WHY THE PROFIT RATE MUST FALL
PART 1. INTRODUCTION
WHY THE PROFIT RATE MUST FALL
PART 1.
INTRODUCTION
The tendency of the rate of profit to fall is a necessary consequence of the evolutionary development of the capitalist mode of production, as it spreads through the world, conquers all the sectors of production and commerce, reaches its peak of expansion, and then enters into its declining phase. This was explained by Marx in Capital, Vol. III. There are extensive passages in Marx’s notebook, Grundisse, which demonstrate his reasoning in support of the necessary character of the tendency of the rate of profit to fall. Yet many academicians and writers who take Marx's works as their primary field of study do not agree.
In this essay, we will explain and defend Marx's conception of the law of the tendency of the rate of profit to fall in opposition to the arguments of Paul Sweezy that he developed in his 1942 book, The Theory of Capitalist Development. Sweezy, who seemed to many to be a leading defender of Marx's economic ideas in the post–WWII period, was the founding editor and publisher of Monthly Review magazine. Like many other left-wing writers of that period, Sweezy turned out to be an opponent of Marx's theory who mistakenly described himself as a Marxist and played a key part in misleading many students of Marxism of the late 20th century.
At the outset, it will help to briefly review the basic features of Marx's law of the tendency of the rate of profit to fall. As we explain how the course of development is governed by this law, we will gain insight into the historical rise and decline of the capitalist system (which Marx generally referred to as the “capitalist mode of production. “) The practical significance of the law of the tendency of the rate of profit to fall is that the rate of profit must fall in the normal course of events as the capitalist mode of production runs its course, passes through the stages of maturity and decline, and approaches its historical demise. This analysis assumes that the capitalist system is allowed to proceed in accordance with its own inner necessity, and is not destroyed by some external interference, such as catastrophic warfare or some massively destructive atmospheric cataclysm.
Due to the complexity of the many interacting processes that characterize economic developments on a world scale, it is not surprising that there are several counteracting influences that hinder the force and pace of development of the falling tendency of the profit rate, and Marx enumerates these. But we will show why these counterforces cannot, in the final analysis, prevent the profit rate from falling. Once the law is understood, it will be seen why it must inevitably dominate over the countertendencies.
After the preliminary outline of the features of the law, we will take on the views of Paul Sweezy and explain where he fails to correctly represent the law as he attempts to express in his own words Marx’s theory, but instead of faithfully reflecting Marx’s meaning, he introduces his own erroneous view. The views of Ben Fine and Laurence Harris, two academic Marxist writers, will also be briefly examined. These latter two are scholars who seemingly have followed in Sweezy's footsteps on this question, and have added their own refinements. It so happens that the most sophisticated critics of Marx tend to be those who are the most familiar with his writings, and they are generally writers who consider themselves to be Marxists, or who describe themselves as Marxists. One can access the writings of these would-be Marxists in the pages of such journals as Monthly Review, New Left Review, and Review of Radical Political Economics.
