[Marxism] On the falling rate of profit (after 'Another review of Heinrich') - long

Ed George edgeorge1963 at gmail.com
Thu May 30 05:41:24 MDT 2013


STILL IT FALLS

With regard to the rate of profit (s/C , where s = surplus-value, and C 
= total capital laid out), and the factors that influence it, the 
fundamental relation that Marx establishes (in chapter 3 of volume 3 of 
Capital - all references to the Penguin editions) is π = δ(v/C) , in 
which π = rate of profit, δ = rate of surplus-value (s/v),  and v = 
variable capital (capital laid out as wages): ‘The rate of profit is 
thus determined by two major factors; the rate of surplus-value and the 
value composition of the capital.’ (p. 161) The rate of profit increases 
in function of a rise in the rate of surplus-value, and falls in 
function of an increase in the constant part of capital with respect to 
variable. Marx’s purpose in this chapter was to delink the rate of 
surplus-value from the rate of profit: to show that the same rate of 
surplus-value can find expression as different rates of profit, and that 
the same rate of profit can arise from different rates of surplus-value.

It is intrinsic to capitalist production that the productivity of labour 
rises. This is because it is inherent on each capital to seek a surplus 
profit, and a surplus profit is achieved by increasing the productivity 
of labour over that of competing capitalists in order to reduce per-unit 
output prices (most importantly as set out in Capital volume 1, chapter 
12; and volume 3, chapter 10). A capitalist that achieves this is able 
to realise a surplus profit because the per-unit cost price of her 
commodity product falls below that of her competitors’, allowing her, if 
she sells at the old price, or even below it (which she will almost 
certainly have to do to fulfil conditions of social demand) to achieve a 
rate of profit on her capital higher than that her competitors do. Yet 
when the new productive technique is generalised in the sector of 
production in question (and then beyond it), when a new level of 
productivity of labour is reached, when the socially-necessary value 
(labour-time) of the commodity in question falls to a new level – 
ignoring for the moment the question of social demand and the 
realisation of the commodity value – what happens then?

In production, raw material (constant circulating capital) is converted 
into product by labour (bought as labour-power, variable capital) using 
machines (fixed (constant) capital). The productivity of labour is the 
measure of the physical quantity of use-value produced by a given amount 
of labour-time. If a single worker-day can produce ten units of a given 
commodity product, and then can produce 20 qualitatively identical 
units, then the productivity has doubled.

There are many ways to increase the productivity of labour: making 
people work harder (increasing the intensity of labour), making people 
work longer (increasing absolute surplus-value), improving productive 
techniques (organisation of production), and using more productive 
machines (fixed capital). Let us ignore the first two of these 
(increasing the intensity of labour and lengthening the working 
day/week).  And let us assume that an increase in productivity is 
achieved through more efficient productive techniques (better 
cooperation, less waste, etc.), i.e. the fixed capital (machines, etc.) 
is just used more efficiently. Per worker, more commodity product is 
produced. More raw materials are transformed into commodity product. If 
the constant capital laid out is converted into fixed capital and 
constant circulating capital (raw materials) then, if productivity 
rises, and the fixed capital remains the same, more raw materials are 
transformed into commodity product. A greater physical quantity of 
constant capital is absorbed proportionally by the same quantity (number 
of workers) of labour. This ratio of physical mass of constant capital 
to labour Marx calls the ‘technical’ composition of capital (volume 1, 
p. 762; volume 3, p. 244). If labour productivity rises, the technical 
composition rises, by definition.

Now let us imagine that the productivity of labour is increased by the 
use of more efficient fixed capital (say, a better machine). The result 
is the same: more raw materials are transformed into commodity product, 
and the ratio of physical mass of constant capital to labour rises.

