May 19, 2013
Michael Heinrich is an exponent of what is known as the ‘New German Reading of Marx’, which interprets the theory of value that Marx presents in Capital as a socially specific theory of ‘impersonal social domination’. He is a collaborator on the MEGA edition of Marx and Engel’s complete works and has published several philological studies of Capital. He has also authored a work on Marx’s theory of value, The Science of Value, which is forthcoming in the Historical Materialism book series. And recently he has published An Introduction to all Three Volumes of Capital as his first full-length work to appear in English.
I am not going to do a critique of Heinrich’s views on the theory of value, as this has been done by Guglielmo Carchedi in his book, Behind the Crisis (see chapter 2). But I am moved to respond to a recent article of Heinrich’s in the American Monthly Review, entitled Crisis theory, the law of the tendency of the rate of profit to fall and Marx’s studies in the 1870s (monthlyreview.org-Crisis_Theory_the_Law_of_the_Tendency_of_the_Profit_Rate_to_Fall_and_Marxs_Studies_in_the_1870s__Mont).
In this article, Heinrich makes the following points: 1) Marx’s law is inconsistent because its categories are indeterminate; 2) it is empirically unproven and even unjustifiable on any measure of verification; 3) Engels badly edited Marx’s works to distort his view on the law in Capital Vol 3; 4) Marx himself in his later works of the 1870s began to have doubts about the law as the cause of crises and started to abandon it in favour of some theory that took into account credit, interest rates and the problem of realisation (similar to Keynesian theory); 5) Marx died before he could present these revisions of his crisis theory, so there is no coherent Marxist theory of crisis.
I am working with G Carchedi on a more thorough response to Heinrich’s arguments, so I shall deal with just some of these points in this post – and more briefly. First is Heinrich’s claim that Marx’s law of the tendency of the rate of profit to fall (LTRPF) is illogical and inconsistent. In other words, the conclusions that Marx draws do not lead logically from his assumptions. The LTPRF, the ‘law as such’, says that the rate of profit will tend to fall over time because the organic composition of capital (the ratio of the value of constant capital to variable capital) will tend to rise faster than the rate of surplus value (the ratio of surplus value to variable capital). This flows from the basic equation of profitability, s/c+v, where c/v rises faster than s/v because Marx’s value theory argues that only labour power creates value. So if the value of constant capital (machinery, plant, raw materials etc) rises faster than the value of variable capital (the value of labour power and the only creator of value), then the rate of profit will fall, other things being equal.
But other things are not always equal. Marx allowed for counteracting factors to offset the impact of a rising organic composition of capital on the rate of profit. First, a rise in the rate of exploitation could overcome the effect on the rate of profit of a rising organic composition of capital; and second, the ‘cheapening of the elements of constant capital’ (due, for instance, to technical advances lowering the costs of reproducing labour power) would tend to retard the growth of the organic composition itself.
Now Heinrich says that “Marx assumes that the fall in the rate of profit derived as a law in the long-term outweighs all counteracting factors. Yet Marx does not offer a reason for this.” And Heinrich says the ‘law as such’ is unsubstantiated because“contrary to a widespread notion, the increase in the rate of surplus value as a result of the increase in the productivity (of labour) is not one of the counteracting factors but rather one of the conditions under which the law as such is supposed to be derived, the increase in c occurring precisely in the course of the production of relative surplus value that leads to an increasing rate of surplus value”. The rate of surplus value could rise faster than the organic composition of capital and so the law as such does not prove that the rate of profit will tend to fall over time. The law is thus ‘indeterminate’.
Heinrich reaches this conclusion because he does not accept the method by which Marx focuses on the relation between the organic composition and the average rate of profit (ARP) to show that, if the former rises, the latter falls. In the ‘law as such’, Marx holds the rate of surplus value constant. But this is a common scientific procedure. First, we must establish the inverse relation between the capital composition and the ARP. Then we can let the rate of exploitation fluctuate. So the rate of exploitation becomes one of the counter-tendencies.