The tendency of the rate of profit to fall is an important consequence of the course of development of the capitalist mode of production, and one that, in its dependency on the underlying forces of capitalist development, demonstrates the historical limitedness of this stage of social evolution. Marx's analysis of the operation of this tendency has been energetically attacked by bourgeois economists whose unhistorical theories assume the perpetual existence of the capitalist mode of production (Eugen Bohm von Bawerk, for example, in Karl Marx and the Close of His System, 1896). Within the writings of these opponents of Marxism, there are occasional references to a general decline in the profitability of capital, for various reasons. The bourgeois economists, who see themselves as responsible for explaining how and why capitalism benefits the entire population, try to characterize the profit-driven actions of the capitalists as the sources of the satisfaction of general human needs, and regard profit as a just reward to those who boldly risk their wealth in meeting social needs. Marx, in contrast, characterized capitalists as “personifications of capital, “ unable to think and behave as workers as long as they remain trapped in their role of exploiters of wage labor. Further, Marx emphasized the historical limitedness of the bourgeois system, explaining how a progressive phase would be followed by a declining phase in which further growth would generate ever more powerful obstacles to its continuation. He commented this way on the state of mind of those economists who find themselves confronted with the possibility of a long-term decline in the profit rate:
“But the main thing about their horror of the falling rate of profit is the feeling that capitalist production meets in the development of its 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 the merely historical, transitory 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.” (Marx, 1962, p. 237)
As the capitalist crisis in its declining phase tightens its grip, the worrisome distress generated by weakening profits, increasing debts, and ever-riskier investments weigh heavily on the beleaguered minds of capitalists throughout the world. For the propertied class, and the economists who strive to serve them, it is terrifying to imagine that a long-term decline in production, exchange, and profitability could be the outcome of some underlying process originating within the nature of capitalism itself. That is why it has become second nature for them to assume that capitalism is a permanent feature of human social life. Most of them would deny any notion of a built-in self-destructive tendency in the capitalist economy. When the declining profitability is generalized throughout the economy as a whole (manufacturing, commerce, banking, construction, mining, transportation, etc.), and when it becomes unusually protracted, there must be some more fundamental explanation. But in practice, such a decline is likely to be disguised by its forms of appearance and is not even recognized at all. The capitalists and their agents find themselves unprepared to probe the inner structure of capital and its laws of evolution. Their education, training, and daily experience teach them to confine their thinking within the narrow framework of conflicting influences that forms the everyday ebb and flow of economic relations. Marx commented on the habits of thought that developed among the capitalists and those close to them: their lawyers, political representatives, advisers, and economists:
“. . . it is just as natural for the actual agents of production to feel completely at home in these estranged and irrational forms of capital—interest, land-rent, labor-wages—since these are precisely the forms of illusion in which they move about and find their daily occupation. It is therefore just as natural that vulgar economy, which is no more than a didactic, more or less dogmatic, translation of everyday conceptions of the actual agents of production, and which arranges them in a certain rational order, should see precisely in this trinity, which is devoid of all inner connection, the natural and indubitable lofty basis for its shallow pompousness.” (Marx, 1962, p. 809)
Faced with a general decline in profitability of capital investments, often the first response is that “this is temporary. “ The first question that arises is usually, “who is to blame for this? “ Any number of immediate or indirect causes for falling profits can be identified: poor management by the government or the central bank, excessive or unfair taxes, excessive government regulations (or their weakness), overcompensation of employees, increasing costs of raw materials, growing maintenance expenses, unfair international trade agreements, political/legal discrimination against companies or sectors of the economy, theft of intellectual property, scams propagated by inside traders or business rivals, Ponzi schemes, etc. And, indeed, these explanations are not necessarily wrong—but they are too limited, temporary, and superficial. None of these explanations can challenge or explain away the lawful evolution of the capitalist economy in the long term.
For the economists and investment specialists, once a problem is recognized, there is always a solution, or a range of potential solutions. But these supposed solutions are derived from the same temporary, conditional, and superficial categories that they are constantly juggling in their striving for profit maximization within the world of churning markets. Thus, when the economy suffers from slow growth, they offer recommendations for tax cuts, currency market manipulations, government spending deficits, stimulatory infrastructure spending, loosening credit requirements, lowering interest rates, sovereign bond buybacks, more advantageous trade pacts, technological modifications in production and commerce, etc. The purchase of gold and silver is often regarded as the last resort when the prospects for all paper assets seem dangerous.
At a certain point, late in the historical evolution of capitalism, as the crisis drags on, it seems to them that these strategems are losing their efficacy. Real profit rates cannot be restored to their previous levels, although they can be artificially raised—especially by increasing indebtedness—so that what is owed today can be put off until some distant future. A sense of hopelessness grows, generating increased disillusion and conflict. And even though they cling to the belief that capitalism is, in principle, a permanent and fairly stable system, the dire circumstances they are observing increasingly provoke them towards panic.
