Cooking the Books: The Falling Rate of Profit (1)

In his much talked-of book Capital in the Twenty-First Century (to be reviewed next month) Thomas Piketty has a section headed ‘Back to Marx and the Falling Rate of Profit’ where he accuses Marx of holding that ‘capitalists accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit … and eventually to their own downfall.’ Earlier he had said that Marx’s theory ‘implicitly relies on a strict assumption of zero productivity growth over the long run.’ Since Marx’s ‘law of the tendency of the rate of profit to fall’ is based precisely on a long-run growth of labour productivity this is a bizarre accusation.

A clue as to what is behind it is a passage elsewhere where Piketty equates ‘economic growth’ with ‘growth in output per capita, which is productivity growth’. So it is this that Marx is accused of ignoring. It is true that Marx does not employ this concept but it is not true that he was unaware of it, as in section 5 of chapter 25 of Volume I of Capital on ‘The General Law of Capitalist Accumulation’ (which Piketty himself cites) Marx does compare the rate of increase of profits and the rate of increase of population for the period 1853 to 1864. He even quotes from the Registrar General’s report on the census of 1861 that ‘rapidly as the population has increased, it has not kept pace with the progress of industry and wealth.’

In any event Marx would not have regarded total output per capita as a measure of productivity at national level. He would have defined this rather as total output divided by the number of productive workers.

What Piketty appears to be trying to do is fit what he thinks is Marx’s view into his own categories. He lays down as a ‘first fundamental law of capitalism’ that the share of income from capital in national income = the rate of return on capital multiplied by ratio of the stock of capital to national income. This last, known in conventional economics as the capital/income ratio, or the stock of capital expressed as a multiple of national income (or output, the same thing), is obviously affected by the rate of growth of national income.

Piketty is accusing Marx of assuming an unlikely very high and rising capital/income ratio. According to his first fundamental law of capitalism, the higher is this ratio the higher too is the share of income from capital in national income. If, for instance (as Piketty points out Marx assumes in some of his examples), the stock of capital is ten times annual national output and the rate of return on capital is 5 percent, then capital’s share of national income is 50 percent. Piketty adds that if the capital/income ratio ‘is extremely high, then the rate of return on capital must get smaller and smaller and closer and closer to zero, or else capital’s share of income will ultimately devour all of national income.’ This was why, according to him, Marx had to assume a falling rate of profit.

Piketty says that the only way out of this difficulty is a reduction in the capital/income ratio brought about by an increase in the growth of national income per capita. But Marx does not need rescuing by introducing this since he never held the theory Piketty attributes to him. Marx did hold that there was a slow long-run tendency for the rate of profit to fall (though not for the reason Piketty gives) but he also listed a number of counteracting tendencies too. This meant that there was nothing ‘inexorable’ about it.