[Marxism] Fwd: Special Page at Monthly Review (My reply to Heinrich) Part II

Shane Mage shmage at pipeline.com
Mon Dec 2 12:32:17 MST 2013

> ...Heinrich claims to substantiate his claim that the "Law" is  
> theoretically invalid, because it cannot be logically developed from  
> the basic categories and conceptions of the Marxian theoretical  
> system, with an argument based on a formula that he mistakenly calls  
> "value composition." [cf. footnote two] In this, as in many of  
> Marx's illustrative examples in vol.1, it is assumed that the entire  
> social capital is consumed and reproduced in the course of a single  
> year--ie., that there exists no fixed capital.  Thus he propounds as  
> Marx's "not explicit" expression for the rate of profit the formula   
> "p=s/(c+v)," equivalent to "(s/v)/[(c/v)+1]." From this he argues  
> that his "c" increases "precisely in the course of the production of  
> relative surplus-value, which leads to an increasing rate of surplus- 
> value...when Marx claims a fall in the rate of profit, then he must  
> demonstrate that in the long term the denominator grows faster than  
> the numerator. Yet there is no evidence whatsoever for such a  
> comparison in the speed of growth."
> Heinrich is not wrong about the relation of the stock-of-constant- 
> capital/labor-value-flow ratio (the Organic Composition) to the  
> production of relative surplus-value. Increase of Q, for Marx,  
> expresses "the progressive development of the social productive  
> power of labor," and increased productivity produces relative  
> surplus-value by decreasing the labor-cost of production of labor  
> power (the value of the real wage) and thus the paid portion of the  
> given working day. Where Heinrich goes wrong is in his assertion  
> that there is no reason for the rate of increase in the denominator  
> (capital stock) to exceed the rate of increase in the numerator  
> (surplus value).  From examination of the correct formula for the  
> Marxian rate of profit,  p'=s'/Q(1+s'), it is clear that the rate of  
> surplus value, s', appears with a positive sign in both the  
> numerator and the denominator but that the capital stock, C, appears  
> only in the denominator. Evidently, in the course of the long-run  
> evolution of capitalism the rate of increase of organic composition  
> must tend to exceed the rate of increase in surplus-value resulting  
> from it. (A more rigorous demonstration of this relationship is to  
> be found on pages 147-151 of my 1963 dissertation, "The 'Law of the  
> Falling Tendency of the Rate of Profit': Its Place in the Marxian  
> Theoretical System and Relevance to the US Economy, 1900-1960,"  
> available online from  http://archive.org/details/MagesDissertation)
> Heinrich's second charge against the logical derivation of the "Law"  
> is that there is no systemic reason for organic composition to  
> increase: "we do not know whether the denominator increases."  
> Suppose that labor productivity were to increase more rapidly in the  
> "capital goods" industries than in those producing articles of  
> working-class consumption.  Then the organic composition could  
> decrease (less value embodied in constant capital relative to the  
> living productive labor set in motion by it) with the result of a  
> rising rate of profit unless the overall technical composition would  
> have increased more rapidly than the productivity of capital-goods- 
> producing labor. [footnote three]
> For anyone with eyes open to look around him it is impossible to  
> take this argument seriously--every great city is dominated by  
> commercial structures employing no productive labor at all; every  
> manufacturing industry is constantly displacing workers and  
> replacing them with automated machinery; energy--which once employed  
> millions of miners--is ever more entirely being provided by a  
> relative handful of workers operating enormously capital-intensive  
> nuclear power plants, hydrocarbon wells and pipelines, offshore oil  
> platforms, wind-turbines, solar panels, etc.  And all this is  
> clearly but the latest stage of a process that has built steadily  
> over some two centuries of capitalist economic development and is,  
> if anything, accelerating.  But, Heinrich might argue, this is  
> merely "empirical reality," and the place of technology in the  
> materialist conception of history [footnote four] is merely  
> "philosophy." He would demand a "theoretical" demonstration that  
> this unquestionably real capitalist development is a necessary  
> consequence of Marx's model of capitalism.
> The reply might start with the point that a very large portion of  
> the inputs to capital-goods industries (raw materials, labor-power,  
> electricity, fuel, etc.) are identically inputs to consumer-goods  
> industries.  In particular, they account for virtually the entire  
> cost of construction. Any hypothetical decrease in the value of  
> these inputs would have the same effect in increasing productivity  
> (decreasing unit value) in both types of production. So if capital- 
> goods' productivity were to increase faster than consumer-goods'  
> productivity, that increase would have to come entirely from their  
> machine-building component.  But surely the same applies to the  
> inputs (except machines) for that machine-building component. And so  
> forth ad infinitum.  In the face of an infinite regress the  
> hypothesis of rising relative productivity in the industries  
> supplying capital goods simply collapses. Different individual  
> branches of industry may develop labor productivity at different  
> rates and at different periods of time, but over the historical  
> course of capitalist development the average productivity of social  
> labor in those two gross categories, capital goods and consumer  
> goods industries, cannot be distinguished.
> This is not, however, a theoretical demonstration that the Organic  
> Composition must tend to increase. What is needed is to show how  
> such a tendency follows from the necessary course of capital  
> investment over the course of what, in Marxian terms, constitutes an  
> "ideally average" economic cycle (an "ideal" cycle presupposes a  
