Debate on Marx’s law of falling rate of profit, and value-price conversion

Review Article

Which Way Lies the Future?
KK Theckedath, Ma-Le Prakashana, Bengaluru, 2017. Price Rs 60/-

Publication of Volume III of Capital by Karl Marx began series of controversies on value/price relationship. Bourgeois and even some Marxist economists tried to show that there is a contradiction between labor theory of value of Volume I and the determination of price and profit in Volume III.

They are also trying to prove that the Law of the Tendency of Rate of Profit to Fall (LTRPF) of Marx is either wrong or no more applicable.

In this context, the well-known mathematician-scientist and economist Prof KK Theckedath has taken up the questions in his well-researched monograph Which Way Lies the Future? dealing in detail with the views of famous economists Prof Prabhat Patnaik and Paul Sweezy.

It was published on the occasion of Centenary of Russian revolution. According to the author there has appeared “a tension within Marxist analysis between those who have given primacy to the production side… and those who have paid greater attention to the demand side†. (p9) This monograph discusses the so-called ‘inconsistencies’ between Volumes I and III of Capital, the attempts made to drop LTRPF (Law of Tendency of Rate of Profit to Fall) altogether from Marx’s political economy and to show that price is not a transformation of value.

Prof Theckedath says that his monograph is part of world-wide effort to “reinstate the LTFRP†. (Initials used are in different order but this makes no difference.-AR) The Monograph also includes a review of the famous economist Prof Prabhat Patnaik’s The Value of Money (2009).

Tension within Marxist analysis

In this important section, the author discusses the reference by Prof Prabhat Patnaik to the debate between two illustrious Marxist economists, Paul Sweezy and Maurice Dobb. According to Prof Patnaik, the emphasis on production side leads to missing significance of imperialism, while theories emphasizing demand side are ‘more sensitive’ to the role of imperialism.

Prof Theckedath shows that “The two sides, the production side and the demand side…are the two processes in the circuit of capital given by Marx in Capital.†(Pp 9-10) Value is created in the first, while in the second it is realized in the market, converted into money on demand from the purchaser; that is why it is termed ‘demand side’.
Prof Theckedath rightly points out that production and demand sides are two sides of the same process, inter-related dialectically. They each cannot be over-emphasized. Karl Marx in Volumes I and III of Capital has dealt with them in a dialectical unity. Treating them separately would be a methodological mistake.

The author refers to the clarification given by Marx himself. After production, the entire mass of commodities must be sold. “If this is not done…the laborer has indeed been exploited but his exploitation is not realized…†(Capital, Volume III, Moscow, 1978, p 244, quoted on p10) “The conditions of direct exploitation and those of realizing it are not identical. They diverge not only in place and time but also logically.†(Ibid, emphasis author’s.)

In Marxist political economy, the two sides are two stages of the same process.
Therefore, if you are clear about the process of value-creation in production and its realization on the market, you do not miss the significance of imperialism at all!
As we shall further on, Prof Patnaik, Paul Sweezy and Paul Baran have serious problems with the concepts of value and price.

Attack on Marx

There have been ridiculous attempts to show that Marx was at fault on several counts in Capital Volumes II and III, and did not properly ‘understand’ the market processes. The bourgeois economists, as also some Marxist ones, try to show that Volume III is a departure from Volume I, and thus Karl Marx contradicts himself. Suddenly there a surge of ‘sympathies’ for Volume I!

To this end the technical instrument of algebra of simultaneous equations is used to erase the time lapse between production of value and its realization in market. This point is crucial. Even such outstanding names as Paul Sweezy, Paul Baran and Prof Prabhat Patnaik view that value and prices are mutually incompatible and that the LTFRP is no longer valid. They are in favor of casting away “many of the traditional Marxist emphases†.

The monograph at hand is a commendable effort to restore Marx’s political economy to its scientific form and essence. It also successfully restores dialectics as method in political economy. Prof Theckedath refers to the discussions of the Bergamo conference (1994), which clarified certain points and ‘restored in Marxism’. (p13)

We have two magnitudes and two relations under debate: one is surplus value, calculated against variable capital. The other is profit, which is surplus value calculated against total capital advanced in production. They are unscientifically being termed as ‘two kinds’ or ‘schemes’ of calculations.

