The Capitalist Crisis and the Tendency of the Rate of Profit to Fall

[The following article was originally 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.

These 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.

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 2007.

“The rate of profit in the major G7 economies peaked in 1997; it fell sharply to 2001 and then recovered up to 2007”, states Michael Roberts in January 2009.

The slump of 2000-1 had hit the US particularly hard. But by 2005, profits had dramatically recovered almost to 1997 levels, which “was the highest level of profits reached since the 1960s”, explained Roberts (September 2005). This process was confirmed by figures produced by Robert Brenner. “Between 1965 and 1973, US manufacturers sustained a decline in the rate of return on their capital stock of over 40 per cent”, states Brenner.20

In the same period, the rates of profit in the manufacturing and private business sectors fell by 40.9 per cent and 29.3 per cent, respectively. “Profitability in the US economy thus began a downward trajectory that would not bottom out until the early 1980s.”21 Thus we saw a reversal. “It is true”, states Brenner, “that the profit picture has improved significantly for US firms in recent years – between 1989 and 1997, corporate profits increased about 82 per cent and the corporate rate of profit by 27.8 per cent.” 22 

During the decade of the 1990s, “profitability has rebounded significantly”, states Brenner.

“Despite the weakness of the cyclical upturn, the rate of profit in the private business sector has increased steadily over the course of the 1990s. By 1996, it had, for the first time since the start of the long downturn, decisively surpassed its level of 1973, achieving its level of 1969, 20-25 per cent below its boom time peaks. By 1997, it had almost certainly come back even further, for in that year, profitability in the corporate sector (for which the most recent data is available) had returned to within 15 per cent of its 1960’s highs. Making this recovery possible was, in part, the resiliency of the non-manufacturing sector, where profitability had never fallen all that greatly, had made significant recoveries in both the late 1970s and early to mid-1980s, and had risen over the course of the 1990s above its 1969 level, to within 15-20 per cent of its heights in the boom.

“But the truly dynamic element was obviously the manufacturing sector: rising by 25 per cent above its average for the second half of the 1980s, 100 per cent above the terrible lows of the early 1980s, and about a third above the levels registered at the end of the Keynesian 1970s, the manufacturing profit rate managed by 1995 and 1996 to exceed its level of 1973 for the first time and to come to within about 30 per cent of its level at the peak of the boom.”23

Brenner concludes: “the US profitability recovery has been very major and its positive economic effects very real.”24

Rise in profitability

According to Andrew Kliman: “Finally there was a sharp rise in profitability in the middle years of this decade [2000s]. As we know, however, it was driven by an asset bubble and was not a sustained recovery. Revised and updated Bureau of Economic Affairs data indicate that the rate of profit fell from a peak of 25 per cent in 2006 to 17.9 per cent in 2008.”25 Clearly in 2008, there was a massive fall in production, which drove down profit rates. The rate of profit peaked in 2006 and then began to fall in 2007 with the onset of the financial and banking crisis following the bursting of the US housing bubble in 2005.

Fred Moseley, the author of The Falling Rate of Profit in the Post War United States Economy, states in an interview in March 2008 that “there has not been a complete recovery of the rate of profit in recent years. I don’t want to overstate it. There are different measures of profit rates, but according to my estimates, which are for the total business sector of the economy, by 2006 the rate of profit was within ten per cent of its earlier post war peak.

“Mid-2006 was the peak of its current profit cycle. The profit share and profit rate have declined a bit in the last year or so, and the trajectory seems to be down right now.

“But there was a substantial recovery in the rate of profit. The rate of profit had declined roughly 50 per cent from the peak of the sixties to the trough of the 80s. At least half of that previous decline - I would say, more than half of the previous decline - was reversed.

“Today, profits are, by almost any measure, a lot better than they were in the 70s and 80s.

“Bear in mind also a couple of additional considerations. One is that these statistics are for the domestic US economy. They do not include foreigh profits; and foreign profits are an increasing share of total US corporate profits. Thirty or forty years ago they were less than 10 per cent, today they are 30 per cent. None of that gets counted in the official US govbernment estimates of profit rates.

“In sum, I would argue that there has been a substantial recovery of profit rates. Maybe not complete, and we may disagree a few percentage points on the extent, but a substantial recovery.”

He goes on to argue that this increase in the rate of profit has been mainly due to the holding down of wages and an increase in productivity. “In Marxist terms, that reduced necessary labour time and increased surplus labour time, and therefore increased the rate of surplus value. Over the three decades, we’re talking about the rate of surplus value has approximately doubled...”

