Sunday, April 10, 2016

Explaining the Capitalist crisis - A Marxist analysis

I would like to make an argument that the Marxist rate of profit doesn't necessarily have to fall and propose a counter proposal on why we have crises.

I assume that everyone agrees with the theory of value, in other words that in the long run, prices are determined by the effort spent to produce something.

The Marxist falling rate of profit is defined as the ratio of the variable capital to both the variable and fixed capital.

V/(V+C)

Edit: It is S/(V +C) but if we assume that S/V is the same for the whole economy and fixed, the following arguments continue to hold. S is the surplus value by the way.

It is evident from this equation that if the variable capital is reduced, the rate of profit will fall. Thus the main question is whether the aggregate variable capital of the economy does fall, while all other remain constant.

The decrease in variable capital happens because of a new scientific discovery that reduces the cost of production.
In the case that production produces capital goods, the aggregate fixed capital doesn't remain constant. Thus, the type of research determines whether the condition of the fixed capital being constant is true or not. The type of research is a probabilistic event and it would require us to analyze it in order to draw any conclusions.

Now, having fixed capital not constant doesn't mean that the average rate of profit will rise. I will present you with an example in which it happens, thus it will act as a counterexample.

Consider a chain of enterprise in which all previous ones provide capital goods and the last one consumer goods. In every event in the economy, it is assumed that enough time passes that the theory of value holds.

This diagram shows the rate of profit of each company for the production of a single consumer commodity. I assume that the RoP is the same in all companies. That is not true in general but I do not believe that it will affect the validity of the counterexample.

A                           -> B              ->  C                 -> D
8/(16 + 8)     12/(24 + 12)   18/(36 +18)       27/(54 +27)

The average rate of profit is equal to
ARP = 8 + 12 + 18 + 27/ (16 + 8 +24 + 12 + 36 + 18 + 54 + 27)
= 0.33333 , not surprisingly since all RoPs are equal.

Now, a new invention occurs that reduces the variable capital of firm A, from 8 to 2.

Then after a while when all the firms in the chain have bought this machine (but without having the RoPs become equal for simplicity) these are the new RoPs:

A                           -> B              ->  C                 -> D
2/(16 + 2)     12/(18 + 12)   18/(30 +18)       27/(48 +27)

The average rate of profit is equal to
ARP = 2 + 12 + 18 + 27/ (16 + 2 +18 + 12 + 30 + 18 + 48 + 27) =
= 0.345

Thus as we can see, the average rate of profit as defined by Marx does increase.

Let us consider another counterexample. Let's suppose that B is bought by A. What would be the rate of profits? :

A                           ->  C                 -> D
20/(16 + 20)     18/(36 +18)       27/(54 +27)

The average rate of profit is equal to
ARP = 20 + 18 + 27/ (16 + 20 + 36 + 18 + 54 + 27) =
= 0.38

Here again the rate of profit increases because we do not consider the product of company A as fixed capital for company B.

Does this mean that Capitalism is not prone to have crises. On the contrary, capitalism is prone to crises. Let us see why.

For every scientific discovery, what happens for sure is that the total cost of production is reduced.

In our example, before the invention, we had:

AC = 54 +27 = 81

After the invention:

AC = 48 +27 = 75

Thus after the invention, the capitalists only need to give 75 to continue the exploitation of the workers. The remaining 6 cannot go to the previous investment, they need to go to another investment. But the profitability of new investments do not depend on the sum of profits that were previously obtained by the current investment. In fact, because of all the innovations that are happening and the shrinking of the cost of production, it is impossible to invest those sums of money.

Now it is important to understand that if a sum of money remains dormant in the hands of a few, that also means that debt is kept in the hands of the many. That debt forces people to underconsume, that forces companies to lower their prices and thus decrease their profits which then forces them to exploit more their workers that eventually leads them to underconsume.

The way to get out of this spiral can be done in many ways:
A) Tax the rich and redistribute the wealth.
B) Make the debt payable in 2500.

Both of these cases do not solve the problem but its consequences.

The reason why capitalism has the tendency toward crises is because capital investment is performed by force with a complete disregard of the needs of the economy/people. Money are siphoned because capitalists have the means/ability to exploit the working class. The only way to stop the crises is if production is performed democratically by the people for the people. In such a case profits would not exist, only individual and social good.