Law of the Falling Tendency of the Rate of Profit

[visceroid]

i have read a little bit on the Law of the Falling Tendency of the Rate of Profit, but im not sure if i actually understand it, most of the time when i read up on it, the terminology is not familiar, or alot of what is said seems to be irrelevant.

it seems to be a very important part of the working nature of capitalism, i would be very delighted to actually know what im talking about with it.

if someone could explain it in laymans terms, or at least make it easy to understand it would be greatly appreciated

[pravyj]

Sure.
Marx's theories are outdated and generaly waste of time.

If you follow the development of agregate profit over the last 100 years you will find out it's been increasing.
I would suggest reading something from M. Friedman or even J.M. Keynes if you don't fancy the first one.

Marx described capitalism which existed in ~1850, but capitalism has evolved since then so his theories are outdated.

[JKP]

It's been discussed before:
http://www.revolutionaryleft.com/index.php...topic=44669&hl= (http://www.revolutionaryleft.com/index.php?showtopic=44669&hl=)



Here's some mathamatics on the subject:
http://www.revolutionaryleft.com/index.php...topic=39750&hl= (http://www.revolutionaryleft.com/index.php?showtopic=39750&hl=)

[pravyj]

Ok I must confess, I enjoyed the calculation of ComradeRed

He presented a formula according to which we need 1iron+2labour -> 2iron
And he argues that the price of 1 iron being equal to 2 labour is incorrect.
He is trying to proove that actually it should be 3 labour = 2 iron

Ok so let's assume I'm a bad capitalist and I own 1 iron and 2 labour. I go to a capitalist market and change 2 labour for 1 iron. So I've got 2 iron and that equals to what I could produce myself with my labour and iron.

Now I'm a bad capitalist living in communist world so there is no capitalist market, only communist one changing 3 labour for 2 iron.
I change my 1 iron to 3/2 labour. So I own (3/2+2)labour = 7/2 labour. That is according to the first formula equivalent to 2 iron. And 2 iron is equal to 3 labour or 6/2 labour. But is 7/2 of labour equivalent to 6/2 of labour? Something is clearly wrong with the communist market!

Obviously the first equasion is fallacious, because one can't turn labour into iron, and one must make a distinction between raw materials and products. Otherwise we might get nonsence like ComradeRed. Sorry to dissapoint you, but you will have to find another argument why capitalism can't work ;)

[ComradeRed]

Alas, a philistine of the economy.

For the love of beer, before anyone else criticizes the mathematical model learn basic algebra!


He presented a formula according to which we need 1iron+2labour -> 2iron
And he argues that the price of 1 iron being equal to 2 labour is incorrect.
He is trying to proove that actually it should be 3 labour = 2 iron Have you not heard of a "convergence"? If you reduce a commodity to its dated labor, which I did and you evidently cannot understand, you get a convergence of 1 ton of iron being equal to 2 units of labor, add this to the labor in the current production period and 1+2=3 units of labor equate to 2 units of iron.

I'll walk you through, step by step explaining everything I do. Though, I doubt this would help any, your posts have proven yourself incapable of understanding anything (much less real analysis).

First we are given the equation 1 ton of iron and 2 units of labor produce 2 units of iron. That means that iron is rare enough that it takes exactly that much to produce 2 tons, neither more nor less.

Now, the first instinct which one wants to do is subtract. This isn't what we do, since that doesn't tell us anything. You are mixing apples and oranges while expecting a sound result.

No, we need to add the dated labor units together; the economist who used this formula to criticize the LTV postulated that after production 1 unit of labor becomes 1 unit of value. Thus adding the dated labor gives us the value of the commodity.

Sraffa, the founder of that school of economic thought, believed that a ratio could be used for outputs through a "standard commodity"...a sort of yardstick to measure value. He actually entertained the idea of it being dated labor, but decided otherwise (probably for the sake of his reputation).

According to the vulgar economist (I believe Steedman was his name, a disciple of Sraffa) who created this formula to debunk the LTV, it apparently has always been like this for getting iron.

