The tendency of the rate of profit to fall and post-war capitalism - A critique by AG

In his document, AG disagreed with Marx. He saw the fall in profits as being fundamentally caused by rising real wages biting into the surplus. This had serious implications as it led him to cast doubts on Marx’s theory. MB’s reply is mainly concerned with pointing out that Marx’s theory was fundamentally correct and that it is still a useful guide to understanding reality.

This article explains why I disagree with one important element of our analysis of the economic crisis in Britain, and in the advanced capitalist countries as a whole. To clarify what is at issue it is worth emphasising the following points where I believe there to be basic agreement:

1. There has been a systematic and pronounced fall in the rate of profit in the UK, and to a varying extent in the other advanced countries, since the early 1960s.

2. This fall in the rate of profit flows from the accumulation of capital.

3. The fall in the rate of profit has been a fundamental contributory factor to the extreme economic difficulties of recent years (the world economic crisis) and to the specific crisis of UK capital.

4. The course taken by the economic crisis cannot be deduced simply from the fall in the rate of profit. The uneven development between the different capitalist countries, breakdown of the international monetary system, class struggle over wages and state spending, the colonial revolution, etc., all profoundly contribute to the generation of, and affect the form of, the crisis. More- over, the economic crisis itself worsens the fall in profitability through the stagnation which results.

5. In the economic crisis a prime objective of the capitalists is to restore the rate of profit by holding down real wages and by forcing up productivity through rationalisations, that is, by improving the conditions for producing surplus value. But this is only a situation for a particular (national) capital to the extent that it succeeds more than its rivals and can therefore solve the problems of realising surplus value (selling the extra surplus produced by the working class) at their expense.

My disagreement with the tendency concerns why there has been a falling trend of profitability. It is concerned, therefore, with a more precise explanation of point (2) above.

The position of the tendency, explained repeatedly in our material, is that the decline in profitability reflects the operation of Marx's famous Law of the Tendency of the Rate of Profit to fall (LTRPF for short). A typical formulation from the October 1974 IB is as follows:

"Why does capitalism inevitably tend to crisis? Most crises of capitalism are crises of overproduction... Since the capitalists produce only for profit it follows that capitalist crisis is a crisis of profitability. Too much is produced only in relation to the existing level of profitability... The general tendency of capitalist production is towards a higher organic composition of capital, that is towards a higher proportion of machinery and raw materials employed per man. But although machinery makes human labour more productive, only labour produces surplus value. There is therefore an inevitable tendency for the rate of profit to fall."

My objections are that:

A. The LTRPF as formulated by Marx is theoretically incorrect. In brief, one of the factors which Marx regarded as just an offsetting tendency, the cheapening of the elements of constant capital, could in principle operate indefinitely with sufficient intensity to prevent the organic composition from rising.

B. In actual fact the available data show conclusively that while there has been a rise in the organic composition in some countries, it has not been a systematic and pronounced trend, and even where it has taken place it has not been the explanation for declining. profitability.

These objections are justified at considerable length below, and inevitably the discussion is somewhat technical. But first it is necessary to take up two preliminary questions.

Does it really matter?

Some people may feel that it is a complicated and obscure question of no real significance. Complicated it is, and obscure as well. But insignificant it is not. Even if we can all agree on the five points I listed at the beginning, it is still important that we have as precise as possible an understanding of the forces at work. If the LTRPF is not the explanation of declining profitability then this can affect our interpretation of many detailed questions, such as the implications of new technology as a possible way out the crisis or the specific nature of the UK crisis.

The LTRPF and revolutionary Marxism

Quite the opposite line of though is that the LTRPF is such a fundamental part of "Marx's economics" that it is impossible to criticise it without abandoning historical materialism and thus revolutionary Marxism. It is actually impossible to conduct a rational discussion when one side rules out the other's argument, whether theoretical or empirical, as impermissible because the implications are unacceptable. Since it is my observation that some people hold this position, it is obviously necessary to show first of all that the LTRPF is not in fact an essential component of revolutionary Marxism.

It must be said that the LTRPF was very important for Marx himself - after all he called it the "most important law of political economy". The first general point to make is that Marxism is a method, not a set of dogmatic truths. Quite correctly we constantly repeat this as regards politics; we openly argue that Marx or Lenin or Trotsky were, in our view, wrong on certain questions; for example, Marx's general presumption was that proletarian revolution would take place first in the advanced countries. These "corrections" do not, however, in any way invalidate Marxism as the only way of understanding historical development (the fundamental role of economic development, the nature and basis of class struggle, etc.). Exactly the same applies to economics. The Marxist method in economics—piercing the veil of prices to uncover the real relations of capitalist production and exploitation, the fundamental role in capitalism of capital accumulation both in explaining development and crises—does not stand or fall on the specific application of that method by Marx himself. The LTRPF is a specific application of his method, not part of that method itself. To give a very simple analogy: adding 2 + 2 is a specific application of the method of adding, not the method itself; if somebody incorrectly concluded that the answer was 5 that would not invalidate the laws of arithmetic.

I know that one reason that some people feel that the LTRPF is somehow fundamental is that it summarises in a succinct way the historical limitations to the capitalist system, that capitalism undermines itself in the course of its own development. After all, if capital accumulation is based on profitability, and yet capital accumulation inexorably drives down the rate of profit, the self-contradictory nature of capitalism, is apparent. Now nobody I think has a crude "final breakdown theory" of capitalism, that the economic contradictions cause capitalism simply to "stop" and socialism to take over. We all accept that revolution will only take place through the conscious action of the organised workers, and that the possibilities for this are opened up through the contradictory development of capitalism rather than having to wait on some final breakdown. And yet I think many people still cling to the LTRPF as giving some underlying basis to the very important idea of Marx that "the barrier to capital is capital itself."

My answer to this is that the LTRPF is a very economistic technological interpretation of the idea that the barrier to capital is capital itself. After all, as Marx explained repeatedly, capital is not merely a bundle of physical objects (means of production like machinery and factories), but also a social relation (that is, capital is means of production operated by wage labour and owned by capitalists in competition with each other). The idea of capital as a barrier to itself does not depend on some technologically based impossibility to continue accumulating (technological in the sense that Marx says the LTRPF is the reflection under capitalism of the higher labour productivity resulting from technical progress). It may include such a technological component, but the barrier itself can just as much derive from the fact that the development of the relations between capital and labour, and between the different groups of capital (within a country or between countries), constitutes a barrier to continued development. The barrier then is the class-ridden and unplanned nature of the capitalist system.

I would suggest that this is actually a much more fundamental sense in which capital is a barrier to itself than is the LTRPF. It is interesting that in the 'Communist Manifest' there is no mention of the LTRPF; there could not have been in the first edition of course since Marx had not worked out the law. Nobody could say that Marx was not a Marxist then just because he did not understand the LTRPF. But it is striking that it is never mentioned in any of the later prefaces to the Manifesto; nor is it mentioned in the famous chapter on "Historical Tendency of Capitalism" in Volume I of Capital where again the basic ideas of the progressive and contradictory nature of the development of capitalism are described. Whilst the LTRPF is only developed in Volume III, the drafts of Volume III were already written when Volume I was published. Neither does the LTRPF rate a mention in 'Wages, Prices and Profits' nor in Engels' Socialism, Scientific and Utopian. It figures neither in Lenin's Imperialism nor in Trotsky's Curve of Capitalist Development, nor in his famous Report on the World Economic Crisis to the Third International's Third World Congress. Now, of course, some of these works are brief and deal with a variety of questions (though the LTRPF rates only one mention in Luxemburg's mammoth Accumulation of Capital). But it does suggest that our emphasis on the LTRPF is perhaps a great deal stronger than in the classic works of Marxism. Certainly the fundamental idea that the barrier to capital is capital itself, which is repeatedly discussed in these works, was not conceived of as reducible to the LTRPF.

I think that perhaps the most important reason why people believe that it is essential to maintain the LTRPF as the explanation of declining profitability is fear of the political implications of the alternative. It is easy to show that, in Marx's terminology, a fall in the rate of profit must evolve either because of rising organic composition of capital or because of a fall in the rate of exploitation (wages rising in real terms faster than the productivity of labour). People admit that in some circumstances, particularly when the demand for labour is high at the top of the boom, then real wages may rise rapidly and force the rate of profit down. But they find it impossible even to consider that rising wages could be the basic underlying factor behind the falling trend in profitability. They feel that to allow that wages play a central role in declining profitability involves accepting the argument of the employers that the workers are to blame for the crisis. But this argument should be combated by pointing out the false terms in which the debate is posed. That, after a long period of boom, workers' wages may be excessive from the point of view of the smooth functioning of the capitalist system is in no way to "blame the workers" for the malfunctioning of capitalism. After all we all accept that the capitalists' only way out of the crisis is to drive down wages (and force up productivity). In this sense everybody accepts that wages may be excessive from the point of view of the capitalists. Why then should we rule out the idea that they are excessive, because they have risen too fast? The blame surely can be placed firmly on the nature of the capitalist system which, despite all permanent waste and misused resources, reacts to rising living standards through a crisis which makes the waste and unused resources even greater. The role of rising wages in declining profitability is a subject for empirical investigation rather than for simply turning the propaganda of the capitalists on its head.

Having argued, I hope convincingly, that it is perfectly possible to question the LTRPF without abandoning Marxism, I want to consider first the theoretical objections to LTRPF and then assess the evidence as to whether in, in fact, rising organic composition of capital has been the explanation of declining profitability.

The Theory of the LTRPF

The most important criticism of the LTRPF is that it makes unjustifiable deductions about the value composition of capital from perfectly plausible assumptions about the technical composition of capital. The technical composition of capital is a physical relation between the "mass" of machinery, raw materials, etc. used and the number of workers. The substitution of machinery for labour, which Marx perfectly correctly saw as a persistent tendency of capitalist production, leads to a rising technical composition of capital. (When constant capital consists of a range of different machines, raw materials, etc. the "mass" of constant capital can only be understood in a rough and ready way—how could you measure the "mass" of two lathes plus a building? It is simpler to think of it when constant capital is just one type of machine, in which case the technical composition would show the number of machines operated by each worker.)

But part and parcel of the process of a rising technical composition is a rise in the productivity of labour. This means that the value of each commodity—the socially necessary labour time required to produce them—is falling. Thus the value of constant capital which each worker uses is subject to two contradictory processes.

(a) The rising technical composition of capital means he/she is using a greater mass of materials and machinery which, other things being equal, would mean a greater value of capital,

(b) The value of each machine, chunk of raw materials, etc. is falling, which would mean that, other things being equal, the value of constant capital which he/she operates would fall.

The movement of the value of capital depends on which of the two contradictory processes at work—the rising mass of constant capital and its devaluation—is the dominant one. If the technical composition of capital rises faster than the devaluation of capital then the value of constant capital rises per worker, and vice-versa. Contrary to Marx's assertion, it is impossible to argue for a persistent tendency for the technical composition to rise faster than capital is devalued—the outcome is indeterminate. Thus, while it is possible that over particular periods the value composition of capital will rise, it cannot be held to be a fundamental tendency of capitalist production. (See Appendix I for explanation of why analysis based on the "ratio of dead to living labour" [C/(V + S) is clearer than with the more usual measure of organic composition C/V.]