Let us imagine in these cases that the price of raw materials, fixed 
capital and labour-power (wages) are constant. If the technical 
composition of capital rises because more raw materials are transformed 
into commodity product then the value composition – ratio of the price 
of constant capital to variable capital (wages) – also rises. This 
change Marx calls the ‘organic’ composition of capital: the value 
composition of capital, ‘in so far as this is determined by its 
technical composition and reflects it.’ (volume 1, p. 762; volume 3, p. 245)

*By definition*, a rise in the productivity of labour means that a given 
mass of labour (number of workers) will absorb a greater mass of means 
of production. Hence the organic composition will rise. And, *all else 
being equal*, if the organic composition rises then the value 
composition will too. This rise in the value composition because of the 
change of the technical composition – and only this – is *precisely* 
what we mean by a rise in the organic composition of capital. In other 
words, a rise (or fall) in the organic composition is the *direct* 
effect of a rise (or fall) in productivity of labour.

Marx’s assumption is that it is constitutive to capitalist production to 
increase the productivity of labour constantly (volume 1, p. 437; this 
is also an observable fact), therefore it is also constitutive to 
capitalist production to increase the technical composition of capital 
constantly as well.

If π = δ(v/[c + v]), all else being equal (‘all else being equal’ 
meaning that δ is constant and v is constant) and then c rises in 
relation to v, π will fall. This is the ‘law’ part of the ‘law of the 
tendential fall’: that it is intrinsic and perennial, all else being 
equal, that the rate of profit will fall, because it is intrinsic and 
perennial to capitalist production that the organic composition will 
rise, and this is because it is intrinsic and perennial to capitalist 
production that the productivity of labour will rise.

It is cardinal to understand here that ‘organic composition’ is a 
concept that refers to changes in the value composition of capital 
*because of changes in the productivity of labour*, and to nothing else: 
to changes in the value composition of capital arising from changes in 
the mass of constant capital absorbed by a given mass of labour-power 
because of a rise in labour productivity.

There are many other factors that can impact on the value composition of 
capital, and we shall see some of them below. What we need to keep in 
mind here is that Marx saw it *critically important* to identify the 
effect on the value composition of a change in the technical 
composition, and maintain it conceptually separate from other causes of 
changes in the value composition.

What else can change the value composition of capital? Ruling out 
contingencies – climate, war, plunder, class struggle, and the like – 
and focusing only on processes endogenous to ‘normal’ capitalist 
accumulation, what we are left with essentially is changes in price of 
the elements of constant capital (fixed and circulating) and a change in 
the value of labour-power (through changes in price of the means of 
subsistence). And what will fundamentally change the prices of constant 
capital and means of subsistence is the labour-time socially necessary 
for their production, i.e. their prices are ultimately determined by the 
level of the productivity of labour. In other words, if labour 
productivity rises, the per-unit prices of commodities *in general* 
fall, which means that both the elements of constant capital (means of 
production) and means of workers’ subsistence will fall, and the latter, 
if the value of labour-power is held to be the commodities that the 
worker consumes in the reproduction of her labour-power, and these are 
held constant, means that the value of labour-power will fall too, so 
that, per worker, less variable capital is laid out by the capitalist. 
Hence, when it is said above that, *all else being equal*, if the 
organic composition rises then the value composition will rise in direct 
function of this too, ‘all else is *not* equal’: as *indirect* 
consequences of a rise in labour productivity the value of labour-power 
(v) will fall, and if v falls, for the same given mass of labour-power 
surplus-value will rise (and by the same amount), if v falls and s rises 
then the rate of surplus-value will rise, and if the means of production 
are cheapened the value of constant capital (c) will fall, and hence 
that of total capital (C) can fall too.