Thus we may create a sigma series with an upper limit of infinity (we keep adding an infinite number of times) 2 to the power of (1-interval) because it is two units of labor and we are adding together the dated units. Thus when one adds it together it begins as 1+.5+.25+.125+...=(n-1)/n. This is called a "convergence".

What we do with it is simple: we substitute in 2 (when it is x^{a-b} we substitute in x, in this scenario x=2). That's math, philistine; something you vulgar Austrians can't comprehend.

Now, follow it through. What do we get? 1+2=? You can do the math, can't you?!

Oh, right, you're an Austrian economist. Sorry, I forgot you believe that thinking is just the "wrong" thing to do in economics.



Ok so let's assume I'm a bad capitalist and I own 1 iron and 2 labour. I go to a capitalist market and change 2 labour for 1 iron. So I've got 2 iron and that equals to what I could produce myself with my labour and iron. You can "assume" that just as we can assume that we can disregard the Neoclassical and Austrian schools of "thought". The problem is that we ignore the proof.

I provided a rather technical piece originally on this; however ignorance is no excuse.



Now I'm a bad capitalist living in communist world so there is no capitalist market, only communist one changing 3 labour for 2 iron.
I change my 1 iron to 3/2 labour. So I own (3/2+2)labour = 7/2 labour. That is according to the first formula equivalent to 2 iron. And 2 iron is equal to 3 labour or 6/2 labour. But is 7/2 of labour equivalent to 6/2 of labour? Something is clearly wrong with the communist market! This is the most inconsistent thing I've read. First off, there's no such thingasa "communist market".

Second, the use of labor is heuristic for deriving the exchange ratios between commodities.

Third, you are mixing apples and oranges again. May I suggest that you take some Middle School pre-Algebra and Algebra courses. You need it.



Obviously the first equasion is fallacious, because one can't turn labour into iron, and one must make a distinction between raw materials and products. Otherwise we might get nonsence like ComradeRed. Sorry to dissapoint you, but you will have to find another argument why capitalism can't work wink.gif Obviously it was beyond your level of comprehension. If it were labor alone, why the hell is it in reality "1 unit iron + 2 units labor" as the inputs?

The logic behind it is the same. And a better argument would have been the corn sector, how can iron and labor make corn? That's irrelevant, the logic is the same in the model.

Speaking of logic, the number of fallacies in your mathematical reasoning makes my mind reel. I highly recommend you learn some basic algebra before "criticizing" the mathematics behind anything.

Further, the model defeats marginalism totally (more specifically, the role of marginal utility determining price, the "law" of constant returns, and so on). The Austrian and Neoclassical schools have no basis mathematically or in reality.

Sorry chief but you don't have a point...one that isn't on your head, I mean.

[Severian]

Originally posted by [email protected] 7 2006, 07:57 AM
if someone could explain it in laymans terms, or at least make it easy to understand it would be greatly appreciated
Here's one explanation of it, from the Encyclopedia of Marxism. (http://www.marxists.org/glossary/terms/f/a.htm#falling-rate-profit)

[ComradeRed]

Do you understand thermodynamics? I may be able to explain it in terms of thermo...

[red team]

What&#39;s dated labor? and why does it decreases over time because its the only way that you can get convergence is if the next term in the series is less than the previous one that is if r < 1 in a geometric series (a)(r^n) where n approaches infinity.


Red Team

[pravyj]

After this message, perhaps ComradeRed will understand I&#39;m not the only one who needs to learn basic algebra ;)

Let&#39;s get back to the original formula:
1iron + 2labour = 2iron

so 0.5(iron + 2 labour) = iron
and lets subsitute for iron into the original formula

2lab + 0.5(iron + 2 lab) = 2iron
2lab + 0.5iron + 1 lab = 2iron
3lab + 0.5iron = 2iron

Then substitue for iron again
3lab + 0.5*[0.5(iron+2lab)] = 2iron
3lab + 0.25iron + 0.5lab = 2iron
3.5lab + 0.25iron = 2iron

Lets substitute again
3.5lab + 0.25*[0.5(iron+2lab)] = 2iron
3.5lab + 0.125iron + 0.25lab = 2iron
3.75lab + 0.125iron = 2iron

After infinite number of substitutions we get
4 labour + 0 iron = 2 iron
so 1 iron = 2 labour

There is nothing wrong with the capitalist market price obviously.
We could have subtracted 1iron from the original formula, and it wouldn&#39;t have had any effect on the result.