Marxists, on the other hand, are able to explain the historically transitory character of capitalism. Marx's study of the inner laws of development of the capitalist mode of production began with an evolutionary conception of change over time as a result of the unfolding of increasingly divergent forces. Capitalism accelerates the growth of the productive forces, which drives greater material output per unit of labor time; but as the productivity of labor grows, the reward to every capitalist investor—the ratio of profit per unit of capital investment—declines. This is analogous to the growth and demise of any biological organism: while the growth of the child produces maturity, the maturation of the adult generates the conditions of senescence and death.
But the law of the tendency of the rate of profit to fall does not function openly or constantly; it is not a calculated or mechanical process. It is a probabilistic tendency that makes its impact felt on the surface of events in an unpredictable way, with many reversals and interruptions. The action of the law generates counteracting forces, which delay, retard, or temporarily interrupt its functioning, and Marx carefully analyzes these forces. But it continues to gather strength the longer, and the more completely, the capitalist system develops its inner potential.
The more capital is developed as the exclusive form of the production of the world's goods and services, and the more the processes of production are governed by the needs of capital, the more does the tendency of the rate of profit to fall express itself as an actual reduction in average profits worldwide, and thus acts as a practical impediment to the further development of the productive forces as well a trigger to intensify the class struggle.
As for the capitalist system, it is the tendency of the average rate of profit to fall—over the long run and in the final analysis—that explains its historically temporary character. To understand the operation of this tendency is to come to grips with the logical dynamic of a mode of production that lives: like an organism or a species, it is born, it grows, it matures, it ages and ultimately becomes overwhelmed by its own inner contradictions. It can give rise to new forms of production and exchange, and thus perpetuate civilization on the earth for centuries to come. But there is no mechanism for the rejuvenation or resuscitation of a dying system, although its existence might be extended by artificial means for a limited period of time. But if artificial measures are implemented to prolong the capitalist form of society, they won’t be able to nullify its inner law of development.
As profit rates come under pressure, the capitalists who as a class depend on the maximization of the profit rate in order to accumulate wealth and prosper, feel a growing need to intensify the exploitation of the workers whose labor generates their profit income. More output per worker hour, or else more hours of labor per day, become pressing necessities for the profit-making process. It’s this growing intensification of labor exploitation that stimulates the outbreak of labor stoppages, the growth of labor unions, the moods of discontent among the laboring masses, and the increasing social and economic divergence between the owning class and the working class. These unavoidable changes point towards the unification and mobilization of working people—the immense majority of the population in capitalist countries—to use their force of numerical superiority to fight for political power.
We might add that although capitalism itself will perish, society as a whole, by mobilizing its accumulated achievements of human solidarity and technological creativity, will persevere, and humanity will reach a higher stage of development. This progression of human civilization to higher levels is a necessary consequence of the human capacity to create new and better solutions to technical problems, and to pass these on from generation to generation. Each generation builds on the achievements of previous ones. In addition, as the labor time needed to provide for the necessities of life gradually decreases due to technological progress, the portion of free time in each person’s life increases to the same degree.
BASIC FEATURES OF CAPITALIST ACCUMULATION
The falling rate of profit is rooted in the increasing productivity of labor as it develops under capitalism. As Marx explained,
“. . . the level of the social productivity of labor is expressed in the relative extent of the means of production that one worker, during a given time, with the same degree of intensity of labor power, turns into products. The mass of means of production with which he functions in this way increases with the productivity of his labor. But those means of production play a double role. The increase of some is a consequence, that of others a condition, of the increasing productivity of labor. For example, the consequence of the division of labor (under manufacture) and the application of machinery is that more raw material is worked up in the same time, and therefore a greater mass of raw material and auxiliary substances enters into the labor process. That is the consequence of the increasing productivity of labor. On the other hand, the mass of machinery, beasts of burden, mineral manures, drain-pipes, etc., is a condition of the increasing productivity of labor. This is also true of the means of production concentrated in buildings, furnaces, means of transport, etc. But whether condition or consequence, the growing extent of the means of production, as compared with the labor power incorporated into them, is an expression of the growing productivity of labor. The increase of the latter appears, therefore, in the diminution of the mass of labor in proportion to the mass of means of production moved by it, or in the diminution of the subjective factor of the labor process as compared with the objective factor.” (Marx, 1977, p. 773)
Within the capitalist regime, the means of production are not merely physical objects “implements, machinery, buildings, raw materials, etc. “ but they are also the underlying material substrate of the value invested by the owners of capital in order to produce profits. In order to begin the production process, the capitalist must provide all the necessary buildings, machinery, tools, auxiliary materials, raw materials, and semi-finished products. This part of the capital is called by Marx constant capital, since the value of this part of capital is not a source of new profit, or added profit. The value of constant capital is merely preserved by the laborers in the process of production and passes unchanged into the value of the product. Whatever value this constant capital represents is paid for by the capitalists in an exchange of equal quantities of value.
