Was Marx Right?


Well, it looks like The New York Times has opened a bit of a can of worms by asking Was Marx Right?. I generally find that this question to be a bit annoying. Was Marx right about what, specifically? That labour is the True and Only source of value? No, he was wrong on that. That communism was an inevitable outgrowth of capitalism? He’s been wrong on that — so far, at least. That capitalism was prone to financial crises? Yes, he was quite right about that.

I suppose I’ve made my point. Marx said a lot of things. It would be rather unusual if he were right about everything he wrote and it would be equally surprising if he was wrong about everything he wrote. Marx was right about some things and wrong about some things. Although the man had a marked tendency to play the prophet in truth he was really just a man, no matter how much some of his contemporary acolytes may insist to the contrary. He was right sometimes and wrong sometimes.

Anyway, the series gives me an opportunity to clear up a few Marxian myths. The first is propounded by Brad Delong in his piece Marx Was Blind to the System’s Ingenuity and Ability to Reinvent. It runs like this,

Marx could not fully grok that rising real material living standards for the working class might well go along with a rising rate of exploitation and a smaller labor share. Thus he takes a demonstration that labor’s share of income might fall and without noticing turns it into a claim that the working class will starve.

I don’t know why this myth continues to bounce around. Everyone and their mother seems to think that Marx was dead sure that real living standards of workers could not rise under capitalism. But this is simply not true. In Volume III of Das Kapital Marx does run through some scenarios where real wages rise and the rate of exploitation remains constant. Joan Robinson noted this in her preface to the second edition of An Essay on Marxian Economics where she wrote,

In Volume I of Capital, the existence of the reserve army of labour keeps the level of wages more or less constant, though there may be phases of rising wages when the accumulation of capital runs ahead of the growth of the available labour force. But in Volume III, in connection with the falling rate of profits, we encounter a constant rate of exploitation, along with rising productivity. In Volume I, labour-saving technical progress tends to raise the rate of exploitation and is likely to lower the wage rate, because it reduces the demand for labour. In Volume III it leaves the rate of exploitation more or less constant, and the rate of profit is squeezed. The movements of the level of wages in Volume I depend upon the relative bargaining strength of capitalists and workers and on the political balance of power. The constant rate of exploitation in Volume III is not explained, and the fact that it entails a rising level of real wages is not noticed. (ppviii-ix)

When Robinson was writing her essay in 1942 this was not generally noticed but after the 1960s I think that it was. The issue was raised in Ernest Mandel’s preface to the first volume of Das Kapital that was written in the 1970s. He dismissed it in that typical lackadaisical and lazy manner that characterises much Marxian economic analysis, but he does raise it. I don’t know why people like Delong (but also many self-professed Marxists) miss this. There really is no excuse these days. Marx did not argue that real wages could not rise under capitalism. End of story.

The second confusion arose in Doug Henwood’s piece entitled A Return to a World Marx Would Have Known. It runs like this,

How can this [i.e. the current economic situation] all be explained? The best way to start is by going back to the 1970s. Corporate profitability — which, as every Marxist schoolchild knows, is the motor of the system — had fallen sharply off its mid-1960s highs. Stock and bond markets were performing miserably.

I don’t know where this stuff comes from. I know that Marxists want to bring every crisis down to some sort of crisis of profitability but really, the data is readily available. Below are two graphs showing the year-on-year percentage change of corporate profitability in the US. On the left is the mid 1960s through to the end of the 1970s. On the right is the late 1970s through to the beginning of the 1990s.

PROFITS 60s to 80s

As we can see, there was just as much volatility in both periods. Yes, there was a dip in profits in the late 1960s and early 1970s but there was also a dip in profits in the early 1980s and in the late 1980s too. The point I’m trying to make? Corporate profits are pretty volatile. Get over it.

Or let’s try a different approach. In 1960 corporate profits stood at $31.1bn and by the end of the decade in 1969 they stood at $56.7bn. That’s an increase of around 80%. Meanwhile in 1970 they stood at $51.5bn and in 1979 they stood at $211.1bn.  That’s an increase of nearly 200%. Not bad for a period that Henwood characterises as being one of profit stagnation!

You could probably cut this data in funny ways to try to prove Henwood’s point. But I don’t think that it would an honest approach. A cursory glance at the data suggests that looking for some fundamental change taking place in corporate profitability in the 1970s is a red herring.