[ComradeRed]

Originally posted by red team
What&#39;s dated labor? and why does it decreases over time because its the only way that you can get convergence is if the next term in the series is less than the previous one that is if r < 1 in a geometric series (a)(r^n) where n approaches infinity. Dated labor is the labor inputs to the iron that didn&#39;t occur in the current production process.

That is to say, with a unit of iron, its inputs would be a quarter of 2 units labor + 1 unit iron, but if we substitute in half of that for the iron we get quarter of 2 units of labor + half*quarter (or an eigth) of 2 units labor + 1 unit iron. Keep doing it until there wasn&#39;t production. It converges to 1.


After this message, perhaps ComradeRed will understand I&#39;m not the only one who needs to learn basic algebra wink.gif Well, if we follow your method, we count the current production interval as dated. That is to say it contributes value twice over, which is contrary to the premises of the LTV.

For the sake of math, if one counts it as dated labor, what would that imply for the relations to price? Would it have any effect at all?

Lemme see, first off we calculate out the C V and S which is:
C - V - S
iron 56 14 14
gold 32 4 12
corn 24 2 6
then the rate of profits are 20% in iron, 33.333% in gold, 23.07692308% in corn, with an average of a rate of profit of 24/99=24.242424%.

Now multiply the total by the rate of profit which gives us a mark up of:
Iron mark up = 20.363636...
Gold mark up = 11.636363...
Corn mark up = 7.75757575...
then add these to the capital, giving us
Iron total value = 90.3636363...
Gold total value = 47.636363...
Corn total value = 33.75757575...
Then per unit, it is
Iron value per unit = 1.613636363...
Gold value per unit = 0.9924242424...
Corn value per unit = 4.2196969696...

Now all of these were in units of value, if we set it to per units of gold we get
Iron value per unit in gold = 1.625954198...
Gold value per unit in gold = 1 (notionally)
Corn value per unit in gold = 4.2519...

So even if you were right, it&#39;s all irrelevant; the logic behind the model remains the same. Sorry chief. Either way, if I am right or if I am wrong about the units labor per units of iron, the Labor Theory of Value is still right.

But suppose it is "wrong", you have to show us a better example. Show us the supply and demand curves for the economy. But first you&#39;ll need the marginal utility of each commodity; I&#39;d love to see you find it.

If you can&#39;t, this is what we have to settle for; there are no other alternatives.

I can and did walk you through every step of the way, I came up with answers off the previous ones by .05 assuming you are correct in counting the recent production process as dated and not dated (which makes no sense whatsoever).

Then dynamically, so long as technology doesn&#39;t change the ratio of the ratio iron to labor (or labor to iron if you wish, but be consistent on which one you use) in each sector to the output, the price remains the same.



We could have subtracted 1iron from the original formula, and it wouldn&#39;t have had any effect on the result. Except there would have been no rate of profit. Here is a link (http://www.nrg.to/crr/transform.pdf) on the brief history of the model; it is a fairly rough draft I wrote and it is a pdf (I apologize).

But the problem is if we do that, that means there is neither profit nor surplus production. That&#39;s not capitalism.

[pravyj]

I&#39;m not willing to waste my time by discussing this topic further, some people just can never be persuaded.
What I was pointing at was that you got a result but you didn&#39;t verify it using the original formula. If you did, you would have figured out it was wrong.
I&#39;m not willing to get embroiled in discussion about this nonsensical economy, since I see no utility from doing it.