The other part of the value advanced for the purposes of profit-making Marx calls variable capital, to indicate that it is this part of the capital-value that provides additional value so as to render an increase in the value of the whole capital. Variable capital is exchanged for labor power, which passes into the hands of the workers in the form of wages. (Wages represent the value of labor power.) But what is really obtained by the capitalists in exchange for variable capital is living labor which creates more value in production than is paid for in the form of wages. The value created by the workers in the process of production, on average, is greater than the wages they receive in exchange for their laboring capacity.
Since the value created in production on a daily basis exceeds the daily value of the variable capital which corresponds to wages, there always remains a portion of new value, or unpaid labor value, provided by the laborers to the owners of the means of production. This increment Marx calls surplus value. The ratio of the surplus value to the variable capital is the rate of surplus value (or rate of exploitation), and the ratio of the surplus value to the whole advanced capital, constant and variable, is the rate of profit.
The tendency of the rate of profit to fall is a consequence of the long-term increase in the value of the constant part of the capital in relation to the value of the variable part. As Marx indicated, this changing ratio is both a consequence and condition of the rising productivity of labor, which is the increasing material output produced by the workers per hour. The increase of constant capital in relation to variable capital, which results from the growth in the productivity of labor, Marx calls the increase in the organic composition of capital.
Productive capital exists in the form of commodities that represent both use value and exchange value. As use value, they are material objects which are destined for consumption, whether by the final consumer or by another capitalist production process. Capital in production always has a ratio between the two forms of value, the value of all the material elements and the value of the capital expended for wages. The organic composition of capital must be recognized as being the result of changes both in use value and in exchange value. As Marx explained,
“The composition of capital is to be understood in a twofold sense. As value, it is determined by the proportion in which it is divided into constant capital, or the value of the means of production, and variable capital, or the value of labor power, the sum total of wages. As material, as it functions in the process of production, all capital is divided into means of production and living labor power. This latter composition is determined by the relation between the mass of the means of production employed on the one hand, and the mass of labor necessary for their employment on the other. I call the former the value composition, the latter the technical composition, of capital. There is a close correlation between the two. To express this, I call the value composition of capital, in so far as it is determined by its technical composition and mirrors the changes in the latter, the organic composition of capital. Wherever I refer to the composition of capital, without further qualification, its organic composition is always understood.” (Marx, 1977, p. 762)
If a manufacturing capitalist hires many laborers, who work with simple tools, most of the advanced capital is in the form of variable capital, and there is a relatively small constant capital value. In this case, the rate of profit is high, since all the surplus value produced by these laborers is appropriated by the owner, and the ratio of the appropriated surplus value to the advanced capital is relatively high. If, on the other hand, the capitalist purchases a highly mechanized productive apparatus, and hires relatively few workers to operate it, most of the capital advanced is non-profit-yielding constant capital, and the variable capital advanced to purchase the labor power is relatively small. In this case, the ratio of the surplus value produced by the few workers to the whole advanced capital is relatively low. Thus, as long as the average organic composition of the total social capital continues to rise, as a result of advancing productivity of labor, the value of the constant capital increases in relation to the value of the variable capital, and the rate of profit falls.
