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CAPITALISM: |
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The Clearest and
Most Comprehensive Contemporary Defense of the Capitalist
Economic System Available |
Literature and Lectures by Edith Packer, George Reisman, and Others |
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From Chapter 16: The Problem of Aggregate Profit: Productive Expenditure and the Generation of Equivalent Sales Revenues and Costs (pp. 723-725)This excerpt is taken from George Reisman, Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George Reisman. All rights reserved. May not be reproduced in any form without written permission of the author. The following limited exception is granted: Namely, provided they are reproduced in full and include this copyright notice and are made for noncommercial use, i.e., for use other than for sale, including use as part of any publication that is sold, copies of this excerpt may be downloaded into personal computers and distributed electronically or on paper printouts from a personal computer; reproduction on the internet is permitted provided the copy of the excerpt is accompanied by the following link to the Jefferson School's home page (which may, and hopefully will, be displayed elsewhere and more prominently): The Jefferson School of Philosophy, Economics, and Psychology. This limited right of reproduction expires on December 31, 1999. This page has been visited All business activity is carried on for the purpose of earning a profit. Yet the existence of the very phenomenon of profit in the economic system as a whole, that is, an aggregate profit--an excess of the sum of all profits over the sum of all losses--can appear difficult to explain. This is because productive expenditure, insofar as it constitutes revenue or income payments, bears an equivalent relationship to business sales revenues and to business costs. This is to say, productive expenditure can be understood as generating both an amount of sales revenues equal to itself and an amount of costs equal to itself, which would appear to imply that as far as productive expenditure by itself is concerned, the existence of an aggregate profit would be impossible, at least in the long-run, as a permanent phenomenon. In elaboration of these points, the reader should consider the following facts. On the one hand, one major portion of productive expenditure--the demand for capital goods--is simultaneously business sales revenues. This part of productive expenditure and this part of business sales revenues are equal by identity, just as a side of one triangle is equal to that of another by identity when the two triangles share that same side. The two are identical because capital goods are sold by business enterprises as well as bought by business enterprises. For example, the demand made for steel sheet by an automobile company, or for flour by a baking company, is simultaneously a part of productive expenditure and a part of sales revenues. From the standpoint of the automobile company or baking company, it is a productive expenditure; from the standpoint of the steel company or flour company, it is sales revenue. From the standpoint of the economic system as a whole, it is simultaneously both.14 At the same time, the remaining portion of productive expenditure, insofar as it constitutes revenue or income payments, is made up of wage payments, which, at least as a reasonable first approximation, can be assumed to be expended by their recipients in buying consumers' goods from business firms in the same accounting period.15 Thus, directly or indirectly, productive expenditure is to be understood as generating sales revenues equal to itself, and to do so essentially in the same accounting period. In addition, however, productive expenditure generates business costs equal to itself. We know from Chapter 15 that many of these costs can appear in future accounting periods, indeed, decades in the future, insofar as the productive expenditures are made on account of plant and equipment with many years of useful life.16 Nevertheless, what must be the result in an economic system with a fixed quantity of money? In such an economic system, it would be reasonable to assume a fixed volume of productive expenditure and a fixed volume of business sales revenues. It would also seem reasonable to assume that at some point, aggregate business costs would rise to equality with the fixed amount of productive expenditure. Indeed, even if, for example, plant and equipment is depreciated over a fifty-year period, after fifty years of the same amount of spending for plant and equipment, annual depreciation charges on fifty years' worth of such plant and equipment rise to equality with the current annual spending for plant and equipment. Thus, the proposition would appear to be supported that costs deducted from business sales revenues must rise to equality with productive expenditure in conditions in which the same amount of productive expenditure is repeated over and over again, indefinitely. But this last, of course, would mean that costs rise to equality with business sales revenues insofar as business sales revenues are generated only by productive expenditure. With costs equal to productive expenditure, and sales revenues equal to productive expenditure, both must be equal to each other. Things equal to the same thing are equal to each other. Thus, it would appear that in the conditions of a fixed quantity of money, and in which productive