The Capitalist Crisis and the Tendency of the Rate of Profit to Fall - Part two

marx-engels thIn the second part of his article Rob Sewell explains how marx's analysis of the falling rate of profit developed. From seeing in it the single most important law of capitalist economy, he began to see it as an important tendency within a system of counteracting forces. As opposed mechanical thinking of the academic "Marxists" who are always looking for a magic key in between the dots and commas of Marx's writings to explain all and everything, Marx himself saw the capitalist economy as a complex and living system of contradicting forces.

[Read part one here]

Marx’s Capital

By the time Marx writes Capital, he writes not about the most important law, but rather of the law being of “great importance” for capitalist production. 9  The emphasis had clearly changed.

Despite its undoubted importance, out of 52 chapters in volume three of Capital, only three are devoted to the tendency of the rate of profit to fall. Again, this is hardly the space you would expect to squeeze in “the most important law of modern political economy”. If Marx had regarded it as such, he would have written a whole book on the subject. Instead, one chapter deals with “The Law Itself”, followed by a chapter on “Counteracting Factors”, and finally one on “The Development of the Laws’s Internal Contradictions”.

He explains the tendency in the third volume of Capital by the following example:

“Once wages and the working day are given, a variable capital, which we can take as 100, represents a definite number of workers set in motion; it is an index of this number. Say that £100 provides the wages of 100 workers for one week. If these 100 workers perform as much surplus labour as necessary labour, they work as much time for the capitalist each day, for the production of surplus value, as they do for themselves, for the reproduction of their wages, and their total value product would then be £200, the surplus value they produce amounting to £100. The rate of surplus value s/v would be 100 per cent. Yet, as we have seen, this rate of surplus value will be expressed in very different rates of profit, according to the differing scale of the constant capital c and hence the total capital C, since the rate of profit is s/C. If the rate of surplus value is 100 per cent, we have:

If c = 50 and v = 100, then p’ = 100/150 =

66 2/3 per cent;

If c = 100 and v = 100, then p’ = 100/200 =

50 per cent;

If c = 200 and v = 100, then p’ = 100/300 =

33 1/3 per cent;

If c = 300 and v = 100, then p’ = 100/400 =

25 per cent;

If c = 400 and v = 100, then p’ = 100/500 =

20 per cent.

“The same rate of surplus value, therefore, and an unchanged level of exploitation of labour, is expressed in a falling rate of profit, as the value of the constant capital and hence the total capital grows with the constant capital’s material volume.” 10

In other words, a rising organic composition of capital, assuming that the rate of exploitation remains the same, must bring about a fall in the rate of profit. This is a permanent tendency under capitalism as the system expands and the productivity of labour grows. In other words, the relative decrease in variable capital relative to constant capital is but another expression for greater productivity of labour. Every capitalist is striving to increase the productivity of his workforce, namely the amount produced in a given period of time. If this is so, why is there not a permanent fall in the rate of profit? Marx explains that the TRPF is a “double-edged law” which produces its own counteracting tendencies, which, under certain conditions, can even result in the rate of profit to rise.

The tendency can also bring about a decline in the profit rate with a simultaneous increase in the mass of profit. For example, a capital of £1 million at 40 per cent rate of profit produces £400,000, but a capital of £5 million at 8 per cent also produces £400,000 - all things being equal. While the capitalists are concerned about the falling rate of profit, and they will do everything to combat it, it is manageable as long as the mass of profit is increasing. This is a vtal point to grasp. The absolute mass of profit can continue to grow despite the tendency of the rate of profit to fall as a result of larger investments of capital. Paradoxically the same causes that produce a growth in the mass of profit also produce the tendency for the rate of profit to decline. In the long term, the capitalists are caught in a vicious circle.

As Marx explained: “the same reasons that produce a tendential fall in the general rate of profit also bring about an accelerated accumulation of capital and hence a growth in the absolute magnitude or total mass of the surplus labour (surplus value, profit) appropriated by it. Just as everything is expressed upside down in competition, and hence in the consciousness of its agents, so too is this law – I mean this inner and necessary connection between two apparently contradictory phenomena.” 11

He goes on to add, “It is evident that, on the figures given above, a capitalist controlling large capital will make more profit in absolute terms than a smaller capitalist making apparently high profits. The most superficial examination of competition also shows that, under certain conditions, if the bigger capitalist wants to make more room for himself on the market and expel the smaller capitalists, as in times of crisis, he makes practical use of this advantage and deliberately lowers his profit rate in order to drive out the smaller ones from the field.” 12

Tendency always applies?