The rate of profit is the ratio of the surplus value appropriated by the capitalist, provided that the commodities are sold at prices that reflect their value. As we indicated above, competition forces capitalists to adopt more modern and productive equipment and methods, thus advancing the organic composition of capital. It is assumed here that surplus value is produced only by the workers in the process of production, not by the elements of constant capital. This conclusion is derived from an analysis of competition, which reveals that products are sold at prices that correspond to their values. If the elements of constant capital were sold, on average, above their value, thus signifying a profit for their seller, or below their value, signifying a profit for their buyer, this would annul the laws of price competition, and thus could not be a sustainable feature of commodity exchange. In practice, cheating does occur, but not as a basic law that governs the economic system in capitalist society. The existence of profit cannot be explained as generalized cheating, or robbery, because if all capitalists robbed one another, the robbery of one would be balanced by the robbery of another, and in the end, these transfers of value from one to another would cancel out. In the end, taking from one and giving to another cannot explain the creation of new value, nor can it explain how a social regime can reproduce itself and persist from generation to generation.
PRODUCTIVITY AND COMPETITION
Improvements in productive technology which boost the productivity of labor are driven by competition among the various capitalist enterprises within each branch of industry. Competition, in the final analysis, is price competition. As Marx indicated,
“Other things being equal, the capitalist's commodities can only command a more extensive market if their prices are reduced. He will therefore sell them above their individual value but below their social value. . . .” (Marx, 1977, p. 434) And further:
“No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it may increase the rate of surplus value, so long as it reduces the rate of profit. Yet every such new method of production cheapens the commodities. Hence, the capitalist sells them originally above their prices of production, or, perhaps, above their value. He pockets the difference between their costs of production and the market prices of the same commodities produced at higher costs of production. He can do this because the average labor time required socially for the production of these latter commodities is higher than the labor time required for the new methods of production. But competition makes it general and subject to the general law. There follows a fall in the rate of profit—perhaps first in this sphere of production, and eventually, it achieves a balance with the rest—which is, therefore, wholly independent of the will of the capitalist.” (Marx, 1962, p. 259)
The improvement of technology, or the better organization of production implemented by the capitalist, with the administrators and engineers helping to organize production, must reduce the total costs of producing a given quantity of commodities. If a new machine is purchased to replace living labor, the labor value represented in the machine must be less than the labor replaced by the machine. In this way, the cost of producing a given quantity of commodities is less. The total labor required to produce the given commodities, “both the labor time objectified in the means of production and that expended in the immediate process of production “ is lowered. Marx wrote,
With all application of machinery (let us initially look at the case such as it arises directly, that a capitalist puts a part of his capital into machinery rather than into immediate labor) a part of the capital is taken away from its variable and self-multiplying portion, i.e. that which exchanges for living labor, so as to add it to the constant part, whose value is merely reproduced or maintained in the product. But the purpose of this is to make the remaining portion more productive.” (Marx, 1973, p. 819) Elsewhere Marx noted:
“If a machine which cost 100 working days to make replaced only 100 working days, then it would in no way increase the productive power of labor and in no way decrease the cost of the product.” (Marx, 1973, p. 765)
Later in Capital, Vol. III Marx explained this relationship in another way:
“As demonstrated in Part III of this book, the rate of profit decreases in proportion to the mounting accumulation of capital and the correspondingly increasing productivity of social labour, which is expressed precisely in the relative and progressive decrease of the variable as compared to the constant portion of capital. To produce the same rate of profit after the constant capital set in motion by one labourer increases ten-fold, the surplus labour-time would have to increase ten-fold, and soon the total labour-time, and finally the entire 24 hours of a day, would not suffice, even if wholly appropriated by capital.” (Marx, 1962, p. 390)
Competition enforces the lowering of prices of commodities, which can only be achieved in the long run by lowering their values. Thus mechanization, the replacement of living labor by machinery, must be carried out in such a way that the total labor time socially required to produce a given commodity is less than it was before the new productive equipment was introduced. The problem of reducing labor time through better machinery, equipment, or organizational methods is a problem of science and its application to production. Although new technology may sometimes be introduced that raises the labor time required for the production of particular commodities, this is only possible as an exception, and cannot generally improve the competitive position of the capitalist who introduces such technology. The battle of competition is won by the capitalist with the lowest production cost.
