Re: [OPE-L] Robert Brenner, "That hissing? It's the sound of bubblenomics deflating"

From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Sun Sep 30 2007 - 17:07:08 EDT

Remember Ajit I said that I have not read Brenner, so I was acting
as devils advocate here, trying to make a coherent reconstruction from the 
summary that Gerry posted. 
In part what is at issue is a matter of how one defines profit. I agree
that in the Ricardian view interest is paid out of profit, and is a share of
profit. Marx would also agree that interest payments by capitalists are
paid out of surplus value but he does not treat the latter as identical
to profit, distinguishing between profit of enterprise and interest.

Whilst at a high level of abstraction, concerning only the relationship
between the major classes, it is legitimate to treat interest as a share
of profit, at a lower level of abstraction the difference becomes significant
as Steindl and Sweezy argued in the the 50s. High interest rates will reduce
the ratio between dividends and capital stock, since less is available to distribute
as dividends, thus the apparent profitability experienced by equity capital falls.
( in practice this would be expressed as a fall in the price of equities ).
But we know that there has been a long term rise in the price of equities,
and, over the last 20 years interest rates have been relatively low. But 
from Brenners perspective this might be seen as an aberation from the 
long term history of capitalism brough about by anxieties on the part of
the Fed to avoid recession. Suppose that instead of the dollar being
fiat money, it was still tied to gold. Would the Fed have been able to
sustain these low interest rates? Would equity prices have continued to rise
for so long?

However the factor that Steindl focused on was the tendancy for the gearing
ratio of industrial capital to rise, and thus for the amount of retained profits
to fall. He argued that this can result in lower rates of accumulation.
This cause is independent of the rate of interest since a higher gearing
ratio means, at any given rate of interest, the rate of profit of enterprise
will be lower.
You say " What if you are investing your own
savings only? the rate of profits takes interest into

If you were that would be true, but one has to ask whether the dynamics
of accumulation make that a typical case?

I would say that accumulation out of a capitalists own savings whilst
it may be the aboriginal condition, is not characteristic of a mature
capitalist economy. Given that there is always a dispersion of profit
rates relative to the rate of interest, the population of capitalists
polarises into those whose current business, whilst profitable 
gives less than the rate of interests, and those whose rate of profit
is greater than the rate of interest. The former group will tend to lend
money at interest to the latter. So over time the former group transform
into a class of rentiers, gaining their profits from interest rather than
direct commericial profit.

What happens then when the rate of interest rises - a section of the
firms who had previously borrowed to accumulate will find that their
current rate of profit not longer suffices to meet the interest payments.
In order to continue operations they have to rely upon lines of credit
extended by the banks, which in turn further raises their gearing ratio,
making it harder in the future for them to carry out internal accumulation.

I can conceed your point on the misleading nature of the ratio c/v, but my
argument could be more clearly expressed by saying that the ratio of capital
stock, evaluated in person years, to the current productive working population.
If this rises, the rate of profit falls. I would anticipate that the 
Chinese economy, which has such a high rate of accumulation, and now,
a relatively stable population, will be experiencing such a rise in capital
stock relative to population. This will tend over time to reduce the rate
of profit in China. I would doubt that net accumulation in the USA is currently
fast enough to significantly act to reduce profit rates.
> c) An increase in unproductive employment can
> consume surplus value and lead
>    to a lower rate of profit. This may well have
> been occuring recently.
How is surplus consumed cannot reduce the rate of
profits; but, of course, it can reduce the rate of
accumulation as Smith argued.

It depends on where the unproductive workers are employed.
If they are just personal servants, yes it has no effect
on profit, since they are paid out of distributed profits. 
If on the other hand they are advertising and
sales staff for example, their wages appear in the accounts
like any other employee even though, in aggregate, from 
the standpoint of the whole economy, they are unproductive.
They will thus tend to lower the rate of profit by
increasing the wage bill prior to profit being calculated.

You ask, speaking of the surplus:
If it is consumed one way or the other, how could it
reduce aggregate demand? 

I think one has to view Brenner as being in the Sweezy tradition
and speaking of the reduction in aggregate demand that would
occur were it not for remedial action by the state. Sweezy arguing
that it was military expenditure, Brenner arguing that it was
the extension of consumer credit.

Whilst military expenditure can go on and on, consumer credit
does have limits to its extension. As the level of personal debt
rises, the incidence of default rises and the process must
come to a halt.

