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

latuff-fallen capital-thumb[The following article was orignially published in the summer issue of our theoretical magazine In Defence of Marxism] In the last issue of the In Defence of Marxism magazine we polemicized against the theory of “under-consumption” as an explanation of capitalist crisis. In this issue, we wish to look at Marx’s law of the tendency of the rate of profit to fall.

Illustration: LatuffIllustration: LatuffThese days there is considerable confusion about the tendency for the rate of profit to fall, not least in academic circles. This confusion arises from a one-sided undialectical view, which isolates one element in Marx’s economic theory and exaggerates its significance far beyond Marx’s intention. During the 1960s, the defence of Marx’s ideas about the falling rate of profit against bourgeois critics was no doubt necessary and progressive. Today however it has developed into a kind of infatuation, a veritable obsession of academic “Marxists” who lack any knowledge of dialectics and are incapable of seeing the process as a whole.

In these circles, it has become fashionable to reduce the whole of Marx’s theory of crisis to this one element. What Marx regarded as a tendency (he was very careful to use that term) has been elevated into an absolute principle, a kind of economic Philosopher’s Stone that can seemingly explain everything. If things were as simple as that, one wonders why Marx took the trouble to write three (in reality four) hefty volumes to explain the workings of capitalism.

In reality, there are a host of interacting causes of crisis, some fundamental, others secondary, one of which can be the falling rate of profit. However, for some, it has become a new orthodoxy; the unique reason for capitalist crisis, even to the point of claiming to be able to predict when, where and why a crisis beaks out! Seemingly, armed with a knowledge of profit rates, one can predict almost anything. When profits are up, we are in a boom; when profits are down, we are in a slump! But nothing is that simple or mechanical. Today’s recovery in profit rates is accompanied by deepening crises and collapsing demand in Europe. This in turn has produced a global slowdown, especially in China, Japan, India, and South Korea. This is a reflection of the organic crisis of capitalism as we experienced in the 1930s.

Strangely enough, even Marx himself, with years of study behind him was unable to accurately predict crises. This was not Marx’s method or intention. Clearly he should have waited a hundred years so as to be educated by the “Prophets of the Falling Rate”. Sadly, however, every attempt to predict capitalist crises by this nostrum has been wide of the mark, including this latest crisis. Some say they predicted the 2008 slump, but they have been making the same prediction every year for 20 years! Such “predictions” are two a penny. Needless to say, a stopped clock is normally correct twice in every 24 hours.

Today, we have the sorry spectacle of different schools of academic “Marxists”, established to argue over their rate of profit, based upon their interpretations and calculations. But as Mark Twain said, “there are lies, damned lies, and statistics.” Like the medieval Schoolmen arguing over the sex of angels they squabble over the minutiae of statistics to prove that they, and not the other side, are correct. Needless to say, we are none the wiser after this “debate” than we were beforehand. The whole thing has become quite sterile and reveals a mechanical undialectical approach to this as well as other subjects.

Let us try to put Marx’s idea in its proper context. Although the law of the tendency of the rate of profit to decline was important to Marx, it was not regarded by either him nor Engels as the main cause of crisis or focus of Marxist economics.

Labour theory of value

In volume one of Capital, Marx shows how surplus value is produced. He explains that the capitalist finds in the market place a particular commodity, which, unlike all other commodities, is the source of values greater than its own value. This commodity is labour power. Marx defined it as the “aggregate of those mental and physical capabilities existing in a human being”.1 The purchase and use of these “mental and physical capabilities”, the physical and mental muscle of the labour process, constitutes the exploitation of the working class. In contrast, labour – or the labour process - is the work that adds value to the raw materials.

After purchasing labour power for a wage intended to keep the worker and his or her family going, the capitalist proceeds to put his hired hands to work. While the worker has a contract to work for let us say 8 hours, he covers the value of his wage in perhaps 4 hours. This initial period Marx describes as necessary labour-time. But once covering the value of his wage, he does not stop work but continues until the end of his 8-hour shift. This extra period beyond the necessary part is where the worker produces surplus value for the capitalist, and is described by Marx as surplus labour-time. This is unpaid labour and is where capitalists’ profits come from.

