[OPE-L:2202] Re: A Great Leap Forward

Duncan K Foley (dkf2@columbia.edu)
Tue, 14 May 1996 05:47:32 -0700

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On Sun, 12 May 1996 ernst@pipeline.com wrote:

> Duncan says:
> In reply to John Ernst:
> I had a number of exchanges with Andrew about the FRP. It appears to me
> that the sense in which the "TSS" interpretation predicts a falling rate
> of profit is simply that the profit per year over the historical cost of
> investments will fall with technical progress. We've already had some
> discussion of the relevance of this conception to Marx's concerns and to
> actual capitalist economies and their evolution on the list. It seems to
> me that Marx had much more to say than this about the evolution of the
> profit rate in capitalist economies. He criticized Ricardo successfully
> for disregarding the fact that capitalism institutionalizes technical
> change, and he pointed out some typical patterns of technical change under
> capitalist relations of production (labor augmenting and capital using),
> which are strongly empirically confirmed. Within this framework he was
> able to show why the falling rate of profit Smith and Ricardo both assumed
> was consistent with labor augmenting technical change. This is far more
> than a "minor post-Ricardianism", in my opinion, and also far more
> interesting than a redefinition of accounting rates of profit.
> John replies:
> A couple of matters:
> 1. My point was that with TSS one expands the set of patterns
> of technical change while considering the falling rate of
> profit. That is, with TSS, we need not focus on "labor
> augmenting and capital using" but rather can include as well
> "labor augmenting and capital saving."

The problem here is whether or not there is any relevant sense in which
the system-wide rate of profit will fall with labor-augmenting and
capital-saving technical change. If you plot the real wage-profit rate
frontier in this case, you see that it moves uniformly to the northeast,
so that it is hard to see how this type of technical change puts
structural pressure on the capitalist economy.

> 2. Given what we are discussing how are we to determine what
> is "empirically confirmed"? I asked for an example of
> a machine used to replace another machine such that the
> constant capital to output ratio rises. I also stated
> that I was unaware of any such machine in the mailing
> industry. Do you know of any in any industry?

I don't know about particular industries, but there's a lot of
macroeconomic evidence for historical patterns with a fall in capital
"productivity", that is, the output-capital ratio. Dumenil and Levy's book
on the Economics of the Profit Rate reports very careful work on this.

> 3. From what I recall of Smith and Ricardo, each included
> labor augmenting technical change in their views of
> technical change. Perhaps, I misread your use of the
> idea.

>From my reading of Smith it is hard to untangle exactly what he had in
mind in discussing the falling rate of profit, because he is not very
clear in distinguishing individual sectors (where increased competition
due to entry will drive down the rate of profit) from the whole economy
(where it is not clear why overall accumulation should drive down the rate
of profit.)

Ricardo's theory of the falling rate of profit depends on diminishing
returns to labor and capital in the face of a limited land input. He does
discuss the possibility that land-saving technical change could delay the
fall in the rate of profit (parallel to international trade in
agricultural products, which essentially moves the agricultural margin to
more fertile foreign lands).

> 4. In the standard interpretation of Marx, the rate of profit
> falls since the returns to scale fall with technical change.
> In both Smith and Ricardo, the rate of profit falls since
> the returns to scale fall with technical change. To be sure,
> for Smith and Ricardo, the rise in what Marx called variable
> capital was the cause whereas, for Marx, the rise in constant
> capital is the main factor.

I'm not sure what you mean by "returns to scale fall with technical
change". "Returns to scale" usually means the proportion by which output
increases in response to a uniform proportional increase in all inputs.
I'm not aware of any model of technical change that links t.c. to returns
to scale. Hicks neutral technical change involves a uniform proportional
increase in the productivity of all inputs to production. As I mentioned
above, I think Ricardo's theory does not involve returns to scale, but
diminishing returns to a subset of inputs as they increase while some
other input (in Ricardo's case, land) is held constant. It is true that
Ricardo's theory implies a rise in the share of output going to wages, and
thus, in Marxian terms, a fall in the rate of surplus value, and I agree
with you that Marx was at pains to reconcile the falling rate of profit
with a rising rate of surplus value, which he did by pointing out the
mediating factor of the ratio of constant capital (and turnover) to
variable capital.