Paul Cockshott

-----Original Message-----
From: OPE-L on behalf of ajit sinha
Sent: Sun 9/30/2007 2:18 PM
Subject: Re: [OPE-L] Robert Brenner, "That hissing? It's the sound of bubblenomics deflating"
At last something to bite on!
--- Paul Cockshott <wpc@DCS.GLA.AC.UK> wrote:

> Ajit, I think that there are more unbound variables
> in the system than you allow.
> Consider first the issue of rate of profit. You are
> quite right to point out that
> one would expect this to be negatively correlated
> with wages, so that lower
> wages would tend to imply higher profit rates. But
> there are several possible
> confounding variables.
> You identify rent among these and say that this
> would only be relevant in the case of
> diminishing returns to agriculture. Well in an early
> 19th century model this
> would make sense, but today rent on commercial
> premises in city centers and
> rent obtained from mineral rights are probably more
> significant, and in
> both cases diminishing returns probably do apply -
> both to oil production
> and due to congestion in central business districts
> to office rents.
First of all, let's be clear that at least in Ricardo
'high rent is not the *cause* of low profit. There is
no causal connection between rent and the rate of
profits. Rate of profits fall because of rise in the
value of wages. The rise in the value of wages is
caused by extension of cultivation on inferior land or
diminishing returns on the extension of capital and
labor on given land. So from this perspective one will
have to show that value of wages are rising due to
diminishin returns in oil production etc. This has not
been established yet. Secondly, my hunch is that
rising prices of oil and buildings etc. have actually
increased the rate of profits in these sectors at
least. I'm not sure how to draw a one to one
relationship with modern day real estate sector with
Ricardian agricultural sector. In these cases rise in
rent may be just a consequence of rise in profits in
these sectors.
> But there are 3 other possible confounding factors
> that spring immediately to
> my mind:
> a) changes in the organic composition of capital
> could lead to lower rates of
>    profit despite higher rates of exploitation.
First of all, it seems you are following Marx's
formula for the rate of profits as r = S/(C+V). Now,
we all know that this formula of the rate of profits
is incorrect. Thus we will have to make the argument
in the context of correct rate of profits.

Secondly, the measure C/V as the measure of organic
composition of capital, which is sometimes used in
Marxist literature as the coefficient of technology,
is not a good measure. Given the same technology and
the same labor-values of commodities, if you reduce V
it immediately leads to rise in C/V (even though no
change in technology has taken place only real wages
of the workers have been reduced) implying that there
is a simultaneous tendency from the technology
perspective for the rate of profits to fall. But
within the framework of labor theory of value this
shouldn't be possible.
> empirical work we did years
>    ago on the UK, this did seem to be the case there
> during the 1970s and 1960s.
>    But for this to occur you do need a very rapid
> rate of accumulation to build
>    up the capital stock - something that Brenner
> says is absent. Well it may
>    be absent in the US , but it is certainly present
> in China where accumulation
>    is currently standing at around 50% of GNP - a
> quite astonishing figure.
I'll let it pass. However, you would agree that
Chinese economy is booming, which would be a problem
for Mr. Brenner.
> b) Changes in the share of surplus value going as
> profit can also be due to
>    interest payments making up a larger share of
> surplus value. It depends on
>    whether he is talking about gross profit or
> profit net of interest. If the
>    gearing ratio has risen, then a larger share of
> surplus may be going as interest
>    rather than what Marx called profit of
> enterprise.
Within Marx's economics (and for that matter economic
theory in general, I would say) rate of interest is
nothing but a share of profits given as interest to
finance capital. What if you are investing your own
savings only? the rate of profits takes interest into
> c) An increase in unproductive employment can
> consume surplus value and lead
>    to a lower rate of profit. This may well have
> been occuring recently.
How is surplus consumed cannot reduce the rate of
profits; but, of course, it can reduce the rate of
accumulation as Smith argued.
> Why might there be a sustained deficit in aggregate
> demand?
> Well if the money rate of wages does not rise as
> fast as the growth of productivity (in
> money terms), then the excess product must either
> be:
> 1) accumulated
> 2) consumed unproductively
> 3) consumed by the working class on credit
> I have not read Brenner, but it is at least possible
> to argue that options 2 and 3 have
> been what has occured since the 90s.
If it is consumed one way or the other, how could it
reduce aggregate demand? Take a given net output, push
the real wages down, it will increase the profits but
why should it lead to fall in aggregate demand? The
problem with Brenner and other Marxists is that they
mix long-term trend analysis with short-term
fluctuations. Let us suppose you have a downward
long-term trend and along this trend you find a
short-term cycles. Now, the cause(s) for the long-term
and the cause(s) for the short term cycles may be
completely independent. When people want to explain a
downward cyclical movement by the long-term downward
trend, as Brenner is trying to do, they invariably
introduce serious theoretical confusions. First of
all, if the cyclical downturn could be explained by
long-term downward trend, then how do you explain the
cyclical upward trend? The Keynesian idea of
deficiency in 'effective' or 'aggregate demand' was
designed for explaining a specifically short-term
phenomenon, such as resession or dpression. We all
know that such deficiency in aggregate demand cannot
be 'permanent' as real balance effect etc. come into
play. In my opinion, it is a serious mistake to
introduce the idea of lack of aggregate demand in the
growth context, which is what most of the Marxists and
some post-Keynesians often do. If you listen to Indian
Marxists and post-Keynesians talking about present day
Indian economy, you will come out with a distinct
feeling that Indian economy was going through a
serious depression! They start from data on poverty,
low wages and unemployment. Conclude from here that
the aggregate demand is low and thus potential for
growth is simply lacking. The Keynesian deficiency of
effective demand, however, has nothing to do with
poverty or low wages as such, it basically rests on
the disconnect between savings and investment. But
enough said. Cheers, ajit sinha

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