Tendency of The Rate of Profit To Fall - Later Marxist Interpretation

Later Marxist Interpretation

Henryk Grossmann and Paul Mattick argued that mass long-term unemployment prevalent in the 19th and early 20th centuries was the result of the long-term effect of labor-saving technological innovations. At a certain point, they argued, the falling rate of profit stops the total mass of profit in the economy from growing altogether, or at least from growing at a sufficient rate. This results in a crisis of over-accumulation (or a shortage of surplus-value), and consequently a drop in new productive investment, causing an increase in unemployment. This, in turn, leads to a wave of takeovers and mergers to restore profitable production. In Capitalism versus Planet Earth, Fawzi Ibrahim argues that while profits can be maintained and in fact grow as rates of profit fall provided capital investment increases by the same or a larger proportion than the fall in the rate of profit, down the line, as capital accumulation reaches the high levels witnessed in advanced economies of the west, a ‘tipping point’ is reached when the additional capital investment necessary to offset a fall in the rate of profit becomes prohibitingly large, profits begin to tumble and capital enters a ‘critical zone’ ushering in an economic crisis qualitatively different from those of the past.

However, nearly a century ago, economists such as Eugen von Böhm-Bawerk and Ladislaus Bortkiewicz found Marx's argument mathematically faulty. This gave rise to a controversy about the so-called transformation problem. Marx himself pointed out the need to find a general rule to transform the "values" of commodities into the "competitive prices" of the marketplace in chapter 9 of the draft of Volume 3 of Capital, where he also tried to solve it. The essential difficulty was this: given that profit ("surplus value") was derived from direct labour inputs, and that the amount of direct labour input varied widely between commodities, how to explain the tendency towards a uniform rate profit on production capital invested?

This has important implications for Marx's theory of labour exploitation and economic dynamics, namely that there is no inevitability of decline in the rate of profit from capital accumulation.

In the 20th century, many Marxists have moved away from Marx's labour theory of value and tried to provide alternative crisis theories in the Marxian tradition, focusing variously on the chaos of capitalist production, sectoral disproportions, under-consumption, labor-shortage and population pressures, credit insufficiency, and wages squeezing profits. Some theories attribute crises to one single factor (such as the TRPF), while others argue for a multi-causal approach in which a distinction is drawn between the "triggers" of the crisis, its deeper underlying causes, and the concrete manifestation of crises.

Marxist economist Chris Harman has advanced a reading of Marx that sees economic crisis as the main effective countervailing factor, but which places limits on its effectiveness as the capitalist system ages and units of capital become larger and more interlinked.

Against the allegations of internal inconsistency, proponents of the Temporal single-system interpretation (TSSI) such as economics professor Andrew Kliman maintain that the evidence presented by von Böhm-Bawerk, Bortkiewicz, Okishio and others are invalid refutations of the logic in Marx's argument. Kliman argues in Reclaiming Marx's Capital (2007) that the famous logical deficiencies arise not from a plausible reading of Marx but from the critics' interpretations and alterations ("corrections") of Marx, interpretations and alterations that are inspired by bourgeois general equilibrium theory. Once Capital is interpreted as temporal (as opposed to simultanist) and single-system (that values and prices are not worlds apart) the transformation problem disappears and the theory of the tendency of the profit rate can no longer be dismissed on logical grounds.