Reviews: Andrew Kliman’s Reclaiming Marx’s Capital and The Failure of Capitalist Production

by Ravi Bali on August 20, 2013

When Karl Marx wrote Capital, it was the crowning achievement of a lifetime spent in political and theoretical struggle. Published in three volumes, with a further three books on Theories of Surplus Value which, taken together, constitute the fourth volume, Capital runs to thousands of pages. It is a critique of the previous best attempts to explain the laws that shape capitalist development, such as the classical economists like Adam Smith and David Ricardo.

Due to the sheer length and complexity of Capital, few people have actually taken the trouble to read it carefully. Capital must rank as one of the best-known but least-read works ever published; most of us will have gleaned what we know about Capital through commentators or interpreters. And therein lies the problem. Marx’s explanation of capitalist development is far removed from conventional accounts of how our society functions — in particular, the Anglo-Saxon tradition that takes the isolated individual as its starting point. This is not a coincidence, as the viewpoint of the isolated individual corresponds more closely to the surface appearance of how we relate to our society and are expressed in the liberal ideals of opportunity, meritocracy, and self-reliance.

The viewpoint of the isolated, self-determined individual is the default setting for anyone considering their place in our capitalist world. This means any analysis that is not based on this subjectivist attitude will seem counter-intuitive. Moreover, the philosophical ideas that dominate our society and frame our thinking are those that accompanied the birth and rise of capitalism. These ideas, embodied in the industrial and scientific revolutions, were those of mechanical materialism – including the use of metaphors derived from mechanics to describe society. But when looking at social phenomena we can get only so far in using mechanical metaphors. As thinking beings, we are not reducible to cogs in a machine, our subjectivity also has to be accounted for. Here organic metaphors can be more useful, in that they capture unfolding possibilities. However, this too can be taken too far: there is no predictable fixed outcome that societies are definitely heading towards, and unlike plants and animals, we can influence our form of development.  This is the importance of dialectics, looking at objective social processes as constituted by beings with subjectivity and consciousness.

The difficulties of making Marx’s ideas correspond with our common sense notions is what often leads to problems in getting to grips with his work.  To understand Marx is to initially plunge into an unfamiliar mode of thought.  It is to think historically and (that much abused word, dialectically).  One cannot hope to grasp the meaning of Marx by simply applying rules of formal logic. Dialectical thinking recognises that social development is the process of both un-becoming (moving away from one state) and becoming (towards a different state). At any time, any social object (e.g., a society) may both be one thing and contain within itself the possibility of becoming other than what it is.

When familiarising oneself with Marx’s work, and Capital in particular, one must bear this dialectical way of thinking in mind. To look at society as a historically produced entity with its own laws of development and to capture these in concepts that we can understand is a formidable task. Because of this, it is not easy or straightforward to comprehend Capital in its entirety and lots of people have got lost in the effort of trying. There are a quite a number of commentators on Marx who have failed to see the whole of Capital as advancing a single picture of capitalism as a social system.

Andrew Kliman is someone who has studied Marx very closely and believes that the old revolutionary still has something vitally important to tell us about how our society works.  He has pulled off a remarkable feat with his two recent books, Reclaiming Marx’s Capital and The Failure of Capitalist Production. In these, Kliman has not simply given us another guide to Capital, but rather has drawn out its central purpose and shown its contemporary relevance. 

While each book stands alone as a very worthwhile read, I recommend you start with Reclaiming Marx’s Capital, as it establishes the foundation for The Failure of Capitalist Production. In Reclaiming Marx’s Capital, Kliman deliberately restricts himself to the question of the theoretical consistency of Capital. Here, he argues that if Marx’s argument can be proved to be self-contradictory then it can be dismissed as irrelevant. So only once Marx’s work has been acquitted of the charges of internal inconsistency can Kliman move on, in his second book, to the applicability of using these theoretical categories to explaining the current economic crisis.

This review will look at each book in turn.

Reclaiming Marx’s Capital is an extended treatise countering the attacks on Marx’s crisis theory, arguing that those critics and “defenders” of Marx who support these attacks have misunderstood his work, making it appear incoherent. For Kliman, many who have claimed to be working in the tradition of Marx have done great violence to the legacy of his thought. When Marx is interpreted according to his own assumptions rather than those incorrectly attributed to him by both his critics and those “defenders” who feel his work needs their correction, Marx’s central argument stands as entirely consistent. But this is not a straightforward case: various passages in Marx’s work are ambiguous and the intended meaning contested.

The subtitle of Reclaiming Marx’s Capital is “A Refutation of the Myth of Inconsistency”. The book’s main target, then, is the variety of misunderstandings of Capital that have led commentators to accuse Marx of inconsistency. Kliman’s purpose is to give a reading of the argument in Marx’s Capital that shows it to be a coherent whole. He makes clear in his first book that he is not trying to establish Marx’s theory as true, but rather attempting the more modest task of showing it as coherent, that it makes sense on its own terms. Kliman’s hope is that if the hasty dismissal of Marx’s crisis theory as inconsistent can be exposed as based on clear misunderstandings, it may be possible to create a new audience for his work.