Another author who analysed the present crisis, Graham Turner, also recognises, that “profits rose strongly after the dotcom recession. They did not quite reach the dizzying heights of 1950 during the long post-war boom, but they were not far short.” He goes on to say that “much of this was due to rising profits from overseas”, a counteracting factor that Marx talks about in Capital. “Domestic non-financial profits rose slowly during the boom.”26

“Globalisation was a classic countervailing force, but it subsequently turned from being virtuous to vicious”, explains Turner. “It led to a stunning collapse in production and output, and the sudden emergence of enormous excess capacity. And it triggered a wave of job cuts, as companies reacted with a vengeance to the inevitable slump in profits by exporting more capital and squeezing labour costs.”27

He correctly adds that, ”Falling output and such huge excess capacity destroyed profit margins, even as raw material costs fell. In Japan, the decline was seismic. Profits fell by more than two-thirds. Within manufacturing, profits disappeared altogether, as industry recorded a loss for the first time on record…

“Across the West, the decline in profits was initially driven by the rise in raw material costs, as commodity prices soared in the early months of 2008. But the biggest drop came after the credit crunch hit consumer demand. Falling demand, when firms had already been struggling to use their available capacity, caused profits to implode...”

“Not surprisingly, one of the most heavily impacted industries was capital goods. With so much excess capacity, there was little need to expand existing facilities. That is why Japan and Germany, both major exporters of capital goods, were hit so hard by the credit crisis of 2008. In Germany, foreign demand for capital goods tumbled by nearly half. In Japan, foreign demand for machinery fell by nearly three-quarters in the year to February 2009.” What Turner, not being a Marxist, is describing is a classic crisis of over-production, but uses the term excess-capacity instead.28

He says the following about profits: “Data published by the Bureau of Economic Analysis in the US strongly supports the argument by those who claim the economic crisis of 2008 was attributable to a declining profit rate.” (Ibid, p.130-1) But this conclusion is not supported by the facts as laid out by Turner. He goes on:

“Superficially (!), it would appear (!) that US companies have seen a secular improvement in their profits during recent years. Looking at total profits in relation to the economy, it is hard to see why there was such a collapse into a deep recession in 2008.

“The ratio of profits to GDP fell sharply during the dotcom recession, dropping to 7.0 per cent in the third quarter of 2001. But aggressive central bank reflation, the rapid rise in house prices and a determination to keep a lid on labour costs, partly through outsourcing, saw the profits to GDP climb steadily. It reached a high of 12.9 per cent in the third quarter of 2006. This was far short of the post-war high, when the profits to GDP ratio hit 13.3 per cent in the fourth quarter of 1950.

“Since 2006, the collapse of house prices has precipitated a swift drop in the profits to GDP ratio. It fell to 8.9 per cent by the fourth quarter of 2008, before rebounding to 9.3 per cent in Q1 2009. But there is nothing in any of this to connect profits or the over-accumulation of capital to the current credit crisis. Profits appear not to have been under pressure during the upswing. And even in the downturn, they remain above their historic low reached in the fourth of 1982, when the profits to GDP ratio dropped to 6.3 per cent.”29

He continues: “the ratio of profits to investment spending did rise during the housing boom, climbing from a cyclical low of 61.2 per cent in the third quarter of 2001 to 19.6 per cent five years later. The profit rate has since fallen, but again, the decline is not particularly striking. It was down to 84.1 per cent by the end of 2008, but that was still above the dotcom low. And again it rebounded in Q1 2009, to 98.4 per cent.”30

Turner admits that these profit rate figures are not the way Marx would have calculated them. These are bourgeois statistics which do not define figures in Marxist categories, such as constant capital or variable capital. There have been various attempts to do so, but this is an impossible task given the way such statistics are compiled, including the Bureau of Economic Analysis. In addition, companies, for different reasons, either attempt to inflate or deflate their profits to avoid taxes or increase the values of their shares. General Electric, the biggest US manufacturing company, was fined several million dollars in August 2010 for falsely inflating its profit figures. There are many things these days that distort profit figures, rendering a precise picture impossible. Nevertheless, despite all these massive problems and disparities, the figures produced by different sources can provide a rough guide to the situation.

Turner continues, “Looking at domestic profits is an entirely different matter. At the top of the housing boom, more than a third of US company profits were being earned abroad. Indeed, by the fourth quarter of 2008, overseas profits had risen to a record 45.6 per cent of domestic profits.”31

Turner’s argument centres on the figures of US domestic profits and those earned abroad. But this is not an appearance, but a fact. It also represents a misunderstanding of Marx. As we saw earlier, Marx never made this distinction between domestic and foreign-earned profits. In fact, he stated that foreign trade would serve as a counteracting tendency in regard to a falling rate of profit. It was for him an important addition to the process. And this was clearly the case in the past period with the intensification of so-called globalisation and the exploitation of new markets.