The tendency does not mean that the absolute mass of exploited labour falls. In fact, historically the direction is for the scale of production to increase with a rise in the labour force and for production to become ever more concentrated into fewer but larger units. The concentration of capital is far greater today than in Marx’s time, but the working class has never been so numerous. “The fall in the rate of profit does not arise from an absolute decline in the variable component of the total capital but simply from a relative decline, from its decrease in comparison with the constant component.” 13 

Nevertheless, the falling rate of profit is not absolute, applicable to all periods. The capitalists are constantly looking for ways around it. In practice, the rate of profit does not always fall, but can actually rise for a considerable period of time, as we have witnessed over the last 30 years, which does not contradict the process as some so-called Marxists seem to fear. We must base ourselves not only on the theory, but also on the facts and how the different tendencies and counter-tendencies work themselves out in practice. It is a tendency and not a law, as Marx emphasised. “The rate of profit could even rise”, states Marx, “if a rise in the rate of surplus value was coupled with a significant reduction in the value of elements of constant capital, and fixed capital in particular.” 14  This is what has happened in the last three decades, but this could not last indefinitely, or “in the long run”, to use the exact words of Marx.

However, Marx points out that the problem is rather to explain why the rate had not fallen far more, and more rapidly. “Counteracting influences must be at work”, he explains, “checking and cancelling the effect of the general law and giving it simply the character of a tendency, which is why we have described the fall in the general rate of profit as a tendential fall.” 15 In fact, Marx also points out that all economic laws have the nature of tendencies, affected by forces pulling in different directions. He then goes on to explain the factors that serve to counteract the law of the falling rate of profit and transform it into a tendency, all of which incidentally have been operating in the recent period.

The first counteracting tendency explained by Marx is a more intense exploitation of labour, an increase in relative surplus value. That has been happening on a massive scale over the last period. In Britain, manufacturing industry produces the same level of output with a million less workers. This is a reflection of the squeeze that has taken place across the workforce, not only in Britain, but world-wide.

Labour’s share in national income has been in decline across the main capitalist economies (OECD) since 1980. The gap has been especially wide in the USA, where productivity rose by 83 per cent between 1973 and 2007, but male median real wages increased by just 5 per cent. The share of the US national income that goes to wages has fallen to its lowest level since records began after the second world war. The production of relative surplus value is a process of progressively cheapening commodities, with the new commodities containing less value than before. A larger mass of use-values will be expressed in a smaller total value. Alternatively, the working day can be prolonged, resulting in greater absolute surplus value. The working week has been increasing everywhere in the past period. The working class has been squeezed by deskilling, the introduction of part-time work, just-in-time production, short-term contracts, and other regressive measures to extract more unpaid labour out of the working class. If you increase the rate of surplus value, you will increase the mass of surplus value, everything being equal. This then serves to push up the rate of profit. “It does not annul the general law”, he explains. “But it has the effect that this law operates more as a tendency, i.e. as a law whose absolute realisation is held up, delayed and weakened by counteracting factors.” 16

The driving down of wages below their value is another factor that serves to counteract a falling rate of profit. Again this has become a feature especially in the developing world where labour is viciously exploited without limit. The exploitation of women and children is part of this process. In addition, the cheapening of commodities, which has been a very important feature over the past period, serves to cheapen the cost of labour power.

