When the Invisible Hand Shakes: An Interview with Alan Freeman

by Tom O'Brien on May 21, 2013

This week’s From Alpha 2 Omega — After a brief holiday to bask in the cold and brutal wet weather of Ireland and England, the show is back on the road, fueled up, and raring to go. This week’s guest is Professor Alan Freeman, where we talk about the falling rate of profit, crises of capitalism, and our way out of the current economic mire.

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The interview is loosely based about a paper of his just published in the Journal of Australian Political Economy called The Profit Rate in the Presence of Financial Markets: A Necessary Correction. You can see Freeman talking about it at the recent Historical Materialism conference in New York:

Freenab is a retired but research-active cultural economist. He formerly worked for the Mayor of London’s Economic Analysis Unit where he was responsible for the Living Wage, Innovation, and the Cultural and Creative Industries. He is co-editor, with Radhika Desai, of a new book series entitled ‘the Future of World Capitalism’, published by Pluto Books. He is one of a small club of economists who predicted the crash of 2008, and in 2008 he also predicted that the economic crisis would not leave the industrialised countries until these countries undertook public investment on the scale associated with U.S. government spending during World War II (about 55% of GDP). He is a visiting Professor at London Metropolitan University where he works on the Cities Cultural and Creative Evidence project, and currently lives in Winnipeg, Canada.


{ 16 comments… read them below or add one }

Pham Binh May 21, 2013 at 4:53 pm

Marx’s conception of value is not about price, capital (in the sense that Marx used that word) is not physical goods (machines, plants) but a social relationship, and there’s no law pushing the rate of profit downwards.

All the data in the world does not matter when the underlying methodology is faulty. We might as well measure skulls to determine intelligence.


Arthur May 21, 2013 at 6:36 pm

My eyes glazed over while reading Alan Freedman’s paper.

But as far as I can make out he simply treats fictitious capital as real in order to increase the denominator and thus obtain an empirical fall in the rate of profit.

This seems to involve somehow pretending that investments in financial assets somehow involve assets without liabilities and “compete” with investments in “physical” capital rather than being a way that such investments in physical capital are financed.

I can’t quite believe that it really is that silly and shallow. But that’s the impression I got.

Re Heinrich’s argument against the law of the tendency of the rate of profit to fall, I agree it has been wrongly taken as central to Marx’s theory of crisis (and in fact used as the basis for some other theory of crisis).

But the social relations expressed by value do unambiguously imply such a law (which is now tacitly accepted even in bourgeois accounts such as neoclassical growth theory).


John Halle May 22, 2013 at 9:12 am

YES! Never too much FROP theory. Only when the left reaches universal consensus on whether profits do (or do not) have a tendency to fall under capitalism can we begin to discuss oh, I don’t know, climate catastrophe, jobs crisis, civil and human rights, whatever. All that stuff is so reactionary. In fact, I would urge a complete moratorium on all topics other than FROP. Your full, complete and exclusive attention to this matter is urgently required. Weigh in NOW or find yourself on the wrong side of history!!!


PatrickSMcNally May 22, 2013 at 9:49 am

Also, never too much “Vote Democrat!” theory. Only when the Left reaches universal consensus on a need to take over the Democrats by running pro-Israel candidates like Sanders can we begin to discuss anything like proletarian revolution.


Pham Binh May 23, 2013 at 12:05 am

Sanders did a lot of good in local politics and paved the way for the strongest third party in this country, the VPP, which helped win single payer in Vermont. If we had 60 Sanders in the Senate and a Sanders majority in the House, we could get single payer nationally and a whole range of important economic, political, and democratic reforms.

By contrast, endlessly discussing proletarian revolution and shouting long live Trotsky and (one of) the Fourth Internationals for 8 decades has gotten us exactly zero millimeters closer to that revolution.


PatrickSMcNally May 23, 2013 at 7:14 am

“win single payer”

Again, that statement is clearly premature. The claim is that something like single-payer may come into place by 2017, if it is judged that the costs will not be any greater than at present. Otherwise, the deal is off. You’re hyping this into something much bigger than it is.


Pham Binh May 23, 2013 at 9:48 am

Premature? The operative word in my statement was “if.” Last I checked, we only had 1 Sanders in Congress, so only a hopeless optimist could imagine we’d win single-payer in 2017, especially when we haven’t even begun to see a mass revolt against Obamacare gain traction.