If the ratio of dead to living labour does rise over a particular period this may or may not be associated with a fall in the rate of profit. As is well known, it depends whether the rate of exploitation is increased sufficiently. What is true is that if the ratio of dead to living labour rises indefinitely then the rate of profit must fall (because of the limits to the increased rate of exploitation—see Appendix 1). But such a persistent continual rise in the rate of dead to living labour is only one out of many possibilities. It is possible that the capitalists, forced by competition to cheapen their commodities and seeking to increase as far as possible the margin of profit they earn on each commodity, might persistently introduce new techniques of production of a higher and higher ratio of dead to living labour which must eventually depress the profit rate. (See Appendix 2 on Profit Rates and Margins.) But it is equally possible, when account is taken of the cheapening of machinery due to technical progress in the capital goods industries, that the ratio of dead to living labour will not increase, so the capitalists search for cheaper commodities, and the maximum profit margin and mass of profit would not lead to a fall in the profit rate. There is no logical basis for giving one of these possibilities (falling rate of profit, reflecting rising ratio of dead to living labour) any theoretical priority at this level of abstraction and divorced from the other aspects of the accumulation process.

While Marx recognised that the cheapening of constant capital due to productivity increases tended to hold back the value of constant capital he said that this could not over-ride the increase due to rising technical composition. But this is pure assertion. It cannot be settled as a matter of logic as to which of the forces—rising technical composition or devaluation of capital—operates more strongly. Particular numerical examples based on particular rates of productivity growth in particular sectors, which can always be constructed to show the value composition of capital rising, prove nothing about a general tendency (note 1). If I am travelling from Oxford to London and you are travelling from London to Oxford whether we meet in the middle or nearer London or nearer Oxford depends entirely on our relative speeds of travel. Special cases prove nothing; it could only be argued that there will be a persistent tendency for us to meet closer to London if in principle and of necessity I had faster transport. But no factor of this sort can be brought forward to sustain Marx's argument that there must be a general tendency for the value composition of capital to increase. This leaves the question as being an empirical one. Once it is recognised that theoretically the value composition of capital may rise or may fall it is possible to assess the available evidence in a rational fashion, and it is impermissible to reject some evidence as "wrong" simply because it does not support what is regarded as theoretically necessary.

The Facts:

The fundamental question which we need to answer is whether there has been a general tendency during the post-war boom for the value composition of capital to rise or fall. The statistics presented below are from the conventional national income and capital stock figures constructed by the statistical offices of the different countries. They are not, of course, constructed with Marx's value categories—value of capital, surplus value, etc.—in mind. They are measured in terms of prices—either 'current prices' or recalculated at some set of 'constant prices'-that is what the commodities or means of production would sell for in terms of money. They are not measured in terms of Marx's values—quantities of labour time socially necessary to produce the commodities. However, it is perfectly reasonable to use these figures as indicators of trends in the value magnitudes.(note 2) The two trends would only diverge in particular cases (associated with different movements in the organic composition in different sectors) which there is no evidence to suggest actually applied. Any objection to these figures, which are without question the best available, must be based on a scientific critique of their basis, not on vague assertions as to the dangers of using bourgeois statistics.

The typical figures used to back up the LTRPF are the huge increase of fixed capital per worker, such as these shown in columns 1-3 below.


Industry 1953-72


(% growth rates per year)

Capital Stock



Productivity (Devaluation of Capital)

Ratio of dead to living labour






































Source: Boltho, Economic Survey of Japan

Huge increases in the capital stock per worker are recorded (column 3).(note 2) But these are indicators of the technical composition, not the value composition. These statistics for the capital stock at constant prices are attempts to measure the volume of the capital stock (i.e. number of machines before taking account of their cheapening due to productivity growth). They do not simply get rid of the effect of inflation, but they also ignore productivity growth—the devaluation of capital, which cheapens machines. If we want to get at the value composition, i.e. what is relevant for the rate of profit which is calculated on the value of capital—not its physical volume—we have to account for this devaluation of capital. This I have done in a simple way by subtracting the growth of productivity (column 4) from the growth of the volume of capital per worker to give the growth in the value of capital per worker.(note 3) Whilst marked increases do emerge for Germany and the UK, the other countries show slight falls. These figures are not definitive, but it is most unlikely that they would fail to pick up a sustained and general rise in the value of capital per worker. At least they show clearly how grossly misleading it is for writers like Mandel to use figures for the growth of the physical stock per man (column 3) as supporting the idea of rising organic composition. Confirmation of these trends (or lack of them) comes from more accurate figures I have assembled below for the capital/output ratio, an indicator of the value composition of capital (or the ratio of dead to living labour (see Appendix 1).


Ratio of dead to living labour














1.33 (1972)







1.29 (1971)







1.79 (1972)







1.05 (1970)
















Source: National Income and Capital Stock Statistics

The picture since the early '50s would seem to be of no real trend in the USA or France, a marked downward trend in Italy and Japan (which were industrialising exceptionally rapidly) and definite upward trends in Germany and the UK.

This definitely does not add up to a general and systematic trend towards a higher composition of capital in the course of the long-boom. But if the value composition of capital failed to rise generally, perhaps the rate of profit failed to fall generally. Perhaps we do not need an alternative to LTRPF as an explanation for falling profitability if the rate of profit actually did not fall. This, however, is not the case. There can be absolutely no ambiguity whatsoever—there was a general and decisive fall in the rate of profit even before the post-1973 crisis (and with the apparent exception of France).


Rates of Profit (% before tax)


Industrial and commercial companies











































Source: Clarke and Williams; Feldstein and Summers, Deleste and Mairesse; 
Annual Report on National Income Statistics of Japan, 1979; 
estimates for Italy and Germany based on National Account and Capital Stock 
sources are very rough and cannot be compared with the other countries.

The fact that the rate of profit fell more (or rose less) than can be accounted for by the rise (or fall) in the ratio of dead to living labour means that the surplus value received by the capitalists as pre-tax profits must have fallen as a share of the value of output. (The rate of profit (P/K) is the ratio of living to dead labour (O/K), multiplied by the share of profits in the value of output (P/O), where P is total profits, K is the stock of capital and O is the value of output.)

The Profit Squeeze

Whilst there has been no systematic and general trend in the ratio of dead to living labour, there has been a persistent and general decline in the share of profits—the infamous "profit squeeze"! Any understanding of the decline in profitability must come to terms with this phenomenon.


Manufacturing Profit Margin as a percentage of the Value of Output
























36.3 (1954)





















Source: National Income Statistics for Industrial Countries

It is important to be quite clear what is implied by this profits squeeze. As a matter of arithmetic a decline in the share of profits means that the cost of employing labour in real terms has risen faster than productivity (note 4). It does not necessarily mean that the workers' real take-home pay has risen faster than labour productivity because real take-home pay reflects also:

(a) the taxation (including national insurance contributions) paid out of the cost to capitalists of employing workers (the worker only gets the net wage after deduction of taxation and national insurance);

(b) the cost of things which workers buy may rise at a different rate than the price of things they produce (most obviously when the price of imported food and materials went up very sharply after 1972 workers' real take-home pay rose much more slowly than the real cost, measured in terms of the price of the things the workers produced, of employing labour) (note 5).

I believe there are really two types of explanation for the generalised profits squeeze since the early sixties and prior to the post-1973 crisis. The first type of explanation emphasises the militancy and organisation of the working class which enabled them to force up money wages and which the capitalists were unable to pass on in the form of higher prices as a result of international competition (Glyn and Sutcliffe). The argument is made less subjective when it is pointed out that the huge increase in state spending has led to a sharp rise in the burden of taxation paid by workers (and after 1972 the sharp increases in the cost of living as imported food and materials shot up) so that these large increases in real gross wages were necessary to secure much more modest increases in take-home pay (Yaffe, Bacon and Eltis). It is located much more firmly in the historical context when it is emphasised that the strengthening of workers' organisations, and increased militancy itself reflected the achievement of something approaching full employment in most of the advanced countries in the early to mid-sixties. The exhaustion, or partial exhaustion of a massive reserve army of labour—the unemployed, the refugees, the mass of semi-employed on tiny agricultural holdings and in small service sectors—which still existed in the early fifties was one of the historic achievements of the long-boom of the fifties and sixties. By 1973, for example, the share of employment in agriculture in the OECD countries had fallen to 8% from 22% in 1954; fully half of the increased number of wage-earners employed by capitalists had been recruited from the ranks of the self-employed.

Indeed, the alternative explanation of the profits squeeze, (which I now agree with) is that it is the direct economic result of the exhaustion of the reserve army of labour—the excess or over-accumulation of capital with respect to the supply of labour meant that there was excess demand for labour, employers bid up real wages in the scramble to find workers, and so the share of profit and the rate of profit fell. The militancy of workers was very important in determining the form that the crisis subsequently took, and is especially relevant to the question as to why inflationary policies cannot be easily used indefinitely to restore profitability. But fundamentally the profits squeeze would have happened anyway, simply through the mechanics of the supply and demand for labour.

It should also be noted that the sharp increase in real labour costs (gross wages) actually performs a necessary function for capital in a situation of a tight labour market. As the capitalists accumulate new and improved means of production the only way they can secure the additional labour needed to operate them is for this labour to be released from old means of production. But capitalists only stop using old means of production when they are not profitable. What makes them unprofitable is a rise in real labour costs (that is, the gross wage in ^ relation to the price of the product). So a rapid rise in real labour costs, and associated profits squeeze, performs a real function under capitalism of ensuring the transfer of labour to where it is most productive (it is precisely how the 'law of value' operates). Of course increased state spending (predominantly financed by taxation of workers) meant that much of the benefit of the high demand for labour was received by workers indirectly (through health, education, pensions, etc.) rather than in take-home pay.

The basic idea of over-accumulation in relation to the supply of labour was discussed by Marx in the first section of Chapter 24 of Capital, Vol. 1, but is then pushed to one side by his analysis of the introduction of labour-saving machinery which would tend to preserve the reserve army. But he returns to the question in the following long quotation in Vol. III:

"Over-production of capital, not of individual commodities—although over-production of capital always includes over-production of commodities—is therefore simply over-accumulation of capital. To appreciate what this over-accumulation is (its closer analysis follows later), one need only assume it to be absolute...As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time could be expanded any further (this last would not be feasible at any rate in the case when a demand for labour was so strong that there was a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital... In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces but by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour." (Capital, Vol. III, p. 251)

The point, however, is not so much to find justification in the basic texts but to develop an analysis which does come to terms with the implication of the long boom, which did secure what was substantially full employment in all the major countries (though only very fleetingly in the USA). We have always stressed the political implications of this (reformism/growing strength of labour movement); but have neglected detailed discussion of the economic implications of the drying up of the reserve army in agriculture, petty service industries, etc.

It would be possible to go into the economic mechanisms of over-accumulation, scrapping of inefficient capital and the profits squeeze in more detail, but really it would only spell out the mechanics of the basic process. This is that competition for labour tends to drag up real wages, and to push down the rate of profit to a level which can be sustained, and accumulation can take place with the available labour supply. But certain basic objections to stressing the economic importance of full employment should be dealt with here.

One issue is why over-accumulation in relation to the labour supply should have set in, let alone persisted, in the metropolitan countries when capital could have invested in the labour-abundant periphery. The fact that it did not do so on a significant scale is well known. The reason why it did not is the subject of dispute.

Two factors seem to have played a major role. One is the political dangers inherent in such investment: the possibilities of nationalisation by radical or bourgeois- nationalist regimes. The other factor is the desirability of locating production inside the economies which furnish the major markets. This is desirable from capital's point of view because of the danger of protectionist measures being introduced to exclude goods produced abroad.

Another issue is how high rates of accumulation were maintained for a decade or so after labour shortage first made itself felt. One very important factor here is continued additions to capitalist employment over and above the underlying demographic growth in the labour force. The major sources of such additions were the decline of self-employment in agriculture, increased participation rates amongst (especially married) women and historically-unprecedented rates of immigration.

