The Real Movement

The phony debate over investment and the cause of crisis

One of the biggest controversies among labor theorists when it come to calculating the rate of profit is whether the profit rate should be calculated based on the original amount of capital laid out by the capitalists minus depreciation or the current cost of replacing this capital. For example, assume I bought a widget machine for 100 dollars last year. Assume also that since I bought this machine, the price of widget machines fell from 100 dollars to fifty dollars. When I calculate my profit do I do this based on my original investment of 100 dollars or on the basis of the current market price of fifty dollars?

Some labor theorists argue I should use the original figure, while another group wants to use the replacement cost for the capital. Kliman is in the former group and claims he is not alone on this:

“almost everyone else –-businesses, investors, Marx––means by―rate of profit is the historical-cost [original investment cost] rate, profit as a percentage of the amount of money actually invested in the past to purchase the capital assets (their historical cost), minus depreciation.”

As can be seen in the chart below, based on the data Kliman provides, which of these two measures of cost is employed has a very big impact on the data:

The estimate of the value of fixed asset in 2007 on which the rate of profit is calculated based on current replacement cost is 59% or about $4.5 trillion higher than it would be if calculated on the original actual capital advanced. Thus, it makes a big difference whether the rate of profit is calculated on the basis of historical costs or current (replacement) costs. The current (replacement) cost is far more generous in its estimate of the value of the fixed assets. And Kliman believes this difference has made it possible for some labor theorists to argue that the rate of profit increased in the run up to the financial crisis.

“Whereas, as we saw above, the actual rate of profit continued to decline, the analogous current-cost ―rate of profit  did rebound to some degree. But it’s not a rate of profit in any real sense, so the fact that it rose doesn’t matter.”

Indeed, the argument that current valuations of investment should be used in place of the original value of the capital invested allows the proponents of the first method to argue Marx was wrong in his belief capitalist crises are caused by a falling rate of profit. These labor theorists argue instead that every crisis is unique and has it own unique causes. Here, for instance, is one variant of that alleged theory as articulated by Sam Gindin:

“Each Crisis is Unique

One reason that the great crises of capitalism are so hard to clearly explicate is that every one is in fact “special.” The present crisis is only the fourth such crisis (the others being in the 1880s, 1930s, and 1970s) in some 150 years. This means each has occurred in a historically distinct era. The world of the late 19th century or the 1930s is radically different than the world of today in terms of the development of the corporate form, the nature of finance, the organizational capacity of workers, the role of the state. Though the backdrop of these crises is the common dynamics of capitalism (competition, class conflict, uneven technological development, the volatility of finance, etc.), each crisis demands not an already-discovered general law but an analysis sensitive to its particularities.

It is the failure, on the one hand, to locate these diverse events within that common context of capitalism and, on the other, to try and squeeze these events into the straightjacket of a trans-historical causality (such as the falling rate of profit or production as the sole site of crisis-creation) that create sterile “paradoxes.” Theory must, as Phillip McMichael has emphasized, be historicized, in the sense that we need to combine a theoretically-grounded understanding of the contours within which capitalist societies develop, with a material investigation of the particular social forces, institutions, and contradictions that lead to contingent, rather than pre-determined, outcomes. It is this kind of orientation that historical materialism tries to apply.”

The argument of folks like Kliman and Michael Roberts in face of this sort of facile, patently ridiculous, gibberish advanced by Gindin is crippled not by their data, but by the fact that, like their “multi-causal crises” opponents, they too employ methods that violate Marx’s theory. In fact, no matter whether we use current or historical costs, the result is still the same: profits crashed in the 1970s and they crashed again in the 2000s — during the run up to the financial crisis. Here is a chart showing the both measures of costs in a commodity money for the period:

The methods employed by Kliman’s opponents may still be more generous than Kliman’s, but the result is the same and unquestionable. The value of fixed assets in the United States fell sharply throughout the 1970s and again throughout the 2000s in the run up to the financial crisis. This collapse of valuation is exactly what we should expect if indeed there was a severe crisis in the 1970s. In the end, Kliman’s case against his opponents is crippled by the fact that he completely agrees with them that dollars can be used in labor theory analysis.

