> Rather, the argument is this. If prices fall as a result of
> rising productivity (which they will if the relation between
> money and labor-time remains constant), then *aggregate*
> profitability tends to decline, since the machinery, etc. was
> acquired in the *past* when prices were higher, but the output
is
> being sold *now* when prices are lower. *All* machines, etc.
> acquired in the past are subject to "moral depreciation," i.e.,
> losses of value. Sooner or later, firms must charge these
losses
> against operating income.
Rakesh responds: "But if new machines are becoming cheaper as well, then firms don't have charge as much against their operating income for the replacement of capital--so where's the big profitability problem?"
As I'm sure Rakesh knows, this is precisely the argument that the simultaneist value theorists lodge against temporalism.
The first thing wrong with the argument is that it misconstrues what profit and thus the profit rate are. Profit in any period is the difference between the income received during the period and the costs incurred during the *same* period. What happens *after* this doesn't matter. So as far as the definition of profit and the profit rate of the current period are concerned, this "cheapening of the elements of constant capital," of which Marx was certainly aware, doesn't matter.
Nothing compels a capitalist to stay in business rather than take the profits and retire to the Bahamas. So what would be the profit of someone who did so, if the replacement cost of the means of production did matter? Say that s/he's got $100,000 in his/her pocket. How does it help him/her if the $100,000 now buys more machines than it did before? The whole concept of profit becomes meaningless, at variance with real processes taking place in *time*.
The second thing wrong with the argument is that it PRESUPPOSES that the goal of capital and capitalists is to accumulate use-values, not accumulate value. We are supposed to believe that the decline in actual profit (as defined above) doesn't matter, because the decline is offset by the cheapening of machines, and therefore the firm's ability to accumulate machines is not impeded. It is true that the decline in profitability is offset, but it isn't necessarily true that the ability to accumulate machines is unaffected.
I'll address that in a moment, but let's assume for argument's sake that the notion is correct -- the firm's *ability* to accumulate machines is unaffected. Why should we assume that this *ability* to accumulate translates into *actual* accumulation? It all turns on what the goal of the firm is. If its goal is to accumulate use-values (accumulate machines in order to produce more stuff in order to accumulate more machines ...), then certainly the fall in the rate of profit doesn't matter. But there are very good reasons for believing that accumulation of use-values is not the goal of capital (I'm sure Rakesh knows them.) Now, then, if the accumulation of VALUE is instead the goal, there is a plausible case to be made that the decline in the rate of profit will lead to a slackening of investment.
The third thing wrong with the argument is that it tries to put everything on the basis of the present only (simultaneous valuation). But value is a *temporal* relation, as any CFA, bank, etc. knows well. All of finance is about linking present and future values, or past and present values. The argument is a version of the argument that if all prices (including wages, etc.) fall proportionately, then no one is hurt and no one is helped. This is complete hogwash. The fact is that debts need to be repaid, and falling prices help creditors and hurt borrowers. I addressed this in my last post, but it is so important in today's world of hot money flows pauperizing Asia and such that it cannot be stressed enough. It doesn't matter how many machines you *could* buy today with your profit if in fact the profit isn't enough to cover your debt service. So falling prices definitely do matter -- it just isn't the case that proportionate declines in output prices and input prices leave the ability to accumulate machines unaffected.
The fourth thing wrong with the argument is that it implicitly presupposes that the decline in prices is a one-shot deal. Supposedly, the profit is lower now, but the firm buys the extra machines and then everything is fine. Yet if the fall in prices is a continuing process, then the decline in profit, and thus the decline in the profit rate, is also continuous.
Let's take a simple, very extreme case. Imagine that corn is produced by means of corn. At the start of the year, 10 bushels of corn are planted and paid as wages, and at the end of the year, 11 bushels are harvested. This goes on year after year. A long tradition (that Rakesh has helped me learn about) holds that this is sufficient information to conclude that the profit rate is 10% p.a. But let us imagine that, year after year, the price of corn also declines by 10%. So if P is the start-of year price in any year, the end-of-year price in the same year equals (0.9)*P. The profit rate is therefore
(0.9)*P*11 - P*10 -----------------
P*10
which works out to be -1% -- year after year!
Rakesh: "But now the problem is less severe because new labor saving machines themselves embody less labor and thus their adoption does not come at the expense of gross revenue and employment; indeed they may embody less labor than the less powerful machines they replace! Marx's theory generalizes from the early industrial revolution at which point systematic, science-based productivity advances in the capital goods industries were just beginning. Or so John Hicks seems to think. Nathan Rosenberg does show that Marx was the first to theorize the centrality of innovation in the capital goods industries but it seems that Marx did not think through its critical implications in terms of the falling profitability theory."
Well, I think I've dealt sufficiently with this already. Calling the cheapening of machines a reduction in embodied labor doesn't change anything. This is essentially the same simultaneist argument as that above, sharing all the same simultaneist errors. Also Hicks is really, really wrong when he says that Marx did not understand that technical change cheapens machinery. Marx only notes this fact in about a zillion places. In any case, the problem is not that "Marx did not think through its critical implications in terms of the falling profitability theory," but that simultaneism doesn't understand that profitability has to do with *time* and with *value* rather than physical quantities only. Rising productivity, which implies falling values, tends to REDUCE the profit rate under Marx's theory, and there's nothing logically incoherent about that theory.
What do you think?
Ciao
Drewk