A third issue is why these sources of additional labour-power eventually proved inadequate. The fact that they did so—that labour-shortage tightened, wages rose, scrapping accelerated and profitability declined—is sufficiently well documented as to be undeniable. But it has nevertheless to be explained. Particularly important here is the question of immigration; why did immigration not accelerate sufficiently to provide ample supplies of labour-power?

One immediate answer is, of course, the existence of immigration controls. But why did governments not relax such controls as labour shortage developed? One reason could have been the unpopularity of such a move; active opposition to immigration controls would have spelled electoral suicide in many countries. The unpopularity of immigration among working class members of the electorate could in turn have reflected fears that it would both increase demands on already over-stretched social infrastructure and undermine trade-union bargaining strength.

The rise in real labour costs performed a genuine function which was to ensure an appropriate allocation of scarce labour and to reduce the rate of accumulation to a level which was sustainable once full employment was reached. But this does not prevent it from having been a decisive factor in the crisis. Of course all that a downward trend in profitability implies is that accumulation must slow down as there is less surplus value available (in relation to existing capital). But a crisis occurs when there is not just a slower rate of accumulation but insufficient accumulation to realise all the surplus value, thus leading to unsold commodities, unemployment, etc. This has to be explained taking into account many factors other than the fall in the rate of profit itself—the reaction of the capitalists to a fall in profitability (likely to take the form of a sudden lurch down in accumulation, rather than a smooth slow-down), the break-down of the international monetary system, the action of the state (trying to maintain the boom and then deflationary policies to stop wages rising), the behaviour of the labour movement (full employment leading not to a smooth rise in wages but to sudden wage explosions—Italy 1962-63, 1969—with disruptive effects on the accumulation process). The crucial point is that the crisis reflects the impact on all aspects of capitalist relations of production of the underlying accumulation process. Whereas the LTRPF stresses a fundamental technological basis to falling profitability, over-accumulation stresses the fact that labour power is not a commodity which is reproducible at will in sufficient Quantities as part of the production process. In both these theories accumulation generates its own contradictions—which do not make accumulation impossible but rather require it to slow down. But the relations of capitalist production—between capital and labour and different groups of capitalists—prevent a smooth adjustment of the system to this slow growth and so a crisis develops. This is not a reformist analysis, for the capitalists on a world scale and in relation to the labour movement cannot plan to re-organise their system and to react rationally to the new situation.

This, in my view, is the sense in which, again, capital has become a real barrier to its own development. It is most definitely not the case that, in a technical sense, the possibilities for continued sustained expansion in the advanced capitalist countries have suddenly dried up, that the ratio of dead to living labour has grown to such an extent that further increases in productivity are absolutely too expensive (note 6). Rather it is that the exhaustion of the reserves of labour from the mid-1960s required some slowing down of growth and posed problems to which the system was unable to adjust. 

The UK

The rate of profit began to fall earlier in the UK than in most of the other advanced countries, with the explanation being the fact that over-accumulation set in much earlier because 'full employment' was achieved much sooner. The available evidence (Table 3) is that in the early sixties the rate of profit tended to be somewhat, but not enormously, lower in the UK than in the other major advanced countries (). By the end of the 1960s it was much lower, and by that stage the lower rate of accumulation in the UK, and especially the low rate of productivity growth associated with that accumulation, had made it impossible for many UK industries to compete on world markets. The result was inability to stand up to foreign competition, profits forced down even lower and scrapping on a greater scale than that dictated by the labour supply, that is causing unemployment.

It does seem to be confusing, to say that "it is precisely because the British capitalists have not invested so much that the rate of profit is higher than their rivals' " (BM in paper, 2 July 1976). No doubt there are some sectors where extremely protected markets allow capitalists to maintain fat profit margins whilst their capital depreciates (giving a high rate of profit), with their being under no compulsion to introduce new methods of production. But this cannot be true of the majority of industry which is being crucified by international competition. Many sectors are being bankrupted through their failure to invest over the years—and bankruptcy results from low profits—not high profits. Reduction in profitability and shares of world market are two sides of the same coin. This after all is the operation of the law of value on a world scale—failure to invest means that the labour of British workers is of low productivity and so it is more than is "socially necessary" and eventually (though it is a long process since the British capitalists can compensate at least part of this by paying lower wages) the sectors are knocked out of world markets.

Similarly it cannot be right to say that "the monopolies are not prepared to modernise sufficiently to increase world markets because it would cut into their monopoly profits" (BP, 1976). No doubt in the fifties, with protected colonial markets etc. this may have been a factor; but since the sixties surely the British capitalists have had much less monopoly power than their rivals who are investing much more than they. How do we explain low UK investment? First it is important to realise that the growth of the capital stock was quite high in the UK—see Table 1 (though slowing down under the influence of the falling rate of profit); this is especially so when account is taken of the slow growth of industrial employment (fundamentally reflecting limited possibilities for pulling peasants out of agriculture, etc.). No doubt part of the explanation for the slower growth of capital in the UK was the myopia on the part of the capitalists, with protected markets in the early fifties. But the outstanding feature has been the slow growth of productivity; even the investment which is done yields low growth of productivity. No doubt again this substantially reflects the cautious behaviour of a ruling class unlike their counterparts in the continental countries and Japan who had to fight their way back into world markets after the war-time and immediate post-war catastrophes. UK capitalists tended simply to tack on minor extensions of capacity rather than the really big new plants with most possibilities of incorporating newest most productive techniques. In part perhaps the continuing full employment played a role—making it difficult to secure additional labour for major new projects. But also the shop-floor strength of the labour movement in Britain played its role.

The success for the bourgeois of the 1945-51 Labour government was that it provided a smooth transition from post-war radicalism to 13 years of Tory rule. But the smoothness of the transition concealed an important cost; unlike their rivals in Continental Europe and Japan the British bourgeois was not forced, by a desperate situation, to confront and smash the organised labour movement. This left British workers with much greater shop-floor strength during the period of long-boom than was the case in Europe and Japan. This was not immediately disastrous for the capitalists—in the boom it was possible for both profits and wages to rise even if less fast than in competing countries. But the shop-floor strength undoubtedly played a role in both inhibiting investment and reducing its effectiveness from a capitalist point of view, through the workers' ability to insist on pre-existing manning levels and line speeds. (There is no need here to repeat the points made above about "blaming the workers".)

The TJ (Autumn 19/9) says that "one of the factors in the failure of British capitalists to invest has been due to the low wages of workers in Britain in comparison to their rivals...There was no incentive on the part of the capitalist rising wages acts as a pressure to invest increasing productivity... low wages... under the specific conditions of British capitalism were a disincentive to investment" (p. 9). Now it is true that for an individual capitalist rising wages acts as a pressure on investment for fear of being driven out of the market by having higher costs. I quite accept that in the fifties the collective low investment of UK capital reduced the pressure on each individual capitalist to invest; if collectively they had invested more than wages would have risen faster because demand for labour would have grown faster. But from the sixties the British capitalists were, for the most part, under strong competitive pressure from foreign rivals, a pressure to which they failed to respond. The TJ sounds as if it is saying that if only the British workers had pushed for higher wages in the 1960s and 1970s then British capitalists would have invested more. This seems to me to be the opposite of the truth.

All in all the formulation in BP (1976, p. 6) that investment was inhibited by the "class structure of British society, with all the economic and social contradictions involved in that structure" seems perfectly correct—if a little vague. But whatever the initial factors backwardness is self-reinforcing—since the productivity of labour is so low in the UK, even if the capitalists did invest as high a proportion of output as France, Germany, Japan, etc. in terms of the amount of extra investment per worker it would still be much less. It is impossible for the British capitalists to catch up apart from monumental investment drive (to equip factories up to best international levels) preceded by an onslaught on the trade union movement. This is precisely the historic task of Thatcherism.

Appendix 1: Organic Composition of Capital and Ratio of Dead to Living Labour

Discussion of the LTRPF is normally carried out in terms of the behaviour of C/V—the ratio of constant to variable capital—and S/V—the rate of exploitation. Unfortunately it is impossible to draw any conclusions about a LTRPF from C/V, as rising C/V can always be offset by rising S/V. Consider a simple case where rising technical composition and productivity of labour just balance so that the value of constant capital (per worker) stays unchanged. If the value of labour power falls due to the cheapening of wage goods (i.e. real wages do not rise as fast as productivity) then clearly C/V rises—rising organic composition as normally under- stood. But falling V means rising S (assuming a constant working day) so we have a rising rate of profit S/(C + V) since V falls and S rises and C is constant.

It is possible, however, to show the necessity for the rate of profit to fall if the ratio of "dead" labour [embodied in constant capital (C)] to living labour (V + S) rises. For

S/(C + V) = S/(S + V) x (S + V)/C x C/(C + V)

If the middle term S+V/C falls (i.e. C/(V + S) rises) then the rate of profit must fall, for the share of surplus value S/S+V and of constant capital C/C+V have limits (i.e. 100%). To see this suppose S = 5, V = 5, and C = 10, S/C + V = 33 1/3%. Now if C/(V + S) rises from 1 to 4 then the rate of profit must fall; even if V was nothing (workers lived on air), S would only be 10 (e.g. 10 hours the length of the working day), and the rate of profit would be S/C = 10/40 = 25%.

So if the accumulation process is analysed using C/(S + V), it is possible to demonstrate a LTRPF provided C/(S + V) really does increase. Marx's argument was that rising mass of means of production used during each working day must imply greater value [So (V + S) would have to rise]. But as argued in the text, there is no basis for this assertion. (Marx may have been misled by what was happening at the time he wrote.)

We use the ratio of the capital stock to output at current prices as our indicator (Table 2) of the ratio of dead to living labour. This is justifiable as all we are doing is taking the ratio of the prices of means of production and output and indicators of their value. There is no reason why this should not give an adequate picture of the trend of C/(V + S), even if it may not be a precise measure of the ratio in value terms (due to deviations of prices from values, problems of measurement, etc.)

Appendix 2: Profit Rates and Margins

In monopolistic conditions the capitalists may aim at maximising the profit margin, despite the fact that this involves a much heavier capital outlay and thus a lower profit rate. Suppose in prevailing conditions the capitalist can sell a commodity for £200. Existing methods of production involve a fixed capital outlay of £900 and wage and material costs of £100. The profit rate (assuming no depreciation of fixed capital for simplicity) is £100/£900 + £100 or 10%. If he has to pay an interest rate of 5%, £50 of his gross profit must go to the bank and he is left with £50. His net profit margin is therefore 50/200 or 25%. Suppose a new technique comes along which involves fixed capital of £1,550, but which reduces labour and material costs to £50. Interest costs rise from £50 to 5% of £1,600 = £80; but total costs (per unit of output) have fallen from £150 (£100 materials plus labour and £50 interest) to £130. He makes £70 net profit; more to the point he is in a stronger competitive position—a fall in the price of the product to £140 would still leave him with a margin of profit, whereas with the old technique he would have been bankrupt (unable to pay interest). But the profit rate on capital employed has fallen; the gross profit (including interest) is now £150 on a capital outlay of £1,600, i.e. less than 10%. Whilst such a fall in the profit margin is perfectly possible, it is important to see that attempting to maximise the profit margin, or mass of profit, does not necessarily imply a fall in the profit rate. Suppose the new technique involved fixed capital of only £1,150, with the same reduction of labour and material costs, then the figures work out as

Profit rate = £200 sales price - £50 wages and materials/£1,150 fixed capital + £50 = 12.5% (i.e. an increase)

Net margin = £200 sales price — £50 — £60 interest (5% on £l,200)/£200 = 45% (i.e. an even bigger rise)

There is no way of asserting in the abstract that a fall in the rate of profit is most likely.

