[OPE-L:2588] Reply to Andrew on FRP

Duncan K Foley (dkf2@columbia.edu)
Sat, 29 Jun 1996 11:53:40 -0700 (PDT)

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A few comments on Andrew's 2566 continuing the discussion of the falling
rate of

Duncan denies that my examples refute the theorem. ...
I understand "refutation" to mean the same thing as Duncan does.
...my argument serves to refute the
Okishio theorem if I can show that the theorem's measure of the profit
rate doesn't necessarily to conform to the one for which Marx stated his
law....Part of what we mean by
the Okishio theorem is an argument that disproves Marx's claim that
mechanization itself can cause the rate of profit to fall. The theorem is
just a mathematical result; the interpretation of this result is what is
at issue....
Let's assume for the sake of argument that the terms of my profit rate
measure differ from those of the theorem. Does that make the theorem--as
understood by its key proponents--valid? I think not. They would need
prove that their profit rate is the one to which Marx's law refers.

I don't think you understand "refutation" in the same way as I do, as the
remarks above show. The theorem states its own premises and conclusion,
and as
far as I can see has not been refuted yet by the production of a
that satisfies the premises and contradicts the conclusion.

What you are arguing is that the Okishio theorem is not relevant to
understanding or evaluating Marx's discussion of the falling rate of
profit on
your reading and interpretation of Marx, which is a different point. The
crux of
this argument seems to be the definition of the profit rate under
conditions of
technical change.

examples model precisely the phenomena that Marx said would give rise to
a FRP--rising productivity and rising organic/technical compositions of
capital--and show that the profit rate can fall on this basis.

The example we worked through has a falling ratio of fixed capital to


A separate question is whether the Okishio thorem refers to a profit rate
different from the one our examples show can fall, as Duncan suggests.
He refers to the "prospective internal rate of return" and the
rate of return to new investment." I'm not sure what this means.

This is the rate of return that would equate the prospective returns from
investment (taking account of anticipated price changes in output from
technical change) to the cost of the investment. In the example we worked
through this rose between period 0 and later periods.


... when new entrants come in, the unit price continues to fall, which
lowers the rate of return on all investments.

Not necessarily, if the fall in unit price had been correctly anticipated
at the
time the investment was made.


But if "prospective" means ex ante, then the
theorem shows nothing more than that viable technical change cannot lower
the rate of return capitalists think they will get (if real wages are
constant, etc., and if the capitalists are ultramyopic).

I think this is a recognizable statement of Okishio's theorem. The phrase
"capitalists think they will get" is taken to refer to future capitalists
correctly forecasting their revenues once relative prices have adjusted to
technical change.


I agree with Duncan, in general, that the difference between historical
replacement cost rates of profit is less the shorter the lives of capital
investment. But I do not understand how they ever become equal, if
(values) are continually falling.

I agree with this. Under conditions of continuing technical change, with a
finite life of capital, there will always be a gap between historical and
replacement cost rate of profit. In a steady state, however, this gap will
constant and could not lead to a situation where one of the profit rates
rising while the other was falling.


Duncan writes that "If, for example, the
original factory ... lasted a finite time, sooner or later it would be
amortized, and the 'general rate of profit' would become equal to the IRR
on current investment." First of all, *which* IRR on current
the one computed at stationary prices, the actual one using profit
or the actual one using profit realized?

I think as we worked it through we were using the profit realized.


Second, why the scare-quotes
around GROP?

I'm not sure that terminology in this area is completely standardized, so
I used
the quotes to indicate that I meant the "general rate of profit" I had


Third, doesn't this statement either presume that prices stop
falling, that capital goods on average are amortized before they wear
or both?

Not in this particular example. If the real wage were positive, factories
be retired before they "wore out" when their net revenue went negative.
But with
a zero real wage they can continue to produce until they are scrapped.


Duncan asks: "Don't capitalists recover the initial investment through
depreciation? ... The value doesn't 'vanish', but is recovered in the
ordinary course of business." As I understand Marx's value theory, the
constant capital transferred to the value of the product, in the case
of "machines" (and fixed capital generally), is a fractional part of the
*current* cost of the machine (the pre-production reproduction cost), not
the historical cost. See, e.g., the next to last page of Ch. 8 of Vol.
For example, if the machine lasts 2 periods, and has a value of 10 at
the beginning of the 1st period, and a value of 6 the beginning of the
2d, I think this means that (1/2)*10 + (1/2)*6 = 8 is transferred.

I'm in a summer house and don't have instant access to Capital, but this
me as wrong. In the absence of technical change, Marx uses an accounting
where the whole initial cost will be written off as part of constant
over the life of the machine.


...capitalists do not recover all
of their intial investments through depreciation if values are falling.
This is indeed crucial, for Marx, in explaining speedup, shiftwork, etc.
The capitalists need to recover the value they've invested in machines
because falling values won't permit them to recover the whole thing.


Individual capitalists can't protect themselves through speedup, and so
because of competition. It's an individual capitalist who faces the losses
competition from more advanced technology, not the system as a whole.


Duncan notes that the disruption in reproduction
to which Marx refers is "short-run." Marx is referring to "short-run ...
crises, and the business cycle." I'm not sure what Duncan means by
short-run here. In any case, I don't think the import of Marx's FRP law
is secular stagnation or a secular decline in the observed profit rate.
As he makes clear in some of the passages I quoted, the tendency of the
rate of profit to fall is, in his view, continually *overcome* by crises;
and the cheapening of the elements of constant capital raises the profit
rate (on new investment, but not existing investment, of course).

This is a possible interpretation of Marx, but not the one that got most
excited about the FRP, I think. This line of thinking about the
interaction of
technical change and the business cycle is quite fertile: Schumpeter and
Goodwin, and their followers have developed it in a number of directions.
Curiously enough, it reappears in "real business cycle theory" which views
unanticipated technical changes as the origin of business cycle