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Reclaiming Marx's Capital: A Refutation of the Myth of Inconsistency

Author: Michael Roberts

Andrew Kliman


This is an important book. In a nutshell, what Andrew Kliman shows is that Marx's laws of motion of capitalism (how capitalism works and does not work) are logically consistent and theoretically valid.

Kliman's book is a compilation and summary of all the efforts of a few Marxist economists over the last 30 years to defend Marxist economic theory from critics (both supporters of the market economy and those claiming to be Marxist).

Over the last 100 years, various economists, including the Austrian Eugen von Bohm-Bawerk in 1896, the Russian Ladislaus von Bortkiewicz in 1896, the Italian Piero Sraffa in 1960 and the American Paul Samuelson in 1971, have all claimed that Marx's labour theory of value and its application to understanding how profitability under capitalism would move was logically inconsistent and/or just plain wrong.

So overwhelming were these arguments that most economists, including most Marxist economists, accepted them. The eminent Marxist economist Paul Sweezy swallowed the criticisms hook line and sinker in 1949 when he republished both Bohm-Bawerk and Bortkiewicz's papers. Later in the 1970s, many Marxist academics accepted the arguments of Sraffa and the Japanese Marxist economist, Nobuo Okishio, that Marx's errors meant that his law of the tendency of the rate of profit to fall under capitalism was wrong theoretically. For them, Marx could not explain the nature of capitalist exploitation consistently and could not provide a logical explanation of capitalist crisis either. Thus, Marx's economic theories were shelved except by a few (including David Yaffe, Guglielmo Carchedi, Alan Freeman and Andrew Kliman), who were quickly dubbed 'fundamentalists' unable to accept reality.

What were the main criticisms of Marx's economic logic? The first deals with Marx's transformation of values of each commodity (as measured by the labour time going into producing them) into prices of production (as measured by cost of production and the average profit).

Marx knew that his labour theory of value did not mean that each commodity sold in the capitalist market would be priced according to the labour time needed to produce it. Competition under capitalism meant that profitability would tend to be equalised or averaged out across the economy. If a company or industry had a higher rate of profit, capital investment would move towards that sector and away from another in order to reap that extra profit. This would lead to an averaging out of the profit generated from the labour employed in all sectors. The labour value embodied in each commodity would be transformed into a price of production that was based on the average profit across all sectors. That would differ from the labour value in the commodity, which was based on the labour time involved. Some of the surplus value generated from workers in one sector would have been transferred to another sector.

But, Marx argued, this did not mean that the labour theory of value no longer provided an explanation of capitalist production because, in aggregate across the whole economy, the total value of all commodities would still equal the total prices of production; total surplus-value would equal total average profit and the rate of profit in value terms would equal the rate of profit in price terms for the whole economy. Thus, indirectly but decisively, the labour time appropriated by the capitalist into the value of production of commodities explained the prices of all commodities.

It was this transformation that Bortkiewicz said did not work. He argued that Marx had made a crucial error in his analysis. If the value of a commodity is transformed into a price of production by an average profit, then Marx should also transform the values of the original investment in capital equipment (constant capital) and labour force (variable capital) into prices of production too. But if Marx had done that, then his formula would not lead to total values equalling total prices of production and/or total surplus-value equalling total profit. Thus Marx's theory of value falls to the ground: its premises led to inconsistencies.

Kliman shows conclusively in his book that Bortkiewicz's 'correction' of Marx's 'error' (so readily accepted by many for over 100 years) is wrong. There is no need to transform the values of the inputs that go into the production process into prices based on prices of the outputs. That is logically and temporally wrong. If you make a pair of trousers and price it according to the cost of the textiles and something for the wear and tear of the machinery and for the labour time involved, you don't then reprice the labour time or the machines you used according to the price of trousers you have just made. That's because you have already spent the money on the machines, textiles and labour. To reprice the labour time on the basis of subsequent sale-price is not only logically incorrect; it makes no sense of what happens in the real world. Thus Bortkiewicz's correction is wrong and Marx's solution to the transformation problem is perfectly valid.

The other main criticism of Marx was on his law of the tendency of the rate of profit to fall. For Marx, this was the most important law of motion of capitalism, because it showed that capitalism had an inherent tendency towards crisis and collapse. Capitalist production is production for profit and if profit should fall, capitalists may well stop production.

Marx argued that the capitalist economy reproduces by increasingly using technology and equipment in place of the labour force in order to drive down costs and raise the productivity of labour. But, as the cost of machinery rises relative to the cost of employing labour (what Marx called a rising organic composition of capital), the rate of profit will tend to fall because, if it takes less labour time to make a commodity, its value (or price) would fall and thus tend to squeeze profitability.