Note, however, that Marx's argument that whilst attempting to increase the profit rate, the capitalists introduce techniques which lower it, is wrong. It can be proved that new techniques introduced by capitalists in order to increase the rate of profit for the individual capitalist lead to an increase in the rate of profit in the economy as a whole when they are generally introduced into a particular industry. The intuitive explanation is as follows. An individual capitalist introduces the new technique with lower costs, and while he is the only user of this technique he reaps the surplus profit. Now suppose all the competitors in the industry introduce the new technique. If they all continued selling at the old price they would make the higher rate of profit and so the average for the economy would rise. Obviously this is not the end of the story, for with that industry earning more than the average, there will be an inflow of capital. This will push down prices in that industry, but this fall increases the rate of profit in the rest of the economy as other industries find the costs of the inputs they buy from that industry falling in price relative to their own output prices (or if that industry produces wage goods, money wages fall which will have the same effect in pushing up the rate of profit). The net result will be the re-establishment of the average rate of profit, but it must be not less than the higher level than before the new technique was introduced (that is, on the assumption that the real wage is unchanged). The importance of this result is that it shows that the rate of profit cannot fall simply because new methods, which appear more profitable for the individual capitalist, in fact of themselves reduce profitability for the capitalist class as a whole.

The fundamental reason is that a technique which raises the rate of profit for the capitalist does mean a real saving in outlay for himself, and thus for the industry as a whole when the technique is generalised, and thus for the capitalist class as a whole. The only way an argument can be made for the possibility of a falling rate of profit resulting from techniques with a higher value composition, must be that competitive pressures force the capitalists to be concerned about the profit margin. The argument, which seems quite correct in monopolistic conditions, is that the profit rate on what they lay out in productive investment is not the crucial question. Interest is paid on the funds they borrow (or could have lent), and the decisive factor for them in deciding which the most profitable technique, is the mass of net profit (after payment of interest). But to repeat, this only gives the possibility of a falling rate of profit. 

The tendency of the rate of profit to fall 
and post-war capitalism


by MB

This is just a preliminary reply, mainly concerned to explain and defend the fundamental principles of Marxism. A more detailed analysis of the actual course of the post-war boom, including an interpretation of the statistical evidence, needs to be made by the tendency. It is the merit of AG's paper that it raises these issues for discussion and will force the tendency to clarify its position.

What Marx said

The law of the tendency for the rate of profit to fall can be explained in its simplest outlines in the words of Marx himself (Capital, Vol. 3, pp. 211-13); "Assuming a given wage and working day a variable capital for instance of 100 represents a certain number of employed labourers. It is the index of this number. Suppose £100 are the wages of 100 labourers for, say, one week. If these labourers perform equal amounts of necessary and surplus labour, if they work daily as many hours for themselves, i.e. for the reproduction of their wage, as they do for the capitalist, i.e. for the production of surplus value, then the value of their total product equals £200, and the surplus value they produce would amount to £100. The rate of surplus S/V would equal 100%. But, as we have seen, this rate of surplus value would none the less express itself in different rates of profit, depending on the different volumes of constant capital c and consequently of the total capital C, because the rate of profit equals s/C. The rate of surplus value is 100%;

if c = 50 and v = 100 then the rate of p = 100/150 = 66 2/3%

If c = 100 and v = 100 then the rate of p = 100/200 = 50%

If c = 200 and v = 100 then rate of p = 100/300 = 33 1/3%

If c = 300 and v = 100 then the rate of p = 100/400 = 25%

If c = 400 and v = 100 then the rate of p = 100/500.= 20%

This is how the same rate of surplus value would express itself under the same degree of labour exploitation in a falling rate of profit, because the material growth of the constant capital implies also a growth - albeit not in the same proportion - in its value and consequently in that of the total capital.

If it is further assumed that this gradual change in the composition of capital is not confined only to individual spheres of production, but that it occurs more or less in all, or at least in the key spheres of production, so that it involves changes in the average organic composition of the total capital of a certain society, then the gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall in the general rate of profit, so long as the rate of surplus value, or the intensity of exploitation of labour by capital, remains the same. Now we have seen that it is a law of capitalist production, that its development is attended by a relative decrease of variable in relation to constant capital, and consequently to the total capital set in motion. This is just another way of saying that owing to the distinctive methods of production developing in the capitalist system, the same number of labourers, i.e. the same quantity of labour power set in motion by a variable capital of a given value, operate, work up and productively consume in the same time span an ever increasing quantity of means of labour, machinery and fixed capital of all sorts, raw and auxiliary materials—and consequently a constant capital of an ever increasing value. This continual relative decrease of the variable capital is identical with the progressively higher organic composition of the social capital in its average. It is likewise just another expression for the progressive development of the social productivity of labour, which is demonstrated precisely by the fact that the same number of labourers in the same time, i.e. with less labour, convert an ever increasing quantity of raw and auxiliary materials into products, thanks to the growing application of machinery and fixed capital in general. To this growing quantity of value of the constant capital—although indicating the growth of the real mass of use values of which the constant capital materially consists only approximately—corresponds a progressive cheapening of products. Every individual product, considered by itself, contains a smaller quantity of labour than it did on a lower level of production, where the capital invested in wages occupies a far greater place compared to the capital invested in the means of production. The hypothetical series drawn up at the beginning of this chapter expresses, therefore, the actual tendency of capitalist production. This mode of production produces a progressive relative decrease of the variable capital as compared to the constant capital, and consequently a continuously rising organic composition of the total capital. The immediate result of this is that the rate of surplus value, at the same or even a rising degree of labour exploitation, is represented by a continually falling general rate of profit. (We shall see later why this fall does not manifest itself in an absolute form but rather as a tendency towards a progressive fall). The progressive tendency of the general rate of profit to fall is, therefore, just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour. This does not mean to say that the rate of profit may not fall temporarily for other reasons. But proceeding from the nature of the capitalist mode of production, it is thereby proved a logical necessity that in its development the general average rate of surplus value must express itself in a falling general rate of profit. Since the mass of the employed living labour is continually on the decline, as compared to the mass of materialised labour set in motion by it, i.e. to the productively consumed means of production, it follows that the portion of living labour, unpaid and congealed in surplus value, must also be continually on the decrease compared to the amount of value represented by the invested total capital. Since the ratio of the mass of surplus value to the value of the invested total capital forms the rate of profit, this rate must continually fall."

[By constant capital (c) we mean costs of plant and raw materials etc which passed their value unchanged to the final product. By variable capital (v) we mean the outlay on wages which yields the capitalist a surplus. By surplus value (s) we mean the unpaid labour of the workers which divides into rent, interest and profit etc.]

Counteracting tendencies  

Of course there is a good deal more to it than that. The whole process of accumulation is bound up with the cheapening of products. These commodities are cheaper because it takes less labour time overall to produce each one.

The capitalists are forced by competition between themselves to invest. The first one to introduce some new machinery can undercut his competitors while still selling his products above their individual value (the labour time actually it costs to produce them) and so reap super-profits. As the new machinery comes in to general use, however, his price is beaten down to the new social value (that is the amount of labour socially necessary to produce the commodity under the new production conditions) and his rate of profit comes down to the new average.

Since the value of constant capital has risen there will be tendency for the rate of profit to fall. Whether there is an actual fall in the rate of profit depends upon the strength of a number of counteracting tendencies brought into being by the law of the tendency for the rate of profit to fall itself. These counteracting tendencies are listed by Marx on pages 237 to 240 of Capital, Vol. 3. The most important ones we are concerned with here are the 'Increasing intensity of exploitation' and 'Cheapening of elements of constant capital.' As we have seen, the whole process of raising the productivity of labour tends to reduce the value of all commodities—including, of course, elements of variable capital and of constant capital. This process has been concealed during the post-war period by the general rise in prices caused by debasing the currency, but it has still been going on.

In so far as wage goods (elements of variable capital) become cheaper the capitalist can pay his workers less (we assume they can still buy the same amount of wage goods—they still have the same standard of living) and the rate of surplus value (rate of exploitation) rises. The worker can now work less hours to reproduce his own wages, leaving more hours in the working day to produce surplus value.

If we look at Marx's examples:

If first;—c == 50 + v = 100 + s = 100

then second;— c becomes 100, but v is not now 100 but 50. s is not now 100 but 150. Because of the rise in the rate of exploitation consequent upon the introduction of new machinery the rate of profit will have risen from 100/150 = 66 2/3% to 150/150.= 100%.

If the value of new machinery actually falls then, as AG shows on page 4 of his paper, the organic composition of capital need not necessarily rise, and the rate of profit need not necessarily fall.

What is a tendency?

Before we look at the question of whether these counteracting tendencies can indefinitely offset the tendency for the rate of profit to fall it is necessary to make a few remarks on method.

What do we mean by a tendency for the rate of profit to fall? The word 'tendency' has two meanings in English. Thus the sociologist may refer to the tendency for wife battering to increase. All he is doing is looking at a statistical table and observing that year by year more men are reported to be battering their wives. He ventures no reason as to why this should be so. He has spotted an empirical tendency—a trend.

On the other hand Marx points out that all economic laws have the nature of tendencies. On the General Law of Capitalist Accumulation for instance (Capital, Vol. 1, p. 603) he says: " all the other laws it is modified by its working by many circumstances the analysis of which does not concern us here." For Marxists a tendency is not a trend, but a force pulling society in one direction. It is a peculiarity of Marxist dialectical analysis that it recognises that tendencies call forth their own counter-tendencies—for instance the law of the tendency for the rate of profit to fall can actually produce a rise in the rate of profit under some circumstances, as we pointed out earlier.

Thus it could be the case (we are not making a definite statement on the facts here) that the organic composition of capital has remained unchanged for the past forty years because of a jumble of interacting factors at work on the economy, all pulling in different directions. This would not invalidate the tendency for the rate of profit to fall as a key to understanding these developments in the slightest. Of course we would have to explain how the different tendencies and counter tendencies had worked out in reality.

We have to say that AG appears to come to his conclusion in the opposite way. He first looks at what he sees as the facts and then selects the appropriate 'theory' to explain them. As we have always pointed out, empiricism, which imagines it approaches reality without preconceptions, actually approaches reality with preconceptions that are not conscious, worked out and tested like the ideology of Marxism. Facts are selected and forced into a theory dictated by these lurking preconceptions.

How the tendency for the rate of profit to fall works

Marx said that the law for the tendency for the rate of profit to fall was "the most important law in modern political economy" (Grundrisse, p. 748.) Why? Speaking about Ricardo and economists like him, Marx said (Capital, Vol. 3, p. 242) "But the main thing about their horror of the falling rate of profit, is the feeling that capitalist production meets in the development of the productive forces a barrier which has nothing to do with the production of wealth as such, and this peculiar barrier testifies to the limitations and to the merely transitory historical character of the capitalist mode of production; testifies that for the production of wealth it is not an absolute mode, moreover, that at a certain stage it rather conflicts with its further development." In other words the law of the tendency for the rate of profit to fall, shows that "the real barrier of capitalist production is capital itself" (ibid. p. 250.)

Let's be clear. We have already pointed out that the tendency for the rate of profit to fall does not manifest itself in a smooth downward decline—perhaps reaching a point where the rate of profit reaches zero, whereupon the capitalists all hang themselves. Actually the tendency for the rate of profit to fall manifests itself in periods of a rising rate of profit followed by periods of a fall. The ebb and flow of the rate of profit is bound up with the trade cycle of capitalism. We do not intend to deal exhaustively with the connections between the tendency for the rate of profit to fall and capitalist crisis here. The main points are dealt with in the chapter of Capital Vol. 3 'Exposition of the Internal Contradictions of the Law'.

