity in the production of wage [consumption] goods, then the organic composition of capital rises in line with the technical composition. Thus, whether the organic composition of capital rises or not is not a predetermined issue, but will depend on the success that workers have in maintaining the level of their wages in the period of increasing productivity. The central role of wages in determining movements in the rate of profit was, of course, one of the main emphases in Andrew Glyn and Bob Sutcliffe’s book.”
This main emphasis, initially refuted by Militant but later adopted by the Socialist Party in the late 1990’s, was the profits squeeze thesis, which asserted that rising wages were primarily responsible for the falling rate of profit and the crisis of capitalism.
“The crucial assumption of [Glyn’s] corn model is, however, not what happens to wages, but rather the valuation of inputs at current socially necessary labour-times. [In] Andrew Glyn’s table… we find no case in which the rate of profit falls, whether or not the organic composition of capital moves up or down… The main reason for this is the writing down of the value of the capital advanced as a result of the productivity increases. Constant capital of 75 tons of seed corn suddenly has its value cut in half as the result of its application in the process of production… But this is surely mistaken. The capitalist advances a quantity of money capital which he exchanges for commodities. The fact that this new production lowers the value of the inputs used up in the process can make no difference to the original value of the commodity inputs prior to the circulation of the new output. To cut the subsistence wage in money terms by half, on the grounds that corn will be halved in value in the next time period, does nothing to keep the labourer alive today.”
Murray concludes that, in his corrected temporal corn model, “a number of Marx’s general propositions appear to be born out: a rising organic composition of capital, a rise in the mass of profits consistent with the fall in the rate of profit, and counter-tendencies which can offset the fall in the rate of profit but which demand a rate of increase in technical change or in the labour force which in many circumstances would be difficult to sustain. These propositions do not depend on the level of wages.”
False Assertion from a Flawed Model
Based on his now discredited corn model, Glyn continued to promote the line that the organic composition did not rise:
“The dramatically falling rate of profit in Britain does not seem to have been caused to any significant extent by the increasing organic composition of capital but rather by an increase in labour’s share of the product (very roughly the equivalent of a decrease in the rate of exploitation)”. (Glyn, British Capitalism, Workers and the Profits Squeeze, 1972, p231)
Again, this is now simply an assertion based on his flawed model. Glyn makes no attempt to even measure the organic composition of capital within the 286 pages of the book.
Glyn’s Economic Disaster
As we explained in our first document, in 1980 Glyn still continued to use his flawed model to explain the crisis of capitalism in his book “The British Economic Disaster”:
“Advocates of the LTRPF mistakenly assume that an increase in the physical mass of capital operated by each worker (the technical composition of capital) necessarily implies a rise in its value relative to the value of either output or surplus.”
“The following figures demonstrate that the mass of capital operated by each worker has not systematically grown faster than the productivity of labour in the post-war period. Thus the cost of means of production in terms of the labour time required to produce them (or put it another way, the value of capital operated by each worker) has not generally increased.”
From this, Glyn continued with his thesis that “the explanation for the general fall in the rate of profit from the mid-60’s cannot therefore be the operation of the LTRPF.”
Debate in Militant Tendency
It was at this time that Andrew Glyn, in a minority of one, requested a debate on the issue within the Militant Tendency, to which the leadership complied with. Documents from both sides were produced and circulated to the entire membership. Glyn’s document was largely a fuller explanation of what he wrote in the British Economic Disaster, that between 1953 to 1972 the organic composition of capital barely rose in the UK and Germany, whilst in Japan, France, Italy and the USA it actually fell.
Mick Brooks replied to Andrew Glyn in defence of the LTRPF, and we reproduce some of the key points below:
“We have to say that AG appears to come to his conclusion in the opposite way. He first looks at what he sees as the facts and then selects the appropriate ‘theory’ to explain them. As we have always pointed out, empiricism, which imagines it approaches reality without preconceptions, actually approaches reality with preconceptions that are not conscious, worked out and tested like the ideology of Marxism. Facts are selected and forced into a theory dictated by these lurking preconceptions.”
