This paper will show that the first three points are factually incorrect. The rate of profit never recovered. And the rate of accumulation fell because the rate of profit fell, not because portfolio investment increased at the expense of productive investment. Thus the fall in the rate of profit is a key indirect cause of the sluggish growth, debt buildup, and the crisis. The paper will also discuss the political implications of this controversy.

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Okishio began as a bourgeois marginalist mathematical economist but evolved toward Marx. According to the Okishio theorem, as long as the real wage remains unchanged it will never be in the interest of an individual capitalist to adopt a method of production that will cause the rate of profit to fall.

Marx showed that the real wage—the use values of the commodities the workers buy with the money they receive in exchange for their labor power—is determined by what is necessary to reproduce their labor power. Marx explained that the real wage consists of two fractions.

The real wage can never fall below this level for any prolonged period of time. If it did, the working class would die out and surplus value production would cease. The second fraction is the historical-moral component, which depends on the history of a given country and the course of the class struggle. The latter fraction of the real wage enables the workers to a certain extent to participate in the fruits of the development of civilization.

By contrast, Okishio assumed that the real wage of the workers would never change. Okishio then went on to prove mathematically that assuming this unchanged real wage it would never be in the interest of an individual capitalist to adopt a method of production that would actually lower the rate of profit.

Assuming this unchanged real wage, the only innovations that would be adopted by the capitalists would be those that would raise the rate of profit. Marx, however, never attempted to demonstrate that the rate of profit would fall if the real wage were fixed. Instead, Marx showed that a given rate of surplus value can express itself in different rates of profit with different organic compositions of capital.

This was a great advance beyond Ricardian economics, because Ricardo had under the influence of Adam Smith ignored constant capital. Adam Smith held that constant capital can always be reduced to variable capital if you go back far enough. Under the influence of this incorrect idea of Smith, Ricardo treated the rate of surplus value and the rate of profit as identical.

Constant capital—fixed capital, raw materials and auxiliary materials—yield a zero rate of profit. Therefore, looking at the total social capital and assuming a given rate of surplus value—again holding other variables constant—the more the total social capital consists of constant capital as opposed to profit-yielding variable capital, the lower the rate of profit will be.

It is not hard to calculate examples where a higher rate of surplus value will express itself in a lower rate of profit. It is perfectly possible, therefore, for a rising rate of exploitation of the working class to express itself in an actual fall in the rate of profit. Robert Brenner and the falling rate of profit Some years ago, the Marxist historian Robert Brenner published a book-length article on crises in the world capitalist economy in the English socialist journal New Left Review.

Marxist writers sometimes do this for reasons of popularization. However, Brenner made it clear that he was omitting the Marxist categories not for this reason but because he rejected them. This is particularly ironic, because Brenner attributes the post economic crises of capitalism precisely to a fall in the rate of profit, which he holds has been occurring since the end of World War II. Brenner summarized the Okishio theorem as holding that no capitalist would ever adopt an innovation that actually lowers the rate of profit.

How could Marx have overlooked such an elementary point! However, Brenner in his New Left Review article and in other writings does put a falling rate of profit at the very center of his analysis of the contemporary world capitalist economy and its crises.

Why competition, Brenner explains. Since the end of World War II, competition among the capitalists has been steadily increasing. According to Brenner, this increasing capitalist competition has led to a strong downward tendency in the rate of profit.

And the fall in the rate of profit is behind the worsening crises of contemporary capitalism. And I believe it is the opposite of what Andrew Kliman is attempting to do as well. The rate of profit could fall if real wages rise, according to Okishio Actually Okishio did not deny that if the real wage increases the rate of profit could fall. But in this case, the supporters of Okishio claim that the fall in the rate of profit is caused by a rise in the real wage, not a rise in the organic composition of capital.

Why would industrial capitalists ever introduce an innovative method of production that increases the organic composition of capital and therefore reduces their rate of profit? An individual industrial capitalist might very well introduce a new method of production that increases the ratio of constant to variable capital—in everyday language introduce a labor-saving method—if it reduces the cost price—constant capital plus variable capital.

That is, the capitalist will introduce the new labor-saving method only when the savings in the variable capital is greater than the increased cost of the constant capital—dead labor. This is true because our innovating capitalist only lowers the individual value of the commodity produced and not its social value. However, during the interval between the introduction of a new innovation by a particular capitalist and its generalization, our pioneering industrial capitalist is able to sell his or her commodities at a price well above the individual value—or individual price of production—though not above its social value—or social price of production.

This occurs every day in world capitalist competition. However, once the innovation becomes generalized, the social value will fall, and sooner or later the price of the commodity—assuming the value of money remains unchanged—will also fall as market prices adjust to the new lower prices of production. Once prices have adapted to the new lower values and production prices of the commodity—which cannot happen without a competitive struggle, of course—and the rate of profit has again become equalized in all branches of industry—which also requires a competitive struggle—the general rate of profit will, all else remaining equal, be slightly lower than before.

Therefore, did our capitalist make a mistake in introducing the innovation? Not at all. For a transitional period—perhaps a prolonged transitional period—our innovating capitalist made a super-profit above and beyond the previous rate of profit. In the case of a loss, our laggard will lose all his or her capital sooner or later. Therefore, the drive of every individual industrial capitalist to increase his or her particular rate of profit can very well lead to a fall in the rate of profit for all the contending capitalists.

Unless our capitalists are able to organize a universal cartel that outlaws any innovation that increases the organic composition of capital—something the mutual antagonism among our competing capitalists renders impossible—there is no way to prevent a rise in the organic composition of capital. And this will mean— assuming the rate of surplus value remains unchanged and all else remaining equal as well—a fall in the rate of profit.