Marx now refers to the cheapening of constant capital as a key factor in this process. If the rate of profit tends to fall with a greater proportion invested in constant capital as opposed to variable capital, then a cheapening of constant capital will serve to counteract the falling rate of profit. The increasing productivity of labour serves to cheapen the constant capital transferred to the product in the bargain, despite the continued rise in its volume. Thus the same influences that tend to cause a fall in the rate of profit would serve to moderate this tendency. The value of constant value would depend on which of these two tendencies is stronger. If productivity of labour doubles, then the value of constant capital will be halved. If productivity is less than the rising value of constant capital, there will be a falling rate of profit. Therefore, we need to see the net effect of these conflicting forces. In practice, however, over the last 30 years we have seen a dramatic decrease in the value of components of constant capital, especially with the advance of new technology. The falling price of computer chips, for example, has cheapened computers, which are part of constant capital used extensively in the economy. China has been a source of cheap goods flooding the world market, which have taken the increasing form of constant capital, and has assisted the rising rate of profit for the past three decades.

Relative surplus population is another factor. We can see the growth of mass unemployment everywhere, which has now become a permanent feature. This has served to drive down wage levels and to cheapen the cost of labour power, thereby increasing the surplus labour time for the capitalists. The reduction of “wage costs” has been the main character of the past period, as the capitalists seek to push up their profits.

Foreign trade is also a means of cheapening elements of constant capital as well as introducing cheaper commodities from abroad, which again serve to reduce the cost of labour power. This was why the capitalists in the nineteenth century fought to abolish the Corn Laws that prevented the importation of cheap wheat that would reduce the cost of bread. The lower cost of living for the workers could allow the capitalists to depress wages, thereby increasing their profits. Foreign trade could also cheapen the elements of constant capital.

Capital invested in foreign countries, where the organic composition is lower, will also yield a higher rate of profit and will increase the average rate of profit of those engaged in foreign trade. “Capital invested in foreign trade can yield a higher rate of profit, firstly, because it competes with commodities produced by other countries with less developed production facilities, so that the more advanced country sells its goods above their value, even though still more cheaply than its competitors”, explains Marx. 17 “The privileged country receives more labour in exchange for less”, continues Marx, a reference to the adverse terms of trade. The benefit is the same as for the capitalist who introduces new machinery that allows him to sell below his competitors but reap a surplus profit. This notion of foreign cheap labour points to a theory of imperialism, which was later developed by Lenin.

The expansion of the world market (“globalisation”) has allowed a massive increase in investment, production, and sales. There has been a massive increase in the export of capital. The collapse of the Soviet Union and the restoration of capitalism in Russia, Eastern Europe, and China, have provided capitalism with new markets and areas of exploitation. This allowed some two billion people to enter the world capitalist market. The “liberalisation” of the developing countries, including privatisation of basic utilities, also opened up possibilities for new investment, all of which allowed the rate of profit to increase during this period.

The final point that Marx mentions, but says will need more detailed consideration later, is that with the development of capitalism “one portion of capital is considered simply to be interest-bearing capital.” 18  He feels that this does not affect the level of the general rate of profit as such capitalists are content with a lower rate of interest, for instance, investments in railways, which do not enter into the general rate of profit.

In other words, what we are dealing with is only a tendency which manifests itself over the whole history of capitalist development. “The law operates therefore simply as a tendency, whose effect is decisive only under certain particular circumstances and over long periods”, explains Marx. 19 Thus, there can be long periods, even decades, where the tendency of the rate of profit to fall is cancelled out by the above counteracting tendencies. These can cut across the process and even reverse it, but not indefinitely. Eventually, this downward tendency will reassert itself and act as a further barrier to the development of capitalism.


The TRPF in practice

In his book The Current Crisis written in 1987, Mark Glick published the following figures for the long-term rate of profit in the United States:

            1899 – 22 per cent

            1914-18 – 18 per cent

            1921 – 18 per cent

            1929 – 12 per cent

            1932 – 2 per cent

            1939 – 7 per cent

            1945 – 23 per cent

            1948 – 17 per cent

            1965 – 18 per cent

            1983 – 10 per cent

So, from an historical point of view, we see that, leaving aside the inevitable cyclical fluctuations, the rate of profit in 1983 was lower than it was a hundred years ago. However, for whole periods this tendency has been reversed. In the post war period, the rate of profit began to fall roughly from the mid-1960s to its low-point in 1983. Then, with the onslaught against the working class, coupled with a whole host of the counteracting tendencies described above, the rate of profit began an ascent, with various ups and downs, that was to last approximately 30 years, up until the emerging crisis of 2008.