PatrickSMcNally May 23, 2013 at 10:16 am

“which helped win”

I don’t see an “if” in there.


John Halle May 23, 2013 at 10:37 am

I will not allow this conversation to get diverted into useless irrelevancies such as the prospects for building a socialist third party. To repeat: There is one topic which demands the exclusive attention of all leftists of good conscience. FROP! FROP NOW! FROP FOREVER!


Pham Binh May 23, 2013 at 11:05 am

We’re talking about two different things — single-payer on the federal level and on the state level.


Pham Binh May 22, 2013 at 9:52 am

Yes, if only we could all agree to cook their books, capitalism would be fried for sure.


Jurriaan Bendien May 25, 2013 at 9:11 pm

If you study the background information of US Budget data, and consult BEA data on capital formation and capital stocks, you can see straightaway that the private capital invested in physical means of production is only the minor part of the total stock of physical capital assets. So the very process that Marx focused upon in Capital, i.e. capitalist production, ties up only a minor part of the total capital stock. What does the rest consist of? Mainly various kinds of real estate. If you then consult McKinsey Quarterly surveys on capital markets, you can see that aside from physical assets there is also a very large stock of traded financial assets. If you put together the financial assets with the unproductive physical assets, you get an asset value which dwarfs the stock of private means of production. It is certainly true that there exists a tendency of the rate of profit on industrial production capital to fall, but it is a bit ludicrous to think that this alone can be the root cause of the contemporary economic malaise. Simply put, to get profit you don’t need to produce stuff for sale necessarily, and Marx never argued otherwise. All that is needed is that you buy an asset and sell it at a profit. And that is in fact mainly what the bigger investors do. Their profit consists largely of capital gains and arbitrage operations (cf. Michael Hudson on this). If you really want to understand something about how capitalism works these days, you have to start off by understanding that there is one capital base in production, and another capital base in the non-productive sphere, and that they both generate profit. What Marxists typically ignore is the gigantic trade in already existing assets which are not output of new production. That leads to a lopsided, not to say stunted view of the reality of the capitalist economy such as it exists today. I think.


PatrickSMcNally May 25, 2013 at 10:23 pm

A central point which was understood by many early socialists was that productive capital is the vital underpinning to all forms of profit. Financial capital developed because in the earliest settings one might have an individual who has a business idea for which they need some money to pay start-up costs before the business can begin to roll in profits. So in the simplest form of solution they would seek an interest loan to raise the money. Whoever gives them that loan doesn’t really care about the success of the business, but has simply judged that the borrower has enough collateral that the loan should be profitable. Now suppose that the lender decides that they are not really so confident, but that they can purchase a financial insurance option somewhere else from someone else who has even more money. This pattern can grow into a great cycle where many of those involved are making financial purchases of stock insurance assets without any idea of how does the whole web tie in to productive capital. But ultimately it has to tie in to such, or else the house of cards comes down eventually. That was what happened in 1929 & 2007.


Matt June 4, 2013 at 3:07 pm

“What does the rest consist of? Mainly various kinds of real estate.” RIGHT. Hence one importance of revisiting the theory of rent. The other importance – of obvious import for the class struggle – is, as I’ve noted on Michael Roberts blog, to Artesian, etc., that workers, more than anyone else, pay rent for housing, including in the form of mortgages for owner-occupation (and in countries like the U.S. for some privileged workers to buy second houses/apts. to function as petty landlords). This rent paid is not a part of the variable capital that is destined to be (in turn) exchanged against the consumer commodities necessary to the reproduction of labor power. That is because rent, by (the Marxian) definition, is simply a transfer of (monetary commodity) value in exchange for access to a use value of nature (“natural resources”), land in this case. As a monetary expression of value magnitude, it is *not* the equivalent value realization of the commodity in relative form (in the formula C1 -> M, C1 occupies the relative form of value, M the equivalent form), because “natural resources”, not being use values as the product of human labor, are not commodities.