SUBSTITUTION OF MACHINES FOR LIVING LABOR
However, it may not always be clear why technical innovation, automation, or mechanization, in the final analysis, must necessarily increase the mass of the means of production in relation to living labor, i.e. increase the technical composition of capital. Paul Sweezy, for example, in a 1981 lecture, tries to build a case for the possibility of substantial growth in the productivity of labor without substituting machinery for living labor. He argues:
“. . . Marx's law of the falling tendency of the rate of profit was rooted in the conditions of nineteenth-century capitalism. But it must be added that it loses plausibility when applied to the fully mature capitalism that emerged in the twentieth century.
“. . . The way for capitalists to increase labor productivity (and hence raise their rate of profit) can no longer be assumed generally to be through substituting machinery for living labor. It may equally well be through substituting more productive machines and processes.” (Sweezy, 1981, p. 52) To bolster this assertion, he then quotes Capital, Vol. I, where Marx states:
“A part of the functioning constant capital consists of instruments of labor such as machinery, etc., which are not consumed, and therefore not reproduced or replaced by new ones of the same kind until after long periods of time. . . . If the productiveness of labor has, during the using up of these instruments of labor, increased (and it develops continually with the uninterrupted advance of science and technology), cheaper machines, tools, apparatus, etc., replace the old. The old capital is reproduced in a more productive form, apart from the constant detail improvements in the instruments of labor already in use.” (Marx, 1977, p. 753)
But Marx's judgment here does not support Sweezy's view that substituting more productive for less productive machines differs from substituting machinery for living labor. These two processes are one and the same. The expression: “substituting more productive machines and processes “ cannot mean anything other than: “substituting machines (or processes) for living labor. A more productive machine is one that makes possible the production of more units of physical output per worker-hour, which is the same as saying that it produces the same number of units with less labor time. In other words, the ratio between machinery and living labor increases, or machinery is substituted for living labor. If one sets up a comparison between labor time, on the one side, and the mass of tooling and materials on the other side, it soon becomes apparent that as the tooling improves the ratio changes with less and less labor time in relation to the mass of material on the other side.
And it makes no difference whether this technological progress occurs in the nineteenth, twentieth, or twenty-first century. Modern machinery is a qualitative advance in the evolution of the instruments of labor, to be sure, but this advance, in itself, from its earliest days, has always involved the substitution of tools, or systems of tools, or instruments, for living labor. The advancing productivity also subsumes the introduction of more efficient and cheaper kind of motive force: from the human back, to the ox, to the water-wheel, to the steam engine, to the internal combustion engine, to the modern electrical grid running on fossil fuels. And the process of substituting better, more effective, tools for the ones currently in use, is quite synonymous with the substitution of tools, equipment, instrumentation, etc., for labor. Marx has pointed out:
“The increasing productivity of labor (insofar as it is connected with machinery) is identical with the decreasing number of workers relatively to the number and extent of the machinery employed. “In order to illustrate this principle, he continues, saying: “Instead of a simple and cheap instrument a collection of such instruments (even though they are modified) is used, and to that collection has to be added the whole part of the machinery which consists of the moving and transmitting parts; and also, the materials used (like coal, etc.) to produce the motive power (such as steam).” (Marx, 1971, p. 365)
Here Marx draws attention to the mechanization of handicraft industry, and not to the further mechanization of machine industry. But the increasing use of improved machinery and more efficient production methods only perpetuates and deepens the initial mechanization on its own basis, institutionalizing it, and spurring the growth of technological research and development, which, in their turn, provide the knowledge that feeds more revolutions in productive technology. Just as the first machine replaces a certain number of workers engaged in handicraft production of the given article, a better machine replaces yet more. Marx maintained:
“It is an incontrovertible fact that, as capitalist production develops, the portion of capital invested in machinery and raw materials grows, and the portion laid out in wages declines.” (Marx, 1971, p. 364)