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«Behind and beyond the crisis»: Guglielmo Carchedi

The 2007 financial crisis has reignited the discussion on crises, their origin and possible remedies. At present the most influential thesis on the left sees the crisis as caused by underconsumption and recommends Keynesian policies as a solution. This paper argues that we should understand the crisis from the perspective of Karl Marx‟s “law of the tendential fall in the average rate of profit” (ARP), for short “the law”. Its characteristic feature is that technological progress decreases the rate of profit, rather than increasing it as is usually assumed. Let us see why.

The law in a nutshell

The law‟s essential features are as follows:

(1) Capitalists compete against each other by introducing new means of production incorporating new technologies. This is not the only form of competition but it is by far the most important one for understanding the dynamics of the crisis.

(2) The new means of production increase the efficiency (output of use values per unit of capital invested) of the technological leaders in the productive sectors.

(3) At the same time, the new technologies are designed to replace labourers with means of production. Therefore the technological leaders ‟proportion of capital invested in means of production relative to that in labour power, the organic composition of capital, increases. Unemployment follows.

(4) Since only labour creates value, less labour power employed means less (surplus) value created by hightechnology capitals. All other things being equal, the ARP falls: „„The rate of profit does not fall because labour becomes less productive, but because it becomes more productive”. Notice that it is the rate of profit and not the mass of profits that falls. The latter can increase when the former falls. Conventional economics cannot see that it is the very dynamics of the system, ie technological competition, that causes the fall in the ARP and thus crises, because implicitly or explicitly it reasons only in physical or use value terms.

(5) It follows that a greater quantity of use values incorporates a smaller quantity of (surplus) value, ie that falling profit rates and rising outputs are two sides of the same coin.

(6) The technological leaders perceive increased productivity as the way to realise higher profit rates. They do not know that their workers produce less surplus value. However, rises in the rate of profit of the technological leaders come about because they appropriate surplus value from two sources. First, from other sectors, if the new products attract purchasing power from other sectors. Initially those suffering as a result will be the weaker capitals in those other sectors. Second, from the technological laggards in their own sector because the more productive capitals can sell at the same unit price a greater output per unit of capital invested. So the technological leaders‟ rate of profit rises, while that of the laggards and the ARP falls. Eventually, capitalists who cannot innovate go bankrupt.

(7) Like all laws of development, this one is tendential. The same factor, technological innovation, determines both the tendency (the increase in the organic composition and the resulting fall in the ARP) and the countertendencies. Several countertendencies can and do coexist.

(8) The tendency is such because it is kept back and delayed by the countertendencies. But it eventually emerges when the countertendencies exhaust their counteracting power. Then the crisis emerges. There is a sudden jump in bankruptcies and unemployment whose real scope had not been allowed to manifest itself (fully) by the countertendencies.

(9) It follows that the tendency continues to operate even if temporarily reversed by the countertendencies. This becomes empirically visible when the ARP is computed in the absence of the countertendencies.

(10) The crisis creates the conditions for the recovery. The recovery emerges when these conditions have become sufficiently strong. Periods of growth alternate with period of crises.

(11) Since technological competition is the dynamic of capitalism, the economy tends necessarily towards an increase in the organic composition of capital, a decrease in the ARP, and crises. But the concrete shape of the ARP is the result of the interplay of the tendency and its countertendencies.

Empirical evidence

Initially, the focus will be on the profits realised, rather than those produced, in the productive sectors. These are the profits that can be capitalised as further productive capital, and this capitalisation (or lack of it) is the basis for an acceleration or deceleration of the economy and thus of the cycle. Moreover, one of the theses of this work is that the cause of the financial crises is to be found in the decreasing profitability of the productive sectors. The computation of the ARP for the whole economy would not allow the empirical substantiation of this thesis. Figure 1 focuses on the productive sectors (see the Appendix). This chart shows both a secular (from 1948 to 2009) falling trend in the ARP and a secular rising trend in the organic composition of capital (c/v), in conformity with the law.

The ARP peaks in 1950 (22 percent), reaches a trough in 1986 (3 percent), rises to 14 percent in 2006 and drops vertically to 5 percent in 2009. The organic composition rises from 0.98 in 1948 to 2.85 in 2009.

Behind and beyond the crisis

International Socialism
Issue: 132
Posted: 11 October 11

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