I want to be clear on one point: I am not alone in saying there was a crisis in the 1970s — this is the common interpretation of that period held by labor theorists from all schools including Kliman. If I differ from the vast majority of labor theorists, it is only because, unlike these theorists, who borrow from bourgeois economists,  I stick strictly to Marx’s methodology. There is no question the falling rate of profit is the cause of the present crisis when commodity money is employed in analysis; the question only arises because Kliman has abandoned Marx’s own methods in favor of bourgeois simpleton methods.

Again, here is a comparison of Kliman’s data for net value added by corporations, historic and current:

And here is Kliman’s data using gold as standard of prices:

Just as fixed assets fell in the 1970s — when labor theorists claim there was a crisis — so net valued added fell during the same period.

And, not surprising, the same holds true for depreciation. Kliman’s original data:

And Kliman’s data using gold as standard of prices:

Based on these three examples, it becomes clear that the critical problem with the empirical work of labor theorists is not their minor differences over whether to use current or historical measures, but their insistence on using fiat dollars instead of a commodity money. The errors that can be imputed to the current cost approach to the data is rather inconsequential in comparison  to the error both the current and historical approaches generate when using fiat dollars.

One final point to this particular post:

In my previous post, I argued that employment of deflators like the CPI (consumer price index) and the PCE  (personal consumption expenditures) are in complete violation of labor theory assumptions that use-value has no impact on value.

Marx is very clear on this and leaves no doubt as to how he approached the subject:

“As use values, commodities are, above all, of different qualities, but as exchange values they are merely different quantities, and consequently do not contain an atom of use value.”

I don’t think anyone will deny this is how Marx saw the situation, yet labor theorists routinely employ measures like of utility like CPI and PCE to deflate dollar prices.

I want to show another reason why using deflators like the CPI is a mistake: the CPI is a political tool employed by the fascist to conceal the actual depreciation of fiat dollars. According to the BLS, $20.67 in 1929 currency — which then was the equivalent of one ounce of gold — has the purchasing power of $288.10 today. However, today, $288.10 will only buy about a fifth of a troy ounce of gold.

Here is what that looks like:

The depreciation of the purchasing power of the dollar (1929 and 2014): gold versus CPI

Labor theorists who employ fiat dollars in their analysis have to explain why this difference is not relevant to the working class, when critical programs like Social Security are tied to CPI, not gold. The CPI is a manipulated measure of the depreciation of the purchasing power of dollars, that has a significant impact on the class and labor theorists are employing this patently manipulated measure in their analysis — all the while ignoring its political character.

Writers like John Williams of Shadowstats have documented the role played by political forces in Washington to deliberately understate the rate of depreciation of the purchasing power of fiat dollars:

“Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes. The concentration of this installment on the quality of government economic reports will be first on CPI series redefinition and the damages done to those dependent on accurate cost-of-living estimates, and on pending further redefinition and economic damage.

The CPI was designed to help businesses, individuals and the government adjust their financial planning and considerations for the impact of inflation. The CPI worked reasonably well for those purposes into the early-1980s. In recent decades, however, the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval.

In particular, changes made in CPI methodology during the Clinton Administration understated inflation significantly, and, through a cumulative effect with earlier changes that began in the late-Carter and early Reagan Administrations have reduced current social security payments by roughly half from where they would have been otherwise. That means Social Security checks today would be about double had the various changes not been made. In like manner, anyone involved in commerce, who relies on receiving payments adjusted for the CPI, has been similarly damaged. On the other side, if you are making payments based on the CPI (i.e., the federal government), you are making out like a bandit.”

Williams may be dismissed as an Austrian crank, but he raises significant questions about how the CPI is being used to silently starve the working class — especially retirees and those dependent on handouts from the fascist state. The issue has been ignored by labor theorists and constitutes another example of way they have abandoned their responsibility to the working class. Moreover, as employed by labor theorists, these sorts of deflators play a critical role in parsing the data of the fascist state.

I will show how this is done in my next post.