“Both the law for the tendency of the rate of profit to fall and overproduction are bound up together as aspects of an anarchic commodity economy where production is for profit. The tendency for the rate of profit to fall would lead at a certain stage to a crisis of overproduction. Overproduction in turn is overproduction only in relation to profitability.”
“AG admits on page 13 of his paper that “huge increases in the capital stock per worker are recorded” in his own table. But he goes on to say “these are indicators of the technical composition not the value composition.” AG fails to understand that the technical composition of capital (mass of machinery) is not an economic relation. It cannot be measured economically, any more than how much a kid enjoys a new train set for Christmas (the use value of the train set) can be measured economically. What we can ascertain is the value of the capital or of the train set.
Flowing from his general method, AG attempts to find a monetary measure and then “subtracting the growth of productivity” to find the organic composition of capital i.e. the actual value relationship. In other words AG presupposes what has to be proved. For if prices fell in proportion as productivity rose, and if the rate of profit rose to the extent that prices (“inputs”) fell, then indeed the long term movement of the rate of profit would be indeterminate, purely dependent on the extent to which each application of new technology increased productivity. We have gone to some effort, however, to show that this is not the case, and it is inevitable that the organic composition of capital must rise in the long term.”
“AG seems to be suggesting that a rise in the rate of profit of itself could lead to an economic revival. The further hint of this is on page 7 where he says, “after all we accept that the capitalists’ only way out of the crisis is to drive down wages.” Driving down wages is not necessarily a way out for the capitalists. It is certainly their inevitable reaction to a falling rate of profit. Whether an economic revival follows a successful onslaught on wages depends upon a number of other factors. Take two obvious cases: Mussolini’s Italy and Nazi Germany in the 1930s. In both cases wages were forced down. In Italy this proved to be no solution. Italian capitalism was too weak to take advantage of starvation wages and undercut its competitors. The world economic situation did not provide an expanding market for Italian goods.
Adolf Hitler was of course the man who provided ‘full employment’. In addition to driving down wages he simultaneously provided a market for profitable production through war preparation. German capitalism was strong enough to take advantage of its opportunity.
To appraise the effect of wage cuts it’s necessary also to see whether the markets exist through which profits can be made and whether the individual capital or capitalist nation state is competitive enough to take advantage of them.
In no sense can wage cuts alone solve the problems of the capitalist system. Such a conclusion, rooted in AG’s analysis though he denies it, is both scientifically incorrect and potentially politically dangerous.”
Glyn: rate of profit would “limit economic growth under socialism”
Amazingly, Glyn also implied that, if the law of the tendency of the rate of profit to fall was valid, wage restraint would have to be considered under socialism so as not to lower the rate of profit and limit economic growth! Mick Brooks immediately responded that “[t]his remark betrays a lack of understanding about how the society of the future would work.”
At this stage it was apparent that Glyn was unable to see beyond the capitalist mode of production and the law of value, and did not really understand socialism in the sense that Marxists do. Unable to reconcile his views with the Marxist ideas that Militant held at the time, Andrew Glyn subsequently left.
Glyn moves right and attacks transitional programme
Reproduced below is part of the document “What is the cause of the current capitalist crisis”, where we have already touched on Glyn’s degeneration from Marxism:
“The abandonment of The Law and his departure from Marxist theory led Andrew to reject not only Marxism, but also the basic tenants of socialism such as the nationalisation of the economy.
In 1985, he wrote a pamphlet for the reformist-left Campaign Group of Labour MP’s called ‘A Million Jobs a year’ – a programme for a Labour government to restore full employment. In this, he rejected socialist nationalisation of the economy and instead put forward a programme of public control over private capitalist industry rather than public ownership.