Neither do we in any way want to be interpreted as attempting to mechanically present the tendency for the rate of profit to fall as being the main or exclusive cause of every actual capitalist crisis. There is an unfortunate tendency in popularisations of Marxist economic theory such as Sweezy's Theory of Capitalist Development to devote different sections to 'Overproduction' (and perhaps 'Disproportion') as alternative possible causes of crisis to the 'Tendency of the rate of profit to fall.' The author selects his own favourite cause of crisis. Contending schools of thought then set themselves up in the academic world and berate each other. The whole business is thoroughly undialectical.

Both the law for the tendency of the rate of profit to fall and overproduction are bound up together as aspects of an anarchic commodity economy where production is for profit. The tendency for the rate of profit to fall would lead at a certain stage to a crisis of overproduction. Overproduction in turn is overproduction only in relation to profitability. As AG points out, overproduction further hits the rate of profit.

"The real crisis can only be deduced from the real movement of capitalist production, competition and credit" (Theories of Surplus Value, Vol. 2, p. 512). A whole number of intermediate steps have to be taken in our analysis before we can pass over from the abstract general laws laid down by Marx to the concrete reality of a particular economic conjuncture.

Falling rate of profit and crisis

Even when the way in which the tendency for the rate of profit to fall works is taken account of, we doubt if a single actual crisis can be attributed solely to the abstract tendency outlined by Marx, where a progressive fall in the rate of profit must eventually lead to a fall in the actual mass of profit, whereupon the capitalists sit upon their money and a massive destruction of the value of capital begins. As we know the 1929 world crisis was triggered off by a panic on the New York Stock Exchange, and deepened by the collapse of the Credit Anstaltt Bank. The movement of credit and of interest rates or speculative movements in the price of raw materials—any of these or many other factors—may be sufficient to precipitate the moment of crisis. Let us say that the rate of interest was the determining factor in a particular crisis. Its movement in turn is determined by the rate of profit and level of accumulation dependent upon it. Thus the tendency for the rate of profit to fall is part of the indispensable background to understanding the actual movement of capitalism into crisis.

With all the qualifications we have outlined, the disintegration of the Ricardian school took place because it could not explain the tendency for the rate of profit to fall and its implications for the capitalist system. Volume 3 of Theories of Surplus Value, almost in its entirety, deals with the evasions and errors of the post-Ricardians on this question of questions for political economy. So it is entirely incorrect for AG to state that it is only a specific application of the method of Marxism—like the "general presumption... that the proletarian revolution would take place first in the advanced countries."

Our position and Marx's  

Secondly AG seems to be ambivalent on whether the tendency's emphasis on the law for the tendency of the rate of profit to fall "is perhaps a great deal stronger than in the classic works of Marxism." What is AG saying? Is he suggesting that we are in some way revising the basic principles of Marxism? He points out that the tendency for the rate of profit to fall is not mentioned in the Communist Manifesto. This is not surprising. To explain the tendency for the rate of profit to fall as a result of the increasing proportion of constant capital (i.e. dead labour; plant, raw materials etc) to variable capital (wages costs) you have to have a concept of constant capital and of variable capital. In classical political economy this distinction was submerged in with the difference between fixed capital (such as machinery) and circulating capital (which includes both raw materials and wages). Marx only discovered the difference some ten years after the Communist Manifesto was written. It is necessary to clearly separate the rate of surplus value (ratio of paid to unpaid labour in the working day) from the rate of profit (ratio of surplus value to total capital employed). Yet in 1848 Marx had not developed the concept of labour power, the decisive link in understanding the production of surplus value under capitalism, that is the foundation of capitalist society.

Why was there no mention of this discovery in subsequent editions? Marx and Engels provide the answer in their 1872 introduction to the Manifesto. After incorporating the general lesson of the Paris Commune, i.e. "that the working class cannot simply take hold of the ready-made state machine and wield it for its own purposes" they add "but then the Manifesto has become a historical document which we no longer have any right to alter." So the only addition Marx and Engels were prepared to tolerate to this historic document, and then only in an introduction, was a discovery made possible by the first seizure of power by the working class in the world—a decisive practical question for the workers' movement.

The method of Marxism

AG goes on to say that the tendency for the rate of profit to fall is not mentioned in the chapter on the General Law of Capitalist Accumulation in Volume 1 of Capital. This remark seems to show a failure to understand the method of Capital. "Seventeenth century economists for example always took as their starting point the living organism, the population, the nation, the state, several states, etc, but analysis led them always in the end to the discovery of a few decisive abstract, general relations such as division of labour, money and labour. When these separate factors were more or less clearly deduced and established, economic systems were evolved from which simple concepts such as labour, division of labour, demand, exchange value, advanced to categories like state, international exchange and world markets. The latter is obviously the correct scientific method...the first procedure attenuates meaningful images to abstract definitions, the second leads from abstract definitions by way of reasoning to the reproduction of the concrete situation." (Critique of Political Economy, p. 206, the Introduction.)

Marx cannot deal with the equalisation of profit rates, which lies in the discussion of "the process of capitalist production as a whole" dealt with in Vol. 3 until production has been dealt with in Vol. 1 and circulation in Vol. 2.

The other works AG mentions which fail to deal with the law of the tendency for the rate of profit to fall are either brief polemical works or, in the case of Accumulation of Capital, by an author (Rosa Luxemburg) who definitely regarded the tendency for the rate of profit to fall as irrelevant. In fact it was Rosa Luxemburg who was wrong. That the rate of profit tended to fall was well known to Ricardo and regarded as an empirical fact in his time. What he was unable to do was give an adequate theoretical explanation. He ascribed it instead to the rise in corn prices as agriculture was forced to move from more fertile to less fertile land when the demand for corn increased. So the price of wages was pushed up, because it now took more labour time to produce bread, the main element of workers' subsistence, and profits fell.

If AG is trying to suggest that Lenin and Trotsky actually rejected the tendency for the rate of profit to fall then he should come up with some evidence for this surprising proposition. Of course, we no more reduce the idea that "the barrier to capital is capital itself" to the tendency of the rate of profit to fall, than the classics of Marxism do. Where does AG get the word "economistic" from to criticise our position on this question?

In reality AG concedes the point when he admits "the law of the tendency of the rate of profit to fall was very important for Marx himself." It is not just the interpretation of our tendency that is under attack but a basic proposition of Marxism itself.

Would the tendency for the rate of profit to fall apply under socialism?

One point that needs to be taken up immediately is the idea on page 7 of the paper, that if our tendency (and Marx) were right about the tendency for the rate of profit to fall then "it would limit economic growth under socialism as well." This remark betrays a lack of understanding about how the society of the future would work. We should also take up the objection that the tendency for the rate of profit to fall can only defended with "a Ricardian notion of diminishing returns in industries producing raw materials." Why this argument (to be marshalled later in this reply) must be regarded as 'Ricardian' when it is lifted from the writings of Marx or, come to that, why the expression 'Ricardian' should be enough to entitle all the arguments to be dismissed forthwith will have to remain a mystery. A discus: 'on of the notion that the tendency for the rate of profit to fall is in some way a natural 'technological' law applicable to any form of society helps us to explain the way the law actually works under capitalism

"Every child knows that a nation which ceases to work for a year or even for a few weeks would perish. Every child knows too, that the masses of products corresponding to the different needs require different and quantitatively determined masses of the total labour of society. That this necessity of the distribution of the social labour in definite proportions cannot possibly be done away with by a particular form of social production but can only change the mode of its appearance is self evident. No natural laws can be done away with. What can change in the historically different circumstances is only the way in which these laws assert themselves. The form in which this proportional distribution of labour asserts itself, in a state of society where the interconnection of social labour is manifested in the private exchange of the individual products of labour, is precisely the exchange value of these products." (Marx to Kugelman July 11th 1868, Selected Correspondence, p. 209)

What we are concerned with here is first the relations of human society to natural resources and secondly the way this relation works itself out in a commodity economy (and commodity production only becomes generalised under capitalism). In general the problem with AG's analysis is that he looks at the quantity of labour time expended and the productivity of labour as a technical question unrelated to the nature of capitalist society and the form which the rationing and distribution of labour takes under capitalism.

The law of diminishing returns

As we know Marxists have always rejected the so-called law of diminishing returns according to which each additional investment of labour and capital in land produces a relatively smaller additional quantity of products. It blames nature for stagnation really caused by the nature of capitalist society.

It is necessary to separate out two factors. The effects of differential rent is to claw back the advantages of greater fertility of the land for a propertied minority of landlords, so that as the wants of mankind increase less fertile land tends to go under the plough and all grain prices rise relatively on the one hand. On the other hand the tendency of capitalist farmers is to continually revolutionise production techniques and reduce prices like any other section of the capitalist class.

Differential rent

The existence of differential rent has, however, to be explained. When goods are not reproducible at will, for instance land or mineral wealth, they are a natural monopoly and under capitalism become a property monopoly of a minority of society as well. Let us take the well known example which has such a profound effect on the post war economy—the rise in the price of oil.

We assume for simplicity's sake that in 1950 the world demand could be satisfied by production of oil from the Gulf states, oil that only costs a few cents a barrel to produce. 25 years later world demand has now increased to the point where it is necessary to sink huge derricks in the North Sea. Obviously North Sea oil is much dearer to produce. Equally obviously there is no reason why the Gulf oil should be sold any cheaper. There will not be two prices for oil. Somebody will pocket the difference as differential rent. The general price of oil is determined by the value of oil that takes the most labour time to extract unlike commodities where those produced under average conditions determine the value.

Would differential rent exist under communism?

This would not be the case in a communist society. In the first instance under a workers' state the rent would be pocketed by the state as the universal landlord. But as goods stop being bought and sold, there would be no need for the price of oil to be reduced to uniformity—rent would disappear. In a moneyless communist society if more oil was needed, and what was available was more difficult to extract, then it would take more of the labour time available to society to extract the additional oil. There would be no reason whatsoever for Gulf oil to cost society more, however, that is there would be no reason for a section of society to "reap where they have not sown" as Adam Smith said about the landlords.

We have assumed that the natural course of development is from the most fertile land, mines or oilfields, to the less fertile. Actually this is not necessarily the case. Ricardo formulated his ideas at a time of continental blockade, world war and heavy import duties on grain, and tended to project this exceptional period onto his theory of the natural development of capitalism. Later in the 19th Century there was a dramatic fall in the price of corn, as the American prairies were opened up to agriculture. Thus the normal development is by no means necessarily from more fertile land to less fertile. Likewise it is not true that the most fertile oil fields were to be found in Pennsylvania (where oil was first exploited commercially) and mankind unwillingly moved on to Saudi Arabia as world demand increased. In fact Saudi Arabia has much the most 'fertile' oil fields in the world.

How capitalism stifles progress

But apart from this side of the question the tendency for the rate of profit to fall is absolutely inapplicable to communist society. In the first place there will be no commodities, just goods—use values produced to satisfy the wants of mankind. It follows that there will be no constant capital, no variable capital and no surplus value. There will still be surplus in the sense that each person would not get 'the full fruits of his labour.' Society will collectively dispose of this surplus for replacement of means of production used up, an additional portion for the expansion of production, reserve or insurance funds and various items of communal consumption. From the standpoint of society there would be no economic compulsion to maximise this surplus as there is under capitalism. A democratic vote would decide what portion of the value of living labour added in the production process would be surplus. In that sense the difference between variable capital and surplus value would disappear—the important distinction to be made in the production process would be between dead and living labour.

Of course society would still have to allot a certain proportion of dead and living labour to satisfy its wants. The general tendency of human progress (irrespective of the form of society) is for the proportion of dead labour to rise relative to living labour—that is how the productivity of labour rises.

Let us assume that society reckons directly in labour hours. One labour hour under communism = £1 under capitalism.