The most central aspect of Marx’s thought that Kliman seeks to defend is the tendency for the rate of profit to fall, though Kliman uses the abbreviation LTFRP (law of the tendential fall in the rate of profit). The LTFRP is the expression of how the introduction of labour-saving technology has the effect over time of depressing the rate of profit. Marx’s contention in Capital was that there are specific laws that regulate the way in which capitalists accumulate wealth. Capitalist accumulation generally takes place by advancing a certain quantity of capital used to employ labour (and other means of production such as raw materials, land, and machinery) to produce something for the market.  This product is then sold on for more than was initially advanced and the capitalist increases the size of his capital. This making of profit is both the incentive and motor force of capitalism. As long as sufficient profits are being made, then capital can accumulate, and we will have economic growth. If something interrupts this making of profit, then capitalism grinds to a halt.

Based on a modified labour theory of value, what Marx was able to show was that there is a consistent trend for capitalism to continually undermine the basis of its profit, and thereby its own functioning. This arises from the fact that any individual capitalist will try to improve the efficiency of his operation through introducing labour-saving technology. He can for a period either make higher profits by having a more streamlined operation while charging the same price for his product than his now less efficient competitors or alternatively undercut his competitors on price and gain a greater market share. These technological improvements will eventually be adopted by his competitors, thereby making this more efficient level of production the new industry standard. This has the effect of squeezing out the living labour that is the source of all profits. This in turn has the eventual effect of lowering the general rate of profit. It is thus ironically the profit maximising behaviour of each individual capitalist that ultimately has the effect of reducing the rate of profit for the capitalists as a whole.

The reason why this most important of Marx’s laws of capitalist motion is counter-intuitive is that I assumed that improved productivity, cheapening the production process, should for a smaller outlay allow us to make higher profits (assuming we sell at the same price). Assume this for the operation of the whole economy. In a system based on market exchange, as labour-saving technology spreads there is a general effect of lowering the market price of the finished product(s) over time. The interests of each individual capitalist is to raise their labour productivity (reduce labour time for making their individual product) but this ends up reducing the rate of profit for all capitalists. Therefore, the underlying pattern of capitalist development is for a rising proportion of the capitalist’s outlay to be on machinery and materials (called constant capital) and a falling proportion on paying workers (called variable capital). This is referred to by Marx as the rising “organic composition of capital”. It is the reason that there is a LTFRP: living workers that are the only source of surplus value and therefore of profit are reduced as proportion of total capital, therefore the ratio of profit to total capital goes down. Of course, the LTFRP is not the only tendency in capitalism: otherwise the system would have long since collapsed. There are factors that slow and can even temporarily reverse the direction of an ever higher proportion of constant to variable capital, but these do not stop for long the dominant trend of technological improvements causing the LTFRP and thereby the possibility of economic crisis.  

Kliman knows that anyone who is familiar with Marx will be aware of his labour theory of value. He goes on to demonstrate that the many people who have tried to correct Marx’s argument on the LTRPF fail to use it. He painstakingly goes through the variety of ways in which those who say that Marx’s argument is inconsistent are in fact not basing their own arguments on his value theory, but instead are smuggling in their own assumptions. These assumptions, Kliman argues, violate Marx’s principle that socially necessary labour time is the only source of a commodity’s value and that surplus labour (labour performed by the worker that is not paid for by the capitalist) is the sole source of surplus value and profit. Having failed to develop their arguments from his premise, their “improved” interpretations of Marx are always going to be at variance with Marx’s own arguments and conclusions.

It is in using the criterion of the need to understand Capital as a whole that Kliman goes through the different ways in which those who accuse Marx of inconsistency misread him. He argues that all the objections to Marx’s argument that have been maintained for the last 30 years are down to the same root cause: the simultaneous valuation of inputs and outputs in production. A simultaneous (or replacement cost or current cost) valuation is one that takes the inputs that went into production and values them at what would be paid if one were using the same inputs today. The alternative, a temporal valuation, is taking the actual cost of the inputs that go into production as the basis for working out profits and profit rates. Kliman argues that the simultaneous form of costing is not one that one that would be understood by anyone in business, and more importantly, it is not what Marx would have understood as a cost when studying capital accumulation and the formation of a rate of profit.

The book continues with a detailed discussion on the implications of this form of valuation. If the value of an output is always assumed to be an equivalent to what its value was as an input, rather than the value observed at the moment of production, increasing productivity over time will be understood one-sidedly as just a higher quantity of output. This fails to account for the lowering value of each item during the production period as a result of this technological change. This, in turn, will have the effect of overestimating the real profit and rate of profit. It also would contradict Marx’s LTFRP since rising productivity of labour through introduction of machinery is going to result in a greater quantity of output, with no corresponding fall in value, resulting in an ever rising rate and mass of profit. Kliman shows how simultaneous valuation of inputs and outputs leads to physicalist conclusions, i.e. that a rise in physical quantities produced means greater total value. This diverges from Marx’s insistence that a certain amount of socially necessary labour time represents the same value irrespective of how much is produced. Higher productivity, for Marx, simply means that the value represented by a certain amount of socially necessary labour time is spread over a greater number of items.

There is a particularly impressive section in chapter 6 in which Kliman gives a forensic reading of a paragraph from Marx’s Economic Manuscripts (1861–1863). He quotes a 20-line passage in full, adds a numbering to demarcate each separate point being made then shows why a simultaneous (or replacement cost) valuation interpretation is incompatible with the passage as a whole. He shows why simultaneous valuation interpretation only superficially seems to make sense of part of the passage but flatly contradicts the rest of it. By contrast, when read in Kliman’s preferred temporal manner, the whole passage is made coherent. Since this passage in question is one often cited as evidence of Marx being in favour of simultaneous valuation, Kliman’s demolition of this misinterpretation should have settled this controversy. There are however still radical economists who continue to give a simultaneous interpretation of Marx and call for a modified version of his theory.  

