[OPE-L:3132] Re: Fred's Comments on 3074

Fred Moseley (fmoseley@laneta.apc.org)
Wed, 25 Sep 1996 14:37:59 -0700 (PDT)

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This is a reply to John's (3106) about the TSS interpretation and changes in
the value of money. (John, thanks again for your comments.)

1. John apologized for the unclarity of his earlier example of my
interpretation and offered instead an example of his own interpretation -
the same example he has offered in his discussion with Duncan. Duncan has
already responded in (3100) that John's example implies that the amount of
value added (and hence the amount of profit) is affected by a mere change in
the price of the material inputs (an inventory valuation adjustment) and
that this contradicts Marx's theory that the value added depends only on
living labor - the fundamental issue that Duncan raised in 3074. So I will
wait for John's response to Duncan's comments on this example.

2. John then altered his numerical example to include inflation in the TSS

Recall I invested $100 and sold everything for $130. Thus, my capital
investment could purchase 10/13 of the output. If prices suddenly doubled,
I would still want to be able to purchase 10/13 of the output. Of the $260
of output $200 would be funds sufficient to purchase the 10/13 of the
output. The prices doubled but the rate of profit stayed the same,
assuming I get my $200.

However, this example assumes away the problem of changes in the value of
the material inputs DURING the period of production, such that input prices
are not equal to output prices, due to changes in the value of money. This
example assumes that inputs are purchased at the same inflated prices as the
outputs are sold. The real issue is this: assume that the inputs were
purchased at the old output prices of $100 (i.e. historical costs) and then
the outputs are sold at the new inflated prices of $260. The amount of
profit calculated according to historical costs would then be $160 and the
"historical cost" rate of profit would then be 160% - a very significant
increase. This is what happens to the "historical cost" rate of profit in
times of inflation (not that much of course, but an increase).

3. Finally, John commented on my earlier discussion on the actual trends in
the "historical cost" rate of profit (increase) and the "current cost" rate
of profit (decrease) in the postwar US economy. John argued first of all:

a. Those studies in using current costs imply that as the rate of profit
falls the constant capital to output ratio rises. Yet, examples of
capitalists investing in machinery that causes such an increase are, at
best, few and far between. Thus, given all the sound and fury, surrounding
Okishio and the choice of technique problem, it would be helpful if we
could look at actual changes in technique.

I am not familiar with the literature to which you refer. But whatever this
literature says, all the macro empirical studies of the "current cost" rate
of profit for the postwar US economy (and in all other countries for which
there are estimates) show that the rate of profit declined significantly.
My own position is that unless direct criticisms of these estimates are made
(there are of course flaws, but none I think serious enough to significantly
affect the results), then either there is something wrong with the micro
studies of investment decisions or there is a contradiction between the
mirco decisions of individual capitalists and the macro outcomes - my guess
would be the latter, which I think is what Marx's theory of the falling rate
of profit is all about.

John then speculated about a specific flaw in the macro estimates:

b. Given studies that show a falling rate of profit in one country like
the U.S., we should also consider that capitals of relatively low
composition are often the first to flee the homeland. What's left?
Obviously, those of higher than average composition. Perhaps, it is not
surprising that the rate of profit falls in the U.S. and other developed
countries. If the capitals that went abroad in search of higher profits are
incorporated into such studies, it is unclear that we would see an FRP.

I agree that the estimates of the rate of profit in one country is a flaw
and a possible source of bias but I think the potential bias is small,
especially during the period during which the rate of profit declined
(through the mid- 1970s). The amount of capital "fleeing the homeland"
during this period was a tiny fraction of the total capital invested in the
US economy. More capital has of course fled since then, but the total US
direct foreign investment in other countries is still less than 50f the
total US capital. Even is this were included, it would not affect the
overall trends very much.

My main research project for this year will be to derive estimates of the
rate of profit in the Mexican economy for the postwar period (along with a
group of Mexican Marxian economists). One of the things we will be looking
at is the relative compositions of capital and rates of profit in the
Mexican and US economies and the extent of the productive capital flow from
the US to Mexico. So we should have a better idea about the extent of this
possible bias after this work is done.

In any case, one thing is perfectly clear: if the "current cost" rate of
profit did not decline in the inflationary postwar period, then the
"historical cost" rate of profit certainly did not decline and had an even
more positive trend. Where would that leave Marx's theory of the falling
rate of profit as a basis for understanding the current crisis of world