The supporters of the Okishio theorem claim that they have taken these effects into account, and say that their mathematical proof still holds. As long as the real wage but not the rate of surplus value remains unchanged, no industrial capitalist will ever adopt an innovation that will lead to a general fall in the rate of profit. Only innovations that raise the rate of profit will be adopted.

Marx versus Okishio But remember, Marx never attempted to prove that the rate of profit would tend to fall if the real wage remains unchanged. He only demonstrated that the rate of profit will fall assuming a given rate of surplus value—all other things remaining equal—if the organic composition of capital rises. If they do so insufficiently, the rate of profit might still fall even as the rate of surplus value rises.

If the rate of surplus value remains fixed, a rise in the productivity of labor that is implied in a rising organic composition of capital will mean that the standard of living of the workers will rise absolutely, even as it stagnates relative to the total national income wages plus all incomes derived from surplus value.

This brings us to the fatal flaw in the Okishio theorem. The fatal flaw in the Okishio theorem Okishio was a rigorous mathematical economist. How do we in a mathematically rigorous way actually compare the real wage in one period with the real wage in another period? Before we can compare the real wage at two different points in the development of capitalism, we have to render the two real wages earned by our workers in the two different periods quantitatively comparable.

That is we have to render the use values of the commodities that workers buy with their wages quantitatively comparable.

But before we can do this, we have to render the use values of the commodities the workers consume qualitatively identical. And here the Okishio theorem breaks down. Back to the corn models One way to render real wages qualitatively identical and therefore quantitatively comparable is to assume that real wages consist of a single commodity—such as corn of a given quality.

Or alternately that real wages consist of commodities whose use values never change and remain in exactly the same proportion to one another. Both are fantastic assumptions that are completely divorced from reality. Therefore, there is no way to apply the Okishio theorem to real-world capitalism. In the real world, there is no way to compare quantitatively the real wage at different times in the history of capitalist production.

As the organic composition of capital rises and labor productivity rises with it, the commodities that the workers consume change qualitatively and not simply quantitatively.

Therefore when applied to real-world capitalism, the Okishio theorem is mathematically undefined. As far as the logic of his math is concerned, Okishio might as well have divided by zero. The comparisons we cannot make For example, suppose we wanted to calculate the rate of profit today compared with the rate of profit in the epoch of Marx. We have to make a quantitative comparison of the use values that workers buy in London in the year with the use values of the commodities that the workers who lived in London bought with their wages in Today, except for maybe the worst paid workers in third world countries, workers have to purchase electricity for electric lighting, for example, and also acquire cheap radios, telephones and televisions.

Better-paid workers—workers who live in the imperialist countries like Britain, for example—purchase many other commodities as well. For example, they buy automobiles to get to work, electric-powered clothes dryers and dishwashers, vacuum cleaners and computers. None of these use values even existed in How many s dial phones equal a cell phone of today? What movies came preloaded on s dial phones? Exactly how many black and white TVs from the s equal in use value terms a modern color TV made in ?

As soon as you start to talk about real wages, you are calculating in physical terms. When analyzing the capitalist economy based on profit, which is measured in money—exchange value—terms, any attempt to explain it by calculating in physical terms, Kliman correctly points out, ends in a blind alley. An hour of abstract human labor—a social substance—is qualitatively identical with any other hour of abstract human labor in both space and time. Therefore, the values of the money the workers were paid in say London in and are paid in London in are quantitatively comparable.

Similarly, we can compare the organic composition of capital in the two epochs, since the organic composition of capital is a ratio of values—constant and variable capital— consisting of hours of abstract human labor.

These comparisons are logically consistent in the real world. Any element of truth in the Okishio theorem? That is, the ratio of unpaid labor performed by the working class to the paid labor will have risen sharply.

Or, what comes to more or less the same thing, the labor value of labor power will have fallen sharply. Changes in the organic composition partially governed by the rate of surplus value What governs changes in the organic composition of capital? Of course, the advances of science and technology play an important role here. Technical composition of capital versus organic composition of capital The technical composition of capital is not the same as the organic composition, because the technical composition involves ratios of use values—and therefore cannot be calculated in a mathematically rigorous way—while the organic composition of capital involves a ratio of values—the ratio of the abstract labor embodied in the commodities that make up the constant capital to the abstract labor embodied in the commodity labor power.

Therefore, the rise in the organic composition of capital—which involves a ratio of labor values—will not be as great as it might first appear. But if we assume a given rate of scientific and technological progress, the evolution of the organic composition of capital will be governed by the evolution of the rate of surplus value.

The reason is that while on average an industrial capitalist has to pay the full value of the commodities that make up constant capital—dead labor—the industrial capitalist only pays for a fraction of the living labor of the workers.

If it were otherwise, no surplus value would be produced and there would be no profit. The higher the rate of surplus value the closer we are to the mathematical limit where all living labor is unpaid labor. The lower the rate of surplus value the closer we are to the opposite mathematical limit, where no surplus value is produced and the rate of profit falls to zero.

This means that the higher the rate of surplus value—assuming a given rate of inventions from the domain of science and engineering—the lower the organic composition will be at a given point of time in the future, because capitalists will have less incentive to replace living labor with dead labor.


Andrew Kliman

What is the point of this lie? The organisers of this debate do not believe in the capability of Taaffe and Walsh to prove that a fall in the rate of profit did not precipitate the current crisis. But we believe that their position, which is widely held in the bourgeois press, deserves to be represented in this debate. We recognise that this is not ideal. There are several thousand members of the CWI internationally.

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