The tendency of the rate of profit to fall (TRPF). Would I ever have imagined writing that some aspect of this classical theory was correct. 20+ years ago I was studying in Edinburgh and as a diversion from my own course and the tiny Edinburgh College of Art exhausted library I used to dust off their huge collection of heterodox economic books (well huge collection of everything) and became fascinated by the Sraffan/Neo-Ricardian writings then fashionable. Then I would have been totally convinced that the concept of the falling rate of profits had been completely and totally disproved – look at the maths – look at Okishio’s theorem – its been totally disproved. I would, and did, argue it till the cows come home. It was to me an obvious fallacy.
Indeed most were convinced and indeed it seemed only the tankiest of tendencies still believed it (especially at my neighbours the University of Greenwich). Now coming back to an interest in the history of economics after a 20 year break I can see things from a new perspective. Just as heterodox economists apply ever more arguments about the root assumptions of neoclassical economics, those same assumptions can be applied to the criticisms and arguments over value theory, especially long run equilibrium as a basis for excluding study of disequilibrium price movements and investment decisions.
These doubts has promoted me to start this series to prompt argument and discussion about a number of puzzles over profit rates that an easily dismissal of TRPF leaves unexplored. I should stress i’m not here arguing that there is an inevitability of capitalist ‘breakdown’, rather there are structural aspects of capitalism, that unless corrected by political action lead to crisis and depression, and these need to be corrected to address our current condition. Nor am I arguing for a labour theory of value (LTV) at least in its pure pysicalist form of value been hammered into goods – though I will argue that there are interesting puzzles there too which mean that until they are addressed the theory won’t go away.
A Bias Towards Capital Deepening
This first part is about a core assumption in TRPF that there is a bias towards labour saving technology. The theory, at least in Marx’s form, requires there to be a bias that capital deepening techniques are chosen over capital shallowing techniques. Capital deepening being more intensive of fixed capital – mechanisation etc. Capital swallowing being choosing techniques more intensive of ‘variable capital’ in Marx’s term – expenditure on labour.
A very frequent argument made in too many books and articles to mention is that Marx did not prove that Capitalism has an inbuilt bias towards capital deepening. He did not, very little about this in his writings, again numerous Marxian authors claim that there is a bias and Marx’s approach proves it. Hence
If a capitalist introduces a capital deepening technique which is more productive and hence more profitable then other capitalists will be forced to adopt it, if not then capital will flow from that sector.
However that immediately begs a retort
If a capitalist introduces a capital shallowing technique which is more productive and hence more profitable then other capitalists will be forced to adopt it, if not then capital will flow from that sector.
Indeed argument II might also seem to have Marx on its side. After all if labour is immiserated wont it then become cheaper forcing a switch from capital intensive production, won’t some form of dynamic equilibrium be reached below which the rate of profit will not fall?
Before getting too deeply into the maths of this in future instalments I want to try to show in simple non mathematical terms why in most areas in most circumstances there is a clear bias under capitalism for capital deepening.
The Stick Houses
A couple of years ago I was working in the Middle East. Though the construction boom had ended there was still a lot going on. ‘Stick houses’ as they are known were being built everywhere. That is housing made from encasing concrete around steel ‘sticks’ that stick up until the roof is formed at the end of construction. What was interesting was just how labour intensive it was (and also how appalling labour conditions were with labour camps in the desert with no water of electricity- astonishing). You often saw several poor guys mixing concrete by hand in a big tub rather than using a mixer for example. I used to discuss this with the chief economist of the country. His explanation for it – Dutch Disease – that oil/resource rich countries get lazy and stop innovating. This seemed only a partial explanation to me, after all hadn’t the concrete mixer been invented, and would not richness sometimes express itself in overly expensive capital toys (which it sometimes did in State or State guaranteed monopoly projects)? After all it was rational for construction countries to substitute labour for capital because it was more profitable.
Only yesterday I thought about this when contemplating this series of articles. The answer was obvious. In most countries you tend to get capital widening because very cheap labour is not available and is not allowed to be imported, in some countries it is available and is allowed to be imported. It is the exception that proves the general rule.
Lets take our hypothetical concrete mixer example and a potential investment decision by a capitalist. Ok this mixer is five (say) times more productive than a single builder – but requires one man to load. So in a single year it will produce 5-1=4 man years worth of concrete. If I spent $1000 dollars on purchasing it I need to decide whether or not at the current rate of interest it will produce more in terms of profit than the wages of the 4 workers – the opportunity cost – over the period of the loan. If the payback period on the loan (assuming interest and all other costs remain equal) is less than the period of the loan then every day past the payback period you are in profit.
But consider the inverse calculation replacing the mixer by hiring additional workers?
The calculation is exactly the same, apart from asset resale value, which if labour is cheaper and export of the asset expensive would be zero (or even have a negative price – scrappage cost), the only other difference being that you are purchasing workers for the investment period rather than capital.
