The dynamics of capitalism

by Mick Brooks

The foundation of the capitalist system is the exploitation of the working class. The workers produce more value than what they are paid for. They are paid not for the labour they put in, but for their labour power. This is their keep, though as Marx says there is a ‘historical and moral element’ in it. The prevailing level of wages is determined by class struggle, and the subsistence of a worker in an advanced capitalist country today is much higher than it was two hundred years ago, or remains for a worker in a third world country today. Nevertheless it is still a subsistence in the sense that the worker has no alternative way of making a living other than working for a boss. The boss class collectively own the means of production, the means of making a living.

The working class are exploited in the strictly scientific sense that they produce more than they are paid. So the working day, the working hour or any piece of value added at work can be divided into paid labour and unpaid labour. Marx calls this unpaid labour surplus value, and it is divided into rent, interest and profit by the different fractions of the ruling class. To get more surplus value, the capitalist has to raise the rate of exploitation.

The first decision taken by the industrial capitalist is what proportion of the surplus value to consume unproductively on his own upkeep and what proportion to capitalise, invest back into expanded production. We have presented this as an individual decision, but in fact there are pressures upon the individual capitalist. He is competing with other capitalists, so he must either compete with them on price or go to the wall. In Marx’s view it was the progressive nature of the capitalist system that it developed the productive forces, thus preparing the way for a classless communist society of abundance. The productive forces were developed because individual capitalists were forced to plough back a great part of the surplus value rather than just consuming it unproductively. The mechanism that produced this result is the production of relative surplus value.

Absolute and relative surplus value

There is an imperative upon the capitalist to raise the rate of exploitation. As Marx explains in Capital Volume I, the rate of surplus value is the rate of exploitation, or s/v (surplus value divided by the value of variable capital laid out on labour power by the capitalist in the production process). There are two ways for the capitalist to raise the rate of exploitation. They are by increasing the production of absolute surplus value and the production of more relative surplus value.

It may be useful to look first at absolute surplus value. If the rate of surplus value = 4 hours unpaid labour divided by 4 hours paid labour = 100% then, if the capitalist can force the worker to work 10 hours for the same daily wage, the rate of surplus value will rise to 150%. So far, so easy.

The reader may well find this example extremely unrealistic. How can the bosses push the workers around in this way? In fact the long Chapter 10 in Capital Volume I The working day is about how they tried to do precisely this in the nineteenth century, and how the workers fought back. In the twenty-first century there are other ways of achieving exactly the same result. We all know occupations (such as security guard) where workers cannot live on the basic rate for a standard working day and will be forced to take all the overtime available to make up a living wage. This section, however, is not concerned to show the continuing ingenuity of modern capitalists in coining absolute surplus value from their workers – important though this is – but to contrast it to the production of relative surplus value.

There are obviously limits to this continued extension of absolute surplus value, which basically consists of exploiting weaknesses in the working class movement. Increasingly capitalism has historically sought the path of extracting more and more relative surplus value. If the minimum acceptable wage and the maximum hours in the working day are set by working class struggle, then capitalists must seek to get more out of ‘their’ workers in a given time. They must raise the productivity of labour. If the capitalist can get his work force to produce double the quantity of products in a given time, then each commodity will contain less labour and will tend to cost less. If these commodities are part of the basket of goods the workers take as part of their standard of living (‘wage goods’) then the workers will need to spend less time on producing the elements of their own wage and more time will be ‘freed’ up to produce relative surplus value.

This is an unconscious result on the part of the capitalist, a result from the process of capitalist competition. What are the mechanisms of this process? What is the capitalist trying to do? He wants to know how he can undercut his competitors. The best way to sell cheaper is by producing cheaper. The way to do this is by being the first to introduce new machinery that enables the workers to produce the same quantity of products in less time – and thus make things cheaper. In doing so the capitalist is, of course, exploiting the workers more – they are producing more commodities in their working time.

The first capitalist in a sector of production to innovate is likely to make a super-profit by pricing the commodity above its individual value (the labour time required to produce it under the new technology) but below the socially necessary labour time determined by the old level of technology.

Let us assume that the value of the commodity under existing production conditions is £10. The innovating capitalist can produce it for £8, including the same profit rate as his rivals. He can sell the commodity at any price between £8 and £10. Above £8 he will make a super-profit. He may choose to sell it below £10 since the new technique probably means he is producing on a larger scale than before and wants to get rid of all his finished goods. In any case choice will go out of the window as his competitors start to retool and bid the price down to its new value.

So his super-profit will not survive. The other capitalists will either have to retool with the new technology or go to the wall. The overall result will be the establishment of a new, lower, amount of socially necessary labour time to make the product and a new average rate of profit within the industry.

This is the dynamic for capitalism as a whole. Increased productivity and the accumulation of capital are the result and the eternal impulse of this process. Later we will see how these cheaper prices can act as countervailing tendencies to Marx’s tendency for the rate of profit to fall.

