[OPE-L:3144] Re: Fred's Comments on 3074

John Ernst (ernst@nyc.pipeline.com)
Thu, 26 Sep 1996 10:15:50 -0700 (PDT)

[ show plain text ]


Here are some comments on your post.

Fred says:

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
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.

John says:

As you see, I have asked Duncam for more info on the role IVA plays
in the accumulation process. In doing so, I noted that his use of
it at the very least does acknowledge the loss of value due to
productivity increases. Generally, those who use simultaneous
valuation do not do so. Rather value vanishes as accumulation
proceeds. I am not sure how you use the concept of IVA in your
interpretation of Marx. Note that we are talking about using the
concept of IVA as prices fall. Money is involved. That is,
it matters little that I, as a capitalist, report a high profit
rate if, at the same time, I lose my shirt because of "inventory
value adjustments." Again, we are dealing with Marx and his assumption
that the value of money is constant, that productivity increases
lead to price decreases.

(This may be nitpicking but I do not think Duncan or I are dealing
with a "mere change in the price of material inputs." Here we are
talking about the destruction and preservation of value itself.)

Given Duncan's position on the amount of value living labor creates
and his idea of using that to determine prices, I suspect that he
and I would differ on issues concerning the transformation of values
into prices of production. Somehow, I think you and he will differ
on the matter of prices of production.

Fred says:

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
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).

John says:

As one of our great U.S. statesmen once said, "There you go again."
That is, you want to deal with inflation or a change in the value of
money that occurs simultaneously with increases in productivity and
the decreases in value. There is a qualitative difference between the
price increases due to inflation and price decreases due to decreases
in value.

What makes the notion of simultaneous valuation so appealing is that
in the world of today we generally see price inflation. The rates of
profit, unadjusted, appear higher than they should be. In this case,
we could say that the value of money has changed. Perhaps, it would
be fair to say that our capitalists in these situations have more money
that they should. With these high rates of profit it would seem the
falling rate of profit could become a thing of the past. I do not
think it is accident that "orthodox" Marxists like Grossmann began
to focus on the mass of profit necessary to carry out the accumulation
process in the next period when maintaining and even inflating price
levels became a conscious policy of capitalism. Others shifted to
the idea that the main difficulty of capitalism was the lack of
effective demand.

Matters are different with falling prices. Here we are speaking of
extracting Marx's notion of accumulation given his assumptions of
a constant value of money and falling values due to productivity
increases. The entire notion of M -- C -- M' becomes the central
focus as the process of valuation is simultaneously one of
devaluation. Indeed, in Duncan's interpretation of my example,
the matter became M'-- C -- M. I think he and I will agree that
if this were the case, no IVA could save the system.

In the example above, I simply took the rate of profit as given
and showed that it did not change simply because the value of
money changed. In your comments on this, you imply that I should
have dealt with the case where the value of money changes as
increases in productivity take place. You seem to want a general
principle that applies to each and every case -- falling prices with
and without decreases and increases in the value of money and rising
prices with and without decreases and increases in the value of money.
I'll be honest and admit simply that I am not sure this is possible.
I am, for now, locked into the case Marx examines and note that as
he speaks of changes in the value of money and its affect on the
computation of the rate of profit, the rate of profit is given. If
production itself is in the process of determining the rate of profit
it is not given. Hence, I thought I dealt with the matter as it
the old boy himself would have.

Fred says:

3. Finally, John commented on my earlier discussion on the actual trends
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
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
(there are of course flaws, but none I think serious enough to
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
of profit is all about.

John says:

All I am saying here is that each and every piece of machinery I have
seen introduced in the mailing industry is both capital augmenting and
labor augmenting. This does not necessarily negate your macro results
which imply that I should be seeing machines which are not capital
augmenting. I have asked for examples of investments which would
support your notion that the rate of profit decreases even when
inputs and outputs are simultaneously valued. As I said, the
results of my search have been meager. I then ask, "How can you
get the results you get given no capitalists seem to investing
the way your data suggests?" Thus, I seek no flaw but rather an
explanation. Let's turn to our comments on this matter.

(I'm not sure that there is literature on this. Given plants are
privately owned it is difficult to get an evaluation of a particular
change in technique. Should someone find an example, we should also
be aware that Marx himself states that in the period of large scale
industry as machines replace machines technical change is capital
augmenting -- in other words, the opposite of what your macro
research suggests.)

Fred says:

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.

John says:

You've looked at this stuff a great deal more than I have. Hence, I tend
to trust your results. The question is -- Do they support the hypothesis?
I raised one question concerning the data and you've answered it. Here,
I'd also note that the period you examined is characterized by the loss
of manufacturing and mining jobs in the U.S. Jobs which we both agree
would be generally seen as productive.

Fred says:

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

John says:

You're way ahead of us. Again, we are talking about Marx and working
with his assumptions in dealing with the issues. Once we establish
the validity of his concept of the rate of profit, we can turn to its
application. As I suggested above, the need for further tools to
examine the accumulation process is suggested by many 20th Century
Marxists outside the mainstream. Again, as an example, I'd use Grossmann
whose "collapse" would occur with or without a falling rate of profit.
For him, the demand for constant capital in one period outstrips the
that produced in the prior period.

We should also note that Marx himself, after he wrote his "Law of the
Tendency of the Rate of Profit to Fall", suggested that the "material
basis" for the periodicity of crisis was the turnover of fixed capital.

One more point, the historic rate of profit you mention here would be
one computed using money whose value is not constant but falling. The
rate of profit in question is one computed with the assumption that
the value of maoney is constant.