If you have not followed some of the academic controversies in value theory of the last few years, then Kliman’s Reclaiming Marx’s Capital is a clear and well-argued account of them. It is necessarily and explicitly partisan, in that it presents the case for Marx’s crisis theory, particularly the LTFRP, as internally consistent and coherent. However, perhaps the best reason for reading it is as a primer for his second book, The Failure of Capitalist Production, where Kliman uses his interpretation of Marx’s categories to analyse the current economic crisis.

The Failure of Capitalist Production argues that the roots of the current economic crisis lie in the unresolved problems of over-accumulation that re-emerged at the end of the postwar boom in the 1970s. This is not an entirely novel insight, but Kliman presents it comprehensively and he is combative in challenging many misconceptions that have arisen in both radical and mainstream commentaries on the current crisis.

Kliman shows why it is not a failure of policy or regulatory framework that is to blame for today’s economic woes, but rather an integral feature of how capitalism as a system (mal)functions. He examines not just the main tendency of a falling rate of profit but also the counteracting influences that have slowed and shaped the trend towards crisis. It is the exhaustion of the counter-crisis measures that are most important in explaining the timing and form of the current crisis. The virtue of Kliman’s book is in demonstrating how every effort to compensate for a falling rate of profit (whether conscious or otherwise) ends up reproducing the problems in both a more intensive and extensive way. The expansion of credit and rising debt can mask underlying problems of low profitability and sluggish growth for a time, but these cannot be extended indefinitely before there is a “correction”: a crisis that affects the whole of society.

Kliman’s discussion of the events leading up to the collapse of Lehman Brothers is as lucid an explanation of the unfolding crisis as you will find anywhere. He shows how in response to the sluggish state of the American economy after the bursting of the dot-com bubble, the US establishment was keen to avoid following the example of the “lost decade” in Japan. To avoid the danger of deflation and stagnation, the Federal Reserve maintained artificially low interest rates to encourage borrowing for the purpose of investment. But in conditions of low profitability this did not stimulate investment. Instead, it encouraged financial institutions to borrow this extremely “cheap money” from the government and lend it to people who used it to buy houses. As money poured into the housing market it fueled the explosion in housing prices. However, Kliman emphasizes that if the Federal Reserve had pursued a different policy, the crisis would simply have manifested itself in a different way. Given that the fundamentals of the economy (rate of profit) were so shaky there was no avoiding the crisis happening in some form. Under capitalism, any policy aimed at avoiding crisis altogether is just wishful thinking.

Kliman is at pains to show that even though the LTFRP is the most important law of capitalism it is not the immediate cause of the crisis. The LTFRP will always generate a response within capitalism which can temporarily abate its effects only to reproduce it later, impacting on wider sections of society and with more devastating results. In this case, sluggish growth due to low profitability necessitated a government response which triggered a housing bubble. Once this bubble burst, it led to the great recession, which quickly spread globally. The LTRFP is the underlying ultimate cause of capitalist crisis; but the immediate cause or actual trigger will be different according to how that underlying problem is “managed” in any particular situation. These counter-measures never eliminate the LTFRP which is intrinsic to capitalism’s functioning as a value producing system, but determine its specific form of manifestation at a given time.

Kliman follows with an empirical investigation into what happened to the US economy during the 1980s and 1990s and the impact of neoliberalism. The period of neoliberalism is held by many to have led an improvement in performance and growth. Kliman disputes this account, showing that there was no real recovery, and in fact despite the rhetoric used he argues neoliberalism did not involve the level of restructuring that might hope to facilitate such a recovery. Unlike some commentators on the left, Kliman does not accept that through increasing the exploitation of workers US capitalism underwent a revival in the neoliberal era. He shows there was no marked shift in the share of total national product away from workers to capital, and that when including transfers out of taxation, the share received by workers remained remarkably steady. Instead, it was the slowdown of economic growth that most people experienced as the end of the continually rising living standards they had gotten used to. Kliman therefore also rejects the notion of any real recovery of profitability and growth on the back of this non-existent redistribution from labor to capital.

The following two chapters rework some of the arguments presented in Reclaiming Marx’s Capital. Kliman shows why there is no single measure that will give you an unambiguous answer as to what we should consider a rate of profit, and gives the reasons for selecting and presenting the data he has and what he thinks it shows: namely that capital accumulation (economic growth) can be shown to track corporate profitability very closely. It is in these chapters that the theoretical and methodological framework of Marx’s Capital is used to unpack the plethora of economic data the US produces each year. The next chapter is a development of the previous two chapters on the rate of profit and its centrality for capitalist growth. He discusses why the rapid development of information technology has sped up the depreciation of constant capital. He also explains the development of the idea of MELT (monetary equivalent of labour time) as a way of working out the component of variable capital. In offering the evidence for the validity of the LTFRP, he gives a nuanced explanation of many theoretical issues in using government statistics for these purposes.