But these effects, unlike that of the change in the technical 
composition, are *indirect* effects, and in this precise sense: that 
they occur *subsequently in time*. The change in the value composition 
of capital because of the change in the technical composition is 
immediate: more capital is laid out as constant capital compared to 
variable. But the cheapening of constant capital and means of workers’ 
subsistence that occurs as a consequence is the cheapening of the 
commodity product *output* of a more productive production process; it 
is only in *subsequent* production periods (and iteratively) that these 
cheaper commodities affect the value composition of capital. With regard 
to the ‘Law of the Tendential Fall in the Rate of Profit’ as Marx sets 
it out, this temporal distinction is the same distinction as that 
between the ‘law itself’ and the ‘countervailing tendencies’: ‘the law 
itself’ arises because of the perennial rise in labour productivity and 
hence organic composition (with determinate consequences for the rate of 
profit) inherent to capitalist production, the ‘countervailing 
tendencies’ because of the indirect effects that temporally subsequent 
consequences (cheapening of commodities) have on the value composition 
(and also on the rate of profit). Because of the cheapening of 
commodities in general, productive inputs (means of production and 
labour-power) are cheaper, but because the rise in the organic 
composition is intrinsic and perennial to capitalist production as these 
input prices fall labour productivity and organic composition rise still 
further.

Now, the argument that is frequently offered is that the ‘countervailing 
tendencies’ might (or can) outpace the rise in the organic composition 
of capital in terms of the effect on the rate of profit; that, despite 
the rise in the organic composition, the rate of profit may go up if the 
effect of the countervailing tendencies is strong enough. That, under 
normal conditions of capitalist production and reproduction, that the 
rate of profit displays a tendency to fall is a possibility, but only a 
possibility, because if the countervailing tendencies are strong enough 
then the rate of profit may also go up, despite the rise in the organic 
composition. And the charge is that in Marx’s exposition of the LTFRP 
there is nothing per se to say, despite the perennial rise in 
productivity, that the rate of profit has to go down rather than up.

Let us look first then at the effect of the cheapening of the elements 
of constant capital on the value composition of capital. If we denote 
the value composition the ratio between constant capital and variable, 
c/v , a rise in the organic composition – a consequence of a rise in the 
productivity of labour – means that c/v (in value terms) rises. But a 
cheapening of the elements of constant capital, also a consequence of a 
rise in the productivity of labour, which means that c falls, will mean 
that c/v will fall too. Can the latter effect, then, outpace the former?

In a given production period (here, for future reference, the first), a 
capital transforms 100 units of raw material (at €1 per unit) into 100 
units of commodity product (there is, for the moment, no fixed capital). 
For each 100 units of raw material processed €100 of new value – (v + s) 
– is produced. The per-unit commodity product price is [100c + 100(v 
+s)]/100 = €2. In the next production period (the second) productivity 
doubles (let us not worry about how): 200 units of raw material are 
processed by the same amount of labour, producing 200 units of commodity 
product, whose per-unit price is [200c + 100(v + s)]/200 = €1.50 (75 % 
of its former value). Let us imagine that this rise in productive 
technique is immediately generalised, and that conditions of production 
elsewhere in the economy are the same, such that the prices of the raw 
materials that function as inputs for the next production period are 
affected at the same time and by the same amount. In the next production 
period, the third here, let us imagine that productivity doubles again: 
400 units (but now at €0.75 per unit – 75 % of their former value) are 
transformed by the same labour. The per-unit commodity price is now 
[(400 x 0.75)c + 100(v + s)]/400 = €1. If we take the value composition 
of capital to be c/v, at the rate of surplus-value as a constant 100 % 
(such that v is held at €50) then in period 1 it stands at 100/50 = 2; 
in period 2, 200/50 = 4, and in period 3, when the fall in the price of 
raw materials takes effect, 300/50 = 6 (were it not for this fall in 
price it would stand at 400/50 = 8).

In other words, the value composition rises, even though constant 
capital is cheapened, although not by as much as it would have done had 
it not; the cheapening of the price or raw materials offsets the change 
in the value composition wrought by the rise in the organic composition 
but inevitably only *partially*. Why only partially? Precisely because 
cheaper constant capital enters production as the product of a 
production period *previous* to that in which the productivity of labour 
rose; and in the production product in which it enters as input the 
value composition continues to rise because the productivity of labour 
continues to rise. The change in the value composition as a result of 
the change in the technical composition which it is purported the change 
in the value composition as a result of the cheapening of the elements 
of constant capital might offset is a ‘moving target’ which the latter, 
because it is the product of previous changes in the productivity, can 
never reach.