The value of the raw materials and the power used up in the production of the commodity do not create new value, but simply transfer their existing value to the new product. This includes the wear and tear of the machines, which only gradually transfer their value, known as depreciation. Labour (combined with nature) is the source of all new value, including surplus value. A plant containing machines and raw materials, if left idle, will simply rust away and eventually ruin. However, as soon as human labour is applied to these things, new commodities and new values are created. This is the source, and the only source of surplus value. A machine simply increases the productivity of human labour and allows the labour power to be consumed at a greater intensity.

All the existing value from past labour contained in the raw materials, etc., is transferred to the new commodities. This Marx calls “dead labour”, as opposed to the new value added, which Marx describes as “living labour”. He compares it to a blood-sucking vampire. “Capital is dead labour”, explains Marx, “that vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” 2

The driving force of capitalism is the production of surplus value. The capitalist is determined to squeeze the last drop of profit from the unpaid labour of the working class. He does this through a combination of ways: lengthening the working day, speeding up the machines, introducing labour-saving machines, rationalisation, productivity deals, new shifts, time and motion studies, lean production techniques, etc. These are techniques workers have become very familiar with, especially over the last 30 years or so.

The total capital invested by the capitalist was considered by Marx as follows. The capital made up of means of production, raw materials, power, etc., is deemed constant capital, as it simply transfers its value to the new commodities. The value they impart is fixed. However, the capital represented by labour power (wages) is regarded as variable capital, as it is the source of all new value. The amount of value it imparts is not fixed, but expanding. Therefore, total capital can be presented as c + v, where c is the constant part and v is the variable. It follows that the total value of all commodities is made up of c + v + s, where s represents the surplus value. As the surplus value is “locked up” inside the commodity, the capitalist can only realise this surplus value when the commodities are sold. Thus, surplus value is created only in production, but only realised in exchange, in the market place.

If the working day is divided between necessary-labour and surplus-labour, the rate of surplus value is the ratio between the two portions of the working day. The greater the surplus, the greater the rate. It is exactly the same ratio as between surplus value and variable capital, namely s/v. In simple terms, the rate of surplus value is the rate of exploitation of labour by capital, or the worker by the capitalist. The capitalist class forces the working class to perform more labour than required to cover their means of subsistence, thus producing surplus value.

Of course, the capitalists attempt to conceal this exploitation. They say they buy the workers’ labour rather than the workers’ labour power. But this is not true. The capitalists would not employ workers unless they could make a profit, and the unpaid labour of the workers is the source of this profit. While exploitation is transparent under feudalism, as the serf labours on the lord’s land for free for so many days, under capitalism, surplus and necessary labour performed by the worker are not separated in time and space. It is therefore not so obvious.

“The essential difference between the various economic forms of society, between, for instance, a society based on slave labour, and one based on wage labour,” explained Marx, “lies only in the mode in which this surplus labour is in each case extracted from the actual producer, the labourer.” 3

Of course, such categories are rejected by bourgeois economists, whose role it is to disguise the exploitation that exists. The concepts of Marx are therefore an anathema to them.

Through competition, the capitalist is forced to invest to produce commodities more cheaply than his rivals. Capital is therefore a self-expanding value. Accumulation is a compelling law of capitalism. Capitalism had become “accumulation for accumulation’s sake”, explained Marx. “Production for production’s sake.” Those industries where the productivity of labour lags behind the average are driven out of business by those using the most up-to-date methods. In this way, the introduction of machinery increases the productivity of labour, and reduces the necessary labour time (thereby increasing surplus labour time). It allows those who introduce new techniques to sell their products above their individual value (the labour time it costs to produce them) but less than the average cost, thereby gaining super profits.

Competition leads to a concentration and centralisation of capital. This process  results in bigger and bigger factories with the most modern equipment and technique. Whereas in the past the chemical giant ICI would spend £2m for a plant, these days it would pay around £600m. This accumulation of capital is a key characteristic of capitalism, and constitutes the historic mission of capitalism to develop the productive forces. The driving force of capitalist production is not the satisfaction of human need but the production of surplus value at an ever-increasing rate, a large part of which must be accumulated and incorporated into new means of production.

This drive to introduce labour-saving machines leads, however, to a relative decrease in variable capital (labour power) to constant capital (means of production, raw materials, etc). While there is a relative decrease in labour power to that invested in constant capital, this nevertheless results in more investment being placed at the elbow of every worker employed. Ultimately, however, the amount of surplus value obtained by the capitalists depends upon two things: the rate of surplus value and the number of workers employed.