And, contrary to Heinrich’s claim, Marx does explain why the rate of surplus value cannot permanently outstrip the rise in the organic composition of capital. If two workers can be substituted for 24 workers through mechanisation, total surplus value will eventually be less than the capital advanced, despite the sharp rise in the rate of surplus value from the increase in productivity of the two workers compared the 24 workers. That’s because “the same influences which raise the rate of surplus value (even a lengthening of the working time is the result of a large-scale industry) tend to decrease the labour power employed by a certain capital, it follows that they also tend reduce the rate of profit”. (Marx).
Heinrich rejects this argument:“we cannot exclude the possibility that the capital used to employ the two workers is smaller than that required to employ twenty-four” Heinrich says the numerator (surplus value) in the rate of profit formula may well fall because the variable capital that creates value has shrunk, but so will variable capital in the denominator. Constant capital may have increased due to mechanisation, but the rate of profit only falls if the rise in constant capital is greater than the fall in variable capital in the denominator It depends on “Whichever of the two quantities changes more rapidly – and we do not know that.”
The first thing to say here is that if constant capital rises to at least match the fall in variable capital, then the denominator will not fall. And this will usually be the case in the process of capital accumulation. That’s because increasing the rate of surplus value can only be achieved by methods that also increase the value of the constant capital employed in relation to the number of workers engaged in the production process. So the organic composition of capital will increase. And it will increase faster than the rate of surplus value, the larger that rate of surplus value becomes. So even if the rate of surplus value rises faster than constant capital to begin with, eventually it will increase more slowly as variable capital shrinks as a share of new value. If the capital composition rises, while the variable capital falls by the same amount as the constant capital rises, then the rate of surplus value must rise much more percentage-wise for the rate of profit to remain the same (or to rise). Whether the capital composition grows at an increasing or at a decreasing rate, the rate of surplus value must grow at an increasing rate to keep the rate of profit from falling. This is the reason why, at a certain point, the counter-tendency (the rise in the rate of surplus value) cannot overcome the tendency (the increase in the rate of growth of the capital composition).
To repeat: a rising organic composition of capital will eventually produce a downward move in the rate of profit even when the rate of surplus value is rising faster to begin with. The rate of surplus value rises over time if wages do not rise as fast as the productivity of labour. But as the rate of surplus value rises, it rises at an ever slower rate as it approaches its limit which is the full appropriation of the product of living labour (wages plus surplus value). So no matter how fast the rate of surplus value rises, the rate of profit will eventually fall at a rate asymptotic to the fall in the ratio of the product of living labour (wages plus surplus value) to total constant capital (fixed and circulating). And that is because, as the organic composition of capital rises over time, it reduces the relative amount of living labour produced. So even if surplus value moves towards one and wages move towards zero, the rate of profit will eventually fall.
Now this is not some mathematical trick, although the argument can be spelled out more elegantly using maths. Maths is only as good as the assumptions that you begin with. Maths can take you logically to any conclusions or outcomes that flow from the assumptions. And Marx’s law has two key assumptions: 1) that only labour (or labour power) can create value and 2) as a general rule the value of mechanisation will outstrip growth in the cost of the labour force i.e. the organic composition will rise. Marx draws these assumptions from the reality of the capitalist process of accumulation. So, as long as we assume that the basic trend in capitalist accumulation is for the organic composition of capital to rise, then a rising rate of surplus value cannot permanently counteract any tendency for the rate of profit to fall. If Marx’s two assumptions about the mode of capitalist production are wrong, then Marx’s law is wrong. But starting from these two assumptions, Marx’s law is determinate.