Because of the temporal difference in effect, then, the indirect effect 
of a rise in the productivity can ‘countervail’, but *only* countervail: 
it can never reach, let alone supersede, the effect of the change in the 
organic composition.

But what about the cheapening of labour-power, and the effect of this on 
the rate of surplus-value (and hence the rate of profit)?

Going back to the first case, let us, in period 3, introduce a fall in 
the value of labour-power, to the same extent as the cheapening of raw 
materials, to 75 % of its former value. Now c = 300, v = 37.5, s = 62.5 
(v + s is unchanged because the size of the workforce is unchanged).

The rates of profit ( = s/[c + v]) for the first two production periods 
stand at 1: 50s/(100c + 50v) = 33.3 % ; 2: 50s/(200c + 50v) = 20 % . The 
rate of profit for production period 3, with no cheapening of factors of 
production, = 50s/(400c + 50v) = 11.11 % ; with only the constant 
capital cheapened 50s/(300c + 50v) = 14.29 % ; and with both constant 
capital and labour-power cheapened 62.5s/(300c + 37.5v) = 18.52 % . The 
rise in productivity of period 2, when passed on to period 3 in the 
shape of cheapened factors of production, again *countervails*, but does 
not *reverse*, the fall in the rate of profit; this last falls less, but 
it still falls.

Now, none of this is to say that the rate of profit can never go up. If 
the value of labour-power falls far enough, or labour-power is sold 
below its value, i.e. if a high enough rate of surplus-value obtains, 
then the rate of profit will rise. If, in the last case, we take v = 10 
and s = 90 then the rate of profit = 90s/(300c + 10v) = 29.03 % . Why 
might this happen? Wage levels are determined in good part by class 
struggle (here a ‘contingency’): if capitalists succeed in depressing 
wages below the value of labour-power (cf. volume 3, p. 342), or achieve 
a de facto reduction in the ‘moral and historical’ element of the value 
of labour-power, or if the effects of a rise in the productivity of 
labour affect means of subsistence more sharply (and Marx notes the 
tendency for the generalisation of higher productivity to be uneven: see 
volume 3, p. 273) then the rate of surplus-value can rise sufficiently 
to allow a rise in the rate of profit, despite the rise in the value 
composition as a consequence of the change in the technical composition 
(even if countervailed).

But if a high enough rate of surplus-value can negate the effect on the 
rate of profit of the value composition of capital (which *must* keep 
rising) why might the rate of surplus-value not remain high enough to 
maintain a rising rate of profit *forever*? Because the productivity of 
labour keeps on rising, and what this means is that living labour 
component of production falls, and falls *exponentially* (and thus keeps 
falling). This places a natural limit on the effect of a rise in the 
rate of surplus-value on the rate of profit, ultimately ‘checking’ it, 
but not ‘cancelling it out’, as Marx puts it (volume 3, p. 356).

To see how this works, let us take the example we started with above, 
but multiply the mass (and starting value) of the constant capital by ten.

In the first production period 1,000 units of raw material (at €1 per 
unit) are transformed into 1,000 units of commodity product; again, for 
each 1,000 units of raw material processed €100 of new value is added. 
The per-unit commodity product price now is [1,000c + 100(s + v)]/1,000 
= €1.10. In the second production period productivity doubles, so that 
2,000 units of raw material are processed by the same amount of labour, 
producing 2,000 units of commodity product, whose per-unit price is 
[2,000c + 100(v + s)]/2,000 = €1.05. Again, let us imagine an immediate 
generalisation of this rise in productive technique. In the third 
production period, productivity doubles again: 4,000 units (now at €1 x 
(1.05/1.10) = €0.95 per unit) are transformed by the same labour. The 
per-unit commodity price is now [(4,000 x 0.95)c + 100(s + v)]/400 = 
[3,818.18c + 100(s + v)]/4,000 = €0.98.

