Malthus and Monocausalism

In a recent blog post, Michael Roberts, reviews a recent book on Marxist theories of crisis. I intend to respond to some of the arguments that Michael makes in the post, when I have time – the list of things I have to do continues to lengthen rather than shorten – and I have set out a summary of some of the points that entails, in a comment on his blog. However, there is one point I want to make in the interim. It involves the nature of The Law of the Tendency for the Rate of Profit to Fall as a secular tendency, and its use, by the monocausalists, as the explanation for cyclical crises. 

Life abounds with irony. One reason that the monocausalists put forward The Law of the Tendency for the Rate of Profit to Fall as the single cause of crises is a desire not to be associated with Keynesian underconsumptionism, an association, given the adoption of Keynesianism by social democracy, that is tinged with the danger of being labelled a reformist. However, the consequence is also, thereby, to remove entirely the question of demand from any consideration of the cause of crises, which means that those who do so, unlike Marx himself, are left accepting tacitly, the implications of Say's Law that supply creates its own demand. In fact, Keynes set out, as did Marx, in Theories of Surplus Value, Chapter 17, to disprove Say's Law, and they both do so on a similar basis. 

Both Keynes and Marx, point out that, whilst supply creates a corresponding amount of revenues (GDP = National Income), there is no reason that the recipients of these revenues (wages, profits, rents, interest, taxes) will spend them on the actual goods and services (commodities/output/use values) that have been produced. As Marx puts it, in Chapter 17, Say's Law only applies under systems of barter, where producers produce solely to exchange directly the use values they have produced, for other use values they require, of an equal value. As soon as even a money economy arises, so that money intervenes in such exchanges, and money thereby exists as a general commodity, it becomes possible that any transaction that involves, C – M, no longer implies a subsequent transaction M – C. Person A can sell their commodity, and obtain money of equal value, but then simply hold on to the money rather than exchange it for some other commodity. 

As Marx puts it, 

“At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.” (TOSV2 p 505) 

Or to put it in Keynes' terms, the marginal propensity to consume may fall, and the savings rate rise - the paradox of thrift. Those who fall into the trap of ignoring the question of demand, essentially, accept Say's Law, because their thesis is that on one side of the equation, there is production, and, following Marx, the value of this production/output is comprised of two elements a) capital and b) revenue. The capital element comprises the value of means of production (wear and tear of fixed capital, raw and auxiliary materials) consumed in the production of means of production – Department I (c). The revenue element comprises the new value created by labour (i.e. the new value created by labour in Department I, that processes means of production into intermediate goods (Department I (v + s), consumed in production in Department II, plus the new value created in Department II, by labour that processes these intermediate goods into final output (Department II (v + s). 

The value of the capital element is reproduced "on a like for like basis" out of Department I current production. The new value created by labour divides into that part required to reproduce labour-power, and surplus value. The equivalent of the value of labour-power is paid as wages, and the surplus value then forms revenues as profit, interest, rent and taxes. On this basis, an equal amount of value exists on both sides of the equation of demand and supply. An amount of value of, say, £10 trillion has been produced in the UK economy. It comprises £8 trillion of consumed means of production, which is directly replaced out of current production, and thereby creates its own demand. The remaining £2 trillion comprises the new value created by labour, which equals the GDP (v + s), and is paid out in revenues, equal to National Income. The recipients of these revenues then use them to buy the £2 trillion of final output that constitutes the consumption fund/GDP. If this does not happen, so that there is a crisis of overproduction, it must then be, the monocausalists argue, because of some other factor. Step forward The Law of the Tendency for the Rate of Profit to Fall, which they say means that because the rate of profit falls, it causes capitalists to hold back from using their profits to accumulate additional capital, so that some of the output that has been produced, and was intended for such accumulation, does not get sold. 

Its necessary to point out first, of course, that the argument that because there is an equal amount of value on each side of the supply/demand equation, does not at all mean that this corresponds to supply and demand itself balancing. That is because, as Marx sets out, what consumers (either productive or personal consumers) demand is not an amount of value, but a quantity of use value. This, Marx says, is precisely what is wrong with Say's Law, it confuses value and use value. 

