MARX AND THE MARKETS

Marx was right in terms of crisis again. The last Credir Crise since 2007 was the biggest crunch since 1929. Marx’s Law of Fall of Rate of Profit perfectly describes the last and current years process of capitalism.

What is the correlation between Marx’s Rate of Profit Theory and the markets? Marx analysed the corporate profitability and cyclical crisis of capitalism. He proved that if the Rate of Profit starts falling in the capitalist system it is the bell of next big correction and shortly the crisis come. We had a brutal profitability drop between 2007-2009 in all industries across the board. From that recession US has recovered in fastest phase, but many regions like China, Russia still suffering from that.

But what is the rate of profit, which is an indicator of crisis?

= Rate of Profit
S – Surplus Value. This is the source of profit.
C – Constant Capital. Machinery, office, paper, printer, all expenses excluded wages ... etc.
V – Variable Capital. Expenses of wages.

If the Rate of Profit gets falling that means the certain company or the whole industry or the whole economy profitability is getting smaller. Why? Because the C – technology is getting more expensive and V – wages are higher and higher. When we are in upward period of cycles and the development is over all, the wages are improving, but after a certain point it starts to affect on the Rate of the Profit. The increase of expenses side reduce the profit. Above a critical and certain level needs to be reduced the salaries or make the working days longer or if necessary workers are fired. The rate of unemployment initiate to increase. That is what we saw in 2007-2010 period. The rate jumped up from 5% to 10% and by now normalized between 7-8%.

In the period of the deepest crisis the purpose of companies is reducing the C (Constant expenses) and V (wages). On wages the cut the costs back as you see above and on C they start to use more efficient technologies which can reduce the daily process expenses. The options are finding synergies inside the company, no travel expenses with video technologies, more computerisation.

After those steps the S gets start to increase again and parallely during the crisis the cost of C and V are lowering. In the Marx’s Theory the Rate of Profit starts to recover again during the crisis, which we see now in US. The american flagship companies like Apple, BoA, Starbucks, Tesla, Facebook sitting on more profit and cash then ever. The level of profitability is on historical high. And, how effect on the markets upon those data. Just look at the chart below. This is more than obvious. It is a brutal five years bull market.

All in all Marx was right in terms of the Rate of Profit. It has been recovered again and the crisis is over. This is cycle behaviour of Capitalism. The Capitalism is the most virulent system in the history. Learn always from the crises and reborn again. As Schumapeter called this event creative destruction.

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The BFM Assets Team.