Falling Rate of Profit

Part Three: The Law of the Tendential Fall in the Rate of Profit

Chapter 13 – The Law Itself

The basic point is very simple. With a given rate of SV, the rate of profit falls as the organic composition of capital rises.

This rising composition of capital is a corollary of the specific methods of increasing the productivity of labour characteristic of a capitalist society.

Thus “The progressive tendency of the general rate of profit to fall, is, therefore, just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour.” (p.209)

The falling rate of profit is not the result of a decline in the productivity of labour, but is an expression of the way in which it is increased in a capitalist society.

The falling rate of profit is quite compatible with an increase in the amount of SV and so profit, indeed it is necessarily associated with such an increase.

Thus the rate of profit falls because a large total SV is spread over a still larger total capital (because of the increasing organic composition).

Marx’s argument here gives rise to two fundamental criticisms:

  1. Although it is quite plausible that the technical composition of capital should rise steadily under capitalism, it is not so clear that the value composition will so rise. The value composition relates the value laid out in means of production to the value laid out in labour power and not the physical quantities. If the productivity of labour in producing means of production increases then the value of constant capital does not increase as rapidly as its quantity (more machines of a new type might be cheaper than fewer machines of an old type). Of course the value of labour power is also declining as the means of consumption are cheapened. But the point is that it is at least conceivable that if productivity increases in the production of MP run far ahead of productivity increases in the means of consumption then the organic composition may not rise at all. Marx in fact separates the influence of technical change and the influence of productivity change on the value composition of capital. In this chapter he ignores the effect of productivity change, so using the concept of organic composition of capital and not the value composition, and then brings in productivity change in the next chapter under the heading of the “cheapening of the elements of constant capital” as one of the counteracting influences on the falling rate of profit. Is he legitimate to treat the technical changes as more fundamental than the value changes (the former being considered in relation to the law as such, the latter relegated to counteracting tendencies)? As the capitalist is not concerned with increasing the productivity of labour, but with increasing the profitability of capital, Marx is probably not right. He probably makes this separation out of neatness of analysis in      distinguishing between the forces and relations of production.
  2. There is no a priori reason why the effect on the organic composition should outweigh the effect on the rate of exploitation. (An increasing productivity implies a rising organic composition and a rising rate of exploitation. While the rising oc reduces the rate of profit, a rising rate of exploitation increases it). It appears that Marx ignores the effect of the increase in relative SV consequent on increasing      productivity, and this is why he sees a tendency for the rate of profit to fall as being the fundamental tendency.It the last analysis it is an empirical question whether productivity will be sufficiently rapid for the increase in the rate of exploitation to counteract the increase in the oc so that the rate of profit rises rather than falls.

Finally, some people argue that the rate of profit will never in fact fall because of the rising oc.

The argument is that no capitalist will willingly introduce a method of production that involves a fall in the rate of profit, they would persist with old methods.

The rate of profit will therefore only actually fall if a fall is forced on capitalists, e.g. by rising wages.

Accumulation proceeds at the lower oc until the reserve of labour is absorbed, wages then rise and reduce the rate of profit and capitalists then introduce methods with higher oc in order to economise on labour.

The net result is then a higher oc and a lower rate of profit.

Thus the tendency for the rate of profit to fall does not manifest itself directly.

Doesn’t competition mean that individual capitalists try to get an advantage but overall they become worse off?


Chapter 14 – Counteracting Factors

In practice the rate of profit does not necessarily fall, because capitalists take a series of measures to sustain it.

The counteracting tendencies are:

  1. Increasing the intensity of exploitation
    1. By lengthening the working day
    2. By intensifying labour
  2. Reducing wages below the value of labour power “is one of the most important      factors checking the tendency of the rate of profit to fall”
  3. Cheapening the elements of constant capital. The value composition of capital may      not increase as much as the technical composition because the elements of      constant capital (raw materials and machines) become cheaper.
  4. Relative over-population. Accumulation provides a body of cheap workers who sustain branches of industry with low oc and high rate of exploitation.
  5. Foreign trade. Increases the rate of profit by cheapening the elements of constant and      variable capital. But also increases the rate of accumulation that in turn supposedly reduces the rate of profit.
  6. If some industries, e.g. railways, have a low rate of profit, this increases the rate of profit for other capitals by providing cheaper inputs.


Chapter 15 – Development of the Law’s Internal Contradictions

The role of crises in capitalism.

The main point Marx makes is that there are no limits to capitalist production of SV beyond the available population and the rate of SV.

But the capitalist then has to realise this SV by selling his commodities.

Thus capital has to constantly expand its market.

However, the more the market expands, the more capitalism develops, this higher mass of SV produced (despite the lower rate of profit), the more intense is the “contradiction between the conditions under which this SV is produced and those under which it is realised”.

Here Marx appears to be offering an underconsumptionist version of the theory of crisis, for he refers particularly to the limited consumer demand in a capitalist society, where consumption of the bulk of society is driven to a minimum, thus he seems to argue that the barrier to accumulation is the limited demand that means that the capitalist cannot sell all his products and so cannot realise his SV.

But Marx doesn’t develop this and the rest of the chapter doesn’t present the crisis in this light.

Thus an alternative interpretation is that a crisis appears as the inability of the capitalist to realise his SV, but that it has its origins elsewhere, in the conditions of production of SV.