The capitalist profit, that is, surplus value calculated against total capital, has a tendency to fall, historically speaking. Marx called it the “most important law from the historical point of view.†(Quoted on p24) The drive to keep profits high and to hold back the tendency to fall creates crises for capitalist production and market.
Law of Tendency of Rate of Profit to Fall (LTRPF)

This law has confused many, who have misinterpreted it. The reason is the confusion between value and price and a tendency to give up concept of surplus value, though Marx has clarified sufficiently. Prof Theckedath has described the problems with Prof Prabhat Patnaik, Baran and Sweezy.

Dr Theckedath quotes Alan Freeman’s paper “A Rigorous and General Proof of the Falling Rate of Profit†, contained in the Bergamo conference proceedings Marxian Economics: A Reappraisal, wherein the latter says: “Thus we find…that after a hundred years of nit-picking at Marx’s original statement of the general law of the falling rate of profit, that this law is not merely valid, but scientifically and rigorously exact.†(p13)
Dr Theckedath also quotes Dumenil and Levy (2004) to the effect that in the 1980s, profit rates did reach a low in US and UK, but have since been rising. However, Freeman showed that this was because necessary corrections had not been made for ‘financialization’, in which case the assets functioned as money capital and entered into profit equalization. The corrected rates of profit are indeed falling continuously, as Freeman showed through his charts.

Temporary reversal or suspension does not prove that the law does not function. Rise of finance capital is only a serious symptom and result of this law.

Reviewing Prof Patnaik’s important book The Value of Money (2009), Prof Theckedath comments: “Patnaik’s critique fails to disturb his (Leon Walras’s-AR) equilibrium†(p39), and actually strengthens ‘Walrasian Marxism’. In the process, Prof Patnaik ends up criticizing Marx.

Discussing production and circulation spheres, Prof Theckedath quotes Prof Patnaik to say that according to Marx, sum of values equals the sum of prices, and the sum of surplus values equals the sum of profits. Therefore, as per Marx, “…the equilibrium rate of profit in the price system was nothing else but the general rate of profit (S/(C+V)) of the value system, and the prices of production were nothing else than transformed labor values. The labor values in other words could be visualized as underlying the price system.†(pp40-41)

Prof Patnaik next says that ‘it is generally accepted’ that Marx’s formal reasoning was at fault here: “…For any arbitrary output vector, the equilibrium rate of profit is not equal to S/(C+V), in which case, Marx’s description of a two-stage process…lacks any formal validity.†(p41)

Therefore according to Prof Patnaik, “…the value accounting system becomes a mere add-on as far as the determination of the equilibrium prices is concerned, since the latter system can stand on its own without the rigmarole of labour values.†(p41, emphases by AR)

Prof Theckedath quotes Prof Patnaik to the effect that “Samuelson’s description of values and prices is not without substance.†Prof Theckedath says that to impress this point he could as well have given a more poetic quotation from Joan Robinson:

“Voltaire remarked that it is possible to kill a flock of sheep by witchcraft if you give them plenty of arsenic at the same time… Marx’s penetrating insight and bitter hatred of oppression supply the arsenic, while the labor theory of value provides the incantations.†(p 42)

Says Prof Theckedath that “the flow of time, in all things, is the essence of the dialectical approach.†(p 43) The element of time is killed in the equilibrium economics of Walras, Bortkiewicz and others.

These are astonishing statements, coming as they are from a prominent economist like Prof PAtnaik, as also Paul Sweezy and Paul Baran. How can they commit such mistakes is beyond understanding. It is surprising that Prof Patnaik devalues ‘value system’ by treating it as mere ‘add-on’ (!) on the ‘price system’! How then will you determine prices, if the values are ‘value-less’!! How can one consider value system as a ‘rigmarole’?! Is this not holding the concept of value in a poor light?

Value is not an ‘add-on’ over price at all; they are not two separate ‘systems’ but a single dialectical process. Price system is a conversion of value system, as Marx himself clarifies. Value expresses itself as price in the market via exchange value.

Marx clarifies the issue by showing the difference between cost-price and the price of production. The cost-price does not include the unpaid labor (surplus value), while the price of production does. The capitalist sells commodity at ‘price of production’, as if surplus value has been paid! This is a crucial point.