“Furthermore, a growing share of domestic profits came from the financial sector. During the 1950s and 1960s, an average of 31.1 per cent of domestic profits derived from the finance sector. That grew to a peak of 45.3 per cent in the fourth quarter of 2001. Finance was responsible for a third of domestic profits at the end of 2006, before the slide in house prices began to take its toll on bank earnings.”32

The problem is that Turner and many others besides have accepted consciously or unconsciously capitalist definitions of costs. They view rent (for the landlords) and interest (for the bankers) as costs, when for Marxists these are part of the surplus value produced by the working class. These should be included in the real rate of profit and not excluded. The massive increase in the share of profit going to the banks and financiers only means that the division of surplus value between the ruling class has changed. Finance capital has become increasingly dominant and is now taking an increasing proportion of the surplus value. In addition, the banks are involved in all kinds of investments, not only lending to industry, but also investing heavily in the property market, at least up until the crash. The attempt to exclude “financial” profits from the equation in order to depress figures for the rate of profit is therefore wrong.

In any case, non-financial corporations like General Electric, Ford and General Motors have increasingly engaged in financial operations from the 1990s onwards. The tentacles of finance capital and industrial capital have become entwined.

Turner nevertheless makes the point that “it is worth stressing again that the crisis has not been caused by falling profit rates per se. The profit rate does not actually fall until after the crisis has manifested itself in the finance sector.” In his opinion, “it is the desperate attempt by companies to try and drive profit rates higher – back to levels not seen since the 1950s and 1960s – that leads to the crisis.”33 If he means by this the squeezing of the working class through relative and absolute surplus value, then he has a point. But this, as we have explained, is only one side of the picture.

Rather than explaining crisis in terms of the rate of profit, Marx explains that “the market expands more slowly than production… there comes a moment at which the market manifests as too narrow for production. This occurs at the end of the cycle. But it merely means the market is glutted. Over-production is manifest.”34 And again, “Over-production is specifically conditioned by the general law of production of capital: to produce to the limit set by the productive forces, that is to say, to exploit the maximum amount of labour with the given amount of capital, without any consideration for the actual limits of the market or the needs backed by the ability to pay; and this is carried out through continuous expansion and reproduction and accumulation…”35

Lowering Profitability

This explanation of crisis is repeated again and again throughout Marx’s works. The present crisis was not caused by a crisis of profitability, but certainly resulted in one. When there is a slump in production, this will mean a fall in sales, which in turn, cuts into profits. The rate of profit falls, as does the mass of profit. The crisis, however, was a result of a massive over-production of consumer and capital goods which the market could not profitably absorb. When the capitalists cannot sell their products, the rate of profit is zero. In fact, it is less than zero as the total value of the commodity is written off. At best, they slash their prices to below their cost of production in an attempt to shift them. It was this that had its impact in lowering profitability. In fact, the mass of profit collapsed as a consequence of the collapse in output. “Excess capacity” grows as the big corporations attempt to stem over-production and curtail their losses. As a consequence, factories and production lines are closed, workers are put on short-time and machines are left idle. Giant blast furnaces and plant are shut or “mothballed”. As explained, once over-production occurs, sales fall, the market shrinks, production is cut back and profits tumble. It was as a consequence of an inability to sell the commodities that relentlessly poured onto the market as the market collapsed, which in turn led to a collapse in the mass of profit. It produced what Marx described as a problem of realisation of surplus value, an inability of the capitalists to turn commodities into money, the real aim of their activity.

Over-production, the fundamental cause of crisis, was beginning to manifest itself at the height of the boom in 2005-6, where supply was outstripping demand. In general, as Marx explained, over-production develops precisely at the height of a boom when profitability is high (“at the end of the cycle”, to use his words) and appears well before a fall in the mass of profit that accompanies a slump. This capitalist crisis not only drives down the rate of profit, which started to slide, but more importantly, drives down the mass of profit as the economy comes to a standstill.

