Falling rate of profit

Furthermore, a major shortcoming of the supply-side Marxists is their failure to consider the importance of money. In Brody (1974 9), for example Theories of money... are not discussed, although a parallel mathematical approach to them is much needed and indeed within reach (see also Roemer 1978). The problem is that money is essentially neutral in general equilibrium models, a characteristic more appropriate to a barter economy than to capitalism. And in the Grossmann falling rate of profit thesis, money is stripped from the reproduction schema despite its central importance to Capital, volume 2. 

A subtext of this analysis is an attempt to address some of the limitations of the reproduction schema. Two main limitations of the schema, as modelled in Chapters 2-6, are the absence of free competition, based on the mobility of capital, and the lack of any room for technical progress. Chapter 7 examines the Grossmann model of how technical progress drives the tendency of the falling rate of profit. And in Chapter 8, free competition is considered by turning to Marx s famous transformation problem a problem that has dominated discussions in Marxian economics. 

In addition to questioning the relationship of the Grossmann breakdown thesis to Marx s reproduction schema, consideration can also be given to its relevance to Marx s exposition of the falling rate of profit tendency in... 

Here we see some of the words quoted by Grossmann in italics, but put in the context of the rest of the sentence. The overaccumulation scenario that he finds in Marx is associated with the particular case of an increase in wages, a causal factor that has no mention in Grossmann s interpretation. Indeed, since the falling rate of profit is expounded by Marx in the context of an increasing rate of surplus value, it is difficult to place this overaccumulation scenario at the centre of his theory. 

A different reading of Capital, volume 3, can be suggested, in which questions of realization are the main focus of analysis (see Rosenthal 1999). Thus far, in applying the Kalecki principle to Marx s circulation of money, we have assumed that monetary outlays take place, funding the purchase of all capital and consumption requirements. However, as capital expands, the volume of profits accumulates to such an extent that stringent demands are placed upon the economic system in terms of the amount of money that has to be cast into circulation for realization of these profits. Marx places realization problems at the centre of his analysis of the falling rate of profit. 

Shoul s main motivation is to demonstrate the power of Marx s tendency of the falling rate of profit, which in her view operates even when Say s Law is postulated, even when questions of demand are assumed away (see Shoul 2000 28). Further consideration of this issue is provided in Chapter 7, where it is argued that realization problems are in fact central to Marx s falling rate of profit thesis. 

Cullenberg, S. (1998) Decentring the Marxian debate over the falling rate of profit a new approach , in R. Bellofiore (ed.) Marxian Economics A Reappraisal Essays on Volume III of Capital, London Macmillan, pp. 163-76. 

Let me finally consider some cases of Marx using the term "contradiction" in senses that differ from that discussed here. The most central is the "contradiction between the productive forces and the relations of production", discussed at some length in 5.1.3. Both in the Grundrisse and in Capital III Marx suggests that this contradiction is the same as that underlying the falling rate of profit, but 1 cannot see how this can be defended. The contradiction between the productive forces and the relations of production rests on a contrast between the actual rate of development of the forces and the counterfactual rate that would have obtained under a difierent set of relations, whereas the fall in the rate of profit comes about because of the difference between the intended and the actual result of capitalist behaviour. The two "contradictions" might coexist and be causally related, but they are conceptually distinct. 1 return to this matter in 3.4.2. 

In words, the rate of profit equals the rate of exploitation divided by the organic composition of capital increased by 1. The two central theories of Marxist economics may both be discussed in terms of this relationship. The labour theory of value deals with the problems that arise when the fundamental equation is disaggregated, so that we compare the rates of profit of different sectors of the economy. The theory of the falling rate of profit looks at the dynamic aspect of the equation by studying the trends in the rate of exploitation and the organic composition of capital, and their implication for the rate of profit. 

No problem is more central to Marxism than the mechanism whereby capitalism destroys itself. At the most general level, this comes about by the "contradiction between the productive forces and the relations of production" (5.1.3)- Yet in his economic writings Marx did not devote much attention to this idea. Or rather, he wrongly thought that some of his more specific views on capitalist crises instantiated that general theory. Of these views, the best-known and the most articulate is the theory of the falling rate of profit (3.4.2). More diffuse are a variety of other theories that may be loosely collected together as "theories of insufficient demand" (3.4.3). Before I examine these theories in detail, 1 state some of the features that a Marxist theory of crises should exhibit. 

Let me briefly indicate how the theories discussed here fare in these respects. As further argued in the next chapter, the contradiction between productive forces and relations of production fails to provide a robust motivation for revolutionary action. A less-than-optimal rate of technical change will hardly incite to revolution if that rate is high and even increasing. Demand crises of various kinds (3-4-3) have proved eminently amenable to political reforms that do not touch the foundations of the capitalist mode of production. The theory of the falling rate of profit, being linked to Irreversible technical change, is more satisfactory in this respect. It fails, on the other hand, to provide micro-foundations, since it takes "the tendency of the rate of profit to fall" as an immanent property of the capitalist mode of production. 

In the Grundrisse we find Marx arguing or suggesting that the falling rate of profit was an instance of the contradiction between the productive forces and the relations of production. In particular we find this assertion... 

In 2.3,3 I argued that Marx attempted to demonstrate a connection between three major flaws of capitalism exploitation, alienation and the social contradiction" involved in the falling rate of profit. In the passage just quoted he also tries to link the last of these with the more general thesis of historical materialism, that all modes of production come to an end because of a contradiction between the productive forces and the relations of production. Clearly, the forging of such a link would be highly desirable. In its absence, historical materialism and the economic theory of capitalism would remain separate bodies of analysis, each of them offering an explanation of the downfall of capitalism unrelated to that proposed by the other. ... 

These observations, while true and potentially important, do not lead us beyond the "possibility of crises". Once again, there is no hint at a dynamic mechanism by which the crisis, once set in motion, could become self-reinforcing. In this crucial respect the theory of the falling rate of profit, whatever its other flaws, is more satisfactory. 

Parijs, P. van. The falling-rate-of-profit theory of crisis a rational reconstruction by way of obituary. Reviewed Radical Potitiad Economics 12 (1980), i-i6. 

An application of this distinction to Marx s theory of the falling rate of profit is In Elster(i985), pp. 123-24. 

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