He does decisively call for the immediate nationalisation of the banks… [but] what is significant is his approach to the rest of the economy:
“It can be argued that such approaches to the control of [private capitalist] industry would have the advantage of demonstrating, through the process of struggling to shape the development of the economy, the justification and eventual necessity for the full implementation of Clause IV [i.e. nationalisation of the commanding heights]. Discussion and evaluation of these various approaches to controlling industry… is an absolute priority if a convincing Full Plan for Full Employment is to be constructed.” (Glyn , A Million Jobs a Year, 1985, p34)”
Here Glyn breaks with the transitional programme, and instead advocates a two-stage process of nationalisation: first you take over the banks, and then you gradually, “eventually”, “through discussion and evaluation”, take over the commanding heights of the economy. However radical Glyn wants to dress this up as, it is reformism, pure and simple.
This section has shown that Andrew Glyn based his rejection of the Law of the Tendency of the Rate of Profit to Fall on his flawed, discredited economic model, much like Bortkiewicz. Implicitly, and later explicitly, Glyn rejected the Law of Value and Marxism which set him on his trajectory rightwards towards social democracy. We hope that this explanation is concrete enough for Comrade Jones to appreciate.
Counter-tendencies to the Falling Rate of Profit
According to Comrade Jones, our depiction of the counter-tendencies to the falling rate of profit is abstract and schematic. This is because, as was explained in the section “Marx’s Method of Abstraction”, the entire basis of the Law of the Tendency of the Rate of Profit to Fall, like the other laws of motion described in Capital, is an abstract schema advanced by Marx!
Our first document, reviewed by Comrade Jones, actually listed the six counter-tendencies to the falling rate of profit:
“Meanwhile, some comrades in the leadership appear to deny the actual empirical operation of the law, stating that it is just a “tendency” and that it has no real relevance in relation to the crisis. This is in outright contradiction to the factual data, but a point needs to be made in relation to the counter-tendencies themselves?
The counter-tendencies are not a separate factor operating independently of the rate of profit. This is also a misrepresentation of how The Law works. There are in fact six key counter-tendencies which the falling rate of profit actually brings into being and which operate as long as the rate of profit is falling. These are primarily:
- More intense exploitation of labour (increasing productivity)
- Reduction of wages below their value (wage cuts)
- Cheapening of the elements of constant capital (reducing the cost of machinery)
- The relative surplus population (using unemployment to force down wages and conditions))
- Foreign trade (the expansion of global capitalism)
- The increase in share capital (the growth of banking and finance/debt)
Although all of these counter-tendencies were operative during the neo-liberal period, they did not stop the persistent fall in the historic average rate of profit, as evidenced very clearly by the Shift Index data above.
Marxist economists have dissected the influences of these counter-tendencies exhaustively and have concluded that while the decline in profitability was slowed down in the 1980’s and 1990’s, some argue it was partially restored, it never recovered to the level experienced in the period of the post war boom of the 1950’s and 1960’s. In fact, the crisis of capitalist profitability can be traced to the 1970’s and capitalism has never fully overcome that crisis. Generally, however, there is unanimity amongst classical Marxist economists that the US rate of profit peaked in 1997 and then began to fall again on average until the crisis of 2007-8.
The partial recovery in profitability was due, in large part, to the increase in mechanisation and computerisation of production which boosted labour productivity or, as Marx would describe it, relative surplus value by increasing exploitation. The other was by the extension of trade through the development of capitalism in the Far East opening up new markets for capitalist commodities and investment. The development of other emerging economies was also important.”
A “Schematic Depiction”
So Comrade Jones says in his point above:
“This is an extraordinary schematic depiction of ‘counter-tendencies’. Counter-tendencies are concrete processes rooted in the world economic and political structure. I assume that the comrades would accept that this has developed since Marx’ and Engles’ time?”
He then goes on to say that the restoration of capitalism in Russia and China “spring to mind” and argues that it’s “obvious” that this would have had a massive effect on capitalists’ rate of profit.
Well, we plead guilty to a “schematic depiction” of the counter-tendencies because this is directly copied from the abstracted model as elaborated in the third volume of Capital by Karl Marx! We have merely added some brief explanations of the counter-tendencies in parenthesis. Comrade Jones is also completely wrong in suggesting that this “schematic depiction” has “developed” since the time of Marx and Engels.