Anyway, all that considered let’s reformulate the question: is Marx relevant for understanding the world today? Frankly, I don’t think so. The key problem today is that wealth inequalities are tied to financial markets. Speculation in assets is what drives most Western economies but it is also what drives the bulk of the inequality (see the work of Jamie Galbraith and his team on this). You cannot find this anywhere in Marx and it is the most pressing economic question today. Some economists are beginning to ask questions surrounding the links between income distribution and finance, but it is new territory altogether. You won’t find much of use in Marx in this regard.


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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20 Responses to Was Marx Right?

  1. thankful reader says:

    thanks for your website and your always interesting and stimulating posts.

    Nonetheless, I would like to ask you something. How could you explain the rise of the finance sector? Which is the determinant to the process of finacialization?

    Thanks again!

    • Deregulation, I suppose.

      • JC says:

        Sorry, I can’t seem to reply to your latest comment, so I will reply here.

        Thanks for uploading FRED’s profit rate graph. Presumably now you see where Henwood gets his claim that: “The best way to start is by going back to the 1970s. Corporate profitability… had fallen sharply off its mid-1960s highs”. From tremendous immediate postwar highs, the rate of profit tumbled rapidly before stabilising somewhat in the 1950s, while still trending downwards to a trough in 1970. After a temporary boost in profitability from the sharp dollar devaluations of 1971-3, the rate of profit continued its downward trend to a devastating low in the mid-1980s. Taking 1945-1985, I don’t see how you can paint that as anything other than a declining rate of profit. Of course it fluctuates, but that doesn’t replace the overarching downward trend with one of simple “volatility”.

        Another telling aspect about the graph is the rather meagre recovery of the profit rate from 1985-2000. Profitability peaked in 1997, but was still considerably lower than the average during the 1950s and most of the 1960s. Consequently, during the noughties, profitability just goes off the charts. This coincided with falling GDP growth and a host of other stagnating economic indicators, suggesting that this is fictitious profitability associated with financial speculation. The graph I link below, which shows US profitability at historic cost valuation, paints much the same picture as the FRED data for the postwar period, while providing data for the ‘neoliberal’ period that much better fits with other economic indicators. http://www.newleftproject.org/images/uploads/Screen_Shot_2015-03-12_at_10.18.29.png

        The graph’s creator, Andrew Kliman, explains: “Data is from US Bureau of Economic Analysis: National Income and Products Accounts, Table 1.14, lines 1, 4, 7, 9, 10, and 12; Fixed Asset Table 6.3, line 2; and Fixed Asset Table 6.6, line 2. Net operating surplus and after-tax profit are measures of profit. The denominator of both rates is accumulated investment in fixed assets, net of depreciation”.

      • ‘Corporate profitability’ was doing just fine. The rate of profit on investment fell very modestly. It is not my fault if Henwood is sloppy with his statistical language.

      • JC says:

        So to be clear: 1) the corporate rate of profit was just fine, as long as you discount the denominator – investment – meaning it isn’t a rate of profit at all. And 2) a more than 65% decline in profitability from 1945-1985 – according to your own graph – is a very modest fall. Strange, then, that those dogmatic Marxists at the OECD concluded in 1985 that “There was a widespread decline in profit rates over the period 1960 to 1982 and in a number of countries profit shares also fell. In the 1970s, these phenomena became general”.

      • (1) Henwood did NOT say ‘rate of profit’, he said ‘corporate profitability’. I can only take him at his own words. If he meant the rate of profit he should have stated it clearly. I cannot be held to account for his confusion of two distinct statistical concepts.

        (2) This is a broader issue and not dealt with either in my post or in the comments. Whether you consider this a modest or a substantial decline depends on where you peg the base year. I would be inclined to peg it around 1950. Why? Because of the massive government deficits during the 1940s (if you know GDP accounting/Kaleckian macroeconomics you’ll know what I’m referring to here; if you don’t, you won’t). If you peg the base year at 1950 you get a modest decline in the early-to-mid 1970s that quickly reverses. If you peg the base year at the end of the 1940s you’ll get a substantial decline. But if you did that I’d probably be inclined to stop discussing macro with you because it would be clear that you weren’t up-to-speed on the accounting.