Marx says, 

“Say’s earth-shaking discovery that “commodities can only be bought with commodities” simply means that money is itself the converted form of the commodity. It does not prove by any means that because I can buy only with commodities, I can buy with my commodity, or that my purchasing power is related to the quantity of commodities I produce. The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.” 

(TOSV 3 Chapter 20, p 119) 

And, in the Grundrisse, Marx writes, 

“Here a great confusion: (1) This identity of supply, so that it is a demand measured by its own amount, is true only to the extent that it is exchange value = to a certain amount of objectified labour. To that extent it is the measure of its own demand -- as far as value is concerned. But, as such a value, it first has to be realized through the exchange for money, and as object of exchange for money it depends (2) on its use value,but as use value it depends on the mass of needs present for it, the demand for it. But as use value it is absolutely not measured by the labour time objectified in it, but rather a measuring rod is applied to it which lies outside its nature as exchange value.” 

The point is further emphasised in Theories of Surplus Value, 

“It is true that the man who buys has in his possession merely the converted form of a commodity—money—i.e., the commodity in the form of exchange-value, and he can act as a buyer only because he or others have earlier acted as sellers of commodities which now exist in the form of money. This, however, is no reason why he should reconvert his money into my commodity or why his need for my commodity should be determined by the quantity of it that I have produced. Insofar as he wants to buy my commodity, he may want either a smaller quantity than I supply, or the entire quantity, but below its value. His demand does not have to correspond to my supply any more than the quantity I supply and the value at which I supply it are identical.” 

(Theories of Surplus Value 3) 

And the simple growth in the economy, accumulation of capital, and consequent changes in productivity and production are enough to bring about such a change. 

“By the way, in the various branches of industry in which the same accumulation of capital takes place (and this too is an unfortunate assumption that capital is accumulated at an equal rate in different spheres), the amount of products corresponding to the increased capital employed may vary greatly, since the productive forces in the different industries or the total use-values produced in relation to the labour employed differ considerably. The same value is produced in both cases, but the quantity of commodities in which it is represented is very different. It is quite incomprehensible, therefore, why industry A, because the value of its output has increased by 1 per cent while the mass of its products has grown by 20 per cent, must find a market in B where the value has likewise increased by 1 per cent, but the quantity of its output only by 5 per cent. Here, the author has failed to take into consideration the difference between use-value and exchange-value. 

Theories of Surplus Value 3 

So, the assumptions underlying the monocausalists dismissal of the question of demand, in order to distance themselves from Keynes, are themselves false, as described by Marx. In opposing Keynes, they simply line up with Say. 

But, the irony, is that in proposing The Law of the Tendency for the Rate of Profit to Fall as their monocausal basis of crises, they, in fact, line themselves back up with Keynes, Malthus and the other proponents of underconsumption! 

What is the fundamental basis of The Law of the Tendency for the Rate of Profit to Fall? It is that in relation to the two components of the value of national output described above – capital and revenue c and (v + s) – c rises inexorably compared to (v + s). Marx's explanation for that is that, as capital accumulation proceeds, productivity rises. Simple division of labour causes productivity to rise, production on a larger scale causes productivity to rise, as a result of economies of scale, i.e. the marginal cost of production continually falls, as output expands, contrary to the neoclassical theory of diminishing returns. Productivity is measured for Marx by the quantity of use values produced per unit of labour, as opposed to the measurement by orthodox economics of the quantity of exchange-value produced per unit of labour (which necessarily understates actual productivity growth, because as productivity rises, unit values fall). A rise in productivity, therefore, necessarily implies a rise in the quantity of material processed by any quantity of labour, so that, were values to remain constant, the proportion of material value in final output must rise, relative to the proportion of new value created by labour in final output. 

