Sunday, February 01, 2009

Falling Profit Rates Raise Real Incomes

Jonathan Taplin is a Professor at the Annenberg School for Communication at the University of Southern California and writes Jon Taplin’s Bog (HERE)

There are very few things that Adam Smith and Karl Marx agreed upon–but one was the “tendancy of the rate of profit to fall”. This term is so well known by economists that they use TRPF as the acronym. Here’s Adam Smith from The Wealth of Nations.

“It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that wherever little can be made by it, less will commonly be given for it. According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of stock must vary with it, must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit.”

“It somehow escapes the pea-brains of these dinosaurs, that these are the very policies that have brought us to this crisis

Adam Smith was quite clear on the cause of rising and falling rates of profit:

The rise and fall in the profits of stock depend upon the same causes with the rise and fall in the wages of labour, the increasing or declining state of the wealth of the society; but those causes affect the one and the other very differently.”

The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all.” WN I.x.1: p105

In a thriving town the people who have great stocks to employ, frequently cannot get the number of workmen they want, and therefore bid against one another in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock. In the remote parts of the country there is frequently not stock sufficient to employ all the people, who therefore bid against one another in order to get employment, which lowers the wages of labour, and raises the profits of stock.” (WN I.x.7: pp 106-7)

The interpretations placed upon these (and some other similar) statements are often woefully inadequate. Smith’s was not a determinate model, closed to enable a mathematical ‘solution’ to work. He was not entrapped in the diminishing returns of Ricardo (or Marx, who merely wanted to prove what he eventually called capitalism was going to collapse).

The point is that growing societies, with increasing productivity and markets, reduced price, which raised real incomes, and brought more people within them into employment, creating new markets for new products. Poor societies had enormous profits because capital opportunities were scarce (he cited China); richer societies had lower profits because capital opportunities were abundant (he cited Britain, and in a rare prediction, believed that the former British colonies by around 1880 would be even richer).

As more capital was utilised, the cost of capital would rise and profits would fall. Conversely as more capital was employed the price of labour would rise. As prices of commodities fell from increased productivity (pin-factory, etc.,) and the sub-division of labour within the supply chains (the common labourer’s coat), real incomes from employment would rise. But greater capitals, though they meant lower rates of profits, also meant larger amounts of profit. It was not zero-sum.

The process means a fall rate of profit, earned by ever larger amounts of capital, and rising real wages from work. With 'consumerism' the consequence is all around us in higher living standards.

Note Jon's assessment of those he criticises: 'the pea-brains of these dinosaurs', surely a most unProfessorial tone from California...

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