[OPE-L:6091] falling profits - 2

From: Fred B. Moseley (fmoseley@mtholyoke.edu)
Date: Fri Oct 26 2001 - 12:18:41 EDT

On Thu, 25 Oct 2001, Gerald_A_Levy wrote:

> Whether we're talking about the absolute magnitude of profit, the
> share of profit (to total income), or the rate of profit, the question
> remains:
> what does the empirical evidence tell us about the cause or causes of
> the decline in profit?
> To suggest that a decline in profit is the main cause
> of the current world economic crisis is a bit like saying, imo, that the
> cause of baldness is the loss of hair.

The cause of baldness is not loss of hair, because baldness IS BY
DEFINITION loss of hair.  But your analogy does not work.  The crisis is
not by definition falling profits.  The crisis is by definition falling
output and rising unemployment, etc.  The question is what causes the
falling output and rising unemployment: falling profits or something else?

In mainstream macroeconomics (in all its versions), profit is not even a
variable in the theory!  Similarly, in mainstream macro analyses of
recessions, profit is almost never mentioned, certainly not in academic
journals.  Does anyone know of a single mainstream article which argues
that declining profits was a cause of the stagflation of the 1970s-80s?  

One notable exception, mentioned in my last post, is Alan Greenspan, who
at least recognizes the significance of the steep decline of profits in
recent years.  I have also noticed recent emphasis on falling profits in
the business press (e.g. The Economist) and also from analyses by Goldman
Sachs.  But academic macroeconomists never mention profit or the rate of
profit.  That is the main unique aspect of Marx's theory - emphasis on

I can't answer your big question about the causes of the decline of the
rate of profit for the most recent period, because I haven't updated my
estimates of the rate of surplus-value, etc. beyond 1997 (I hope to
soon).  But you probably know that my previous estimates of the Marxian
variables show that:

1.  The rate of profit declined about 50% in the early postwar period
(thorough the mid-1970s), and the main cause of this very significant
decline were an increase in the composition of capital and an increase in
the ratio of unproductive labor to productive labor.  This decline in the
rate of profit was not caused by a decline in the rate of surplus-value,
but happened in spite of an increase in the rate of surplus-value
(contrary to the "profit squeeze" theory).  

2.  From the mid-70s to 1997, the rate of profit recovered, but only
partially (only about half of its prior decline), so that the rate of
profit in 1997 remained about 25% below its earlier postwar peak.  The
main reason for such a weak recovery of the rate of profit was the
continued increase of the ratio of unproductive labor to productive labor,
which partially offset a sharp increase in the rate of surplus-value and
its positive effect on the rate of profit (the composition of capital
increased only slightly during this period, due mainly to slower capital
accumulation and lower costs of raw materials).  

3.  My guess is that the explanation of the sharp decline in the rate of
profit since 1997, which has wiped out the previous partial recovery and
returned the rate of profit to its 1970s lows, is a combination of all
three Marxian variables: an increase in the composition of capital, a
relative increase of unproductive labor, and also this time a decline in
the rate of surplus-value (the steep decline in the amount of profit
suggests that the rate of surplus-value must have decreased).  

The main implication of this Marxian explanation of the decline of the
rate of profit is that a full recovery of the rate of profit requires a
significant reduction in the composition of capital (i.e. a significant
"devaluation of capital" by means of bankruptcies, write-offs, etc.) and
also a significant reduction of unproductive labor (which would increase
the rate of unemployment sharply).  Therefore, a full recovery of the rate
of profit, which is a precondition for a lasting recovery of the economy,
requires a prior period of more bankruptcies and higher unemployment.  

Whether or not that will happen in the current recession remains to be
seen.  But I think the chances are more likely that it will happen in this
recession than in any previous postwar recession.

> Yet, aren't defaults and bankruptcies a major part of how economic crises
> are overcome?  I.e. isn't the 'rationalization' that accompanies the crisis
> (and with it the forcible destruction of capital values) a major way in
> which the
> conditions for expanded profitability are made possible?

Yes, as just discussed.  The "destruction of capital" by means of
bankruptcies, etc. is the main way to restore the rate of
profit.  However, this is a very painful process, involving a deeper
recession and higher unemployment.  But Marx's theory suggests that this
painful process is necessary for a full recovery of the rate of profit and
hence of the economy.  

> The level of debt by working-class households could indeed be something
> (relatively) 'new' about the current recession.

I think so too.  This is a potentially very volatile situation.  If there
are widespread defaults by households on house mortgages and auto loans,
what would happen?  Will people fight back in some way against the loss of
their homes and cars?

Jerry, thanks for your comments.


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