      • JC says:

        Profitability, rather than just profits, refers to a ratio. A ratio between revenue and expenses, profit and investment, or whatever way you want to turn it. The rate of profit is another way of saying this. At least this is the way it is understood in the academic literature. Certainly this is understood in Marxist discussions of this topic. Henwood probably assumed people were familiar with this. Regardless, this post is called “Was Marx Right?”. Marx’s theory in question is called the “law of the tendency of the *rate* of profit to fall” – not the mass of profits. If you were unaware of this, then you aren’t the right person to be assessing the utility of the theory. If you were aware of this, then it seems you were trying to move the goalposts in order to disprove him.

        From 1950-1985 the rate of profit fell by about 55%. Modest? Not according to businesses themselves. By the 1970s, this decline was already being felt by corporations across the US and globally, who were putting increasing pressure on governments to enact policies to reverse this decline. This is evident from a cursory reading of the historical literature on this period. Taking a case closer to home, the CBI – the most representative business body in the UK – wrote a press release/plea to government in 1973 that “profitability in this country has been steadily declining to the point where it is now at an historically low level. The level of profitability is, in the CBI’s view, vital to the level of investment”. Greta Krippner’s research (Capitalising on Crisis, 2011) has unearthed very similar conversations within US corporations at the same time. So I am afraid you don’t just have to explain to me why a halving of the profit rate was problematic for the economy, although it seems obvious enough, you also have to explain to businesspeople why they were wrong for thinking so too. And the OECD.

      • Yes, yes, we can all mine the data in order to confirm our a priori biases. X fell by 50% between Y and Z. It really depends on your Y and Z, now, doesn’t it? And anyone can choose their Y and Z to fit their a priori notions. This is called ‘confirmation bias’.

        As to your trust in the economic competence of the OECD and ‘businessmen’, well, let’s just say that you’re on the wrong blog. On this blog I try to criticise and pick apart poor mainstream macro arguments by drawing on non-mainstream thinkers. You would prefer to fall back on the ‘authority’ of the OECD and ‘businessmen’. Maybe you should go to their blogs instead. Apparently you guys are on the same page. But maybe that’s just confirmation bias too.

      • JC says:

        Your blog was assessing a claim of whether the profit rate fell in the postwar era… is that not the Y and Z that we are discussing? In fact, you didn’t like my original Y (1945) – for a fair reason – so we changed it (1950) and the falling profit rate thesis still held. At least now we can agree that the profit rate fell during this period, something you originally denied but have now accepted.

        I like political economy when it escapes from modelling and theory and applies itself to the real world. I thought that was the standard you were holding Marx’s theory to here, with your historical-empirical test. I find qualitative as well as quantitative empirics useful because it can show the mediations through which things like profit squeezes translate into real crises. Evidence from business unions is interesting for such crisis theory not because businesspeople are always right, but because, as most theories (especially Keynesian variants) accept, business confidence is important in the dynamics of an economy.

        Anyway, I think we’ve exhausted this debate. I am bowing out. Good luck.

      • “Your blog was assessing a claim of whether the profit rate fell…”

        No it was assessing where corporate profits went in the 1970s.

        “…in the postwar era…”

        No, it was in the 1970s. That was what Henwood was discussing.

        You like anecdotal economics. And as every serious analyst knows: with anecdotal economics you find the anecdotes to fit your biases.

        The other way of doing this is understanding how these statistics are arrived at and recognising the complexity therein. For that you would have to turn to a serious macroeconomist like Kalecki. Not to Henwood or any of the other Marxists who are not actually economists.



      • P.S. If you use net domestic business investment — which is probably a better metric for a Marxian ‘rate of profit’ argument — the profit rate stabilises completely.


        Reality. Complex.

      • JC says:

        Funny how you accuse me of cherry picking the data, when you presented a graph that clearly demonstrated you were wrong, and then scrambled around to construct another that was kinder to you.

        Volatility is to be avoided in statistics, I’m with you. In which case, why are you convinced that a graph that shows profitability to be more than triple the peak of the ‘golden age’ postwar era *in 2010*? In 2010, the US was nowhere near its trend rate of GDP growth, nor was it performing well on nearly an macroeconomic indicator – so your graph certainly raises eyebrows as to its utility. (I’m sorry you assume I have never done a statistics course. I have. It’s required within the academy for doctoral research. Not sure why you felt the need to bring an ad hominum into this. I could just as easily ask why someone with a journalism BA is qualified to say who is or is not an “actual economist”. But it’s irrelevant – let’s deal with the data.)

