The falling rate of profit

hello from a wintry day in Glasgow I'm going to give you another talk today this time about the falling rate of profit as understood by Marxist economics in this talk I intend to cover what the rate of profit is what controls the rate of profit what the time dynamics of the rate of profit are I'll look at the evidence which supports the theory and I'll talk a bit about what the end point of the process of the evolution of the rate of profit is so first what is the rate of profit if we take an individual company into account its rate of profit is given as a percent so you might say it's ten percent a year this means that the annual profits of the company are equal to ten percent of the capital that it employs and when you get a rate of profit it's always given as a percent per unit time normally a percent per annum now the profit rate is related to the growth rate of capital in fact you can look at the profit rate and see it actually has the growth rate of capital suppose a capitalist earns 10% on a capital and reinvest it all as profit then clearly in the first year the capital would grow by 10% over time she would have the following growth in the first year she's got two hundred thousand pounds twenty thousand pound profit reinvested to give two hundred and twenty thousand pounds this time at 10% profit she gets twenty two thousand pounds reinvest sits to get two hundred and forty two thousand pounds of capital and this time gets twenty four thousand two hundred pounds of profit now if the rate of profit remains at ten percent it's clear that the total profit is going to get bigger each year so what are the implications of a constant profit rate if the rate of profit doesn't change and all the profit is reinvested then the mass of capital must grow exponentially and from that the sum of annual profit must also grow exponentially question is how can this an exponential growth be possible can we reconcile such an exponential growth in profit with the Labour theory of value the Labour theory of value states that the added value in industry will be proportional to the labor that it uses or at least tend to be proportional to the labor that its uses and we've produced empirical evidence for that in earlier lectures but our empirical evidence applies to value added in a single year now when we're considering the evolution of the rate of profit with considering pounds of profit in different years and the value of money might change from year to year if the value of money fell one pound of profit might represent less value in 10 years time than one pound of profit does today in order to compensate or abstract from the effects of inflation I'm going to be assuming a constant value of money now if there is inflation it can appear turn on there weary capitalists that they are making profit when all they're doing is holding on to an asset whilst its price inflates if all prices are inflating at the same rate they are not gained by that what does the value of money mean the only coherent meaning you can give for the value of one pound in widely different times is the amount of embodied labour that one pound commands this was the conclusion that the classical economists arrived at you can't really compare the purchasing pound of a pound now with one pound a hundred years ago in 1918 since the goods that you can buy today simply did not exist in 1918 so you can't compare the set of goods that you can buy today and say how much would I have required in pounds to buy them in 1918 because they simply were no iPhones Big Macs of Volkswagen Polar's on the market at that time the only thing that's unchanged since 1918 is human beings and human time and you can ask how much labor one pound represents so we'll go back to the previous question how can an expense exponential growth in profit be possible can we reconcile this with the Labour theory of value if value is created by labor it's clear that that can only been exponential growth in profit if there is also an exponential growth in the workforce from this we get Marx's aphorism that accumulation of capital is growth of the proletariat but what supply what happens if capital accumulates and there is no growth in the labor force suppose the labor force is fixed then obviously the amount of capital per worker has to go up suppose an average worker produces thirty thousand a year which is so plausible for Britain and twenty thousand of this is wage and ten thousand is profit and suppose the average amount of capital per worker is 100 thousand pounds so the rate of profit would be ten percent if the employers reinvest 10,000 pounds per worker it's clear that after 10 years the amount of capital per worker would have risen to 200 thousand pounds and the rate of profit would now be ten thousand divided by two hundred thousand which is five percent so the rate of profit will be half what it was to start out with now there may be things which will alter this the share of income going as wages might decline there might be changes in the rate of accumulation they might not accumulate all of it the population could in fact grow there could be a growth in the part of the population that is employed relative to the part that is for example in an underdeveloped country working on the land as self-employed farmers an addition there's technology changing all the time so all of these may affect the rate of profit suppose the wage share falls by half so after ten years wages have fallen to only ten thousand pounds per annum leaving twenty thousand pounds per profit this would take the rate of profit back up to ten percent now suppose that the employers reinvest this for ten more years then reinvest 20 thousand a year per worker clearly after another ten years the capital stock will have grown to forty thousand four hundred thousand per worker at this point as marx put it even if workers could live on air and were paid nothing the rate of profit must have fallen because if they lived on air all the value they created the thirty thousand pound would belong to the employer but this is now being divided by four hundred thousand pounds of capital and the rate of profit has formed to 7.5% and basically this is why the rate of profit eventually Falls if capital goes on accumulating relative to the workforce that it has the rate of profit has to fall another factor that might happen though is that capitalists decide to accumulate less I have assumed up to now that they reinvest all their profit but what happens if they decide to spend all their profits and luxury jets big country houses and lots of bling well under those circumstances there's no accumulation the capital stock doesn't rise and then the rate of profit itself doesn't fall on the other hand if they spent half their profits on bling then the rate of profit will fall only half at as fast as it would if they accumulated the lot the next thing that may alter is the rate of population growth suppose the initial rate of profit is ten percent of which a quarter is being accumulated that means the capital stock will be growing at 2.5% a year now suppose the working population also grows at 2.5% a year then the rate of profit wouldn't fall because the ratio of capital to labor remains the same and assuming that the division of the the social product during labor and capital doesn't