> closed--ie., abstracting from exchange with other economies--model).  
> This schema involves three definite Marxian theories: that the  
> industrial reserve army is the regulator of the supply and demand  
> for labor power; that expected profitability is the decisive factor  
> in capitalist decision making; and that the supply of credit is  
> endogenous to the system (ie., the quantity of credit is determined  
> by the monetary quantity of transactions to be financed, not the  
> reverse as in the "quantity theory of money" where the aggregate  
> value of transactions depends on an exogenously determined "money  
> supply").
> The cycle can be taken as starting with the low point ("trough") of  
> its preceding cycle.  The industrial reserve army (which Marx  
> defines as the "pivot," the regulator, of the supply and demand for  
> labor power, ie., wages) has been replenished and production is at  
> its nadir (unemployment is high and capacity-utilization low).  
> Interest rates have fallen as a result of lowered demand for credit  
> to finance inventories and capital investment. Replacement of worn- 
> out capital equipment, deferred during the bottom phase of the  
> former cycle, is needed by many businesses.  Thus the upswing  
> involves increasing output without increasing unit costs, raising  
> profits.  As it proceeds profits, capital utilization, prices,  
> employment, real wages, interest rates, and new investment all  
> increase until the cycle approaches its peak.
> The renewed investment at the start of the upswing was mainly in  
> inventories and replacement equipment.  Output could increase  
> without much need for expanded capacity, and employment-increasing  
> (ie., capital-broadening, as against capital-deepening) investment  
> was at its most profitable in comparison to labor-saving  
> innovation.  But then output-increasing investment starts to become  
> ever more needed, older equipment becomes more costly to operate as  
> it is worked more intensely, and labor-power becomes more costly as  
> the reserve army is depleted. As new investment increases, the  
> rising tendency of wages makes it become ever more biased toward  
> labor-saving innovation--the higher the wage the more relative  
> surplus-value is produced by every hour less labor time required to  
> produce a given output. The peak of the cycle is characterized by a  
> high level of capital-intensive investment, spurred on by the  
> expectation of high profitability from maintenance of or increases  
> in prices and demand. As the interest rate required to finance new  
> investment increases (and, conversely, the "payout period" a firm  
> requires to justify new investment shortens) the large investment  
> projects previously begun start to come on line, putting intense  
> competitive pressure on prices and so on less-productive older  
> capitals. Realized profits fall short of what had been expected,  
> inter-business debt payments are delayed for longer times,  business  
> failures with associated loan losses to the credit system increase  
> and credit tightens, workers are laid off thus decreasing effective  
> demand, and new investment, no longer seen as adequately profitable,  
> falls off. The cycle thus has gone into reverse until, at its  
> trough, a new cycle gets underway.
> This abstract model, which tells us almost nothing at all about the  
> concrete determinations--of timing, expectations, foreign trade and  
> foreign exchange, natural-resource costs and rents, market  
> structure, speculation, politics, and class struggle--that shape  
> every actual economic cycle and notably every crisis--nevertheless  
> establishes the vital point at issue: capital accumulation (new  
> investment) takes place predominantly at the height of the cycle  
> when the cost of labor power is high and rising. It is therefore  
> highly biased toward labor-saving technological change and this  
> makes a cycle-to-cycle increase in the Organic Composition of  
> Capital a necessary and fundamental component in Marx's model of the  
> "economic law of motion of modern society."
> Because every cycle thus involves an increase in the organic  
> composition of the social capital, and because increase in organic  
> composition involves decrease in the rate of profit, Marx's abstract  
> model of the cycle (his "crisis theory") necessarily involves an  
> effect of that decrease in the peak phase of the cycle. Marx  
> explains it thus: "The rate of profit, ie., the relative increment  
> of capital, is above all important for all new offshoots of capital  
> seeking an independent location...[it is] the fundamental premise  
> and driving force of accumulation." (v.3, p. 304) This is not at all  
> to assert that new investment necessarily becomes less profitable in  
> operation than the previously-accumulated capital.  The fall in  
> profitability manifests as a decreasing "marginal efficiency of  
> investment" for the social capital as a whole. The decline is  
> principally felt by "older" capital, as commodities from newer more  
> productive capital come onto the market, in the form of  
> overproduction relative to demand at the existing price level.  That  
> overproduction, however, is crucial. The depressed market means that  
> the return on new capital, and therefore the expected return on new  
> investment, has fallen below the level on which the original  
> investment decision was based.  The realized payback period has  
> lengthened beyond what had been projected and new projects are  
> postponed. Thus the Law acts as a powerful constricting influence in  
> every crisis, at the peak and recession phase of every cycle.  It  
> is, over the historical course of the capitalist mode of production,  
> a "barrier," a  force repeatedly depressing the profitability of  
> investment to ever lower levels.  Marx, an ardent Balzacian, might  
> well approve were we to call his Law capitalism's Peau de Chagrin...

> Shane Mage
> This cosmos did none of gods or men make, but it
> always was and is and shall be: an everlasting fire,
> kindling in measures and going out in measures.
> Herakleitos of Ephesos

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