This law has been criticised and mauled by a succession of economists. And in the 1970s, it was rejected by many Marxists. They argued that the rate of profit could not fall if the organic composition of capital rose. This was not an empirical question; it was, in their view, logically impossible. The most elegant mathematical refutation of Marx along these lines came from Nobuo Okishio, basing his ideas on Piero Sraffa, in turn a follower of the classical early 19th-century economist David Ricardo.

Marx had said that no capitalist would willingly introduce a new method of production unless it increased his profitability. In other words, investment in new equipment must raise profitability for the individual capitalist, not lower it. That seemed to contradict Marx's law that increased investment in technology relative to the labour force would tend to drive down profitability. Marx resolved this contradiction by explaining that, while the first capitalist would increase profitability by introducing a new technique before others, once all the rest had done so, profitability would fall back to an even lower level than before.

Okishio denied this. His mathematical formula showed that, assuming there was no increase in real wages for the workers, any increase in the use of new technology would raise profitability and would never cause it to fall. After all, if the workers produced more in the same number of hours, productivity would rise and thus profitability: QED!

Okishio's theorem was soon accepted as a devastating demolition of Marx's position. If you wanted a cause for the rate of profit to fall, you would have to look elsewhere, probably to a rise in the share of wages relative to profit (as argued by Ricardo back in 1819 and Sraffa in 1960 - and later empirically by Andrew Glyn in the 1970s.). It meant that any explanation of economic crisis under capitalism could not rely on Marx’s own theory.

In his book, Kliman provides a convincing refutation of Okishio's theorem. Okishio, ostensibly trying to 'improve' Marx, made a similar mistake to Bortkiewicz. If a new technology increases the productivity of the labour force, it lowers the value of labour time in the production of commodity. According to Marx, that will lower the value or price of production and tend to lower profitability, other things being equal.

But, according to Okishio, a rising organic composition of capital will not squeeze profitability because a higher productivity of labour will immediately (simultaneously) lower the costs of production involved in the technology and the wages of the labour force used in production and thus their prices.

But again this is illogical, as Kliman explains. You cannot reduce the cost of production using the new lower prices achieved with the new technology, because you have already paid for that technology at the old higher prices. The new prices only apply to the next round of production. The process of production is not simultaneous, but temporal. You can do anything with mathematics, but if your assumptions are unrealistic, you will come up with unrealistic outcomes.

In this book, Kliman seeks to show that Okishio is not really improving Marx, but distorting his theory. After a close analysis of Marx's texts, he shows that Marx assumed from the start that the prices of inputs to production would differ from the prices of the output; he was not a simultaneist like Okishio.

Kliman argues for what he and others call a 'temporal single-system interpretation' (TSSI) of Marx's value and profit theory. It is 'temporal' because Marx’s theory is dynamic: the prices of the inputs going into production do not change simultaneously in line with the prices of the outputs after production. And it is 'single-system' in that Marx's labour theory of value is not divorced from the prices of capitalist production, but is integrally connected to them. You cannot have profits (a price term) without surplus-value (a value term) and you cannot have surplus-value without the appropriation of labour time by capitalists from workers. Thus Marx's economic theory of exploitation is logically consistent with the process of capitalist production. The creation of profit depends on the creation of surplus-value.

Kliman shows that a proper reading of Marx's CAPITAL reveals a coherent theory of capitalist production that can be explained by the labour theory of value and a logically consistent explanation of the movement of profit. He has stripped away the obfuscations of the neo-Ricardians. Marx did not make theoretical errors (at least in the areas that the critics have claimed and others have accepted for over one hundred years since Volume 3 of CAPITAL came out).

Kliman makes every effort to make his book simple and easy to follow. Still, many of the arguments are complex and those who do not have some knowledge of Marxist economics may find it difficult. But it is worth persevering.

There is one very important point in the book that Kliman emphasises. Kliman is not saying that Marx is empirically correct. Just because a theory holds together from its premises through to its conclusions, that does not mean that it describes the real world better than another theory. Marx's law of the tendency of the rate of profit to fall asserts that if the organic composition of capital rises, then the rate of profit will eventually fall. But, what if the organic composition of capital does not rise and what if the rate of profit in the economy does not fall? Then Marx's theory is in jeopardy from the facts.

In my view, Marx would not have a coherent explanation of how capitalism gets into economic crisis without his law of the tendency of the rate of profit to fall. Kliman has shown that this law is logically consistent. It will be for others to show if it is empirically valid.

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