Investment as units of Labour
This was an easy case because capital and labour were perfects substitutes. Where they are though you can see from the above example that investment decisions are made in terms of units of wages, or rather bundles of wages goods needed to support the labourer. This is very Keynesian (though Keynes theories on wages have been sadly neglected) but actually the idea goes way back to the foundation of classical economics – Petty and Cantillon and the formulation of this concept by Cantilon has never been bettered.
I.III.1 To whatever cultivation Land is put… the Farmers or Labourers who carry on the work must live near at hand; otherwise the time taken in going to their Fields and returning to their Houses would take up too much of the day. Hence the necessity for Villages established in all the country and cultivated Land…The size of a Village is naturally proportioned in number of inhabitants to what the Land dependent on it requires for daily work
I.XII.6… if we examine the Means by which an Inhabitant is supported it will always appear in returning back to the Fountain-Head, that these Means arise from the Land of the Proprietor either in the two thirds reserved by the Farmer, or the one third which remains to the Landlord.
The relevance of these sections is not obvious at first but there is the fountainhead of the concept of surplus and value theory as it influenced the Pysiocrats, and which Adam Smith (over) simplified to Labour only and then Marx followed.
What we see here as Aspromourgos sets out in his magnificent survey of classical economics before Smith is a simple formula. Put in a slightly different way in plain English
Village Population P = M farmers
Food production F= M x Number of Fields L x productivity/fertility of each field/farmer p
Proprietors Profit = Rent R – (M*F/consumption per farmer C)
Closing the system of equations requires more than one village and a treatment of differential rent and transport costs which is a tiny bit outside the main thrust of this article, the key issue is that profit can be seen in terms of a numeraire of wages goods, that rent is a deduction from profit and that a surplus over the subsistence needs of labour is always needed to generate a profit.
This concept of a population centre being only able to support a given degree of wage goods, with or without trade, is critical.
Back to the Concrete Mixer
So lets imagine a case – such as in England today – where it would be difficult to substitute a concrete mixer for 4 men? Why – because labour is relatively expensive to capital? Why, because if you took the value that might be generated by the concrete mixer and divided that by four the real wage might be less than the cost of wage goods needed to support that worker. Indeed the more productive fixed capital becomes the lower real wages have to be to see capital shallowing.
So why don’t we see floods of very cheap labour from the third world to substitute capital for labour – after all it could be profitable for capitalists? Two reasons, one food is expensive here, which pushes up the price of the real wage. Secondly it would be politically unacceptable. Finally when capital is highly productive then is requires very large numbers of labourers to substitute and this requires at times of rapid growth huge levels of in-migration. The housing etc for these cannot all be produced at the rate capital might wish to expand (the George/Hoyt theorem). The capitalist space economy therefore has an inbuilt capital deepening bias in ‘advanced’ economies.
Consider the other case of capital shallowing. Here we have in the Middle East a source of cheap labour close by, no democratic pressure to control immigration per se, expansion of the workforce through packing them in quickly, and cheap food imports nearby from India. A perfect combination of circumstances for capital shallowing. Indeed in some middle eastern countries the number of guest workers (without any rights) can be as high as 90%.
Lets leave aside world system aspects to this argument and look at Capital Intensive Economies, that is in the construction and manufacturing sectors. Here there are local housing and labour markets, so that if the increase in labour from inmigration is fixed – so that the investment horizon possibilities are constrained locally – then investment decisions will clearly be further and further biased over time towards capital deepening, as the alternative – capital shallowing, get proportionately more and more expensive.
So if TRPF is correct then in these regions the conditions for a falling rate of profit definitely will exist. The assumption here is that wages are a fixed cost under a long term contract and so less buffeted by current labour market conditions, not that unrealistic, especially when labour is imported from elsewhere.
Neither have we considered changes to the interest rate and the phenomenon of reverse capital deepening – where a lower (higher) rate of interest produces a lower (higher) capital per worker. Although with this model it is easy to see that if interest rates rise it may still be more profitable to hire more workers at higher wages if the payback period is long, for imported labour you only need credit during the period of production, whereas for fixed capital you typically buy it for its lifespan.
Of course its more complicated than that –we have only looked so far at a vertically integrated concrete economy with one consumer good and one wage good – onto part two in a few days.
1. Marx, K., Capital. 2001: Electric Book.
2. Rieu, D.-M., Has the Okishio Theorem Been Refuted? Metroeconomica, Vol. 60, Issue 1, pp. 162-178, February 2009.
3. KYDLAND*, F.E. and C.E.J.M. ZARAZAGA, ARGENTINA’S RECOVERY AND EXCESS CAPITAL
SHALLOWING OF THE 1990s. Estudios de Economía, 2002. 29(1): p. 35-45.
4. Cantillon, R., Essay on the Nature of Commerce in General. 1931: Transaction Publishers.
5. Aspromourgos, T., On the Origins of Classical Economics: Distribution and Value from William Petty to Adam Smith. 1996: Routledge.