[Luís Henrique]

Originally posted by [email protected] 8 2006, 07:22 PM
I&#39;m not willing to waste my time by discussing this topic further, some people just can never be persuaded.
What I was pointing at was that you got a result but you didn&#39;t verify it using the original formula. If you did, you would have figured out it was wrong.
I&#39;m not willing to get embroiled in discussion about this nonsensical economy, since I see no utility from doing it.
So provide us with some definition of utility value that is not mystical, self contradictory, or just a phlogistical version of labour value (as in, "utility is not having to work")

Luís Henrique

[ComradeRed]

Its because there is no way to explain the model with the marginalist paradigm.

Look, even if it is 2 units of labor per unit iron, that doesn&#39;t change a thing; you assert otherwise now could you prove it?


What I was pointing at was that you got a result but you didn&#39;t verify it using the original formula. If you did, you would have figured out it was wrong. How so? Demonstrate it?

Which &#39;original formula&#39; are you referring to? Marx&#39;s? One stated earlier?



I&#39;m not willing to get embroiled in discussion about this nonsensical economy, since I see no utility from doing it. This "nonsensical economy" is how the economy really works. This is how every-day capitalists see it; "I paid &#036;x for this and &#036;y for that for an output of z, thus the price needs to be &#036;(x+y)/z if I will break even and greater than that to make a profit." WHat a shocking discovery&#33;

How else could it work? This model is the "litmus test" for economic theories. Where is the marginal cost, marginal benefit, marginal product, marginal yaddah yaddah, so on and so forth?

How would you model the economy? What would you do otherwise?

[JKP]

Now that pravyj is restricted, you&#39;ll have to continue this discussion in OI. You seem to be totally owning him anyway.

[ComradeRed]

Meh, he doesn&#39;t want to admit that Neoclassical/Austrian economics are irrepairably flawed. So be it.

As far as the original post, the Law of the Falling Tendency of the Rate of Profit...where did you read about it? Were you skimming through the third volume of Capital and stumbled upon it or was it referanced to you?

What the basic argument is that class society is a lot like thermodynamics. The labor cannot get its full value (just as we cannot have a perpetual motion machine because of entropy); the excess, or surplus, value is derived from the labor.

We know that capitalism is advancing technologically. Thus the amount of labor needs to be reduced if the output remains the same. That means the value falls because we have less labor. If we keep the labor it still falls because the value per commodity decreases.

If the money were manipulated to fall correspondingly, that might make it appear as though capitalism won&#39;t collapse (or even may be growing&#33;).

Basically, the value created by labor per commodity will keep decreasing (just as order from disorder is a scientific rarity -- did I say rarity? I meant impossibility,
at least in a closed system there will always be more entropy).

[visceroid]

thanks guys for your help, im not sure i totally understand it, but ive taken in the information, tomorrow while at work i will probably be pondering it and figure it out.

[Enragé]

fuck i hate maths

[Djehuti]

Marx goes through The falling tendency of the profitquota fist in the third book of Das Kapital. And while have not read that far yet, I do know something about the theory, and I will try to explain as simple as I can.

The formula for the profit quota is:
p&#39;=s/c+v (P&#39; is profit quota, S is surplus value, C is constant capital, V is variable capital, or simply wage)

The formula for the falling tendency of the profit quota is:
p&#39; = s&#39; (1 — o) (S&#39; is the surplus value quota, o is the organic composition)
So of the organic composition of capital rises, the profitquota (NOTE: profit quota, the profit usually rises) falls.

I will try to explain. The capitalist discovers that if he introduces new technology, new machines, etc (hence the constant capital rises), he could produce more commodities at the same time, with the same labour, or the same amount of commodities at the same time with less labour. So called development of productivity. This enables him to raise his profits. Other capialists will be forced to introduce the same, or even more advanced technology so they wont be out of business. And so it continues.

The competition forces forth that a relativly larger part of the total capital must be invested in constant capital (C,), and a realativly less part will be invested in variable capital (though in absolute numbers both can rise, and often they do). The relation between C and V Marx called the organic composition of Capital: the higher share of C, the higher organic composition. Remember that only V (labour) can create value, and hence also surplus value, S. (C only transfers its own value).
Because of this, the profit quota (s/c+v) falls because V, the part that creates value, is reduced in relation to C. The profit quota (P&#39;) falls because the labour gets more productive.