Finally, there is a very good chapter on “underconsumptionism”: according to Kliman the dominant way in which Marx’s idea of crisis is generally understood. This is the idea that a crisis is caused by an insufficient share of the national income going to workers and thereby generating effective demand. Having shown that there was no redistribution of total product away from workers, Kliman argues why if it had actually moved in their favour it would still not alleviate the crisis, as this is caused by the low rate of profit. Here in the UK, the trade unions, most of the radical left, and mainstream economists all read Marx through this “underconsumptionist” lens. This radical spin on Keynes has nothing in common with Marx’s crisis theory. It is the ubiquity of these faulty interpretations of Marx, Kliman suggests, that are a major problem for understanding his work. Kliman himself, by contrast, is very much in the tradition of the Henryk Grossman’s and Paul Mattick’s interpretations of Marx, maintaining that the central problem of capitalism is the tendency for the rate of profit to fall caused by a rising organic composition of capital. This problem is not susceptible to any kind of redistribution but points to the need to transcend capitalism itself.

This book is a brilliant account of the great recession which began in 2008 and continues to this day.  It is Kliman’s relentless drive to get to the truth and avoid glib easy answers that makes it such an essential read. It is not that there was a falling rate of profit that continued to the point where US capitalism experienced a breakdown. That simple account parroted by some leftists,  is not supported by the data.  It was rather the expression of this tendency up to the 1970’s that left a historic legacy of a low rate of profit. The availability of cheap money and expansion of credit masked the underlying problem for a period. However, the low rate of return on investment left the whole economy vulnerable to shock, and when this came in 2008 after the previous temporary fix was exhausted, our current difficulties began. 

There has been criticism of Kliman for concentrating too much on US developments.  This is not reasonable as America is the archetypal capitalist economy, and for now still the world’s largest.  America expresses today the same laws of development that Britain did when Marx was writing in the nineteenth century. The examination of the trends shown through US data is not a parochial narrowness but a valuable contribution. Moreover, Kliman defends his concentration on US developments on the grounds that the available data is of a higher quality and that it was the epicentre for the crisis that swept the world. It should ideally serve as inspiration for those of us operating in other countries. We could do with quite a few more like Kliman.

The bar has been set very high for explaining the current crisis. Kliman should at least be seen as an important point of reference for all other commentators. He avoids the orthodoxy amongst many radicals of being “practical”, in that he refuses to offer suggestions to how to make capitalism function better. As an implacable revolutionary, Kliman has done a great service to those who wish to understand the world with a view to transforming it.

{ 29 comments… read them below or add one }

J.B. August 21, 2013 at 1:02 pm

Thank you so much for these detailed reviews! I’ve found some of Kliman’s writings online to be highly engaging, and the idea in Marx of a continually unfolding slow moving crisis is obviously worth considering for anyone with a revolutionary bent. However, he also has done some pretty stupid things online (like his poorly researched hit piece of David Graeber), and the LTFRP is supposedly one of the most discredited aspects of Marx, so I haven’t decided yet whether or not to spend my time on Kliman. This review certainly tipped me towards taking the time to read him in detail. Thanks!

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Red Noise October 2, 2014 at 11:11 pm

I know this comment is a year late, but Kliman presents a thorough rebuttal to the issue surrounding Okshio’s supposed discrediting of Marx’s LTFRP. This is addressed in the explanation of the temporal-single-system-interpretation in Reclaiming Marx.

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Wayne August 22, 2013 at 10:28 pm

It is due to such widely held but ignorant beliefs as J.B.’s “the LTFRP is supposedly one of the most discredited aspects of Marx” that makes Kliman’s book on Reclaiming Marx’s Capital so very valuable. I can think of few better refutations of this “supposed” belief.

Let me point out two phenomena: (1) the ratio of machinery, raw materials,buildings, etc. (constant capital) to the amount of labor employed (variable capital) has greatly increased for the past centuries, not to mention the past decades. This is true whether we look at this in technical terms or money (value) terms. Holes are dug by giant earth moving machines these days, not so much shovels–used by fewer workers. This is pretty true throughout the economy.

(2) There is plenty evidence of a general economic trend to decreased accumulation and long-term stagnation. ( Such trends have been demonstrated even by thinkers who reject the falling rate of profit, such as Robert Brenner or the Monthly Review grouping.)

The concept of the tendency toward a falling rate of profit claims that there is a relationship between these two phenomena. It seems to me to be a reasonable assumption, especially since Kliman and others have demonstrated the logical workability of the theory.

I do think it is a little peculiar for Kliman and others to write of a “law of a tendency”, since, to Marx, all his social laws were tendencies–that is laws which were mediated, modified, and interacted-with, so that they never showed up in “pure” form, but only as overall, background, tendencies. But this is a minor issue.

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homo arachnida August 22, 2013 at 10:42 pm

J.B., his stuff on Graeber was accurate. Graeber claimed it wasn’t but didn’t point out any errors and other people just didn’t understand what Kliman was saying. They thought he was saying Graeber was against prefiguarative politics or sitdown strikes.

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Arthur August 27, 2013 at 12:30 pm

“A simultaneous (or replacement cost or current cost) valuation is one that takes the inputs that went into production and values them at what would be paid if one were using the same inputs today. The alternative, a temporal valuation, is taking the actual cost of the inputs that go into production as the basis for working out profits and profit rates. Kliman argues that the simultaneous form of costing is not one that one that would be understood by anyone in business, and more importantly, it is not what Marx would have understood as a cost when studying capital accumulation and the formation of a rate of profit.”

Kliman has some useful stuff (eg against underconsumption and against most “Marxst” economists).

But this is pure ignorant nonsense.