The rates of profit are now: period 1, 50s/(1000c + 50v) = 4.76 % ; 
period 2: 50s/(2000c + 50v) = 2.44 % ; period 3: 50s/(3,818.18c + 50v) = 
1.29 % .

Let us again introduce an arbitrarily high rate of surplus-value in 
period 3 of 900 %, such that s = 90 and v = 10. The rate of profit now 
stands at  90s/(3,818.18c + 10v) = 2.35 % . The rate of profit still 
falls; ‘checked’, but still it falls.

(The mass of surplus-value also depends on turnover time: the faster a 
capital turns over the greater the mass of surplus-value produced. But 
this effect too suffers from the same ‘law of diminishing returns’: as 
the living labour component of production falls, the amount of new 
value, including surplus-value, contained in the commodity product 
falls, and falls exponentially.)

To summarise. The rate of profit depends on the one hand on the rate of 
surplus-value, and on the other on the value composition of capital. All 
else being equal, if the rate of surplus-value rises, the rate of profit 
rises. All else being equal, if the value composition of capital rises, 
the rate of profit falls.

The value composition of capital, ruling out contingencies, depends, on 
the one hand, on changes in the technical composition of capital, and on 
the other on the value of the elements of constant capital and of 
labour-power (and this last depends on the value of the commodities 
making up the labourer’s means of subsistence).

As the productivity of labour rises – and its constant rise is 
constitutive to capitalist production – the technical composition, by 
definition, and the organic composition both rise. But this same process 
cheapens the elements of constant capital, by cheapening commodities in 
general. Yet, in terms of the value composition, this cheapening of the 
elements of constant capital can never, under ‘normal’ conditions, 
outstrip the effect of the rise in the technical composition because its 
effect is temporally subsequent to it.

The cheapening of the means of workers’ subsistence, all else being 
equal, will reduce the value of labour-power, and increase the rate of 
surplus-value. But long term, the effect of a high rate of surplus-value 
will only inhibit, and not cancel out, the fall in the rate of profit, 
because, by definition, increasing productivity means that the constant 
capital component of the finished commodity product will rise constantly 
over the variable capital component.

What kind of ‘tendency’ would all this predict for the long-term 
movement of the rate of profit? With a large living labour component (in 
value terms) in production, and a high rate of surplus-value, one would 
expect a high rate of profit, even a rising one. But as the productivity 
of labour rises, and the value composition with it (despite the 
‘countervailing effects’ of the cheapening of the elements, and despite 
the rate of surplus-value), one would expect the rate of profit to begin 
to fall, and even precipitously so. Nevertheless, as the constant 
capital component of commodities in general grows in proportion to the 
variable capital component – and this will be a constant process because 
of the perennial tendency of capitalist production to raise the 
productivity of labour, one would expect a more or less continuous fall, 
but an exponential one, with the rate of fall continuously slowing. And 
one would expect this final trend to be the ‘normal’ trend of ‘normally’ 
functioning capitalist reproduction.

So I think the argument that Marx fails to demonstrate in Capital that, 
under normal conditions, the rate profit will fall, are, at best, 
unproven. Of course, this is not a argument as to whether Marx was 
right; simply as to whether he was theoretically coherent. It seems to 
me that here he was. As to whether he was right, the proof of the 
pudding, as Engels once said, is in the eating. It is interesting 
therefore that there is an increasing weight of work that appears to 
indicate the kind of long-term trend just described is indeed how 
capitalist production does tend to operate under normal conditions. [*] 
And ultimately, of course it is in relation to how it relates to the 
real world that theory must be judged.

****

[*] I am thinking primarily of the recent work of Alan Freeman and 
Andrew Kliman, for example here: 
<http://www.hetecon.net/documents/ConferencePapers/2012Non-Refereed/FREEMAN_What_causes_Booms.pdf>, 
here: 
<http://media.wix.com/ugd//b629ee_20b6bcc79e688bee2ab6f94f971f7b06.pdf>, 
and here: <http://akliman.squarespace.com/failure-capitalist-production/>.


***


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