As material comprises the largest element of c, the constant capital, or capital element in the components of final output value, that means that the simple growth in output means that c must rise relative to (v + s). In Marx's terms, the organic composition of capital must rise. If c rises relative to (v + s), then (c + v) must rise relative to s, unless s rises relative to v, by a larger proportion. In other words, the rate of surplus value would have to rise sufficiently, to offset the proportional rise in c. But, Marx also points out that because individual firms have to compete against each other to be more efficient, they also introduce new labour saving machines, to increase productivity, and they particularly do this at times, when labour has become relatively scarce, and so, where they cannot expand the social working day, to obtain additional absolute surplus value, and where the shortage of labour causes wages to rise, as firms compete for available workers. The introduction of such machines, means that a) capital that would have gone as variable-capital to employ labour, now goes to buy machines, whose wear and tear now increases the amount of c comprising a portion of output value, and b) the increased productivity caused by the machines, causes more material to be processed, so that c rises again relative to v. 

According to The Law of the Tendency for the Rate of Profit to Fall, therefore, this rise in productivity causes the organic composition of capital to progressively rise, so that the ratio of c to (v +s) rises, and consequently the rate of profit s/(c + v) progressively falls. It is this fall in the rate of profit that the monocausalists suggest is the basis of periodic crises. But, even at first glance its obvious why this proposition is rather odd. If  is a secular tendency, continually heading in a downward direction, how then can it be a cause of cyclical crises? Surely, if it is a secular trend that persists over long periods, if it is to provoke crises, then these crises should be permanent in nature, and not cyclical! 

Indeed, that is part of the monocausalists argument against underconsumption. Following Marx, they argue, how can underconsumption be a cause of crisis, given that the underconsumption of the workers is a permanent condition? In other words, Malthus argued that the workers can never consume all of what they produce, because if they did, their wages would equal their output, and so there would be no profits. But, he argued, the capitalists are led to use their profits to accumulate more capital, and so to produce more, which leads to an even bigger surplus production, so that the problem becomes that this ever growing surplus product can find insufficient demand, because there is no point using the surplus product to accumulate additional productive capacity, if the existing productive capacity produces more than can be consumed. 

Malthus' solution was for the landlord class, whose paid apologist he was, to continue to fulfil a useful role in society, by consuming this surplus production, along with its lackeys in the state, so that the capitalists could, thereby, realise their profits, and continue to invest them. So, long as the landlords continued to drain rents, and the state to drain taxes from capital, they could use these revenues to consume a portion of the surplus product, enabling the capitalists to realise their profits. Keynes' solution to the question of underconsumption is essentially the same as that provided by Malthus, but leaving the function of soaking up the unsold surplus product solely to the state. 

But, the monocausalists explanation for crisis ends up essentially the same. As Marx sets out, for the Law of the Tendency for the Rate of Profit to Fall to apply, c rises relative to both v and s. In fact, as Marx describes, as a consequence of rising productivity, s rises also relative to v, as the rate of surplus value rises. Indeed, Marx emphasises that although profits fall relatively, they grow absolutely, as do wages, because the mass of capital in total employed expands at a faster rate, so that more labour in total is employed. 

So, The Law of the Tendency for the Rate of Profit to Fall means that a secular trend exists whereby, the proportion of total output that must go simply to replace capital "on a like for like basis", out of current production, rises relative to the new value created by labour. It means, therefore, that workers are able to consume a smaller and smaller proportion of what they produce, because a larger and larger proportion of what they produce must simply reproduce consumed capital, whose value is transferred to final output. 

But, that is precisely the argument of Malthus and the underconsumptionists! Marx agued that underconsumption cannot be used, as Malthus did to explain crises of overproduction, in this way, because underconsumption is ever present. But, that underconsumption is ever present as the basis of The Law of the Tendency for the Rate of Profit to Fall too. Indeed, its not just that workers wages continually form a smaller and smaller part of final output, so that workers are able to buy back a smaller proportion of their output, but that applies also to profits, interest, rent and taxes! In which case, the same argument put to the underconsumptionists can, therefore, be put to the monocausalists. If profit continually falling as a share of total output value is a constant feature, due to The Law of the Tendency for the Rate of Profit to Fall, how can it be an explanation of recurring, and cyclical crises?