The two Michaels (Heinrich and Roberts) in Berlin – dogmatism versus doubt

I have just got back from Berlin where I debated with Professor Michael Heinrich (see http://en.wikipedia.org/wiki/Michael_Heinrich and http://www.oekonomiekritik.de/, hereafter called MH) at the Marx is Muss Kongress on the relevance of Marx’s law of the tendency of the rate of profit as a theory of capitalist crises (see http://marxismuss.de/).

Readers of this blog will know that there has been a renewal of this debate in various articles and papers in the last few years. This was partly inspired by an article by MH in the American socialist journal, Monthly Review (see at end of this post) in which he presented several (old) arguments claiming that Marx’s law was: logically inconsistent or indeterminate; that it could not be validated by empirical evidence; and anyway it was irrelevant to a theory of crises under capitalism. In sum, MH concluded that there is no Marxist theory of crises.

Several of us who reckon that Marx’s law of profitability is the basis for a Marxist theory of crises and is also the best and most powerful explanation have taken MH up on these points (see papers by me, G Carchedi, Andrew Kliman, Ed George, Esteban Maito and Sam Williams at the end of this post). We reckon Marx’s law is logical and consistent based on some realistic assumptions; that it can be validated by empirical work; that there is no plausible reason to assume Marx dropped the law that he had regarded as the most important in political economy; and that Engels’ editing of the Volume3 manuscripts was perfectly reasonable.

What I said The Berlin debate was a new opportunity to discuss the issues in front of about 150 people or more. I kicked off and basically this is what I said. First, I raised: why do we care about the theory of crises? It may seem that there is an obvious answer to this question. But not necessarily, as indeed some in the audience wondered whether this was just an obscure academic debate, when what activists needed to know was what happening in the world economy now and how we should respond to the Great Recession and the attacks on labour globally.

Well, I said that we need to have a theory of crises under capitalism that makes sense because these crises cause huge damage to people’s livelihoods and stop human social organisation moving towards a world of abundance and not scarcity and toil. And they are indications of the contradictory and wasteful nature of the capitalist mode of production. Before capitalism, crises were products of scarcity, famine and natural disasters. Now they are products of the fetishism of a profit-making money economy: they are man-made and yet appear to be out of the control of man. Above all, crises show that capitalism is fatally faulty and they expose capitalism as a failing system despite the great strides in the productivity of labour that this mode of production has generated in the last 200 years or so. So it matters.

So did Marx have a theory of crises? Well, Marxist scholars and economists as well as activists have found several theories of crises in his works, all of which have got more support than Marx’s law of profitability, actually. There is the view that capitalism goes into slumps because of the lack of demand from workers because their wages are too low to buy the goods that capitalists sell (underconsumption). There is the view that capitalist blindly produce too much relative to potential profits or demand so there is a collapse (overproduction); and there is the view that capitalism accumulates in an imbalanced way so that sectors get out of line, leading to collapse that spreads generally (disproportion). Finally, there is the view that crises come about because profits are squeezed by too high wages (profit squeeze). But I and others who hold to a Marxist theory of crises based on the law of the tendency of the rate of profit to fall reckon that these other theories are a wrong interpretation of Marx’s view on crises and that he also dismissed them. We start from the view that in a profit-making economy, surely crises must be caused by something that goes wrong with profits, not wages, not demand and not imbalances.

Marx’s law is two-sided. There is a tendency – ‘the law as such’ – and then there are countertendencies. But the law holds that these countertendencies will not overcome the law as such (the tendency) ultimately or over time. “They do not abolish the general law. But they cause that law to act rather as a tendency, as a law whose absolute action is checked, retarded and weakened by counteracting circumstances.” – Marx.

The law as such (that the rate of profit in capital accumulation will eventually fall) is based on just two realistic assumptions. The two assumptions are: 1) the law of value operates, namely that value is only created by living labour; and 2) capitalist accumulation leads to a rising organic composition of capital. These two assumptions (or ‘priors’) are not only realistic: they are self-evident. On the first, even a child can see that nothing is produced unless living labour acts. The production of use values is necessary to create value. “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.” Marx to Kugelmann July 11, 1868.