        Debates over the US rate of profit in the academic literature can be split along one cleavage – whether to use capital valued at current or historic cost. Post-Keynesians like Stockhammer and certain Marxists (Dumenil & Levy) insist on current cost, while the likes of Kliman insist on historic cost. There are advantages to both approaches, however, as is clear from the data below, it only significantly alters the overall trend of profitability in the ‘neoliberal’ era. There is no disagreement that the rate of profit fell secularly fell in the postwar era until the late 1970s/early 1980s.
        http://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1150&context=econ_workingpaper (page 14 shows net operating surplus and profit before tax divided by the capital stock – itself split between historic and current cost valuation).

        If you feel that your data is the right measure and correctly shows that there was no falling rate of profit in the postwar era, or even through the 1960s and 1970s, then this is very significant. There is a consensus to the opposite effect within the literature studying this phenomenon, so you have made a real discovery that you should actively publicise, if you feel it holds water.

      • They’re just proxy measures. Very rough and ready. They were looking at flows when we should be looking at stocks. The time series you have presented in the paper show a massive increase in the profit rate during the war (government deficits, duh) and after that relative tranquility. Nothing particularly exciting there. Again, its only interesting if you take an anomalous period as your starting point and cherry pick data.

        As to my proxies they performed okay in that they captured the high rate in the war and the boost in the 2000s. That’s all you can ask from a proxy.

      • BTW I should probably say that Stockhammer was my teacher in macro and there is no way that he believes that there is some Marxian falling rate of profit (yes, I have an MA in economics… are we playing that game Dr. Illustrator?). We all know that the dip in the 1970s was due to higher household savings and much of the rest can be explained by the trade deficit which had… um… complex causes and had zero to do with “surplus value” or whatever other skeleton you want to try to reanimate.

        Anyway, I’m not getting into a constructive run through as to what is actually driving this stuff. If you want to figure that out you can read some 20th century macro.

    • JC says:

      Marx is talking about the rate of profit, not the mass of profits. You play a trick halfway through this post by switching the discussion from profitability to profits. Capitalists care about the ratio between profits *and capital invested*. If you make £10 billion in profit, but only after investing £9.9 billion in fixed capital, then this is not the sign of a healthy enterprise. The rate of profit is a ratio – you need to look at the numerator and denominator. Show me a Marxist who claims that the mass of profits, rather than the rate, has trended secularly downwards. Marx certainly didn’t.

    • JC says:

      Anecdotal economics! Very creative equation of qualitative evidence with anecdotal evidence. I know some journalists fetishise quants, but rarely do they have the guts to relegate historiography to the rubbish heap.

      Also, Henwood says that profitability had fallen by the 1970s, implying that some falling happened in the preceding period. Commonly referred to as the postwar period. Otherwise why did you originally provide a graph going back to 1960…?

      Let’s recap. You claimed profitability *didn’t* fall. I showed that you didn’t understand what profitability meant. You presented real evidence on profitability. I showed that your evidence proved that profitability *did* fall. You accepted that it did fall, but called it modest. Modest not exactly being a scientific word, I gave preliminary qualitative evidence to the effect that this fall in profitability was significant for business confidence, hence not exactly modest, whatever that means. Although I am kind of interested in how much further you will backtrack, I really will call it a day here.

      • Evidence is not neutral. It must be interpreted. You interpret the evidence that I present anecdotally; so does Henwood, I think. I take an analytical approach using the Kalecki macro framework.

        Finally, there were two sets of evidence. The first showed that gross private investment to corporate profitability was VOLATILE. It rose in some periods, fell in others, then rose again in others. From a ‘falling rate of profit’ standpoint a scientist would dub this evidence inconclusive.

        The second set of evidence used a more accurate measure of the rate of profit. Basically I stripped out all non-business investment. This presented a less volatile series (which is a good thing if you have ever taken a stats course [I know you haven’t, but whatever]). And this series showed an upward trajectory in the rate of profit.


        Here is how your ‘anecdotal economics’ works. You look for what you want to find. You will turn to the time series that shows what you want it to say. Then you will zoom in on a period where the statistical relationship that you want to see exists and ignore the rest. That is called confirmation bias.

  2. Pingback: Was Marx right? | Método socrático

  3. You come out against the labour theory of value but it is a scientifically falsifiable theory which is overwhelmingly supported by econometric evidence whereas the alternative utility theory of value is scientifically unfalsifiable, not even wrong – it has more free variables than observables.

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