As Marx himself shows, surplus value and profit represent qualitatively different relations. The former is a scientific Marxist analysis of the capitalist mode of production; the latter is the representation of the same from a bourgeois point of view. The former shows the source of profit in surplus value. The latter covers it up. (Capital, Volume III, Moscow, 1978 edition, p42 and elsewhere.)

The surplus labor contained in the commodity costs the capitalist nothing. This is the source of market processes.

The capitalist’s profit is derived from the fact that he has something to sell for which he has paid nothing. (Capital, Volume III, 1978, p42)

Rate of profit expresses nothing but a different way of measuring surplus value. (Volume III, p47)

Why then is the so much confusion, so much that well qualified academics and authorities too are confused?

Essence of time and dialectical method

In Marx’s famous formula at the beginning of Capital, Volume II on M-C…P…C’-M’ etc, the dots represent the interval of time taken by commodities to transform into money, a crucial time lag between production and circulation processes (production of value, its realization as price). Relevant quotation from Marx above (p244 of Volume III) clarifies it.

The author points out rightly that the essence of time is killed in the so-called ‘equilibrium economics’ of Bortkiewicz, Walras, Sweezy and Paul Baran. An important book dealing with ‘Walrasian Marxism’ is ‘Marx and Non-Equilibrium Economics’ by Alan Freeman and G. Carchedi. (1996). Samuelson and Patnaik conclude that “the new output values are the old input values plus the labor incorporated.†(p 45)

This is incorrect. The concept ‘the labor incorporated’ is imprecise and open to loose interpretation. As Prof Theckedath shows, “The value of the output is equal to the value of input plus the abstract labor used in production.†(p46)

It would have been more precise to state that the value of output is the value of the input plus the value of labor power expended, and that equals value of abstract labor.
Author says, “Linear simultaneous algebra cannot be used to deal with Marx’s results. The mathematics required is of a non-equilibrium situation, with difference equations and, in continuous case, differential equations. It is time to recognize ‘poverty of algebra’†. (Ibid)

The booklet contains, at the end, some relevant and useful quotations from Marx, and also two appendices on the ‘Dialectics of the Soap Bubble’ and on ‘Conjunctural Analysis’.

Paul Sweezy, surplus value, transformation problem and LTRPF

In Appendix I (p48), Monograph mentions the crucial point that Sweezy and Baran in their Monopoly Capital openly give up the concept of ‘surplus value’ in favor of ‘surplus’. This is the source of confusion! This school of political economists has given up the use of concepts of value, surplus value, rate of surplus value, labor theory of value, LTRPF and so on, feeling that these concepts do not explain processes within imperialist/finance system.

There is nothing wrong in criticizing Marx, if his theories are really shown to be outdated, but this has to be scientifically and dialectically proved. Otherwise one becomes mechanical, and goes against Marxist political economy.

Paul Sweezy in his celebrated ‘Introduction’ (Ed. Paul Sweezy, Karl Marx and the Close of his System, Etc., Merlin Press, 1975, Introduction, p. xxiii) confuses profit with ‘rate of profit’, saying there is a ‘flaw’ in Marx of Volume III: theory of LTRPF contradicts the ‘obvious’ fact that under capitalism, equal investments tend to yield ‘equal profits’. This is a mistaken statement, as Marx does not talk of volume of profit but of the rate of profit. Marx clarified that the same rate of surplus value may yield different rates of profit.

Sweezy also accuses Marx of dropping assumptions of Volumes I and II and in Volume III. (Introduction, ibid, p. xxiii) This is also factually wrong. Solution of LTRPF has been the goal of all political economy since Adam Smith, but it has been running in circles and has never been able to separate surplus value from profit. (Capital, Volume III, pp213-14) Marx showed that market economics begins with prices and market, and is unable to reach the essence (value and surplus value).

Sweezy claims that Marx uses ‘flawed’ method of using two different ‘schemes’ (of value and price) for production and market, and for input and output. (Sweezy, xxiv) This is wrong, again. Marx does not talk of any ‘scheme’ but of transformation of values into prices. In market things appear upside down.

In the light of these arguments, it is clear that the source of confusion in Prof Patnaik, Sweezy and Baran is a mix-up of value and price, as Prof Theckedath has shown ably in his very useful booklet.

Booklet could have been better composed and also should have avoided certain repetitions. Yet it is packed with concepts in defence of Marxism.
Updating Marxism is one thing, confusing its basic concepts another.