# [OPE-L:2312] Profit Rate: minor clarification

Alan Freeman (100042.617@compuserve.com)
Tue, 21 May 1996 15:53:34 -0700

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Re: 2261 and the sequels:

I'm very sorry not to have more time for the profit rate
discussion. I'll have to postpone my own views till the seminar on
depreciation, which I am sure will touch on this topic.

I sense a possibly confusing tendency to speak of 'the' TSS view of
the profit rate. I think there is as yet no such homogenous TSS
view. What exists is a common view that advanced capital (the
denominator in the profit rate) is represented in some way or other
by the historic costs of its elements.

This has two liberating consequences. First it frees Marx from the
dead hand of Linear Production theory. Second as John (2261) says:

==================================================================
TSS allows us to make still another "great leap forward" -- beyond
the falling rate of profit to the accumulation process itself.
That means that we can begin the investigation of matters like the
turnover of fixed capital and the periodicity of crises.
==================================================================

Once we stop valuing capital at reproduction cost, we can connect
profit, accumulation, and crisis like Marx did. In all static
formalisms the relation between the magnitude of profit and the
growth in capital stock is suppressed. We make \$2, we add it to a
capital stock of \$2, and lo! it's worth \$3. Why does 2 + 2 make 3?
Because capital cheapens. Where does it go? Nobody knows.

The common TSS thread is that this idea is nuts. Why keep saying
2 + 2 = 3, when a perfectly good theory, that squares with all the
texts, explains it really is all right to say it's 4?

Within the common search for an alternative to valuation at current
cost, different working hypotheses are possible. These nuances are
I think secondary as I will try to illustrate in relation to three
issues:

(a) what the profit rate is in reality
(b) what Linear Production theory says is the profit rate
(c) what Marx himself says is the profit rate

In a nutshell, Linear Production theory cannot portray reality.
If therefore it represents Marx, then Marx cannot portray reality.

Okishio does not directly speak of Marx. He speaks only of prices,
not values. Nevertheless, he uses Linear Production theory. If we
read Marx using the same theory - meaning its core hypothesis that
capital is valued at current costs - then the disproof of Marx's
FROP theory is an almost trivial corollary of Okishio's theorem.
This is why most writers regard Okishio as a formal disproof of
Marx's FROP theory; and they're right.

The question then arises: to what do we attribute Okishio's
conclusions? Examination shows they follow because current costs
are used as the numerator in the profit rate. I would say:

(1)this is certainly not legitimate in real life. No capitalists
do it. This is generally agreed on OPE, which should not go
without being noted, if only because agreement is quite rare.

(2)Not generally agreed yet is that the capitalists *cannot* do so.
This is already the basis, it seems to me, of an objection to
Okishio's conclusions which is insufficiently understood,
namely they cannot possibly be empirically true.

The point is not just that his results are empirically false in
some cases (though they are). It is that because capitalists use
money, no calculation which values capital at current cost can
possibly yield the same profit rate as the capitalists in the
presence of technical change. Whatever Okishio measures, it is
not capitalist profit.

I am worried lest we become too sophisticated to appreciate a
point which depends on no special formula, no debatable reading
of the texts, no contestable models and absolutely no theory of
what might or might not be equalised. The figures yielded by
valuing capital at current costs *cannot* conform to what the
capitalists report. Moreover, the impact of all modifications so
far suggested is to widen this gap. If capitalists choose, for
example, to anticipate or recognise the cheapening of constant
capital by writing their assets down, this will make current
profits smaller, not larger, and hence even farther from what is
predicted by Okishio or any variant of the current cost hypothesis.

Bluntly, I think this issue has been ducked. It seems to be
viewed as a trick of the light, a juggling of the figures, as
if the difference will go away if only we look at the accounts
different, work at the right level of abstraction, account for
expectations, use dialectics, or whatever.

It ain't so. If it is, show how it's so. 'Might be so' won't do.

There are two numbers, one from a theory and one from reality.
One goes up when the other goes down. Capitalists have no
choice but to use one and Okishio has no choice but to use the
other. Okishio, dear comrades, is *wrong*, by Paul C's criterion
and quite independent of what Marx says. Valuing capital assets
at current cost is *wrong*. A failure to confront this, however
well-meaning, risks wandering across the narrow line between
sophistication and sophistry. Any theory that equates these
numbers will also tell you black is white, the moon is made of
green cheese and hell just froze over.

(3)more contentious (and deliberately separated out in this way,
to accommodate Paul C's concerns) is what Marx said. I think
disagreements on this point are the real obstacle to
understanding point (2). The 'standard interpretation' of
Marx's profit rate is subject to the same objections as
Okishio's. It does not and *cannot* measure what is empirically
observed. This is, I think, the source of the reluctance to look
at point (2) objectively. There is, I think, a subconscious fear
that Marx will sink in the same boat as Okishio.

But what the TSS paradigm has to say is that Marx is in a different
boat. Those who wish to stay in the USS Linear Production are
welcome to a short if exhilarating trip - but there is no reason to
take Marx along.

We salute the gallant captains of the USS Linear Production. We'll
pick up survivors, we share the sadness of all sailors at the fate
of a fine vessel, and we'll leave private lifeboats well alone.

But we're discussing rescue, not suicide. We do not need to jump
ship, hitch ourselves to a wreck or steer for the rocks on which
she foundered. We have a fresh breeze and a world to win.

This is at slight cross-purposes with the current discussion which
involves many necessary refinements at a considerably less
abstract level: fictitious capital, uncertainty, and so on. I do
not dispute their importance and have a view on them, expressed
briefly in the discussion on accumulation.

But this contribution is not meant to launch a new discussion on
my own view but to register the point that differences between it
and other TSS variants do not vitiate the fundamental agreement
and point of departure for all such discussions:

==================================================================
(a) Current or reproduction costs cannot portray reality;

(b) Attributing the current cost hypothesis to Marx necessarily
attributes to him a fundamental weakness, namely, he cannot
portray reality;

(c) An alternative interpretation of reality must be sought,
rooted in the principle of historic cost valuation;

(d) A strong case exists that Marx held to such an alternative
interpretation.
==================================================================

Finally I am with Paul C in wishing to study profit in the first
instance in abstraction from credit relations (and hence the sale
of titles to capital). I appreciate that other OPE members want to
proceed to a less abstract level but I hope we don't entirely
dissolve the abstract into the concrete or altogether lose sight
of Paul's proposal.

I don't think the TSS paradigm stands or falls on the outcome of
the discussions now going on, in the framework of the agreement
above. Nor can Marx's theory of the profit rate, which precedes
the discussion on both credit and fictitious capital in C III.

These theories do stand or fall on the following: can we represent
either reality or Marx using the 'fundamental theorem' of linear
production models - that capital is valued at its current cost?

Alan

PS: Maybe Fred could help things along by indicating if he
considers that the denominator in the profit rate is 'in reality'
the reproduction cost of fixed capital. If not, since he is fairly
adamant that this is the denominator in Marx, perhaps he could
indicate at some point whether Marx got it wrong.