Marx's law of profit: the current state of the controversy

Atlantic Economic Journal, Dec, 1989 by L.E. Johnson, Warren S. Gramm, David J. Hoass

Marx's law, of profit has stimulated considerable debate [Brewer, 1984,1-). 145; Fine and Harris, 1979, p. 581 and is seen by many as critical to the broader controversy regarding the scientific content of Marx's work [Laibman, 1982, p. 95].

The aim of this paper is to determine the extent to which well-defined alternative lines of interpretation have emerged from the flood of research on Marx's law of profit. It is not concerned with questions of textual exegesis [Stigler, 1965, pp. 447-50]. No attempt is made to defend a particular line of interpretation or to provide an alternative reconstruction of Marx's doctrine.

In part, the task is complicated by the vastness of the literature. Complications also result from differing views regarding the phenomena to which the law is intended to apply. Does it refer to movements in the actual as opposed to the potential profit rate or movement in the price rather than the value rate of profit? Difficulty is also created by differences in the approaches taken in Volumes I and III of Capital.

The problem has been exacerbated by the fact that the debate has been carried on at three distinct, though admittedly interrelated, levels of abstraction.2 First, Marx's law of profit has been discussed in the context of his theory of cycles and the problems of sectoral disproportionality, underconsumption, and cyclical instability. At this level of abstraction, the self-limiting nature of capitalism is purely an endogenous process [Brewer, 1984, pp149-50; Wolff and Resnick, 1987, pp. 189-92 ].

Second, the law is presented in context of Marx's theory of secular crisis. The primary emphasis here involves its relationship to the rise in the organic composition of capital, the rate of exploitation, structural unemployment, monopolization of capital, and the subsistence wage doctrine. At this level of abstraction, the self-limiting nature of capitalism is also endogenous.

Finally, the law has been placed in the broader meta-economic context of the natural law of historical change and its relationship to class struggle, alienation, and immiserization. At this level of abstraction, the self-limiting nature of the capitalist system results from both endogenous and exogenous forces [Elster, 1988, p. 74].

The focus here is on the law of profit as it relates to Marx's secular theory of crisis. At this level of abstraction, there are four well-defined alternative lines of interpretation. These reconstructions both reflect the differing analytical and ideologically competing schools of modern economic analysis [Johnson, 1988, p. 792] and mirror the methodological alternatives for the study of the history of economics.

I. Marx's Law: The Traditional Relativist View

One interpretative approach to Marx's law of profit applies the relativist methodological model [Johnson, 1980, pp. 52-5; Johnson and Ley, 1988, pp. 16-20]. Here, Marx's law is placed in the general context of classical political economy. Relativist interpreters generally present Marx's law and related theory of the secular crisis in a framework of historical dynamics [Baumol, 1959, pp. 6-9; Morse, 1961, pp. 237-39; Schumpeter, 1963, pp. 96367, 1160-61 ], rather than dynamics defined in the sense of modern growth theory [Samuelson, 1948, pp. 8-10, 284-85, ch. XI; Harrod, 1948; Frisch, 1935, pp. 100-05].

Moreover, Marx's law is seen as a reaction against the explanations provided by his classical predecessors for the secular fall in the general rate of profit. In particular, these writers contend that Marx's law was derived as an alternative to the Ricardian explanation based on decreasing returns to social scale [Dobb, 1959, p. 99; Foley, 1986, ch. 8; Hunt, 191/ 91.1 Marx emphasized, instead, the neccssity for capitalists to accumulate and innovate if they are to survive the rigors of competition [Balinky, 1970, pp. 127-28].

The relativist definition of profit, and therefore the rate of profit in Marx, is consistent with the general classical conception. As such, it is an aggregative, general, economy-wide average rate [Balinky, 1970, p. 125] based on profits as a residual share [Baumol, 1959, p. 161, though the residual components are unique to Marx's own analysis. As such, it represents a rate of return to capitalists as an economic class rather than a return to capital as a productive factor. There is no implication of profits as a neoclassical opportunity cost of entrepreneurship.

Finally, relativists see the law of profit in Marx within the context of the political economist's overriding concern with capitalism's capability for the long-run maximization, of total social welfare [Johnson, 1983, p. 1105; Johnson and Ley, 1988, pp. 89-90]. Thus, Marx's law is treated as part of the general classical concern for the interdependency between the issues of economic growth and class income distribution within the context of a natural equilibrium [Caravale, 1985, pp. vii and 130-32]. However, this aspect of their argument has never been clearly, and consistently specified [ Landreth and Colander, 1989, p. 185 ].