A rising organic composition of capital under capitalism over time is also self-evident. The huge increase in labour productivity under capitalism is a result of mechanisation. Yes, that can create new jobs, but it is essentially labour-shedding process. And while a new means of production might contain less value that an older similar means of production, usually means of production are replaced by a new and different system of production, which contains more value than the value of the means of production they have replaced. As Marx explains in the Grundrisse: “What becomes cheaper is the individual machine and its component parts, but a system of machinery develops; the tool is not simply replaced by a single machine but by a whole system… Despite the cheapening of individual elements, the price of the whole aggregate increases enormously”. Capital needs higher productivity but gets it through new labour-shedding means of production.

Recently, Esteban Maito has shown there has been a rising organic composition in the UK economy since 1855. Labour relative to assets has fallen over this period while labour productivity (output per labourer) has risen. The result is a long-term fall in the UK rate of profit, as Marx’s law predicts. Maito__Esteban_Ezequiel_-_And_yet_it_moves_down_-published_version_on_Weekly_Worker_N1023-

But the rate of profit has not fallen (and does not fall) in a straight line. There are counteracting influences to the law as such. They include: a rising rate of exploitation; the cheapening of constant capital values; wages dropping below the value of labour power; foreign trade for higher profitability for national capitals etc. But Marx says these counteracting factors “do not do away with the law but impair its effect. The law acts a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.”

The main countertendency, a rising rate of surplus value, cannot overcome the law as such indefinitely. First, there is a limit to the rate of surplus value (24 hours in a day) and there is no limit to the expansion of the organic composition of capital. Second, there is a ‘social limit’ to a rise in the rate of surplus value, namely labour and society sets a minimum ‘social’ living standard and hours of work etc.

Marx’s law is not only logically consistent, given those realistic assumptions, it can be empirically validated. The empirical questions are: does the rate of profit fall over time as the organic composition of capital rises? Does the rate of profit rise when the organic composition falls or when the rate of surplus value rises faster than the organic composition of capital? Does the rate of profit rise, if there is sharp fall in the organic composition of capital in a slump? There is plenty of empirical evidence to show that the answer is yes to all these questions: for the US economy and, more recently, for the world economy.

Basu and Manolakos (http://gesd.free.fr/basumano.pdf) applied econometric analysis to the US economy between 1948 and 2007 and found that there was a secular tendency for the rate of profit to fall with a measurable decline of about 0.3 percent a year “after controlling for counter-tendencies.” In my work on the US rate of profit, I find an average decline of 0.4 percent a year through 2009 using the latest data (see http://gesd.free.fr/robcarch13.pdf). The inverse correlations between a rising organic composition of capital and a falling rate of profit are high (the law as such); but they are low between the rate of surplus value and the rate of profit (the counteracting factor).

Indeed, I argue that the law leads to a clear causal connection to regular and recurrent crises (slumps). It goes from falling profitability to falling profits to falling investment to falling employment and incomes. A bottom is reached when there is sufficient destruction of capital values (writing off plant and equipment, bankruptcy of companies, reduction in wage costs) to raise profits and then profitability. Thus there is a cycle of boom and slump driven by the law of motion of profitability.

The evidence of this causality is available for the US. Tapia Granados (http://deepblue.lib.umich.edu/handle/2027.42/91021), using regression analysis, finds that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44 percent of all movement in investment, while there is no evidence that investment can explain any movement in profits. And we can see in the graph below, that the movement in US corporate profits led the movement in investment before, during and after the Great Recession.

And Marx’s law of the tendency of the rate of profit to fall makes a fundamental prediction: that, over time, there will be fall in the rate of profit globally, delivering more crises of a devastating character. And great work has been done by modern Marxist analysis that confirms that the world rate of profit has indeed fallen over the last 150 years (http://gesd.free.fr/maito14.pdf). Here is a graph of the work of Esteban Maito on a world rate of profit.

So the law predicts that eventually the rate of profit will fall and this will lead to a series of crises. And, as the organic composition of capital rises globally, the rate of profit will fall, despite counteracting factors and despite successive crises. This shows that capital as a mode of production and social relation is transient. It has not always been here and it has ultimate limits, namely capital itself. It has a use-by date. That is the essence of the law for Marx.