Generally Accepted Accounting Principles require valuation of inventory at the lower of cost or market value. This is just common sense. If you bought or produced something that was then worth $2 million and it is now worth $1 million then it is now worth $1 million and anyone pretending otherwise will eventually come to grief.

Marx was fully aware of this and made numerous references to “moral depreciation” and the detailed results of fluctuations in the value raw materials.

The fallacy in opponents of the LTFRP is quite different. They just don’t get the basic idea that there is always a range of various production techniques available with different degrees of capital and labor intensity. The profitability of each depends on current wage rates and expected average rates of return. Accumulation can only proceed together with an overall shift to less labor intensive techniques (higher organic composition) which become MORE profitable at a LOWER rate of profit, along with higher wages.

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Wayne Price August 27, 2013 at 10:06 pm

I think that Arthur is missing Kliman’s point. Sure, inventory goes down (or up) depending on the current cost of producing goods–as Marx said. But profits are not based on the current would-be cost of inventory. Profits are based on how much more the capitalists make on what they have already spent, not on how much more they make compared to what they would spend if they were to start over from scratch today.

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Arthur August 27, 2013 at 11:33 pm

Point is that when you had hoped to make $0.5 million on an investment of $1 million for an annual profit rate of 50% by selling inventory that cost you $1.5 million for its value of $2 million, but the value changes so you can only sell it for $1 million then you end up making a loss of $0.5 million for a -50% rate of return on your investment of $1 million. Profits are based on what they actually make, not what they hoped to make.

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Andrew Kliman August 28, 2013 at 4:13 pm

“Point is that when you had hoped to make $0.5 million on an investment of $1 million for an annual profit rate of 50% by selling inventory that cost you $1.5 million for its value of $2 million, but the value changes so you can only sell it for $1 million then you end up making a loss of $0.5 million for a -50% rate of return on your investment of $1 million. Profits are based on what they actually make, not what they hoped to make.”

Correct. And this is what I say that Marx said.

But the point is that when you hoped to make $0.5 million on an investment of $1 million for an annual profit rate of 50% by selling inventory that cost you $1.5 million for its value of $2 million, and you do sell it for $2 million (for example), your rate of profit is 50%–even though the price of the machinery, etc. that you bought with the $1 million you invested is only $0.75 million when the product is sold. The rate of profit isn’t $0.5 million/$0.75 million = 67%.

Or, if the loss of value of the machinery is recognized immediately, the profit is $2 million – $1.5 million – the loss of $0.25 million on the machinery, etc. = $0.25 million, and your rate of profit this year is $0.25 million/$1 million = 25%.

If the loss is recognized immediately and everything else is the same next year, and there’s no additional fall in the price of the machinery, then your profit next year is $0.5 million and your investment is $1 million – $0.25 million (since the loss has been written off, reducing the investment) = $0.75 million, and your rate of profit NEXT YEAR is $0.5 million/$0.75 million.

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Arthur August 29, 2013 at 9:45 am

If I understood Andrew correctly we are agreed on the treatment of “inventory” (including stocks of raw materials, finished products and work in progress) but Andrew makes a distinction for “fixed capital” and treats that differently.

Both both forms of constant capital (fixed and circulating) are subject to devaluation for the same reasons. Marx’s references to “moral depreciation” are specifically about fixed capital which is (and must be) routinely revalued according to current costs of reproduction.

I kept the “investment” constant at $1 million to bring out the point I think we are agreed on about revaluation of “inventory”.

So consider a (greatly oversimplified) case where the $1 million “investment” is entirely in “machinery” that is expected to last for 10 years before replacement and new machinery becomes available to perform the same functions with the same 10 year expected life at a lower cost of $0.5 million after say 5 years.

During that 5 years half the value of the machinery has been written off as depreciation and the old machinery now has a book value of $0.5 million and the other $0.5 million have been set aside as a fund towards replacing the machinery at the end of another 5 years (by which time another $0.5 million of depreciation will have been set aside so that $1 million is available to fully replace the machinery and continue production at the same level.

The old machinery after 5 years has a book value of $0.5 million and will last another 5 years. But it can be entirely replaced with brand new equivalent machinery for $0.5 million, which will then last a full 10 years. Roughly speaking the new machinery that will last twice as long is worth twice as much. The old machinery is in fact now worth only $0.25 million. An additional $0.25 million of “moral depreciation” should have been set aside (and would have been if the fall in cost had been expected).

The loss in value of the machinery is real and results in subsequent operations at the same scale requiring an investment of only $0.5 million worth of machinery. Part of the capital that was previously invested is “set free” to be invested in other spheres (it no longer needs to be tied up for replacement). Another part, the $0.25 million “virtual depreciation” is simply lost.

My understanding is that is (roughly) the way Marx treats “moral depreciation”, the way generaly accepted accounting principles treat it and the way common sense requires. There is simply no difference in principal between fixed capital declining in value and other forms of constant capital declining in value.

I gather Andrew treats it differently but I do not understand why.

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Andrew Kliman August 31, 2013 at 8:59 am

No, Arthur, I agree with all this and think that Marx agreed with it. It’s compatible with my computations above and the computations make use of the same principles.

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Arthur August 31, 2013 at 11:57 am

Hmmm, if we are agreed that there is no difference of principle for fixed capital as opposed to other constant capital then we should be able to agree on computations of profit rates.

