By Michael Roberts
In an important new development, the University of Tulsa, Oklahoma has launched a new Center for Heterodox Economics (CHE). Led by Clara Mattei as Director of the Center for Heterodox Economics, its mission statement says: “The CHE has the ambitious goal of becoming a hub for achieving economic justice and a more humane society. We aim to organically combine the expertise of lived experience and the expertise of academic rigor. To counter dominant narratives, the CHE seeks to provide sturdy theoretical tools that empower and sharpen common sense. Our Center endeavors to train young scholars in the broad tradition of heterodox economics, encouraging them to learn from real life problems and engage in the world around them.”
To launch the new centre, the CHE held an inaugural conference last weekend in Tulsa with the theme: ‘what’s up with capitalism?’ Many well-known radical economists participated. The sessions were livestreamed, so I was able to follow some of the discussions. But I did not follow all the sessions and missed the contributions of many, so I shall just concentrate on some presentations.
I missed the first session (online) but I noted that James Galbraith was one of the speakers. Galbraith, son of the well-known JK Galbraith, one of the most important leftist American economists of the 20th century, has always been a strong critic of neoclassical general equilibrium economics, the school that dominates mainstream economics in the universities and public institutions.
Galbraith and Chen challenge ‘general equilibrium economics’
James Galbraith with Jing Chen has a new book out, called Entropy Economics, which attacks general equilibrium economics from the angle of the laws of physics and biology, which is “an unequal world of unceasing change in which boundaries, plans, and regulations are essential.” As Galbraith says in an interview: “It’s not a complicated idea, but it’s fundamentally opposed to the notion that the world tends to a balance between the great forces of supply and demand, or however you want to characterize the textbook vision of things.” Instead, capitalism is really subject to entropy, namely a state of disorder, randomness or uncertainty.
The blurb for the book says that “Galbraith and Chen’s theory of value is based on scarcity, and it accounts for the power of monopoly.” That signals to me that Galbraith does not support Marx’s value theory which argues all value comes from human labour power; and capital through the ownership of the means of production can appropriate surplus value from the exploitation of labour. Galbraith instead looks to ‘imperfect competition’ and ‘monopoly’ and ‘imbalances’ in supply and demand in a market economy as the cause of capitalism’s ‘entropy’. This sums up the difference between the Marxist economic analysis of capitalism and ‘heterodox’ theory, both of which are included by CHE in its courses.
Marx’s law of profitability
In the session on Marx, there was a surprising (to me) presentation by Deepankar Basu, Professor of Economics at the University of Massachusetts, Amherst. Basu and his colleagues have done important work on measuring the profitability of capital. In particular, they have set up a fantastic interactive database that measures the rate of profit in many countries and globally.
Marx’s law of profitability argues that a rising organic composition of capital (ie capital stock C divided by the value of labour power v) will lead to a fall in the rate of profit, if the rate of surplus value (ie profit divided by wages) is constant or does not rise as much. You can see this from the formula: s/(C+v). If C/v rises and s/v is constant or rises less than C/v, then the rate of profit must fall. But in his presentation, Professor Basu appeared to support the thesis presented in the 1960s by the Japanese Marxist Nobuo Okshio, who argued that Marx was wrong because no capitalist would invest in new machinery (C) unless it raised profitability. The only way profitability would fall is if wages rose to squeeze profits.
Now the Okishio thesis has been refuted by many Marxist scholars since and even Okishio drew back from it later. I won’t go into the arguments against Okishio here, but what was interesting is that Professor Basu sought to prove Okishio right empirically. With the help of a graduate student, he presented evidence to show that if capitalists invest in new technology that increases the productivity of labour, profitability will only fall if the wage share or wage bill rises. If the wage share falls, then profitability will rise.
Returning to the profit share theory of Ricardo
If true, this does away with Marx’s general law of accumulation (namely a rising organic composition of capital over time) as being the driver of the tendency of the rate of profit to fall. Instead, the causes of falling profitability revolve around the changes in the share of profits and wages in production. This was originally the theory of David Ricardo in the early 19th century to explain falling profits (ie it was due to rising wages). That’s why in the modern era, this profit share theory has been called ‘neo-Ricardian’.