Marx presented an abstract scientific theory of how capitalism functioned in the third volume of Capital that applied to the general and specific features of capitalism. Not specifically 19th century capitalism, but a chemically pure abstract capitalism in order to scientifically explain the main laws of its motion. In this sense, Marx’s extraordinary (we agree) schematic depiction applies universally to the capitalist mode of production. The counter-tendencies do not “develop” over time in their abstract theoretical form. There were six main counter-tendencies in Marx’s time and there are six main counter-tendencies today.
The mistake that Comrade Jones makes is a simple one of mixing up (conflating) the abstract theoretical concepts of Marx with the concrete working out of these self-same counter- tendencies in practice in the modern world. The counter-tendencies do not change, but real world capitalism evolves.
So the point about Russia and China is logically fallacious (false) because what Comrade Jones is referring to is actually contained in one of Marx’s abstract “schematic” categories namely: Foreign trade (the expansion of global capitalism)
The restoration of capitalism in Russia and China is not a new counter-tendency. They are new developments in the evolution of world economy, but they are subject to the laws of motion of capitalism. Let’s take another example just to hammer home this point.
One counter-tendency is cheapening the cost of elements of constant capital. Whether we are talking about a steam powered mechanical loom in 19th century England or a computer controlled robotic milling machine in the USA today, the principle remains the same.
By increasing productivity, more machines can be produced for a lower cost per unit. So if the cost of machines reduces, this means that constant capital (c) reduces as part of the determinant of the rate of profit. This may delay, but not halt, the fall in the rate of profit. Nevertheless, the counter-tendency is exactly the same today as it was when Marx did his research in the British Museum over one hundred and thirty years ago.
In relation to Russia and China I have to say that Comrade Jones suffers from the same fault as the carpenter John Weston, who argued against Marx that it was pointless to fight for higher wages because the amount set aside for wages was fixed and hence wage increases would be cancelled out by price increases. Marx answered Weston thus:
“But suppose the amount of national production to be constant instead of variable. Even then, what our friend Weston considers a logical conclusion would still remain a gratuitous assertion. If I have a given number, say eight, the absolute limits of this number do not prevent its parts from changing their relative limits. If profits were six and wages two, wages might increase to six and profits decrease to two, and still the total amount remain eight. The fixed amount of production would by no means prove the fixed amount of wages. How then does our friend Weston prove this fixity? By asserting it.” (Marx, Value Price and Profit)
Comrade Jones has joined in with Weston’s “method” and with Clive Heemskerk who, at a recent London debate, argued that our critique of the current explanation of crisis by the Socialist Party leadership was inadequate because we had failed to mention China in our analysis.
In essence, how do both Comrades Jones and Heemskerk prove their point about Russia or China having an “obvious” counter effect on the falling rate of profit? By merely asserting it!
Marx was very clear that foreign trade was a counter-tendency that worked like this:
“Capitals invested in foreign trade can yield a higher rate of profit, because, in the first place, there is competition with commodities produced in other countries with inferior production facilities, so that the more advanced country sells its goods above their value even though cheaper than the competing countries. In so far as the labour of the more advanced country is here realised as labour of a higher specific weight, the rate of profit rises, because labour which has not been paid as being of a higher quality is sold as such. The same may obtain in relation to the country, to which commodities are exported and to that from which commodities are imported; namely, the latter may offer more materialised labour in kind than it receives, and yet thereby receive commodities cheaper than it could produce them.” (Marx, Capital volume 3)
This can, in fact, apply to the relationship between China and the advanced capitalist countries. China exports manufactured goods to the advanced countries below their value and the USA sells goods to China above their value. However, what we need to know is the extent of this trade. It would have to be massive on a global scale in order to have a major impact on profit rates.