Clearly, the introduction of machinery tends to reduce the number of workers and therefore changes the ratio between variable and constant capital, the relationship between dead and living labour. Marx described this process as a rising organic composition of capital. This inevitably leads, all things being equal, to a declining rate of profit. “Hence, the application of machinery to production of surplus value,” explains Marx, “implies a contradiction which is immanent in it.” 4

The Grundrisse

Marx was not the first to discover the tendency of the rate of profit to fall. The founders of classical political economy, most notably Adam Smith and David Ricardo, had already been aware of it. Ricardo, in particular, was very worried about its implications. However, their explanations were deficient and undeveloped.

“According to Ricardo’s theory of rent, the rate of profit has a tendency to fall, as a result of the accumulation of capital and the growth of the population, because the necessary means of subsistence rise in value, or agriculture becomes less productive.

“Consequently accumulation has the tendency to check accumulation, and the law of the falling rate of profit – since agriculture becomes relatively less productive as industry develops – hangs ominously over bourgeois production. On the other hand, Adam Smith regards the falling rate of profit with satisfaction. Holland is his model. It compels most capitalists, except the largest ones, to employ their capital in industry, instead of living on interest, and is thus a spur to production. The dread of this pernicious tendency assumes tragi-comic forms among Ricardo’s disciples.” 5

“It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated”, explained Marx. Ricardo in particular mixes up the rate of surplus value with that of profit. He made the fall in the rate of profit dependent on the so-called diminishing returns from land, which led Marx to quip, “He (Ricardo) flees from economics to seek refuge in organic chemistry”! 6

It was left to Marx to undertake a thorough study of this law - or tendency as he preferred to call it. At one point, Marx describes this tendency for the rate of profit to fall in his notebook as “in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint.” 7 

This phrase is constantly repeated by the fans of the TRPF as positive proof that Marx considered this as the most important element in his economic theory. However, this bold assertion does not stand up to even the most cursory scrutiny. In the first place, if Marx really believed this to be the most important question, he would certainly have repeatedly emphasised it. Yet, apart from the unpublished Grundrisse, the expression was only ever again used in another unpublished work called the Economic Manuscripts of 1861-63. These are the only two references where Marx uses this expression in the entire 50-volume Marx and Engels Collected Works.

It does not appear in any of the published works, and there is not a mention of it in any of the three volumes of Capital or the Theories of Surplus Value. Nor is it ever mentioned in the voluminous correspondence of Marx and Engels. If Marx had discovered that the tendency of the rate of profit to fall was “the most important law of modern political economy”, one might well ask why he never mentioned this “eureka” moment in any of his detailed correspondence with Engels, his closest collaborator, or anyone else for that matter.

The Grundrisse, a collection of rough notebooks, were only published after Marx’s death. They contain only the “first cut” of his ideas, so to speak. These ideas were as yet not fully worked out and were written only as notes for self-clarification. Because of this, Marx apparently contradicts himself on the tendency of the rate of profit to fall. Only a few pages after referring to it as “the most important” law, he then describes it as “the second great law”, among the “two immediate laws”.

The first law he describes as “surplus value expressed as profit always appears as a smaller proportion than surplus value in its immediate reality actually amounts to.” He underlines this sentence, by which to emphasise that the rate of profit is always smaller than the rate of surplus value. Consequently, “the rate of profit never expresses the real rate at which capital exploits labour, but always a much smaller relation.” 8

The falling rate of profit is then referred to as the second great law. These apparent contradictions can only be explained by the fact that the Grundrisse was not a finished expression of Marx’s economic theories but a work in progress. Marx’s ideas were not yet completely crystallised. His final thoughts on the subject were expressed later in Capital in a far more complete form. But here, the reference to “the most important law of modern political economy” is dropped altogether. In other words, it is an isolated comment that has been taken out of context to prove something that cannot be proved. It was a casual remark, which Marx made in his preparatory writings for Capital. These represent his initial thoughts on the subject, which he later modified.

While the Grundrisse contains very valuable thoughts on many questions, they cannot be considered to represent the final expression of Marx’s economic theories. These are contained in Capital, especially in the third volume, where the theory of the falling rate of profit is explained at some length and in great detail. To tear out of context one isolated remark made in Marx’s notebooks and attempt to elevate it above the finished version of the theory in Capital volume three is neither scientifically rigorous nor particularly honest.