That Marx’s law of profitability provides an underlying causal explanation of regular and recurring crises under capitalism, with predictive power, does not exclude other immediate causes or triggers like banking and financial crises. The role of credit is an important part of crisis theory. The tendency of the rate of profit to fall engenders countertendencies, one of which is to expand credit and switch surplus value into investment in fictitious capital rather than into lower profit productive capital, with disastrous consequences, as the Great Recession shows (https://thenextrecession.wordpress.com/2012/11/12/monsters-delusions-of-debt-and-the-crisis/ and https://thenextrecession.wordpress.com/2014/02/16/tendencies-triggers-and-tulips/).

MH has argued in his work that Marx dropped the law as being useful in any way in the 1870s when he too found it illogical and irrelevant to crises. This seems a strange conclusion. Did Marx really change his view from a letter to Engels in 1868 that the law “was one of the greatest triumphs over the asses bridge of all previous economics”? And did Engels distort Marx’s manuscripts for the key chapters in Capital Volume 3 and turn Marx’s ideas into a theory of crisis that was not Marx’s?

Back in 1978, Jerrold Seigel (Marx’s Fate) had a look at the manuscripts. Yes, Engels made significant editorial changes to Marx’s writing on the law as in capital Volume 3. He divided it into three chapters 13- 15; 13 was the law; 14 was counteracting influences and 15 described the internal contradictions. But in doing so, Engels shifted some of the text into Chapter 13 on the law as such when in fact in Marx’s manuscript, they came after the counteracting factors in Chapter 14. In this way, Engels actually makes it appear that Marx balances the counter-tendencies in equal measure with the law as such, when the original order of the text re-emphasises the law AFTER talking about counter influences. So, as Seigel puts it: “Engels made Marx’s confidence in the actual operation of the profit law seem weaker than Marx’s manuscript indicates it to be.” Seigel p339 and note 26.

Also, Fred Moseley recently introduced a new translation into English of Marx’s four drafts for Volume 3 of Capital by Regina Roth, where Marx’s law of profitability is developed and showing how Engels edited those drafts for Capital (Moseley intro on Marx’s writings). Moseley shows that much maligned Engels did a solid job of interpreting Marx’s drafts and there was no real distortion. “One can, therefore, surmise that Engels’ interventions were made on the basis that he wished to make Marx’s statements appear sharper and thus more useful for contemporary political and societal debate, for instance, in the third chapter, on the tendency of the rate of profit to fall.”

And this is not surprising, as from 1870, Engels had moved from Manchester so Marx and he met together as a matter of routine, usually daily. Discussions could go on into the small hours. Marx’s house lay little more than 10 minutes walk away … and there was always the Mother Redcap or the Grafton Arms.

What MH said Well, enough of my arguments for the law. What did Professor Heinrich say in Berlin? In his opening remarks, MH started by saying that those who put forward the law of profitability as Marx’s own are just dogmatically following every tic and comma of his writings. Marx changed his mind about lots of ideas and theories over the decades and did not have a strict position from day one. Indeed, Marx’s slogan for life was “doubt everything”. The original manuscripts that contain Marx’s law in its fullness and as edited by Engels were written very early, as early as Volume 1 of Capital, the only volume Marx himself published. And from the end of the 1860s, Marx never refers to the law of profitability in any context to do with crises. Indeed, his mathematical writings at the time show that he struggled to make sense of the law and so dropped it.

Sure, Engels met Marx nearly every day in the 1870s, but Marx was a secretive chap and never showed those old manuscripts to Engels because he no longer believed in them. They only came to light after Marx’s death and then were published as part of Volume 3. It’s not that Engels distorted Marx; it’s that this law had been discarded by Marx, just as he had first raised the idea of underconsumption as an explanation of crises and then dismissed it.

As for the logic of the law itself, sure, the two assumptions that I posed for the law may well be realistic but so is the assumption that a rising organic composition of capital will be accompanied by a rising rate of exploitation. We cannot know which will rise more and so the law is indeterminate, as Marx himself realised later. Indeed, it is perfectly possible for a rising organic composition of capital to lead to a rise in profitability, and not a fall.