Marx also explained that, although foreign trade could initially produce an increase in the rate of profit in the capital-exporting country, eventually this would have a negative effect as capitalism developed in the colonial world. In other words, it would turn into its opposite and lead to a falling rate of profit.
Russia and China
Comrade Jones doesn’t stipulate what effect on profit rates capitalist restoration in Russia and China had (did it go up or down) or when this occurred. Just the mere citation of this general fact is regarded as undermining our arguments.
Alas a brief examination of the facts completely repudiates the suggestion that the entry of Russia onto the world market or the rise of China had a major impact on changing prospects for the world capitalist economy by boosting profit rates.
China is regarded as one of the BRIC’s made up of China, Russia, Brazil and India. However, the major metropolitan capitalist economies of the USA, Japan and the Euro-Zone make up 60% of world economic output. The peripheral emerging economies of the BRIC’s are largely dependent on the production and trade of the advanced economies.
The idea that the largest BRIC economy China could have had a major impact on profit rates, despite its huge reserve of cheap labour, is contradicted by the facts. Despite its impressive growth figures, China still only contributes 8% of global production. Furthermore, despite China exporting cheap manufactured goods, its growth is mainly generated by investment in domestic production and not generally geared towards foreign export. Exports only make up 9% of China’s GDP and 40% through direct domestic investment. So the export of cheap goods from China really only makes up a fraction of global trade despite the proliferation of Chinese products. Few of us drive a Chinese car, for example, and Chinese exports are mainly consumption goods, not investment goods.
Russia isn’t even in China’s league, with 4% of world production in 2013 which is set to decline. Her main contributor to growth has been the export of raw materials from her extraction industries, not the exploitation of cheap labour for manufacture.
However, the main point is that there was a major generalized world economic crisis in 2007-09 that originated in the USA, but it also hit the emerging economies including Russia and China.
In relation to the rate of profit, it should be emphasised that profit rates are centered on nationally based firms and corporations. In other words, there are profit rates for separate capitalist countries, although a world rate of profit will also be forming as capitalism develops on a world scale. However, our main concern is the advanced capitalist countries that produce the lion’s share of economic output and where there is a historical over-accumulation of capital and sluggish recovery from the Great Recession. It is the developed economies which decide the fate of the world economy.
The argument that capitalist restoration in Russia or China had any major impact on reversing the decline in the corporate profitability in the USA or other advanced countries has absolutely no empirical support whatsoever.
Marx or Kondratiev?
The inclusion of Trotsky’s 1923 quote from The Curve of Capitalist Development is an interesting interpolation but Comrade Jones has edited it because Trotsky was answering Kondratiev, and this is what Comrade Jones cuts out (underlined):
“As regards the large segments of the capitalist curve of development (fifty years) which Professor Kondratiev incautiously proposes to designate also as cycles…., their character and duration are determined not by the internal interplay of capitalist forces but by those external conditions through whose channel capitalist development flows etc.”
Kondratiev argued that that capitalism went through fifty year cycles of expansion and contraction governed by some form of “internal interplay” of capitalist forces that were independent from general social development. He was unable to identify what these internal forces were. Not surprising as Kondratiev was a bourgeois, not a Marxist, economist. The way Comrade Jones uses the quote is almost as if Trotsky is dismissing the “internal interplay” of Marx’s theory of the falling rate of profit and the counter-tendencies when he is doing nothing of the sort. In this sense the quote is misleading.
However, despite the brilliance of Trotsky’s ninety-one year old article, knowledge and analysis of Marx’s Capital and empirical research has certainly developed since Trotsky’s time. Unlike the six counter-tendencies which still remain the unaltered, key theoretical concepts of concrete determinants, in the trajectory of the rate of profit on a national and international scale.
This section has shown Comrade Jones’ understanding of the operations of the counter-tendencies to be wanting. We have provided empirical evidence that suggests the restoration of capitalism in Russia and China did not have the effect that Comrade Jones asserts. If Comrade Jones still believes otherwise, we would suggest he provided some evidence to back up his claims, for without it he is simply asserting.