Under capitalism the following simple example would show a falling rate of profit:

50c + 100v +100s (250 use values each £1/1 hour)

150c + 100v + 100s (700 use values each 50p/half hour)

What would happen under communism? All we would be interested in is as a result of employing an extra 100 hours of dead labour in this sector we would have produced another 450 use values, each of which formerly took an hour to produce. That is all that matters.

So, the law for the tendency of the rate of profit to fall is nothing to do with any 'natural' law that each additional investment in constant capital leads to a smaller rise in productivity. Rather it shows the obstacles to the development of productivity imposed by the capitalist system.

Marx also deals with the question in Capital Vol. 1, pp. 370-71 where he points out "The use of machinery for the exclusive purpose of cheapening the product is limited in this way, that less labour must be expended in producing the machinery than is displaced by the employment of that machinery. For the capitalist, moreover, this use is still more limited. Instead of paying for the labour, he only pays the value of the labour power employed; therefore the limit to his using a machine is fixed by the difference between the value of the machine and the value of the labour power replaced by it."

Marx specifically adds a footnote that "Hence in a communistic society there would be a very different scope for the employment of machinery than there can be in a bourgeois society."

Contradictions of capitalism

AG argues in relation to "willingly introduced techniques in Appendix 2 that "a technique which raises the rate of profit for the capitalist does mean a real saving in outlay for himself, and thus for the industry as a whole when the technique is generalised and thus for the capitalist class as a whole."

He is abstracting from the specific nature of capitalist society as a system based on profit and the way it wastes labour and stunts productivity growth, and dealing with it as a system which allots labour in a rational way.

The whole point about Marx's analysis of the accumulation of capital is that he presents it as a contradictory process of individual capitalists chasing a higher profit collectively producing a lower rate of profit for the system as a whole. Such contradictions of capitalism are for us a sign that "for the production of wealth it is not an absolute mode, moreover that at a certain stage it rather conflicts with its further development." The effect of AG's method of analysis is to strip capitalist development of its contradictory, irrational nature.

What AG argues

AG admits that alongside of the accumulation of capital there is a tendency for the technical composition of capital (that is the mass of machinery etc behind the elbow of the worker) to rise. He denies, however, that this necessarily leads to a rise in the organic composition of capital in Marx's sense as well. For, he says, although much more machinery may be deployed for each worker, that does not necessarily mean that the cost of the machinery to the capitalist will also rise. The whole reason the capitalist spends out on new machinery is to raise the productivity of labour. This means that each good is produced cheaper, with a smaller total expenditure of labour time. The general tendency of capitalist progress is that the value of all commodities tends to fall (if we leave inflation out of account). This will include the value of new machinery. AG gives an arithmetical example on page 13a of his paper.

Why shouldn't this go on for ever? Isn't it just a question of how much the new machinery raises the productivity of labour and thus economises on costs compared with how much it costs itself?

First a general caution on methods should be made. Flowing from his general approach AG sees the question of whether the rate of profit will fall as simply being a 'technological' question of what the productivity increase produces in terms of falling prices measured against what it costs in terms of increased investment. Incidentally remarks like the one on page 11 "they are measured in prices... they are not measured in terms of Marx's value—quantities of labour time socially necessary to produce the commodities proves this to be the case. AG does not see that the law of value is precisely the law governing capitalist society.

When Marx talks about commodities being exchanged according to the quantity of labour embodied in their production, nobody knows how much labour time is embodied in a particular commodity. All we know is that it will exchange for a certain sum of the universal equivalent, that is for the same amount of labour time embodied in a certain quantity of gold. Thus values are only ever measured in terms of prices, that is in sums of money.

Profit is calculated on total capital invested [whether used up or not]

We're not dealing with the communist society of the future, which will simply be a matter of looking at the costs and benefits to society of proposed new investments measured directly in units of labour time. We are dealing with capitalism where the production of use values is subordinate to the criterion of profitability. It is therefore entirely wrong to look at the proportion of constant capital, variable capital, and surplus value incorporated in a commodity or in the output [total commodities] over a given period. The capitalist system functions to make profits not to produce goods.

It is necessary to look at the profit rate of one capital or of the total social capital. Since the capitalists invest to produce the goods cheaper, the capital incorporated in a given product over a year will be smaller, but capital stock required will increase. That is precisely what is wrong with the approach of AG in Appendix 2 where he says: "It can be proved that new techniques introduced by the capitalist in order to increase the rate of profit for the individual capitalist will lead to an increase in the rate of profit in the economy as a whole when they are generally introduced into a particular industry." According to this theory the rate of profit must continually rise! This is an example of the curious mode of reasoning in AG's paper where he denies a point in one place and qualifies his own remark later. The last paragraph of Appendix 2 admits at least: "the possibility of a fall in rate of profit."

That AG is just looking at the effect of productivity increases in a 'technological' way comes out clearly in the remark on page 9: "the fundamental reason (that there is no tendency for the rate of profit to fall—MB) is that a technique which raises the rate of profit for the capitalist does mean a real saving in outlay for himself and thus for the industry as a whole when the technique is generalised, and thus for the capitalist class as a whole." But as we have already pointed out, we are not concerned with breaking down the value of the commodity or of total output into c, v and s. (Capital, Vol. 3 p. 227)

"This again shows how important it is in capitalist production to regard individual commodities or the commodity product of a certain period, as products of advanced capital, and in relation to the total capital which produces them, rather than in isolation, by themselves, as mere commodities." (Capital, Vol., 3, p. 229)

Marx spells out the difference between the two approaches in Theories of Surplus Value, Vol. 3, in the section on Cherbuliez, who seems to have raised similar points to AG.

"As far as the machinery is concerned its cost is not as great as that of the labour it displaces, although the spinning machine is much more expensive than the spindle. The individual capitalist who owns a spinning machine must possess a greater amount of capital than the individual spinner who buys a spinning wheel. But the spinning machine is cheaper than the spinning wheel in relation to the number of workers it employs. Otherwise it would not have displaced the spinning wheel. The place of the spinner is taken by a capitalist, but the capital which the former laid out on the spinning wheel was larger relative to the size of the product, than which the capitalist lays out on the spinning machine...The ratio of the wear and tear of the machinery effects only the commodity; the worker confronts the total amount of machinery and similarly the value of the capital laid out in machinery" (p. 365).

It follows that the rate of profit does not move to the same extent as the value of commodities.

What happens when prices fall?

Let us look in more detail at the effect of price reductions on the economic system. Falls in price can either serve to cheapen elements of constant capital, of wages goods, or of surplus value which is not ploughed back into production but spent on 'luxury' goods.

Raising the rate of exploitation

Take the case of wages goods first. If the rate of surplus value is 100 with v = 4 hours and s = 4 hours, and then productivity doubles, the effect is not to double the rate of surplus value. The worker produces the elements of his own wages in two hours, leaving 6 hours of surplus labour. The surplus value has gone up only by 2 hours, that is by 50. This example is given by Marx on page 335 of the Grundrisse, where he shows that the rate of surplus value does not rise as fast as productivity. It is irrelevant to argue that the value of wage goods may have halved—what we are interested in is the rate of surplus value.

What happens with the commodities produced after wages goods have fallen in price, is that the rate of exploitation just goes up. These commodities are no cheaper, because wages are lower, as the worker is still adding the same value in the production process. The capitalist just pockets a higher proportion of this living labour at the expense of the worker.

It follows that a fall in prices cannot be as great as a rise in productivity—unless all productivity increase goes to cheapen capital goods.

AG admits that cheapening of wage goods cannot indefinitely offset the tendency for the rate of profit to fall in his Appendix 2. Again he shows a curious line of reasoning—as he incorrectly begins by saying that "a rising c/v can always be offset by a rising s/v" and then goes on to point out that this is wrong later on in the same page. To simplify the argument, the reason why the rate of profit is bound to fall is that the constant capital can be increased to infinity (and there will be no tendency to reduce the cost of constant capital while all rises in productivity go to cheapening wage goods and so to raising the rate of surplus value). Living labour (v + s) is bound to fall relative to dead labour, (constant capital). If c continues to increase, then since s cannot increase without limit but is limited by (v + s), which is continually falling relative to c, the rate of profit must fall-

Nevertheless the only way the capitalist class as a whole can increase the mass and rate of surplus value at its disposal is by cheapening wage goods and so raising the rate of surplus value. All cheapening elements of constant capital can ever do is to offset the initial cost of new investment. It cannot add a farthing to the surplus value available to the capitalist class as a whole. So cheapening of wage goods cannot indefinitely offset the tendency for the rate of profit to fall.

Fixed and circulating capital

When looking at the effects of cheapening capital goods upon the rate of profit it is necessary to divide constant capital into fixed and circulating. Items of circulating constant capital (raw and auxiliary materials) can be reduced in value by an increase in productivity in producing them, but in no way can they inaugurate a further increase in productivity (a large part of constant capital, such as buildings, is also in this position). Furthermore, the consumption of raw materials necessarily rises in proportion to increases in productivity. The rate of profit is calculated on the total capital invested, whether used up or not, as we have seen, so the rate of profit will look very different if this method is adopted.

To take an extreme case, and one most favourable to AG, if fixed constant capital equals zero and productivity doubles, then the organic composition of capital will still double because living labour will work up twice as much circulating constant capital. The 'organic composition of capital' gauged from an individual commodity or from total output from that year will remain unchanged because only the same amount of circulating constant capital will be incorporated into each commodity.

Let us look at some arithmetical examples where this method, the only correct one, is used to show the effect of productivity increase upon the rate of profit. We assume throughout that all fixed capital is used up. AG affects to find it "pointless to construct numerical examples where the ratio of dead to living labour rises because, for example, there is no productivity growth in the sector producing raw materials." But this productivity growth is not a gift from the good lord, it has to be paid for by new investment in the raw materials sector. We believe our method of examining the increased investment in each sector and then looking at the effect of that increased investment in reducing the price of different 'inputs' is the correct one.

Was Marx a Ricardian?

AG finds our arguments on raw materials 'Ricardian'. Marx asks on page 368 of Theories of Surplus Value, Vol. 3 "If for example productivity in spinning increased ten-fold, that is a single worker spins as much as ten did previously, why should not one negro produce ten times as much cotton as ten did previously? In other words why should the value ratio not remain the same? (This is AG's argument - MB) To this it is quite easy to answer that some kinds of raw material such as wool, silk leather are produced by animal organic processes, while cotton, linen etc are produced by vegetable organic processes, and capitalist production has not yet succeeded and never will in mastering these processes in the same way it has mastered mechanical or inorganic chemical processes. Raw material such as skins etc and other animal products become dearer partly because the insipid law of rent increases the value of these products as civilization advances. As far as coal and metal (wood) they become much cheaper with the advance of production; this will however, become more difficult as mines are exhausted etc." And Marx sums up optimistically "this rubbish is herewith disposed of." (The whole of the section, page 364 to 369 is very relevant for the present discussion.)

How then can AG say that "this has nothing in common with Marx's law of the .tendency for the rate of profit to fall, which is much more fundamentally concerned with fixed capital"? It all seems eminently sensible, and, indeed, prophetic, when we consider the actual course of the post war boom and the enormous importance of raw material prices for capitalism. On page 108 of Volume 3 of Capital, Marx points out "the value of raw material therefore, forms an ever growing component of the value of the commodity product in proportion to the development of the productivity of labour...because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour—both continually decrease." Now on to a few arithmetical examples which should bring home to the reader the significance of all this discussion on method.