Three alternatives were mentioned by Andrew and I am not sure which he accepts. The calculations I would make from my example are as follows:

A) This 5 year’s projected (expected) returns computed 5 years ago on basis of no change in prices:
Investment: $1M of machinery with expected life of 10 years
Sales Revenue: 5 x $2M = $10M
Depreciation: 5 x $1M/10 = $0.5M
Other Cost of Goods Sold: 5 x $1.5M – Depreciation = $7M
Total Expenses including Depreciation: 5 x $1.5M = $7.5M
Profit: Revenue – Expenses $2.5M
Annual Profit: $2.5M/5 = $0.5M
Expected Rate of Profit (presumably also the average rate of profit): $0.5M/$1M = 50%
(In this rough oversimplification the depreciation funds are assumed held as cash so the
first year of investment of $1M machinery has become $0.5M machinery + $0.5M cash
in the fifth year)

B) Projected results for next 5 years to end of 10 years from 5 years ago: Same as A

C) Actual results for first 5 years after revaluation of machinery:
Sales Revenue: Same $10M
Depreciation expensed: Same $0.5M
Loss in revaluing machinery from expected $0.5M residual value to actual $0.25M given available
equivalent machinery at half the price: $0.25M
Other COGS: Same $7M
Actual Annual Profit: ($10M Sales Revenue – $7.5M expected costs – $0.25M unexpected revaluation)/5 = $2.25M/5 = $0.45M

D) Projected results of operating at same scale over next 5 years with new machinery prices:

Initial Investment: $0.25M machinery with 5 year life expectancy + $0.25 cash Depreciation
funds retained to replace with $0.5M of new machinery that is expected to last 10 years,
at end of 5 years: Total $0.5M investment

Note: Other $0.5M of capital that would have been tied up in machinery at old prices are now “set free” for investment in other spheres or at larger scale

Expected Depreciation over next 5 years: $0.25M (5 year remaining life)
Other COGS: Same $7M
Total Expenses including depreciation: $7.25M
Expected Rate of Profit: Same average rate of profit 50%
(actually changes in organic composition of capital will reduce this but cannot be projected
in 5 year plans by individual firms)
Expected Annual Profits on Capital Investment of $0.5M at that rate of 50%: $0.25M
Total 5 year profits expected: 5 x $0.25M = $1.5M
Sales Revenue Expected to achieve that profit: $1.5M + $7.25M = $8.75M
(implies output prices are expected to fall as a result of reduced production costs)

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Arthur August 31, 2013 at 12:01 pm

PS I forgot to mention. Actual results C are 45% rate of return instead of expected 50%, expected future results D are still based on expectations of 50% (or would not be operating at same scale).

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Andrew Kliman August 31, 2013 at 12:06 pm

I have some trouble following this, since no rate of profit is given for some options. Let’s just stick to the actually realized rate of profit, not the expected rate, to keep it manageable, okay?

The key thing is whether you accept that the actually realized rate of profit is profit measured against the capital invested (advanced) in contrast to what the machines are worth down the road.

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Arthur August 31, 2013 at 12:30 pm

Sorry it isn’t presented in a way that is easy to follow but this level of detail is necessary to clarify precisely what the issues are. Please do try to follow the details.

In all 4 calculations I am assuming that the firm expects to earn an average rate of profit which is expected to be 50% per year on capital advanced in each 5 year period.

This expectation is not met at the end of the first 5 years, which turn out to have had a return of only 45% p.a. as a result of the loss in value of machinery.

But that does not result in an expected return of 45% p.a. for future years.

To emphasize that capital advanced is NOT the same as “fixed capital” or “machinery” I have explicitly included the cash reserved as depreciation replacement funds (in addition there would of course be other capital advanced as working capital for input and output stocks and work in progress).

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Andrew Kliman August 31, 2013 at 12:23 pm

Okay, I think I now understand. I don’t think there’s any difference between how you understand the concept “rate of profit,” how I understand it, or how I think Marx understood it, Arthur. (There’s a slight issue in regard to the effect of the loss on the investment, but that’s subsidiary.) The rate of profit is the rate of return on investment. It’s not profit as a percentage of what it would cost to replace all of the physical inputs when the output is produced or sold.

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Andrew Kliman August 31, 2013 at 12:56 pm

I think I understand the numbers now, and as I said, I basically agree with them and think that Marx basically agreed with them, etc. Again, the key point is that the rate of profit is understood as the ratio of profit to investment. Money that recovers depreciation expenses going into a sinking fund is one way of thinking about that.

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Arthur August 31, 2013 at 5:06 pm

Hmm, ok then I guess I will have to read the books to understand why you see this as an important difference with others.

The money in sinking funds is in fact loaned out to finance investment elsewhere, so I suspect there is a distinction without a real difference between this and simply comparing current input and output costs. But at any rate I can no longer assume you are just making some obvious mistake.

I’m still stuck with other priorities (catching up with numerous finance, economics and other MOOCs to have adequate background). However I will put reading your books carefully higher on my backlog list than it was.

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Andrew Kliman August 31, 2013 at 6:38 pm

“But at any rate I can no longer assume you are just making some obvious mistake.” Why would you have assumed such a thing? After all, it’s not just I who thinks this. (See Ravi Bali’s review, for instance.)