change the rate of profit will be stable if the working population actually grows faster or a larger share of the working population our employees rather than self-employed then the rate of profit can actually rise and we see this in practice in countries like Egypt the next factor which may change things is technological advance suppose the productivity of labour rises by two naff percent a year which is plausible for breath in the United States that means that in real terms in terms of the labor that they require things are getting cheaper by two and a half percent a year and when we say things are getting cheaper this includes the capital stock which for correct accounting purposes has to be valued at its current cost and as to say the cost it would K it would obtain sold today or bought today so the effect of a two and a half percent rate of technical change is actually to reduce the value of the capital stock by two and a half cent a year and that's about it the capital stock will shrink by in the absence of new accumulation Marx called this devaluation process of capital as a result of technical change moral depreciation which he distinguished from the physical depreciation of physical wear and tear of capital stock in the form of machinery now we can combine all these factors together to get a simple formula which will give us the final rate of profit which I'm showing as P prime P prime is going to equal to G plus T plus D over a now that's only four variables G is the growth of the labor supply T is the rate of technical progress and D is the physical depreciation rate of capital stock and a is the share of profit that is accumulated both T and D are tending to reduce the stock of capital in value terms D is the physical wear-and-tear T is the effect of Technology in devaluing the ship their capital stock this final rate of profit P Prime is what you call in dynamics the attractor of the rate of profit it's the rate towards which the real rate of profit will tend over time doesn't mean that it's the rate would applies any one year but it means that it moves towards that if the Marxist theory of the rate of profit is a scientific theory it has to be tested we've logically derived a formula from the Labour theory of value but does this formula correctly predict the dynamics of the rate of profit in real economies how do you test it well we use the formula to compute the attractor of the rate of profit in a given country we then look at the real rate of profit in that country if the Labour theory of value is right then the real rate year-on-year will move towards the attractor and the attractor will act as a leading indicator of the rate of profit I'm going to show a selection of diagrams that have appeared in articles that I've published with David Zachariah in which we present test cases for a number of economies showing that the Labour theory of value correctly predicts the rate of profit then the nicest example is Japan the solid line here called jpn equilibrium filtered is the attractor for the rate of profit with short-term fluctuations removed the dashed line is the real rate of profit in Japan note that the formula predicts the real rate about four years hence if we look at the rig at the real rate there and look back four years or three years sometimes three or four years you see what they the predictor was saying it was going to be so it almost exactly predicts the evolution of the real rate of profit some very tiny squiggles are make mixed missed out but the overall shape is an almost perfect match two or three years ahead so this is a very good validation of the Marxist theory of the rate of profit Britain has a more complicated shape in this case the the black line is the actual rate of profit and the blue line is the predictor derived from our formula again the theory correctly predicts how the real rate will move starting out the real rate is falling towards what the predictor says it what the attractor is attracting it to then the attractor starts moving up again and the real rate follows and moves up again the attractor starts falling shortly afterwards the real rate starts falling note this has got a very different shape from Japan in fact Britain is typical of most European countries they all have this shape over time there are some factors which are different between Britain and Japan the most important difference between Britain Japan is this those are big slow down the accumulation from the time that Thatcher took in at 69 here 79 there and there has been a fast growth of the workforce in the UK and both of these tend to depress the rate of profit Japan of course is famous for having a stagnant labor force Japanese severely restrict immigration and they have a declining birthrate and a rising death rate these combined to restrict the the Japanese population such rapid growth of the population as did occur in the 1950s and 60s was due to migration from the countryside into the cities and that is long since over this need for a rapid rate of population growth to hold up the rate of profit is obviously the main reason why the UK government is so keen on expanding the labour force now the Marxist theory actually allows you to precisely identify how much each factor contributes to changes in the rate of profit I'm giving France as an example here in this case in black we have the actual rate of profit I have a predictor for the rate of profit drawn in blue which is the predictor using the actual growth of the workforce and the actual rate of technical change and again we see this predicts what really happens just as it did in Britain and the shape is very similar though the recovery in profits is not nearly so big as it was in Britain the green one shows the predicted rate of profit if there had been no labor force growth so we can see by how much the growth of the labor force in France helped raise the let the the rate of profit and it was not that much is maybe if we look at the effect there it's maybe two percent out of a twenty four percent profit rate the read rate is what the profit rate the predicted profit rate would have been had there been no technical advance in Japan no increase in the productivity of labour now we can see this is markedly lower than the actual rate very markedly lower but it still has the same shape a decline followed by a rise so this rise here is the rise associated with neoliberalism and the declining rate of accumulation which hit all the European countries as a result of that where the Boise slowed down their rate of accumulation in favour of luxury consumption what are the lessons we can draw from this again Marxist economics comes out trumps it explains what's happening and makes testable future predictions it says that developed capitalism has a low birthrate and this implies stagnant population rates as in Japan unless either there's a lot of emigration or technology speeds up a lot compared to what it is now or accumulation comes to a halt and the capitalist class spend their profits on luxuries at the moment spending their profits on luxuries is their preferred way of raising the rate of profit

Channel: Paul Cockshott

Views: 7,847

Rating: 4.9390864 out of 5

Keywords: profit, marxism, labour, population, Rate of profit

Id: ypJ_tcnfaWA

Length: 20min 27sec (1227 seconds)

Published: Thu Mar 01 2018