1] Cheapening of elements of fixed constant capital

fc 100 + cc 100 + v 100 + s 100

(Rate of profit = 100/300. 33 1/3%)

Fixed c is doubled but this leads to a ten fold (!) increase in productivity.

fc200 + cc 1,000 + v100 + c 100

Now we feed the price fall back into fixed capital

fc20 + cc 1,000 + v 100 + s 100. Rate of profit = 100/1120. less than 10%

Despite the amazing productivity rise we have allowed for, to give the most favourable case for AG's thesis, the rate of profit has fallen. Obviously arithmetical examples can be used where a cc starts off as a much smaller proportion of total capital and therefore the rate of profit does not fall:— 100 + 5 + 100 + 100. Rate of profit = 100/205, under 50%

200 + 50 + 100 + 100...... becomes

....20+50+ 100 + 100

Rate of profit = .100/170. about 59%

However, the rise in consumption of circulating constant capital as a result of this investment makes it virtually inevitable that the next stage in investment will mean a fall in the rate of profit. A ten fold increase with constant capital doubling and the rate of profit still falls! Obviously hypothetical examples could still show the rising rate of profit. But is it likely? Could it be sustained?

2] Cheapening of elements of circulating c


fc 100 + cc 100 + v 100 + s 100. (Rate of profit 33 1/3%)

fc200 + cc 1,000 + v 100 + s 100...becomes...

...fc200 + cc 100 + v 100 + s 100.

Rate of profit = 100/400. 25%

The rate of profit falls, and in this case must fall. The rise in productivity by definition leads to a proportionate increase in the amount of cc, and fc must rise to raise productivity.

3] Cheapening of elements of v

fc100 + cc100 + v100 + s100

fc200 + cc 1,000 + v 100 + s 100...becomes...fc200 + cc 1,000 + v10 + s190

AG has already conceded the point. No increase in the rate of exploitation could indefinitely offset the tendency for the rate of profit to fall since the rise in s is bounded by (v + s) which must fall relative to c.

4] Cheapening of elements of s

There is no point in working through the sums again, but just as cheapening of v goods is the only way to raise the rate and mass of s for the system, conversely raising the productivity of elements of uncapitalised s reduces the total mass and rate of s (all that happens is that less workers are needed to produce these goods). This is discussed in Theories of Surplus Value Volume 3 page 349). Furthermore s goods are not just the insignificant fraction of production which serves as personal luxury goods for the capitalist class, but includes armaments and all other unproductive expenditures of modern capitalism—a big sector of total production.

Thus our argument is that:

Surplus value does not rise as fast as productivity.

2. Prices and therefore costs do not fall as fast as productivity rises.

3. The rate of profit does not tend to rise as fast as prices fall. A much faster fall is necessary to prevent the law of the tendency of the rate of profit from operating.

What happens when capital goods are cheapened?

We have tried to show that for AG to be correct, as much of the effect of raising productivity as possible has to go to cheapen the elements of fc, since the cheapening of cc, v or s goods cannot indefinitely offset the tendency for the rate of profit to fall. Actually it is not true that cheapening of capital goods always reduces the organic composition of capital, while the cheapening of wages goods raises the rate of s.

Only the second proposition is true, since even when wages of capital goods workers are cheapened the effect is to raise profits, not reduce prices. The cheapening of capital goods to produce consumer goods only partly reduces the organic composition in the consumer goods sector, while it partly goes to raise the rate of s in the capital goods sector. "Hence, a fall in the value of labour power is also brought about by an increase in the productiveness of labour and by a corresponding cheapening of commodities, in those industries which supply the instruments of labour and the raw materials that form the material elements of the constant capital required for producing the necessaries of life." But as we already know the raising of the rate of s can never indefinitely offset the tendency for the rate of profit to fall (see Capital, Vol. 1, p.315, where Marx uses the example of leather for workers' shoes). Thus the cheapening of most of the elements of social production raises the rate of s and cannot indefinitely offset the tendency for the rate of profit to fall.

Can the organic composition of capital have remained unchanged?

Most comrades will find AG's assertion that the organic composition of capital has not risen incredible. Marx spells out why it must eventually rise, in Theories of Surplus Value, Vol. 3, p.366:

"There can be no doubt that machinery can become cheaper...what becomes cheaper is the individual machine and its component parts, but a system of machinery develops; the tool is not simply replaced by a single machine, but by a whole system...e.g. 1,800 spindles instead of one." He concludes "Despite the cheapening of individual elements the price of the whole aggregate increases enormously."

Can it really be possible that a mechanical digger costs less per worker than a shove did to the capitalist, despite reducing the value of mechanical diggers by improvements in productivity in the mechanical digger factory?

AG's theory applied to the facts

AG admits on page 13 of his paper that "Huge increases in the capital stock per worker are recorded" in his own table. But he goes on to say "these are indicators of the technical composition not the value composition." AG fails to understand that the technical composition of capital (mass of machinery) is not an economic relation. It cannot be measured economically, any more than how much a kid enjoys a new train set for Christmas (the use value of the train set) can be measured economically. What we can ascertain is the value of the capital or of the train set.

Flowing from his general method, AG attempts to find a monetary measure and then "subtracting the growth of productivity" to find the organic composition of capital i.e. the actual value relationship. In other words AG presupposes what has to be proved. For if prices fell in proportion as productivity rose, and if the rate of profit rose to the extent that prices ("inputs") fell, then indeed the long term movement of the rate of profit would be indeterminate, purely dependent on the extent to which each application of new technology increased productivity. We have gone to some effort, however, to show that this is not the case, and it is inevitable that the organic composition of capital must rise in the long term.

Secondly, both tables I and II suffer from the fact that they base their calculation of constant capital on capital stock i.e. on fixed constant capital. They inevitably abstract from the continuous turnover of circulating constant capital. Yet, as we have already pointed out, the increase in the composition of circulating capital proportionate to every increase in productivity is one of the major reasons why the value of constant capital relative to surplus value must rise.

Using dead to living labour as a measure

In relation to table II, while AG is correct to argue in Appendix I that if c rises relative to (v + s) then the rate of profit must fall in the long run, nevertheless analysis of dead to living labour (capital to output), convenient though it may be in the admittedly difficult task of attempting to apply Marxist categories to bourgeois statistics, covers up important aspects of economic reality. Rising productivity can either reduce the cost of constant capital or of wages goods (raising the rate of surplus value). We measure the rate of profit by s/c+v. AG proposes instead to measure c/v+s. He thus glosses over the raising of the rate of surplus value—which must happen with improvements in productivity if constant capital is not cheapened. To show the importance of this, we will break into another arithmetical example.

Let 1) c = 100, v = 100, and s = 100.

Productivity in the wages goods industry doubles, so

2) v = 50 and s = 150

If we use s/c+v 1) 100/200 = 50%. 2) 150/150 = 100%

But if we use c/v+s 1)100/200.= 50%. 2) 100/200 = 50%

This dramatic rise in the rate of exploitation is ignored if we use AG's method.

Finally we have to say that AG's statistical tables, in the form they are presented, do not give us enough information about how they were compiled to compare them with conflicting evidence.

Other interpretations of the facts

We approach the figures of Ernest Mandel (in Late Capitalism, p. 199), who in this instance for once is defending the orthodox Marxist position. He is criticised by AG as 'misleading' for using "figures for the growth of the physical stock per man as supporting the idea of a rising organic composition of capital."

We have to say that in this instance Mandel is right. It is wrong to presuppose as AG does that productivity increase leads to and equivalent fall in prices. Mandel quotes a number of bourgeois economists who, using bourgeois methods of looking at statistics, nevertheless take it for granted that there is a tendency for the organic composition of capital to rise.

Take Carter, 'Structural Changes in the American Economy,' (for 1939-61) who says on page 14 of her book "both labour and capital coefficients are falling in most sectors, with capital falling more slowly." (my emphasis—MB) "There is no evidence that labour productivity has increased in proportion to changing capital intensity."

It seems that the 'facts' AG adduces are the object of serious dispute.

Problems with bourgeois statistics

Has there been a more rapid growth in the capital goods sector over this century than there has been in the consumer goods sector? This could be measured, e.g. by the proportion of the workforce employed in either sector. It seems very likely that there has been. If that is the case, then unless there is a progressive tendency for productivity in the capital goods sector to rise more rapidly than in the consumer goods sector, then the organic composition of capital must have risen.

Even figures of that character however, must be treated with caution. Every capitalist and every nation state is competing with every other. Thus the declining position of British capitalism may mean that less capital goods are being made in this country not because less are being consumed but because more are being imported.

So competition between capitals may distort the figures for individual capitals or capital blocs.

I believe it is common currence that there was a steady rise (subject to the trade cycle, of course) in the organic composition of capital throughout the 19th Century up to about 1914. AG admits this in page 9. The trend since that time is contentious.

How does AG explain the 19th century trend? If there has indeed been a change since then, there is a case for detailed research into why the tendency for the rate of profit to fall has been offset for such a long period. It is the merit of Oilman's book The Falling Rate of Profit that it approaches the question in this spirit, attempting to apply the method of Marxism to the new situation. We do not think that he succeeds in this aim. His approach is preferable to that of AG, however, who sandbags himself behind a set of statistics and proceeds from there to call into question a basic principle of Marxist analysis.

There are enormous practical difficulties in attempting to derive Marxist categories from bourgeois statistics and a number of questions must be asked about any evidence offered.

We are dealing with surplus value which is divided into rent, interest and profit (plus taxation etc). Capitalist statistics regard rent or factory price, which is capitalised rent, as part of the costs, just like raw materials. The same goes for interest payments in many cases.

2. Variable capital is usually represented as the wages and salaries bill, but in practice part of the salaries may be a concealed part of the surplus value paid out as wages of superintendence. Also part of the surplus value may be included as costs of perks, like company cars.

3. Of course bourgeois statistics may always be expected to understate profits—they exist to conceal them, not to reveal them. But in addition, different countries have been adopting different systems of inflation accounting over the past few years—so the whole basis of their accounting has been changed.

4. Assets tend to be valued against expected profits rather than reflecting their own value, i.e. they get written down if profits are down.

5. Over the last century there has been a progressive horizontal as well as vertical monopolisation (vertical monopolisation means progressively taking over raw materials supplies, sales outlets, etc; horizontal monopolisation means taking over competitors). Companies that control every aspect of a production process thus have different kinds of inputs from 100 years ago, and comparing statistics can be misleading. Monopolies can also lead to the well known process of transfer pricing which can make the figures in any one country misleading.

6. One particularly important example of the above was the change from generating your own power on a steam engine to buying it from the state electricity board, which has taken place this century. All the modern capitalist has is a few comparatively small electric motors instead of a steam engine. His organic composition of capital has fallen. It has only done so because of a massive increase in the organic composition of capital of capitalist society as a whole through the creation of electric power stations. However, this increase in the organic composition of capital will not show itself on the accounts because it has taken place in the state sector.

What about the ever increasing proportion of production undertaken or at least interfered in by the state? What about the most common form of transfer pricing, concealed subsidies given through artificially low nationalised industry prices?

7. Furthermore there are other problems in interpreting bourgeois statistics. Gilman for instance adduces statistics to show a dramatic fall in the organic composition of capital in the USA in the early 1940s. It transpires that the reason for this is that to meet the government induced increase in demand, manufactures went over from day shifts to continuous shiftworking. This shows up on the statistics as three times as much v being deployed by the same capital stock! Clearly what really happens is that the capital stock is being used up three times as fast, so the organic composition of capital remains unchanged.

8. In general the law of value can't be applied to individual capitalist corporations in the epoch of imperialism. Lenin remarked in 'Imperialism' that the law of value has already been partially undermined. What does this mean? Though it continues to govern the system as a whole such phenomena as low nationalised industry prices mentioned above, reflecting the merger of industrial with finance capital and the state, mean that the values of individual commodities become completely distorted. For instance the huge increase in the sales effort post war has meant an enormous increase in uncapitalised surplus value. This is however concealed in the accounting statistics as "costs".