Anyway, the law is not a theory of crises; after all, a falling rate of profit was recognised by the classical economists, Adam Smith and David Ricardo, but it was seen as a long-term gradual decline. not an explanation of cyclical crises.

As for the empirical evidence that I presented, MH reckoned that statistics can show anything – it all depends on where you start your time series. Then you can get any result you want. Anyway, the data used by me and others are bourgeois official data and not useful for Marxist value measures and so prove nothing.

A study of Marx’s manuscripts, as he has done, said MH, shows that Marx did not really have a crisis theory of any clear description. Indeed, it was not his intention in writing Capital. In a way, crisis theory based on Marx’s law of profitability is an invention or misinterpretation by Engels.

Summing up the debate Comments from the floor in the debate were varied. Some supported MH in that there is no evidence of a rising organic composition of capital; indeed the opposite, as we can see by the falling value of hi-tech computers. Others supported me in arguing that we can use modern statistics to validate the law.

The debate could be summed up as one between dogmatism and doubt. The ‘dogmatic’ view is mine in that I and others who support the law as the underlying causal explanation of crises are just following words in a book slavishly because Marx wrote them. It is better to doubt all things as Marx did. We should doubt the logical and empirical validity of the law; we should doubt statistics; we should doubt that Marx stuck to every idea he ever expressed.

The other way of summing up the debate is that MH is the great ‘doubter’.  We don’t know if Marx dropped the law; we don’t have any useful data to validate it and we don’t know if Engels distorted it or not.  We know nothing.  We don’t have a theory of crisis or a Marxist one.

Alternatives Having trashed Marx’s law and denied that he had any theory of crisis, MH was asked if he had an alternative theory of crises. In a recent interview in Slovenia at the Institute of Labour Studies, he did offer one (https://www.youtube.com/watch?v=xLiCRnsHf7s). There MH reckoned (as I understand him) that capital accumulates blindly so that production gets out of line with consumption or demand from workers. So a ‘gap’ develops that has to be filled by credit, but this credit bubble cannot hold up things indefinitely and it eventually bursts and then production collapses. Well, this is a sort of a theory, but pretty much the same as the underconsumption (overproduction) theory that MH dismisses himself.

In Berlin, he presented another: that crises take place despite the claims of harmonious equilibrium in market economies by mainstream economics. I take this to mean the very existence of crises under capitalism is the theory or explanation.

These alternatives seem way less convincing or empirically supported than Marx’s own theory of crisis based on the law. No other theory, whether from mainstream economics or from heterodox economics, can explain recurrent and regular (every 8-10 years) crises and offer a clear objective foundation for the transience of the capitalist system. You could even argue that if Marx did drop it, he should not have changed his mind!

Professor Heinrich says he plans a reply to the various critics of his arguments when he gets time. I look forward to that contribution. In the meantime, if you want to follow the arguments in more detail, here are some of the relevant papers and articles on the subject published in the last few years.

Heinrich M. (2013), Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s Monthly Review, Volume 64, Issue 11, April  heinrich13Roberts M.(2013), Michael Roberts and Guglielmo Carchedi on Heinrich

Roberts M.(2013), Michael Roberts and Guglielmo Carchedi on Heinrich robcarch13 Kliman A. (2013), The Unmaking of Marx’s Capital Heinrich’s Attempt to Eliminate Marx’s Crisis Theory with Alan Freeman, Nick Potts, Alexey Gusev, and Brendan Cooney, July 22, 2013 klimanh13 Williams S. (2013), Michael Heinrich’s ‘New Reading’ of Marx—A Critique July-August samh13 Miller J. (1995), Must The Profit Rate Really Fall? – A defense of Marx against Paul Sweezy April miller95 George E. (2013), But Still It Falls: On the Rate of Profit July, 4 stillitf Maito E.E. (2014), The downward trend in the rate of profit since XIX century Maito, Esteban – The historical transience of capital. The downward tren in the rate of profit since XIX century