“The money in sinking funds is in fact loaned out to finance investment elsewhere, so I suspect there is a distinction without a real difference between this and simply comparing current input and output costs.” The difference exists even without any fixed capital. A capitalist farmer spends $4 and invests in 4 bushels of corn to plant as seed and to pay workers (in corn). The farmer’s output (of corn, of the same kind) at harvest time is 5 bushels, at which time the per-bushel price is $0.80. So sales revenue is $4 and the rate of return ON INVESTMENT is zero. But the revalued corn input (which no longer exists of course, so it’s not inventory) is only $3.20. So the physicalist-simultaneist “rate of profit” is $4/$3.20 – 1 = 25%.

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Arthur August 31, 2013 at 7:21 pm

It is unclear what proportion of the $4 is actually invested (a stock) and what proportion is just COGS (a flow). If “physicalists” mix them up in this way that would certainly be wrong.

Anyway I have now moved both books to my ebook reader, which sadly won’t read them for me, but its a step away from the rest of the large backlog in other file stores.

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Andrew Kliman September 1, 2013 at 12:28 am

Some of the corn is immediately planted as seed. The rest is immediately given to farmworkers in exchange for their agreement to come to work through harvest time.

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Arthur September 1, 2013 at 11:51 am

Ok on that basis the rate of profit would certainly be 0, not 25% It seems we are basically in agreement about how Marx would (roughly) calculate these things.

I have now read the preface plus Ch 1-3 of “Reclaiming Marx’s Capital”.

To answer your earlier question “Why would you have assumed such a thing?” Basically “guilt by association”. I collected a lot of the 1970s and 1980s literature mentioned in Chapter 3 at the time, with a view to writing a response, but concluded that the only audience were “academic ‘Marxists'” who were either outright charlatans or at best “just don’t get it” and were making obvious mistakes. As I noticed the hostility between you and some of those I had identified as outright charlatans, I charitably (;-) assumed you would be making obvious mistakes.

Anyway from what I have read so far I gather you are against the whole “academic ‘Marxist'” tradition. So although you politely refer to them as “Marxists” I won’t continue to make assumptions of guilt by association.

Not sure whether you noticed my recommendation in a previous thread. Please do read Maksakovsky, I think it shows how Marx should be developed:

http://www.scribd.com/doc/77012233/Pavel-Maksakovsky-The-Capitalist-Cycle

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Andrew Kliman September 2, 2013 at 2:53 am

I’m glad we’re reaching clarification and dispelling the semblance of disagreement.

I’m familiar with guilt by association when it’s a matter of presuming that someone is guilty because their *friends* are guilty. But presuming that someone is guilty because their *enemies* are guilty is a new one on me.

I definitely agree about “charlatans” and “making obvious mistakes.” These things aren’t mutually exclusive, are they?

I use the terms “Marxian economics” and “Marxist economics” and “Marxian economics” as sociological categories (see the index entry).

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Arthur September 2, 2013 at 5:37 am

Certainly the charlatns make obvious mistakes.

“Guilt by association” is often an error and always at best only a working hypothesis. But it is based on “association” rather than “friendship”. That particular “sociological category” is notorious for enmities,full of sound and fury, signifying nothing.

I still don’t know whether my recommendation of Maksakovsky has registered, let alone whether you will read it. Please respond.

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Andrew Kliman September 2, 2013 at 8:11 am

I have a copy of Maksakovsky’s book and will give it a 2d read at your suggestion. What in particular about it do you regard as a model for “how Marx should be developed”?

“That particular “sociological category” is notorious for enmities,full of sound and fury, signifying nothing.” True, but the treatment of the TSSI is a special case, qualitatively and quantitatively–even or maybe especially in terms of the degree of association. I guess that’s not easily seen from a distance.

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Arthur September 2, 2013 at 11:17 am

Maksakovsky takes for granted the further development of values as production prices and develops the important real contradictions between (actual market) price and value (in the fully developed form of production price) showing how they become separated along with the separation between the actual volumes of production and consumption and corresponding relations between the two main departments and the necessary relations, with unity only established through fluctuation and crisis. The “temporal” aspect is treated in some depth highlighting the consequences of the lag between high boom prices that stimulates a positive feedback loop in the sectors with the highest organic composition and the much later emergence of overproduction and crash in prices when the new capacity later come on stream.

This represents a serious effort to complete Marx’s theory of cyclical crisis and disproportions with its roots in the first three chapters of capital and fully based on the further development in volumes 2 and 3 (and material in vol 4)..

The fools and charlatans stuff about values and poduction prices distracts from analysis of the centrally important (and blindingly obvious) real contradictions between the endlessly fluctuating (and sometimes wildly gyrating) market prices and the underlying necessary value relations that are brought forcibly into focus in crisis.

Anyway, glad you will have another look and hope others do too.

I’m now up to chapter 5 of “Reclaiming…” but must return for now to MOOCs just starting on “Economics of Money and Banking”, “Asset-Pricing”, Classical Mechanics”, “Financial Accounting”, “Complexity”, Micro, Macro etc

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Arthur September 4, 2013 at 1:12 pm

I’ve finished “Reclaiming…” (though my eyes glazed over so would need to go over the tables properly to respond).

1. Andrew needs a strict editor. Chapter 4 could not have got past ANY competent editor. It is the sort of thing that only an author would insist on publishing, with its essential content repeated SEVERAL times in pretty much EVERY other chapter. The side issues should have been ditched and the essential content reduced to simple positive exposition in a short paper (with tables having more columns and very clear associated explanations instead of separate footnotes).

