Jack Rasmus

Contemporary Anglo-American economists who consider themselves ‘Marxist Economists’ (M. Roberts, Kliman, Brennan, Freeman, Mosely, et. al.) have long held that the rate of corporate profits determine the shifts in business cycles (i.e. recessions, great recessions, depressions). It’s a single determinant view, derived from a dissecting of unpublished paragraphs by Marx in vol. II of Capital on the topic of a falling rate of profit tendency in a capitalist economy and its effect. While alleging causation, what Roberts and others really present is a tabular correlation showing how corporate profit rates from real investment (ignoring non-corporate business income or financial asset profits) slowdown may be correlated with real investment and GDP slowing, and then declining, as well. But correlations aren’t causations. And no number of line graphs of corporate profits plotted on paper against real investment (i.e. net private domestic capital spending) show any causation. (It’s a big problem in economics in general, not just Marxist, today where too much correlation examples are simply claimed to be causative–ie. business tax cuts create jobs, free trade benefits everyone, wages drive inflation, money supply determines economic growth, etc.)

The UK marxist economist, Michael Roberts, who attended the recent economics section of the American Social Science Association’s annual gathering, recently summarized the debates on-going (as they have for decades) between Anglo American Marxist economists and Keynesians-Kaleckians(the latter a variation on Keynesianism) on whether the rate of profit is the singular key variable that determines real investment and therefore growth and the business cycle.

Michael Roberts is an indefatigable defender of the Marxist rate of profit thesis, while I am not. He sees profits solely determining investment, and criticizes Keynesians for arguing the opposite–i.e. that investment determines profits vice-versa. It’s a silly ‘what comes first, chicken or the egg’, argument, for both profits and investment are obviously mutually determining. My reading of both Keynes and Marx is that both realized this ‘mutual feedback effect’ between profits and investment–even if contemporary so-called Marxists and Keynesians have forgotten. What both should be doing is trying to estimate the mutual feedback effects quantitatively, instead of arguing it is one or the other variable that is totally determining the other.

In his recent blog post, Roberts restated the profits-investment, chicken-egg, debate. What follows is my commentary on his post. The problem with business cycle analysis among both Marxist and Keynesians today is that neither understands, or even addresses, in their analyses the new radically changed structure of 21st century global capitalism, which is increasingly dominating by financial asset investing–an argument I’ve been making from 2010 to the present in my three theoretical books (Epic Recession, Systemic Fragility, & my latest, ‘Central Bankers at the End of Their Ropes’).

Marx only began to consider the role of finance capital in his unpublished notes in Vol.III of Capital. (Which raises the question how much credence, one might add, should one give to an author who does not feel his exploration is developed sufficiently yet to publish?) And Keynes only briefly touched upon it in chapter 12 of his ‘General Theory’ book of 1935, moving on in remaining chapters to consider the effects of non-financial variables on real investment. Yet both Marxists and Keynesian followers today generally fail to address the changes in 21st century capitalism, content merely to quote from Marx and Keynes texts that are now 80 years (Keynes) and 150 years old (Marx). Their theorizing is more a case of ‘economic philology’ than economic science observing the new conditions, variables, and changed weights of the old variables. But it is so much easier to simply quote passages from the texts of the masters (and then deliver one’s opinion on such) than to dig into the complex, messy present of 21st century global capitalism. (Which, by the way, I’m convinced the data of which cannot be made sense of by mere text quoting + opinion, but must employ the best of advanced statistical and mathematical methods.)

So here’s my commentary on the profits-investment debate in response to Roberts’ blog entry:

“I find it strange that marxists should be debating keynesians (or ersatz Keynesian Kaleckians) over what determines which–i.e. profits determine investment (Marxists) or investment determines profits (keynesians). Data is clear that both determine each other: profits drive investment (although studies show conclusively real asset investment is financed less than 35% by profits), but investment also determine profits. This poses a problem for Marxist falling rate of profit enthusiasts. What volume of profits is driven by investment? If investment in part determines profits, then it is investment that is determining investment to some extent. The real question is what are the relative magnitudes–of profits determining investment, of investment determining profits and then investment, or of other third variables determining both profits and investment? How does one sort this out? And over time in the lead up to, during, and following the business cycle, during which the relationships and weights between the variables–profits, investment, or other–clearly will change? Certainly not by text analysis. Marxist economists attempt to solve this mutual determination by literary analysis–i.e. by trying to find some secret gem of causation somewhere in Marx or other contemporary Marxists’ works. What we get are constant line-graphs showing correlations (not causation) between profits (however defined) and real asset investment (usually net private domestic investment data). That tells you nothing about causation. If you want to solve the mutual feedback determination effects between profits-investment, it can only be done mathematically. A time series for each variable (profits and investment) via what’s called vector autoregression, combined with an analysis of lagged covariance analysis, will give you a quantitative value of how much profits determines investment, and vice versa, over a given period of time (let’s say 1995-2017 in the US so that two major recessions, and the coming next soon, are included). But that still leaves a dilemma for the falling rate of profit (or volume of profits) arguments for business cycle determination. Profit rates or levels do not determine solely business cycle dynamics. But then in my reading of Marx that never was his intent to explain short term business cycles via falling rate of profit theses (which he never felt was complete enough to pubish as well). Marx wrote of mid-19th century capitalist dynamics. Keynes of mid-20th century. This is the 21st century. Time that Marxists (and Keynesians) came up to speed on the changed structure and dynamics of 21st century capitalism. Neither of whom (Marx or Keynes) understood the new role of financial asset investment (fictitious capital or speculative investment) in disrupting the reproduction of capital cycle(Marx) or GDP contraction. Those interested may read my forthcoming contribution to the ICT journal in Beijing for clarifying all this.”