Capitalist profit and different responses to recession

Contando_Dinheiro_(8228640)The rate of profit, a concept more or less central to all schools of economics, from mainstream neoclassical to Marxist, still gives rise to vigorous academic debates. Its source, measurement and effects remain controversial.

For Marx and Marxists, the exploitation of propertyless labour by the property-owning capitalists gives rise to surplus value, which is transformed into profit, as well as interest, dividends and rent. Surplus value arises from labour being coerced to work longer than is necessary to secure its own means of subsistence. Thus the workplace struggle between capital and labour over the length and intensity of the working day, as a social process, is vital to this kind of analysis of capitalism. Ultimately there is no profit without surplus labour. This is the production of surplus value, which gives rise to the potential for profit-making.

But the production of a surplus is not the end of the story. Although for many Marxist economists exploitation in production is key to their understanding of capitalism, profit also needs to be realized upon the sale of the produced goods or services. This realization of surplus value is also important and on its own is part of Keynesian and post-Keynesian theory: the flow of income that becomes profit upon sale is dependent upon aggregate demand or expenditure in the economy.

Marxist Michael Roberts, whose new book The Long Depression I posted about recently, dismisses the realization part of the argument, and argues, seemingly ad infinitum, that only the production of surplus or profit is what matters, and that Keynesian policies which aim to expand demand are no solution to recessions which in the last instance are caused by weak investment, itself the product of insufficient profit. Only the falling price or scrapping of part of the capital stock and falling wages as well as unemployment can restore the capitalist rate of profit and lay the foundations for a new round of economic growth.

By contrast, Keynesians of all kinds propose that monetary (interest rates) and fiscal (tax and spending) policies can prevent or at least mitigate recession and lead to recovery. The more radical post-Keynesians argue that stagnant wages relative to productivity for the majority and the consequent inequality put too much income in the hands of the richest, who tend to spend a smaller proportion of their earnings than poorer members of society. This limits consumption growth. Thus policies which favour redistribution in favour of the poorest such as stronger trade unions and more progressive taxation, should boost consumption which will ultimately raise the motive for firms to invest and drive faster growth in output. In many countries in recent decades, consumption was only sustained in the face of weakening wage growth by the growth of private credit. Since the latter has certain limits, once it stopped growing, prior growth rates could not be sustained. The process of deleveraging is necessary, but at the moment it is surely contributing to the phenomenon of ‘secular stagnation’.

Thus different schools of thought offer different responses to the problem of recession. For Keynesians the answer is a technical one, which may be difficult to put into practice if governments and their electorates believe that the state should be a good housekeeper and not borrow to any great extent.

Many Marxists tend to be more pessimistic. They see recessions as inevitable under capitalism and even part of the system’s strength in that economic restructuring will result in renewed growth. For them, a new system entirely, socialism, is the answer to the problem of recession, if production can be planned for social need rather than simply the accumulation of profit.

I still struggle somewhat with this debate between the primacy of the production of surplus value or profit versus its realization. I am certainly persuaded that both are important under capitalism. Without surplus labour there can be no profit at all, but without subsequent sale at a profit, the latter cannot be realized. The realization of profit on its own, which forms an important part of Keynesian theory, is insufficient. But policies to expand aggregate demand can be successful in promoting growth if, as is currently needed in many countries, governments invest in necessary infrastructure, which can stimulate productivity growth by promoting a ‘crowding-in’ of private investment as new business opportunities are opened up.

There can therefore be a tension or contradiction between the production and realization of profit. Weak wage growth will exert a drag on consumption in the absence of rising household debt, which can prevent sufficient profit from being realized upon the sale of production. On the other hand it can raise the rate of profit for firms, other things being equal.. In a closed economy, the extra profit could be reinvested in new production capacity, but with weak consumption this may prove unproductive and unsustainable. It may instead be redistributed in the form of dividends, which could either be spent on consumption or reinvested in different parts of the private sector.

In an open economy, the extra profits could be exported abroad as capital flows if there is insufficient demand for domestic investment. This could end up in the form of new consumption or investment, either real or financial, in the recipient economy, and could simulate growth there, at least for a while. If the foreign borrowing which this necessitates proves unsustainable then it may in turn give rise to slower growth or recession once the process falters.

Thus the rate of profit is central to capitalist production and the labour process is certainly part of this. But it is also important to analyse the production and realization of profit by considering the world economy as a whole system and to be clear about the impact of this on individual economies.

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