I have not seen Basu et al’s data, but his conclusions seem odd to me. I went to Basu’s profitability website and analysed the data for the US rate of profit that he seemed to have used. Using that data, I found a high correlation between changes in the ‘profit share’ of value added in the US corporate sector (+0.63), supporting Basu’s conclusions. But I also found a very high correlation between changes in investment in capital stock and profits (+0.83). This suggests that Marx’s law of accumulation is relevant to profitability, even more than profit/wage shares. Indeed, I converted Basu’s data into Marxist categories and found that changes in the organic composition of capital were inversely related with the rate of profit (-0.53) as well as changes in the rate of surplus value being positively related to the rate of profit (+0.62). Indeed, I have shown these correlations in several papers over the years.
Evidence for a falling rate of profit
Basu also claimed that the Great Recession of 2008-9 could not have been caused even indirectly by a falling rate of profit because it was rising up to 2008. Again, this is not correct. Even on Basu’s own database figures, the rate of profit fell from a peak in 2006 of 17.5% in 2006 to a low of 13.5% in 2008. It’s true that the ROP had been rising from 2001 to 2006, but it was still no higher then than in the 1997 turning point of the ROP in the neoliberal period from 1982. Indeed, if we use the quarterly figures offered by the US Fed, we find that the non-financial corporate sector ROP rose from 11.1% in Q4 2001 to 12.7% in Q1 2006, but then fell to 10.5% at the beginning of 2008 just before the financial crash and the recession (data on request). Also in 2006, that 12.7% peak was still well below the 1997 turning point in Q3 1997 of 14.6%. So there is still a strong case for Marx’s law of profitability applying to the Great Recession.
I may have misrepresented Basu’s arguments and conclusions as I have not seen his paper, but I went through this at some length here because in a session on Marx’s political economy, a leading analyst of Marx’s law of profitability appears to have disowned it and reverted to the neo-Ricardian view.
In the rest of the session on Marx’s political economy, Nicolas Chatzarakis, Assistant Professor of Economics at The New School, presented an interesting paper that showed Marx’s reproduction schema as in Capital Volume 2 could incorporate flows of commercial and finance capital as well as production, thus making the schema relevant into the 21st century.
Focus on the work of Piero Sraffa
The work of Piero Sraffa got equal billing with that of Marx. This shows that the heterodox school of economics is just that: heterodox. It stands for varied alternatives to mainstream general equilibrium neoclassical theory. And Sraffa certainly was a trenchant critic of Marshallian marginalism. He argued that there was no equilibrium in capitalist production, but instead there was the creation of a surplus for owners of commodities.
But he did not adopt Marx’s value theory. His great work, Production of Commodities by Means of Commodities, reveals exactly his view: that commodities can produce more commodities (and a surplus) without labour being involved. It becomes a mathematical construct, not reality. Moreover, in Sraffa’s model, wages are represented by a commodity consumed by workers which becomes the independent variable deciding the size of any surplus (profit) from producing more commodities. Investment in the means of production and its relation to the rate of profit is irrelevant. This is where the neo-Ricardian thesis above comes in.
However, in this session, many were keen to merge Sraffa with Marx. Some said that Sraffa had been moving towards a labour theory of value in later studies. He apparently criticised the neo-Ricardian critique of Marx’s transformation of the values of commodities into prices as expounded by Von Bortkiewicz. Nevertheless, Sraffa was a dedicated communist and revolutionary (according to James Galbraith he wanted to return to Italy from the US at the end of WW2 to participate in the Communist government he hoped was coming to power). But while he may have been a Communist, he was not a Marxist, at least in political economy. That’s because for me the litmus test of Marx’s economics is Marx’s labour theory of value and surplus value, not theories of value based on ‘scarcity’ or on physical commodities.
Marx was a strong critic of ‘classical’ political economy
Some at CHE reckoned that Marx’s political economy can be reconciled with ‘classical’ political economy or with Sraffa’s version. I think not. Marx was a strong critic of ‘classical political economy’ – indeed Capital has a subheading: “a critique of political economy”. Marx reckoned that even if Smith and Ricardo saw labour as the source of value and tried to measure prices in terms of labour time, they denied the specific character of the capitalist mode of production, namely the exploitation of labour for the appropriation of surplus value and they denied capital as a social relation ie where the means of production are privately owned by a few, while the many only had their labour power to sell.