On this basis I would assert that this transfer has the social character of *tribute* – a private “tax” – one variably integrated to the capitalist mode of production, and emphatically not an “articulation” of different modes of production, as with modern slavery, nor is it to be confused with the concept of a “tributary mode of production” itself. As such, the value magnitude of this tributary transfer does not find *absolute* regulation by the law of value; rent finds its closest relative regulation as such within capitalist production as a whole, where such transfers occur and are managed within the class of owners themselves. However, such tributary transfers do not necessarily find said regulation within the sphere of consumption. Although standing outside capitalist production, it is an integral part of capitalist accumulation. In particular, with regard to worker’s consumption, this means rents can vary absolutely in relation to variable capital advanced, and relatively in proportion to the “real wage” bundle of consumer commodities. In this way rising rents can squeeze the real wage, producing a crisis in the reproduction of labor power. In the absence of strong worker’s organizations – like today – this crisis becomes the ultimate terminal point for capitalist accumulation crises, resulting in a break in the circuit here, as in 2007-08 as “subprime” workers could no longer pay the rents demanded by the capitalist class (via mortgage banks as “class representative”) on the basis of their pyramiding investments in this sector.

Jurriaan’s relation of fictitious capital to the “source” of profits (form surplus value of course) is OTOH just confused and wrong. Fictitious capital in general is nothing more than a distributive claim to a portion of the total surplus value; it has nothing to do with the production of that surplus value. As such, it *does* have a part to play in the *transformation* of values into prices, surplus value into profits – the so-called transformation “problem” that is actually a non-problem, and here I am in total agreement with Freeman/Kliman . Perhaps that what Jurriaan means. However I’d note that Jurrian’s general point is not far off from what Freeman is doing in his article and video preso: moving from the theory of production to the theory of accumulation. These are two different, if obviously related, objects.

Heinrich is what I’d generally classify as a “Monetary Theory of Production” theorist. This is a quite diverse trend, encompassing everything from MR style “financialization” and price-driven “monopoly capital” a la Sweezy, to “monetary circuit” theorists such as Augusto Graziani and Riccardo Bellofiore (“Rosa Luxemburg and the Critique of Political Economy”) and Neo-Georgians such as Michael Hudson, to “alternative mainstream” economics in the Post-Keynesian and “Non-Equilibrium Economics” whose prominent avatar is Paul Krugman. I would call all of these “institutionalist” or “neo-institutionalist” and by no accident they can all trace some inspiration back in part to a couple of Germans, Thorsten Veblen and Joseph Schumpeter, as well as of course, J.M. Keynes.

Of course it is not that institutions are not a legitimate subject for analysis. The point is though to explain *why* certain institutions are characteristically produced by a given mode of production, as the inevitable result of that mode of production. The above though, tend to pose the question the other way around, though it must be said that the Graziani trend is aware of of this methodological issue and attempts to straddle/surmount it.

Finally, contrary to some of the silly counter-positions of theory and practice presented on these comments, whether or not a theoretical framing is adequate to the perception of reality has a huge impact on our ability to act. See the above on rent as Exhibit No. 1.


Jurriaan Bendien May 26, 2013 at 5:12 am

“A central point which was understood by many early socialists was that productive capital is the vital underpinning to all forms of profit.” This is simply not true. It’s a basically Smithian idea. What early socialists were concerned about was the distinction between earned and unearned profit. What is true that the productive base of society sets a limit for how fast an economy can expand, in the very basic sense that if more stuff is to be distributed, it has to be produced first. It is also not true that productive capital was there first, and then financial capital emerged. As Marx himself noted, usury capital and rentier capital already existed a long time before capitalist industry emerged. Long before the factory system emerged, merchant houses were already engaging in banking and insurance activities. Marxists assumed in their reproduction models that income was either consumed or reinvested in production. But of course that is not strictly true. The income is als used to buy physical assets and durables, as well as financial assets. And so parellel to the accumulation of production capital is the accumulation of non-productive capital. It is true that a financial panic leads to a devaluation of capital assets and a drop in spending, so that production growth drops off. But the point is that the falling rate of profit in industry (in the sense that Marx talks about it) was not the direct cause. The profitability of industries in the real world is not calculated at all in the way that Marx calculated it. A real business doesn’t simply invest in means of production and labour, and its income doesn’t simply consist of value added through production. We shouldn’t confuse a simplified model with the reality of business. All Marxist estimates of profitability are based on value-added statistics in national accounts, but those data diverge from true profitability both because some profits are never counted and because part of the profits is transferred to tax havens.


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