2. Marx’s expoition in chapters 9 and 10 of Capital Volume III is not a model of clarity, but certainly much easier and makes more sense. The whole spirit of the “debate” is entirely alien to what Marx was writing about.

3. On the “transformation problem”, Marx is completely unambiguous in Chapter 9 that of course a more detailed calculation would have to transform inputs to production prices but the “present analysis does not necessitate a closer examination of this point.”

“The foregoing statements have at any rate modified the original assumption concerning the determination of the cost-price of commodities. We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it. It is necessary to remember this modified significance of the cost-price, and to bear in mind that there is always the possibility of an error if the cost-price of a commodity in any particular sphere is identified with the value of the means of production consumed by it. Our present analysis does not necessitate a closer examination of this point.”:

There is no way to interpret this that does not render the entire “debate” a distraction among people who just don’t get it.

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Andrew Kliman September 4, 2013 at 9:32 pm

My interpretation of the Marx quote is very different (see p. 106 of RMC). Arthur, your interpretation leads to inconsistency–inconsistency that can be avoided–since Marx’s arguments become inconsistent if his “inputs” are construed as not-yet-transformed. That’s because his conclusions don’t hold true if the supposedly not-yet-transformed inputs are transformed in “a more detailed calculation.”

Which returns us to the issue of how to decide between interpretations.

The principles of interpretation I develop in chap. 4 and apply elsewhere are about

(1) trying to make the text make sense as a whole, and

(2) deciding between interpretations on the basis of which is better able to do so.

Hand-picking a single quotation is the opposite of (1). (As George Stigler, quoted on p. 63 of RMC, wrote, “Why should we allow the hand-picked quotation to carry an interpretation when we would reject the hand-picked fact as an empirical test of a hypothesis?”)

And insisting that it is “completely unambiguous” that one’s interpretation of the hand-picked quotation is correct, without regard to how well or poorly the interpretation makes the text make sense as a whole, is the opposite of (2).

I think that what I wrote on pp. 61-2 is relevant here:

“They defend their interpretations of particular passages by appealing to ‘what Marx wrote’ in those passages and elsewhere. Yet their appeal to ‘what Marx wrote’ is actually an appeal to *their own interpretations* of what he wrote––not his words *per se*, but his words as construed by them. In other words, they defend their interpretations by appealing to their interpretations.

“This also leads inevitably to unintentional dogmatism. When Marx’s critics insist that their interpretations are correct because they are ‘what Marx wrote,’ they are actually insisting upon *their own interpretations* of what he wrote. In other words, their interpretations are correct because they say so. To avoid dogmatism, one needs to escape from this vicious circularity. …

“The criterion of coherence allows us to break out of such question begging, circularity, and dogmatism, because it allows us to specify the conditions under which an interpretation should be rejected. Warnke (1993: 21) draws out this implication clearly: ‘the adequacy of a given textual interpretation depends on the extent to which it can show the text’s coherence as a unified whole.’ Thus an interpretation that resolves apparent inconsistencies within a text is superior to ones that either fail to do so or do so only to a lesser extent.

“Sound interpretation thus makes sense of a text by making the text make sense.”

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Arthur September 5, 2013 at 5:09 am

On p106 Andrew rebuts Sweezy’s claim that this passage was an admission of error. But throughout the text accepts the claim that its obvious interpretation leads to a dual system approach and inconsistency.

It wasn’t an admission of error. Marx starts with a simplified model and develops its details in a series of refinements. This “dialectical” development is always necessary for grasping a complex whole but is seen by fools and charlatans as self-contradictory or an admission of error. That further development also considered varying rates of turnover and went on to consider rent and interest. (Instead of actually helping to clarify that, RMC retreats from the clear example of 5 capitals with different proportions of fixed capital in the second table of chapter 9 to a “simpler” version with 2 capials and no fixed capital and doesn’t go anywhere near the stuff on rent.)

As a first approximation, for many practical purposes of building and construction, the earth is flat. Geometry could not have been developed without starting from the measurement of shapes and sizes on a flat earth. Further development shows that the earth is round. More detailed consideration has a geoid varying considerably from an oblate spheroid. A further development of our understanding shows that space itself is not “flat” (Euclidean) but curved corresponding to gravitational mass. These are develoments, not admissions of mistakes. Euclidean geometry and Newtonian mechanics is still a necessary stage in understanding.

Nor does what Marx actually said result in a dual system approach and inconsistentcy. Marx is clearly treating production prices as a more developed expression of value, not a separate system. The contradiction between price and value that he is interested in is the actual fluctuations, cyclic movements and crises, not the childish flea-cracking engaged in by “academic ‘Marxists'”.

The quote I objected to from the Review article opening this thread by Ravi Bali was:

“The alternative, a temporal valuation, is taking the actual cost of the inputs that go into production as the basis for working out profits and profit rates.”

This can be taken as an example of how interepetation should try to make sense of a passage.

If it had said “taking the historical costs as the basis for working out capital advanced and current costs of inputs consumed as the basis for working out profits” then there would have been no need for the clarification obtained by Andrew’s agreement with detailed calculations showing both moral depreciation included in profit calculations and calculation of profit rates by comparing those “current” profits with the historical costs of the original capital advanced.

Unfortunately the book itself also repeatedly uses phrases about temporal valuation that do not make it clear, and prefers examples with no fixed capital – even where Marx provided one.

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