expenditure were the only source of business sales revenues, an aggregate profit simply could not exist as a permanent phenomenon. It would further appear that the average rate of profit in such conditions would have to be zero, at least insofar as productive expenditure were the only determinant of business sales revenues. This is because a zero amount of aggregate profit would mean a zero numerator in any calculation of the average rate of profit. Several times in the last two paragraphs, I used the word "appear," instead of making flat-out statements. This is because things would actually not be quite as bad for the rate of profit as I have just indicated. As I will show, even with a fixed amount of productive expenditure taking place year after year, indefinitely, it would always be possible to have some positive amount of profit. There could be profit equal to some positive amount of net investment, that is to say, to some continuing excess of productive expenditure over aggregate costs.17 Even under such conditions, however, a major negative implication would still be present. This would be that the average rate of profit in the economic system would be continually falling, in the direction of zero. This implication would exist, because insofar as profits correspond to net investment, the net investment constitutes an addition to the amount of capital invested. Thus even if every year there were the same amount of net investment and profit, that constant amount of profit would have to be spread ever thinner, over a continually growing volume of capital invested. Thus, the average rate of profit would be continually falling. For example, if the total capital invested in the economic system were initially 2,000 and there were 100 of profit corresponding to 100 of net investment, the average rate of profit would initially be 5 percent--that is, 100/2,000. In the next year, however, it would be less than 5 percent--namely, 100/2,100--then still less, namely, 100/2,200, and so on. This is because, as I say, the net investment of each year is added to the amount of accumulated capital. There could be no possibility of the rate of profit holding up by virtue of net investment growing along with the growth in capital invested. This is because in the conditions of a constant amount of productive expenditure, which is the implication of a fixed quantity of money, the only way that net investment could grow would be by virtue of aggregate costs falling. To maintain a given rate of profit, aggregate costs would have to fall by ever increasing amounts--eventually, they would have to fall below zero and go on falling from there, to produce the ever growing amounts of net investment and profit that would be required to keep the rate of profit constant. But this, of course, is simply impossible. For example, if the initial 100 of profit is the result of productive expenditure being 1,000 and costs being 900, then in the face of productive expenditure continuing to be 1,000, the only way the initial 5 percent rate of profit could be maintained would be if costs now fell to 895. This would provide 5 more of profit to accompany the 100 of additional capital resulting from 100 of net investment. Now, however, net investment becomes 105 and capital grows from 2,100 to 2,205. To maintain a 5 percent rate of profit at this point, net investment of 110.25 would be required, which means that costs would have to fall to 889.75. In order for the rate of profit to be maintained at 5 percent, aggregate costs would have to fall at a rate equal to 5 percent compounded on a base of 100. This implies that at some point aggregate costs must fall to zero and then go into minus territory. These results, of course, are absolutely impossible. At some point, aggregate costs must stabilize, if not rise. This implies a fixed or falling amount of profit, while the amount of capital invested continues to grow. Thus, we are left with the fact that in the conditions of a fixed quantity of money, insofar as productive expenditure alone is the source of business sales revenues, the average rate of profit in the economic system, if not actually at zero, must nevertheless be continually falling toward zero. This brings me to the first major problem that I believe the theory of aggregate profit and the average rate of profit must solve, namely, to explain how, in the conditions of a fixed quantity of money, the existence of a positive average rate of profit is possible on a long-run, permanent basis, and is so, moreover, without the rate of profit having continually to fall. Notes14. There is an exception to the principle that the demand for capital goods is simultaneously business sales revenues. This is the case of the purchase of second-hand capital goods from sellers who are not dealers in the goods. . . . 15. This assumption is actually compatible with the existence of extensive saving on the part of individual wage earners, insofar as their savings are used to finance consumption expenditures of other wage earners or have a counterpart in consumption expenditures by wage earners that are financed by funds obtained from business firms in the form of extensions of credit. For elaboration of this point, see below, p. 735. Nevertheless, even though it is probably descriptively correct, the net-consumption theory does not depend on this assumption. Concerning this fact, see below, pp. 750754. 16. See above, pp. 702705. 17. See below, pp. 754756. |
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