The capitalist mode of production tends to develop the forces of production without limit, but this development comes into conflict with the need to produce and realise SV.

The overaccumulation of capital leads to a fall in the rate of profit that is checked by the “periodical depreciation of existing capital”, that itself upsets the circulation process, leading to a crisis and a stoppage of production.

Thus the contradiction between the forces and relations of production gives rise to a crisis that permits a renewed bout of accumulation by restoring the rate of profit, paving the way for another crisis.

Thus “the real barrier of capitalist production is capital itself”.

Not nature as the classics had argued.

The third section discusses the mechanism of the crisis.

The process of concentration of capital and the declining rate of profit reinforce one another: the higher the development of the productivity of labour and the organic composition of capital, the greater the advantages of the large capital. Thus a fall in the rate of profit hits the smaller capitals which are unable to survive. Thus a fall in the rate of profit produces both unemployed capital and unemployed labour.

This “overproduction of capital” (i.e. too much capital to be employed) implies overproduction of commodities (i.e. the redundant capitals cannot sell their commodities to realise their profit), but is essentially the “overaccumulation of capital”.

Marx looks at the case where overproduction is not characteristic of one industry, but of the economy as a whole.

This is the case where no more capital can be profitably employed, i.e. where an addition to capital will cause a sharp fall in the rate of profit.

This is the case when accumulation is checked by a shortage of labour so that wages suddenly increase.

Thus there is a fierce competitive struggle between capitals.

However, this increasing competition is not the cause of the decline in profitability.

Rather a decline in profitability precipitates the struggle.

If the rate of profit is to be restored then some of the capital must be removed.

This happens through the destruction of capital as factories close, the devaluation of credit, the losses made in the market, the depreciation of elements of fixed capital as prices fall.

All this leads to a commercial crisis and the collapse of credit.

On the other hand the crisis creates unemployment and the conditions for a fall in wages and so restoration of profitability, while the competitive struggle drives all capitalists to adopt the most advanced methods of production to economise on labour and to cut costs.

Thus the crisis prepares the way for a resumption of accumulation.

The overproduction of capital that precipitates the crisis is only an overproduction within capitalist social relations; it is overproduction in relation to the possibilities for profit.

  1. More Intense Exploitation of Labour
  2. Reduction of Wages Below their Value
  3. Cheapening of the Elements of Constant Capital
  4. The Relative Surplus Population
  5. Foreign Trade
  6. The Increase in Share Capital

General Considerations

A rising rate of surplus value (S/V) tends to be expressed in a falling rate of profit (S/(C+V)) as C grows.

“A falling rate of profit, then, expresses a falling rate of SV only if the ratio of C to V remains unchanged, or if V has risen in relation to C”

“A fall in the profit rate, & accelerated accumulation, are simply different expressions of the same process, in so far as both express the development of productivity. Accumulation in turn accelerates the fall in the profit rate, in so far as it involves the concentration of workers on a large scale & hence a higher composition of capital. On the other hand the fall in the profit rate again accelerates the concentration of capital, & its centralisation, by dispossessing the smaller capitalists & expropriating the final residue of direct producers…In this way there is an acceleration of accumulation as far as its mass is concerned, even though the rate of this accumulation falls together with the rate of profit.”

“On the other hand, however, the falling rate of profit slows down the formation of new, independent capitals & thus appears as a threat to the development of the capitalist production process; it promotes [JK: NOT causes] overproduction, speculation & crises, & leads to the existence of excess capital, alongside a surplus population.”

The extraction of SV faces no other barriers than the working population, if the rate of SV, i.e. level of exploitation, is given.

But “the total mass of commodities, the total, must be sold, both that portion which replaces c & v, & that which represents s. If this does not happen, or happens only partly, or only at prices that are less than the price of production, then although the worker is certainly exploited, his exploitation is not realised as such for the capitalist & may even not involve any realisation of the SV extracted, or only a partial realisation; indeed, it may even mean a partial or complete loss of his capital. The conditions for immediate exploitation & for the realisation of that exploitation are not identical. Not only are they separate in time & space, they are also separate in theory. The former is restricted only by society’s productive forces, the latter by the proportionality between different branches of production & by the society’s power of consumption. And this is determined neither by the absolute power of production nor by the absolute power of consumption but rather by the power of consumption within a given framework of antagonistic conditions of distribution, which reduce the consumption of the vast majority of society to a minimum level, only capable of varying within more or less narrow limits. It is further restricted by the drive for accumulation, the drive to expand capital & produce SV on a larger scale. This is the law governing capitalist production, arising from the constant revolutions in methods of production themselves, from the devaluation of the existing capital which is always associated with this, & from the general competitive struggle & the need to improve production & extend scale, merely as an act of self-preservation, & on pain of going under. The market, therefore, must be continually extended, so that its relationships & the conditions governing them assume ever more the form of a natural law independent of the producers & become ever more uncontrollable. The internal contradiction seeks resolution by extending the external field of production. But the more productivity develops, the more it comes into conflict with the narrow basis on which the relations of consumption rest. It is in no way a contradiction, on this contradictory basis, that excess capital coexists with a growing surplus population; for although the mass of SV produced would rise if these were brought together, yet this would equally heighten the contradiction between the conditions in which this SV was produced & the conditions in which it was realised.”

  1. The Conflict Between the Extension of Production & Valorisation
  2. Surplus Capital Alongside Surplus Population
  3. Supplementary Remarks




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