The profits crisis debate

IT WAS with regret that I read Peter Taaffe’s reply to John Smithee on Marx’s theory of the law of the tendency of the rate of profit to fall (LTRPTF). John does not give a rounded out explanation of the law but he is certainly on the right track.

Militant, forerunner of the Socialist Party, had a debate on just this issue in 1980. At that stage Militant upheld the centrality of Marx’s law in its reply to the economist, the late Andrew Glyn, who argued that "the LTRPTF as formulated by Marx is theoretically incorrect". The reply concluded that Glyn’s view of the LTRPTF was "both scientifically incorrect and potentially politically dangerous".

Between 1980 and today the LTRPTF appears to have become less important for us or even redundant. It would be interesting to know how this has come about?

Peter quotes Marx to support the idea that capitalists aren’t interested in the rate but the ‘mass’ of profit. Marx noted that when there was an increase in the extraction of surplus value from the working class that the mass of profit ‘must’ increase but that the rate of profit would fall (Capital Vol III p219). However it is just untrue that capitalists are only interested in the mass of profit. That may be true during a boom, but certainly not in a slump! See Marx Capital Vol III p253.

Marx was very clear about the importance of the rate of profit for capitalism and in relation to the accumulation of capital he wrote: "The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces". (Capital Vol III p249) And: "The rate of profit is the motive power of capitalist production". (Capital Vol III p259)

Therefore capitalist development, in all its facets, including accumulation and hence investment, is impossible without a falling rate of profit!

The great recession cannot be understood unless Marx’s theory of crisis, of which the LTRPTF is its most important part, is applied.

The point that Peter makes about the growth in the rate and mass of profit increasing during this crisis is questionable. Prior to the great recession there was an absolute drop in the rate of profit and in the mass of profit in the USA in 2006-07 of approximately from 20% to 12% for mass and for rate, using 1980 as a baseline of 100%, from 150% to 90%!

The fall in the rate of profit was the underlying, but not the proximate, cause of the capitalist crisis just as Marx’s theory predicts. Profits have recovered somewhat but to nothing like previous ‘boom’ levels and the economic recovery is anaemic.

There are many points made by Peter which I believe are controversial and require discussion. Perhaps a good start would be to come clean on our attitude towards the LTRPTF?

Bruce Wallace, Scotland

Peter Taaffe responds:

BRUCE IMPLIES that in my short reply to John Smithee (Socialism Today No.157, April 2012) I have, in effect, abandoned the LTRPTF. This is not so, as I will show. But a monocausal explanation for the crisis of capitalism is wrong. Marx explained that the difficulty was not to understand the reasons for the tendency of the rate of profit to fall but for the comparative slowness of its fall. This is where the counteracting factors come in, which can temporarily arrest the decline and even increase the rate of profit. Any number of factors can be the trigger for a specific crisis.

It was this question that I highlighted both in my article and reply to John Smithee. Yes, the LTRPTF forms the background, it is, as Bruce puts it, the underlying but not the proximate cause of the crisis. It is not possible here to analyse fully how this works out in the current crisis. But a few remarks are necessary.

The roots of the present ‘Great Recession’ undoubtedly lie in the crisis of the 1970s, which the subsequent ‘boom’ never completely overcame. But to argue, as some Marxist economists have done, that nothing has fundamentally changed, that neo-liberalism did not have a significant effect in overcoming the crisis of profitability that existed then, I think is wrong. Also, the turn to investment in the financial sector – an extended and extreme form of credit – arose from the same causes. This created the bubbles which have now burst.

The basis upon which such economists draw their evidence is new, seems to be incomplete and one-sided, and pertains to one part of the world economy, albeit the most important, the US. The assertion they make that profits dropped in 2006-07 has yet to be proved. However, even if this was correct, it does not automatically cancel out what I wrote about the colossal piling up in the banks and big business of what is now $7.5 trillion of cash reserves – half the GDP of the US. It seems inconceivable that this would have been possible without a huge rise in the mass of profits and possibly their rate as well.

And what are political implications of this for capitalism? With the colossal mountains of liquidity in the vaults of the banks and big business our demand for a capital levy is very apposite, in view of the zombie-like character of capitalism at the present time. We cannot just repeat what Marx said and leave it at that; we base ourselves on his method but we have to analyse each situation – which will contain new features – as it develops.

Bruce argues we have abandoned the theory of the LTRPTF. But the reason why we do not mention the LTRPTF as regularly as he would like – although it has featured in articles over the years – is not because we have abandoned Marxist ideas on this issue. It is because it is a given, but we have had to take up new features, which always arise under capitalism. I made it clear in my reply that I did not agree with those who argue that this law formulated by Marx is now redundant. Moreover, in our book Marxism in Today’s World, I state: "We think that Marx was correct about the tendency of the rate of profit to decline. Historically, there has been a colossal growth of constant capital, dead labour if you like, to use Marx’s terminology, compared to living labour, variable capital. Consequently, capital, said Marx, has a tendency to become less and less ‘organic’, with a tendency to create relatively smaller and smaller annual increments of surplus value. However, the capitalists express that as the technical growth of capitalism but dead labour predominates over living labour. It is generally accepted even by pre-Marxist economists as an empirical fact that, as capitalism grew, the rate of profit declined. Marx described it as ‘tendency’ and analysed this in detail in part three of the third volume of Capital". (p24) There is no difference in our approach to this question now and the position of Militant in the 1980s.

However, the debate on this question in the ranks of Militant then generated more heat than light. Some took up a ‘fundamentalist’ position without taking into account in a serious way the counter-arguments and seeking to answer them. Mere denunciation was sufficient. No attempt was made to take account of any changes that have taken place in the structure of capitalism, new features, facts, figures, etc. Moreover, those who were most strident – the late Ted Grant in particular – in crudely upholding ‘theoretically’ the LTRPTF, when it came to a real economic crisis in 1987 argued that we were on the verge of another 1929-type Wall Street crash. Lynn Walsh and I – and others – opposed them, drawing attention to the huge liquidity of Germany and Japan, which was used to prevent another 1929 – and we were proved right.

The analysis we have given on the current crisis illustrates the specific character at this stage of the catastrophic incapacity of capitalism to further develop the productive forces; they refuse to invest, because there are insufficient profitable outlets. And, moreover, this can go on for some time. As we pointed out this is even an expression, in a sense, "of a ‘crisis of ‘profitability’. Not because profits have dropped or there is a ‘tendency’ for the rate of profit to decline. Both the rate and the absolute amount of profit have increased, it seems, even during this terrible crisis". (Socialism Today, April 2012)

There is a debate amongst academic Marxist economists on the current application of the theory of the LTRPTF. Some argue that the rate of profit has dropped continually since 1982. Andrew Kliman, for example, even says that the neo-liberal counter-revolution – with its massive attack on the working class – has had little effect in arresting the drop in profits. The rate of profit did increase during the 1990s but, as a harbinger of the looming crisis, may have fallen back recently. These are questions we have to look at.

However, it is not sufficient to merely quote what Marx said on this question, but seek to locate an analysis in the real developments of capitalism without in any way repudiating the basically correct position of Marx on the issue.