Invigorating session on economic history
The session on economic history was invigorating. David McNally, Professor of History and Business at the University of Houston, reminded us through his recent book that capitalism did not emerge as the dominant mode of production globally by some gradual and benign replacement of feudalism with commercial exchange, as mainstream economics likes to claim, relying on Adam Smith’s Wealth of Nations. Instead, it was the result of wars, the brutal exploitation of the defeated and the enslaving of millions of humans.
Stephen Maher, Assistant Professor of Economics at SUNY Cortland, New York and co-author of Fall and Rise of American Finance, argued against the consensus that finance and financialisation is destroying capitalism’s vitality. On the contrary, Mather argued that finance is good for capitalism, not bad. Finance and industry have always been intimately connected. So the idea that industry contains progressive capitalists and finance is the only enemy of labour is wrong. The enemy of labour is not finance, but capitalism itself; there is no reformist option based on progressive capitalism. For me, this was a powerful argument against the current heterodox view of ‘feudal capitalism’, as presented by Yanis Varoufakis and Michael Hudson.
Sam Salor (name right?) stood in for Robert Brenner, the great Marxist economic historian, to remind the session that empirical research can lose the forest for the trees; theory must play its role. Robert Brenner had always argued that capitalism was defined by its social relations (the ownership of means of production and exploitation of labour), not by class struggle. There has always been class struggle. But what Marx showed in his critique of classical political economy was the ‘value’ form of capitalism. As Ellen Wood argued, markets and money existed before capitalism, but under capitalism, markets and money become necessities for value production.
The use of statistical techniques to analyse capitalism
The other session that I followed was on Probabilistic Political Economy, namely the use of statistical techniques to analyse the nature of capitalism. The panel emphasised the failure of mainstream econometrics; the alternative was to use Bayesian analysis. (If you don’t know what that means, see here.) Bruno Theodosio, Assistant Professor of Economics at University of Tulsa and Ellis Scharfenaker, Associate Professor of Economics at the University of Utah presented ‘probabilistic’ models of capitalist competition using a huge database of US companies. It’s complicated, but the conclusions reached were important. First, the results showed that competitive capitalism was still functioning; capitalism had not morphed into ‘monopoly’ capital, where there was no battle for surplus value share. Second, the competitive struggle among capitals still led to a fall in average profitability.
What I would add is that statistical analyses do not have to assume that the capitalist world is just random chaos. Marx’s fundamental laws of accumulation and profitability do determine or explain the continual movement of capital from sector to sector seeking better profitability. There is no ‘uniform’ (single) rate of profit, but instead a continually moving (but determinable) average rate of profit as capitalists invest (or don’t) in new sectors. This latter point is one that Guglielmo Carchedi and I have taken up with Emmanuel Farjoun and Moshe Machover over their book written in 1983 called Laws of Chaos, where they argue that Marx’s transformation of the values of commodities through the equalisation of individual rates of surplus value (profit) into prices of production based on an average rate of profit for all capitals is ‘indeterminate’ (ie it does not work).
Programmes of action to replace capitalism
Finally, two non-academics gave presentations that reminded us all that these discussions are for the purpose of understanding capitalism and coming up with programs of action to replace it. Halla Gunnarsdóttir, the head of VR union in Iceland, wanted to know how trade unions could combat the arguments of bosses that there was no alternative to ‘austerity’; and Bob Lord of Patriotic Millionaires also called for policies to end the grotesque inequalities of income and wealth in the US and across the globe.
During a zoom session in the UK that I did on the world economy just after the CHE conference, one participant told us that she lived in northern England where people were struggling to survive, working in low-paid jobs, with long hours and in poor conditions, while public services were being decimated and young people saw no future. She asked how could academics talking at length about value, profitability, probability etc be relevant to that reality?
Marx famously said that up to now, “philosophers have only interpreted the world, in various ways. The point, however, is to change it.” These words are inscribed on Marx’s grave. But as one CHE participant put it; we won’t change (replace) capitalism unless we also interpret how it works (or why it doesn’t). Engels once said that ‘an ounce of action was worth a ton of theory’. But we still need that ton, as long as it helps the ounce. The setting up of the Center for Heterodox Economics at the University of Tulsa, Oklahoma, USA is an important step forward in doing that.
From the blog of Michael Roberts. The original, with all charts and hyperlinks, can be found here.