By 2008, the massive crisis of over-production had produced a big fall in the rate and eventually the mass of profit by the last quarter of that year. This is, however, hardly the long-term trend that Marx talked about, and the fall in the rate of profit is very much a consequence of the crisis of over-production. This crisis was certainly not due to a single factor, but a whole series of factors that were to culminate is a massive crisis of over-production. “In world market crises”, explained Marx, “all the contradictions of bourgeois production erupt collectively.”36

Today’s capitalist crisis can only be really understood, not in reference to this or that secondary aspect, including the rate of profit, but through an appreciation of its contradictions in its wider historical context. The present crisis is not a cyclical crisis, but an organic crisis rooted within the system itself. It is a reflection of the epoch of capitalist decline, where the system has exhausted itself. The productive forces have been strangled by private ownership and the nation state, a fundamental contradiction ignored by our acedemic “Marxists”. The decline of capitalism will not be a straight line, but affected by intermittent ups and downs, crises and convulsions, which has nothing to do with the episodic movements in the rate of profit and everything to do with the inherent barriers to capitalism in its old age. Capitalism has now reached its limits. This essential character, together with all its implications, is ignored by all those who are mesmerised by a mechanical explanation of crisis, simply reducing the cause of crisis to this or that particular aspect.

The capitalist system was able to put off deep crisis for a whole historical period. Now all the contradictions have risen to the surface. While there are many reasons for capitalist crisis, the over-riding reason is over-production. This was explained by Ted Grant long ago, who underlined what Marx had written:

“The fundamental cause of crisis in capitalist society, a phenomenon peculiar to capitalist society alone, lies in the inevitable over-production of both consumer and capital goods for the purposes of capitalist production. There can be all sorts of secondary causes of crisis, particularly in a period of capitalist development – partial over-production in only some industries; financial juggling on the stock exchange; inflationary swindles; disproportions in production; and a whole host of others – but the fundamental cause of crisis lies in over-production. This, in turn, is caused by the market economy, and the division of society into mutually conflicting classes.”37

However, what is striking about the last 30 years, despite the successful attempt to drive up the rate of profit by a whole range of means, as explained above, the capitalists were never able to restore the profit rate to the levels of the post-war upswing. Despite all their attacks and efforts over this period, they failed in this regard.

Today, there has been a recovery in the rate of profit since 2009 following the destruction of capital and its values arising from the crisis. Profits in the US corporate sector are 25-30 per cent greater than before the recession. But despite this fact, there has been no return to “normality”. Those who regard profitability simply as a gauge to the health of capitalism must be scratching their heads. Despite the boost to profits, there has been no investment and no recovery. “Profit margins are not only very high today”, states Andrew Smithers, who runs a London consultancy, “but [companies’] behaviour has been very unusual.”38 What he means by “unusual” is that there is no investment and without this there can be no boom. The reason for this is the massive over-hang of personal, corporate and government debt, which kept capitalism afloat in the past period, but has now undermined demand. Without potential sales and an expanding market, there will be no incentive to produce or invest. That is why large parts of the world are either slowing down or in recession, while mass unemployment is growing. Once again, this is a reflection of a structural crisis of capitalism and nothing to do with the normal boom and slump cycle.

Lenin said that politics is concentrated economics. For Marxists, the science of economics is not a matter of abstract debates in academic circles but an instrument for changing society. The economic impasse of capitalism provides the ground for an unprecedented upswing of the class struggle. The stormy period that lies ahead will shake society to its foundations, transforming the consciousness of the working class and preparing the way for the overthrow of the capitalist system and the establishment of a new and higher order of society - socialism.


1. Capital, vol.1, p.164, Lawrence &Wishart 1977 edition

2. Ibid, p.224

3. Capital, vol.2, p.209, Penguin

4. Capital, vol.1, p.407

5. The Theory of Surplus Value, vol.2, p.541

6. Grundrisse, pp.748 and 754, Penguin

7. Ibid, p.748

8. Ibid, p.762-3

9. Capital, vol.3, p.319, Penguin

10. Ibid, p.317

11. Ibid, p.331

12. Ibid, p.331

13. Ibid, p.323, our emphasis

14. Ibid, p.337

15. Ibid, p.339

16. Ibid, pp. 341-2

17. Ibid, pp.344-5

18. Capital, vol.1, p.347

19. Capital, vol.3, p.346

20. The Economics of Global Turbulence, p.93, New Left Review 1998

21. Ibid, p.95

22. Ibid, p.246

23. Ibid, p.252, emphasis in original

24. Ibid, p.256

25. The persistent fall in profitability underlying the current crisis: new temporalist evidence, 2009, pp.23-4

26. No Way to run an Economy, p.119

27. Ibid, p.121

28. Ibid, p.124-7

29. Ibid, pp. 131-2

30. Ibid, pp. 133-4

31. Ibid, p.135

32. Ibid, p.136

33. Ibid, p.138, our emphasis

34. Theories of Surplus Value, vol.2, p.524

35. Ibid, pp.534-5

36. Ibid, p.534, our emphasis

37. The Unbroken Thread, pp.394-5, emphasis in original

38. Financial Times, 15/12/11

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