Applying AG's conclusions to the post-war boom

What of AG's conclusions? One of the deficiencies of AG's alternative is that he seems to consider nothing else but the ratio between wages and profits. Furthermore when he looks at the rate of profit he takes no account of division of profit (which is total s over total capital invested) into rent, interest and profit, despite the enormous practical importance of these fluctuations for the post war economy. Similarly the reductions of raw materials below their value (as with oil) and the substitution of synthetic raw materials for expensive natural products such as rubber, provided an added impetus to the boom, just as the rise in their price gave an impetus to the recession later on. Nevertheless I think it would be correct to say that deviations of price from value are determined by the trade cycle, while they may dialectically further influence the cycle.

What is full employment?

AG's whole argument is that the dynamics of the post-war boom can be explained by movements in the supply and demand for labour power. He sees the achievement of full employment (with all the practical qualifications made on page 6) as the force which drove up wages and ate into profits. We have always seen the securing of relatively full employment as one of the main achievements of the post-war boom.

That is not to draw a hard and fast line at the point of 'full employment', beyond which capitalism cannot develop. When Marx deals with the 'General Law of Capitalist Accumulation in Vol. 1 of Capital he shows that on the one hand capitalism in boom tends to take on more workers so more goods can be produced, while on the other hand the rising organic composition of capital (which happens precisely when capitalism is going full blast) means that relatively less workers will tend to be needed to produce the goods. Capitalism, in other words, continually creates a reserve army at one pole while it mops it up at another. Clearly 'full employment' is not a fixed limit measured in terms of a fixed labour force.

Secondly, when he analyses surplus population, Marx clearly separates out the floating, latent, and stagnant elements, and finally the pauperised sections who may be drawn into employment at the height of a boom (Capital Vol. 1, p. 600). We have to be very careful before saying that absolutely no more people can be employed by the system, as it shows an almost indefinite ability to expand employment when accumulation requires it. So millions of housewives who would not have dreamed of working in the 1930s got a job in the post-war boom. As AG shows, agriculture in countries like Japan was revolutionised in order to free labour and expand the industrial work force.

Thus capital employing workers and the work force available for exploitation are both continually changing. There can be no arithmetical relationship between amount of capital, level of employment and the level of wages as the wage fund theory asserts. Of course AG does not advocate that theory but because he analyses the relations in a somewhat mechanical, undialectical way, he opens the door to that interpretation.

The progress of the post-war boom was different in Britain. First there was no massive agrarian population (part of the latent reserve army, in Marx's terms) to lap up. Secondly the tempo of accumulation was much slower, with continual stop-go even during the period of general world boom.

Immigration and immigration controls

AG addresses himself to the question of why immigration "did not accelerate sufficiently to provide ample supplies of labour-power," and answers himself with "immigration controls".

This is quite wrong. In Britain the main immigration took place in the 1950s, during the height of the boom. The first Immigration Act was passed in 1962. Its purpose was not to restrict the supply of labour-power and so increase wages. It was a response to the pressure of the racialists and a further spur to divide and weaken the workforce. This happened precisely because the boom had already passed its peak and unemployment was becoming a threat to the stability of the system. It cannot be shown that immigration controls had any important economic effect in creating full employment and so allowing the rate of wages to rise, since the period from 1962 of progressively stricter immigration controls was also one of rising unemployment.

There is no evidence that any capitalist government has ever caved in to such pressures in the face of the urgent needs of their system. In the USA a section of the workers were anti-abolitionist before the Civil War because they feared cheap labour. The farmers, the vast majority of the nation, were afraid of a flood of blacks competing for land. Their feelings availed nothing—the American capitalist class were determined that former slaves should be deprived of the '60 acres and a mule' they were demanding so they could form a pool of cheap labour. The progress which has been made by the black people in the USA since then has come about first because of mass movements of the blanks but also by the changing employment requirements of the capitalist class. The classic case was the threatened march of a quarter of a million upon Washington in 1941 to end restricting of jobs to whites in the armaments industry. The government caved in to mass pressure, but it was also in capitalism's interests to do so. When the British imperialists found Asian labour more suited to building the railways in East Africa, they rode roughshod over the feelings of the local blacks. The racial divide that opened up as a result was actually an extra reason for their policy. In Kuwait at the present time a majority of the population are foreigners, working for the local ruling class irrespective of the views of local population (who are not in the main wage workers).

Everywhere we look, immigration laws follow the requirements of capital rather than dictating to it. Likewise the movement of population flows from the dynamics of the particular form of society (as Marx argued against Malthus) rather than determining its development.

What are the implications?

We believe political implications, not thought out by AG, underlie his conclusions.

AG remarks on page 1 on "the implications of new technology as a possible way out of the crisis as one potential area of difference" on practical perspectives arising from his conclusions. Unfortunately he does not spell out what he is driving at.

First it is possible, as we have said before, that individual applications of new machinery can raise the rate of profit, not lower it. It is possible that 'new technology' is like that. That in now way disproves the law of the tendency for the rate of profit to fall.

We have ruled out the possibility of the hew technology being capable by itself of opening up a new era of capitalist prosperity.

As AG's previous pamphlet points out, what capitalism needs is profitable markets. The dilemma of the capitalist system in crisis is that increase in profits cuts the market and expending the market cuts into profits.

Now, what the present spate of publicists project about the new technology is that it will lead to such a dramatic rise in productivity, and therefore profitability, that mass unemployment will result, so cutting drastically into the market for the capitalist class.

The problems of applying the new technology are a good illustration of the contradictions of capitalism, and how the tendency for the rate of profit to fall is important as part of the overall process. With the rate of profit now so low, and therefore funds for new investment so tight, the capitalist class will have great difficulty in moving over to the new technology in industry on a grand scale. (Although microprocessors are cheap, industrial robots are not). Investment prospects are further curtailed by the malaise in the world economy which both cuts into markets and poses the prospect of continuing low profits for years to come.

That is not to rule out the possibility of one nation state (such as Japan) being in a position to use the new technology and clean up at the expense of its competitors. We would have to separate out the problems of the system as a whole and the jostling for position caused by competition between capitals within that system. The effect of such a partial reinvestment would be to increase world unemployment. Massive unemployment 'could, though not necessarily would, be alleviated in Japan itself.

AG seems to be suggesting that a rise in the rate of profit of itself could lead to an economic revival. The further hint of this is on page 7 where he says, "after all we accept that the capitalists' only way out of the crisis is to drive down wages." Driving down wages is not necessarily a way out for the capitalists. It is certainly their inevitable reaction to a falling rate of profit. Whether an economic revival follows a successful onslaught on wages depends upon a number of other factors. Take two obvious cases—Mussolini's Italy and Nazi Germany in the 1930s. In both cases wages were forced down. In Italy this proved to be no solution. Italian capitalism was too weak to take advantage of starvation wages and undercut its competitors. The world economic situation did not provide an expanding market for Italian goods.

Adolf Hitler was of course the man who provided 'full employment'. In addition to driving down wages he simultaneously provided a market for profitable production through war preparation. German capitalism was strong enough to take advantage of its opportunity.

To appraise the effect of wage cuts it's necessary also to see whether the markets exist through which profits can be made and whether the individual capital or capitalist nation state is competitive enough to take advantage of them.

In no sense can wage cuts alone solve the problems of the capitalist system. Such a conclusion, rooted in AG's analysis though he denies it, is both scientifically incorrect and potentially politically dangerous.

See the Introduction to debate between AG and MB By Mick Brooks (October 2003)


constant capital (c) — cost of plant and raw materials etc.

variable capital (v) — cost of wages

surplus value (s) — rent, interest and profit, the unpaid labour of the working class.

organic composition of capital — proportion of variable to constant capital (v)/c+V.

So a labour intensive process has a low organic composition of capital while a capital intensive process has a high organic composition of capital. rate of surplus value s/v— rate of exploitation; ratio of unpaid to paid labour.

rate of profit — ratio of surplus value to total capital s/c+v.



(note 1) 
In particular it is pointless to construct numerical examples where the ratio of dead to living labour rises because, for example, there is no productivity growth in the sector producing raw materials. Obviously this would lead to a rise in the ratio of dead to living labour, but no general reason can be given for expecting it to be the case (short of a Ricardian notion of diminishing returns in industries producing raw materials which has nothing in common with Marx's LTRPF which is much more fundamentally concerned with fixed capital).[Back to the Text]

(note 2)
The capital stock figures are based on original selling price of the means of production, not on expected future profits. They are depreciated according to consistent assumptions about asset lines, not subject to arbitrary changes in accounting conventions.[Back to the Text]

(note 3) 
To see why measuring the capital stock at constant prices is an indicator of volume take a simple case where there is just one type of machine and in 1960 there were 100 machines whose price was £100. In 1970 the number of machines has doubled to 200, while inflation has pushed the price up to £200. So at current prices the capital stock has risen from £10,000 to £40,000. If the stock in 1970 is recalculated at 1960 prices (£100), the stock in 1970 would be £20,000. Comparing this with the 1960 stock of £10,000 shows a doubling of the volume of the capital stock, which is just the same increase as you get by looking simply at the number of machines. If employment had not changed we would say the technical composition of capital had doubled. In the real world there are many different types of machines, buildings, etc. You cannot measure the technical composition directly by looking at numbers of machines; the only way it can be done is by these calculations of the capital stock at constant prices. Suppose also that the real productivity of labour had doubled so that it took one worker-year to produce one machine in 1960, two machines in 1970. So the value of a machine has fallen from 1 worker year to half a worker year. The value of the capital stock then has stayed unchanged at 100 worker years (representing 100 machines in 1960 and 200 in 1970), despite the rise in the technical composition— the doubling of the technical composition of capital has been precisely counterbalanced by the rise in labour productivity (or fall in the value of machines). So the value composition of capital (value of constant capital in relation to the number of workers employed) would be unchanged. This is just a particular example but it illustrates the processes.[Back to the Text]

(note 4) 
The share of profits is 1-w/p where w is the real cost of employing labour (the wage bill per worker in real terms) and p is productivity (output per worker in real terms). So the share of profits falls if the growth of real wage costs is greater than the growth of productivity.[Back to the Text]

(note 5) 
I hope the following figures will clarify some of these concepts. In UK manufacturing industry between the years 1960 and 1975 productivity rose by 45. The average real cost of employing a worker rose by 81 (which means that wages before tax and including all national insurance contributions paid by the employer rose by 81 more than the price of what the manufacturing sector produced). But the proportion of the gross wage taken in tax and contributions rose from 14 in 1960 to 28 in 1975. Moreover the cost of living rose considerably faster than the price of manufacturing output (171 as compared with 137). So that the real take-home pay rose by only 31. Thus, while the real cost of employing workers rose much faster than productivity (81 as compared with 45), thus accounting for the profit squeeze, real take-home pay rose substantially slower than productivity.[Back to the Text]

(note 6) 
It may be noted that if productivity growth did imply a rising value composition of capital, as Marx suggested, it would limit economic growth under socialism as well. This would not take the form of falling profitability obviously since the rate of profit would not apply, but a rising value composition of capital or capital-output ratio does imply the necessity, at some stage, for the rate of accumulation to slow down. People who argue for the LTRPF under capitalism have not generally been aware of this implication.[Back to the Text]

(note 7) 
In the past BP has quoted 'Management Today' figures suggesting a higher rate of profit for UK companies. But faster inflation in the UK, inclusion of high profits from overseas subsidiaries (which, like those of the oil companies, may be very profitable but which do not reflect the profitability of production in the UK), different methods of financing investment, all distort these figures derived from company accounts. None of these problems apply in the standardised figures I have quoted in Table 2, which must therefore be regarded as more reliable. [Back to the Text]