|
|
|
CAPITALISM: |
|
The Clearest and
Most Comprehensive Contemporary Defense of the Capitalist
Economic System Available |
Literature and Lectures by Edith Packer, George Reisman, and Others |
|
|
|
|
|
From Chapter 18: The Marginal-Efficiency-of-Capital Doctrine's Reversal of the Actual Relationship Between Net Investment and the Rate of Profit (pp. 882-883)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 We are now in a position to make what is perhaps the most decisive objection of all to the declining-marginal-efficiency-of-capital doctrine and the Keynesian analysis. And that is that our discussion of the determinants of the rate of profit has shown that the rate of profit and net investment are positively related. We have seen that net investment and profits move together virtually dollar for dollar, because while profits are the difference between sales revenue and costs, net investment is the difference between productive expenditure (which is almost equivalent to sales revenue) and those same costs.40 [Productive expenditure is the expenditure by business firms for capital goods and labor. Net investment equals productive expenditure minus costs, i.e., the difference between the additions to business assets constituted by productive expenditures for plant and equipment and inventory and work in progress, and the subtractions constituted by depreciation cost and cost of goods sold.] Thus, the actual reason the rate of profit is so low or negative in a depression is the same as the reason net investment is so low or negative--namely, that productive expenditure has fallen, taking sales revenue with it, while costs, especially depreciation costs, fall only with a lag. By the same token, in the recovery from a depression net investment and the rate of profit both improve together. For every dollar by which productive expenditure rises relative to costs, creating net investment, sales revenues rise relative to those same costs, creating profits. Likewise, for every dollar by which costs fall relative to productive expenditure, also creating net investment, those same costs fall relative to sales revenues, creating profits. The mathematical implication of this virtual dollar-for-dollar equivalence between additional net investment and additional profits is that the rate of profit--the so-called marginal efficiency of capital--must actually rise with the rise in net investment, and not fall as the Keynesians maintain. For example, if in the depths of a depression, aggregate profit in the economic system is 10, while total accumulated capital is 1,000, then the average rate of profit is a mere 1 percent. But if now net investment increases by, say, 50, then aggregate profit increases from 10 to 60. At the same time, of course, the total accumulated capital of the economic system rises to 1,050. The average capital outstanding over the period becomes 1,025--viz., the average of 1,000 and 1,050. However much it may come as a shock to the Keynesians, the unavoidable implication of these facts is that the average rate of profit rises from 1 percent to almost 6 percent! What happens mathematically is exactly the same sort of thing as happens to the season average of a baseball team that goes on a winning streak. In the case of the baseball team, its season average rises in the direction of 1,000. A thousand is its average over the course of its winning streak--its marginal average so to speak--and thus its season average rises accordingly. In the case of more net investment and equivalently more profit, the average rate of profit rises in the direction of a mathematical limit of 200 percent, for the additional net investment is accompanied by an equivalent addition to the amount of profit and by an addition only half as great to the average capital outstanding in the economic system. As indicated, the rise in the rate of profit that must accompany more net investment in the recovery from a depression, has its counterpart in the fall in the rate of profit that accompanies the wiping out of net investment in the descent into a depression. In the latter case, the plunge in productive expenditure not only drives productive expenditure below costs, making net investment negative, but equivalently reduces sales revenues relative to the same costs. This drives profit in the economic system below net consumption. Profit comes to equal net consumption plus a negative net investment component. In the light of the foregoing analysis, it is difficult to imagine a more erroneous
conception of things than the Keynesian notion that the rate of profit is at a depression
level because of too much net investment and that the further net investment that must
accompany recovery from the depression will drive it still lower. The facts are that the
rate of profit is low in a depression for the same reasons that net investment is low--to
the point of being negative--and will rise with the rise in net investment. In other
words, among the changes that would need to be made in the Keynesian analysis, if for some
reason one had any wish to retain it, is a reversal of the slope of the so-called mec
and IS curves in the context of recovery from a depression and the reestablishment
of full employment. But since the Keynesian system is so thoroughly riddled with errors
and contradictions, there is no point in attempting to modify it or retain it in any way.
The Keynesian analysis is so wrong that it is beyond redemption. The one, fundamental
change that is needed is its total abandonment. Notes40. Again, see above, ibid. See also above, pp. 723725 and 744750. |
||