As for Heinrich’s argument that Marx’s law cannot be empirically proved or refuted, this is bizarre. We can measure the rate of profit in capitalist economy using Marxist categories and test the law against its components. I and a host of other scholars have done just that for various national economies and even for the world capitalist economy (see lots of my posts). And that includes Marx himself. He looked for empirical verification for his law. Marx’s law, just like any other scientific law, can be refuted and empirical analysis is necessary to confirm or refute it. Does the rate of profit fall over a long period as the organic composition rises? Does the rate of profit rise when the organic composition falls or the rate of surplus value rises more than the organic composition increases? Does the rate of profit recover if there is sharp fall in the organic composition of capital through the destruction of value of capital? The answers to each of these empirical questions is yes. The statistical correlations and measures of significance between Marx’s variables (organic composition and the rate of exploitation etc) and the outcome (the rate of profit) have been shown to be high and significant.
Here are some examples for the UK and the US economies that I analysed quickly for this post. Between 1963 and 1975, the UK rate of profit fell 28%, while the organic composition of capital rose 20% and the rate of surplus value fell 19%. Between 1975 (when the UK rate of profit troughed) and 1996, the UK rate of profit rose 50%, while the organic composition of capital rose 17%. The rate of profit rose because the rate of surplus value rose 66%, faster than the rise in the organic composition of capital. Finally, from 1996 to 2008, the rate of profit fell 11%, as the organic composition of capital rose 16% but the rate of surplus value was flat. All these three phases are compatible with Marx’s LTRPF. Indeed, over the whole period, 1963 to 2008, the organic composition of capital rose 63%, while the rate of surplus value rose 33%, so the rate of profit fell on a secular trend.
In the case of the US economy, the rate of profit fell 24% from 1963 to a trough in 1982, because the organic composition of capital rose 16% and the rate of surplus value fell 16%. Then the rate of profit rose 15% to a peak in 1997, because although the organic composition of capital rose 9%, it was outstripped by a rise in the rate of surplus value of 22%. From 1997 to 2008, the rate of profit fell 12%, because the organic composition of capital rose 22%, outstripping the rate of surplus value, up only 2%. Again, all three phases fit Marx’s law, when the organic composition of capital rose faster than the rate of surplus value, the rate of profit fell and vice versa. Over the 45 years to 2008, the US rate of profit fell secularly by 21% because the organic composition of capital rose 51% while the rate of surplus value rose just 5%. The rate of profit was negatively correlated with the organic composition at -62%, while there was no significant correlation with the rise in the rate of surplus value.
Second, there are empirical studies of Marx’s law that show that it is a reasonable predictor of future events, including the recent Great Recession of 2008-9. These studies show that when the rate of profit starts to fall, a crisis or economic slump will occur some time thereafter and, even more specifically, the recession begins when the mass of profit falls as a result of the falling rate of profit. This is predictive value is more than we can say about any studies that aim to justify empirically alternative explanations of crises based on the ‘problem of realisation’ (consumption or investment) or on high interest-rates or lack of credit, Keynesian-style.
Again, I looked at the UK economy. Since 1963 there have been four major economic recessions of slumps: 1974-5, 1980-2, 1990-2 and 2008-9. In each recession, the rate of profit peaked and started to decline at least one year before the slump began. And each recession was accompanied by (or coincided with) a fall in the mass of profit in successive years. Similarly, if we look at the US economy, there were five recessions or slumps after 1963: 1974-5, 1980-2, 1990-2, 2001 and 2008-9. In each case, the rate of profit peaked at least one year before, but on most occasions up to three years before. And on each occasion (with the exception of the very mild 2001 recession), a fall in the mass of profit coincided with the slump, with the biggest fall (over 7%) in the Great Recession. So there is a body of evidence to support the view that Marx’s law does operate in a capitalist economy and that it is the key (underlying) factor in booms and busts.
We can derive a coherent theory of crisis from Marx’s works based on his LTRPF, his views on credit and banking (fictitious capital) and on world markets and imperialism. Of course, there is plenty of work to be done in developing Marx’s theory of crisis in relation to modern developments and, as Marx did, we are learning more each day. But Marx’s LTRPF remains the most robust explanation of capitalist crises and something way superior to alternative Keynesian and other mainstream economic explanations, which signally failed to explain the Great Recession.
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