The rate of profit since the Second World War

We are going to try to test the theories against ‘the facts’. The facts in this case are the record of economic statistics. Economic statistics are drawn up, for the most part, by honest people. With few exceptions, none are Marxists. They don’t think in Marxist categories. For instance we saw earlier how Marx divided the value of a commodity into constant capital, variable and surplus value. Variable capital is outlay on wages, constant capital on all the other costs and surplus value is rent, interest and profit. These categories are needed to work out the rate of profit in Marxist terms, as we find out later.

This division does not concern the capitalist, or the economic statistician. The individual capitalist is more concerned as to whether he recovers his capital at the end of the production period (which is true both of wages and raw materials costs – together called circulating capital) or whether it is tied up as fixed capital (which means it can take years to get his money back). These are the concepts captured in economic statistics. Marx’s categories just disappear from the statistical record. They can be quite difficult to recover.

The profit share can be measured as a proportion of national income. National income is a flow of revenues usually measured over a year. For our purposes Gross National Product and Gross Domestic Product can be regarded as the same thing as National Income (though there are some differences).  Deduct the share of wages and other factor income flows from national income as a whole and the profit share is what is left. It can be presented as P/Y, when profit is P and national income is Y.

The rate of profit is more difficult to work out than the share. It is shown as P/K where K is the capital stock. It is necessary to make sure the source of the stock figures for K are compatible with the flow figures for Y, and that they are compiled in the same way.

For Marx the rate of profit is calculated against the entire capital stock, whether used up over a year or not. One way to work out the rate of profit is to multiply the profit share by the output/capital ratio (Y/K). P/Y x Y/K gives you P/K (dividing both denominator and numerator by Y).

The rate of profit has been the heartbeat of capitalism throughout the whole period we are investigating. Generally speaking, periods when the rate of profit has been high have been periods when investment has been high (a rapid rate of capital accumulation), and periods of relatively high employment. All these generalisations refer to the advanced capitalist countries. These are the only countries with consistent and accurate statistics for the whole period. But these, after all, are the heartlands of capitalism that contribute so much to the rhythms of global capital accumulation.

Andrew Glyn and his fellow authors first made their name by analysing the emerging crisis of capitalism in the 1970s in terms of a profits squeeze. To identify this profits squeeze they looked at the rate of profit, but also at the share of profit in the national income.

Let us look first at the evidence from Capitalism since 1945 (Armstrong, Glyn and Harrison). This in turn is based on earlier, pioneering works such as British capitalism, workers and the profits squeeze (Glyn and Sutcliffe). This team of authors were the first to identify the centrality of the profit rate in the evolution of global capitalism since the Second World War.

Armstrong et al. also deal with the profit share (which is easier to measure). There is a difference between the profit rate and the profit share, but one important and obvious reason the profit share might increase or decrease is because the rate of profit has gone up or down – so there is also a connection. Armstrong’s central thesis was that the profit share was squeezed by militant workers, and that this was the basic cause of the breakdown of the ‘golden years’ after World War II. Our historic critique of their position can be found at The tendency for the rate of profit to fall and post-war capitalism - AG and MB.

On page 8, Armstrong et al. deal with the increase of investment as a result of the War. “In Japan throughout the period 1939-44 private industrial investment ran at around the rate of the mid-thirties. In Germany between 1936 and 1943 the volume of investment in industry grew continuously to an unprecedented level….In the United States investment grew rapidly during the early years of the war. The peak in 1941, however, still represented a lower level than that achieved in 1929, and it then declined and stayed at a rather low level (less than half the 1929 peak) for the remainder of the war. Investment in plant and machinery in the United Kingdom rose by nearly one-half between 1938 and 1940, but then declined to well below half the previous rate for the last three years of the war.”

So far, then, investment was recovering from the Great Depression as a result of the open-handed arms spending by the warring states. Rates of profit were extremely high throughout the War in the fascist countries, as the authors point out, because of the repression of the labour movement.

Post-War chaos and devastation at first held the economies back. Despite the ‘advantages’ of fascism in Italy, “the low level of capacity utilisation, especially in 1946, substantially increased overheads, such as depreciation. Overall the share of profits in industrial output in 1947 can hardly have been much below that in 1938.” (ibid. p.53).

In Japan the profit share rose year on year from 1947-1951 from 8%, to 9%, to 15% to 22%, to 26% (ibid p. 91). In Germany “profits were high” (ibid p. 97). A graph shows industrial production, industrial employment and industrial productivity increasing by leaps and bounds after the War.

The authors sum up the causes of the post-War recovery. “The balance between wages and productivity was extremely favourable to the employers. Profits were comparable to prewar levels even in the countries then under fascism” (p. 105). The revival of the possibility of profitable production was a precondition of the great post-War boom.

Throughout what the authors call the ‘golden years’, the rate of profit was in gentle decline. This was not a straight-line movement, of course. The rate of profit went down in years of downturn and revived in the upturn. There continued to be a cycle of boom and slump, but it was much more moderate over this period. The rate of profit did revive after each downswing, but did not generally recover its previous peak. So the graph lines for Europe, the United States, Japan and the advanced capitalist countries as a whole show profit rates dipping as we approach 1974, the year of the first generalised post-War crisis of capitalism. Diagrammatically, the movement in the rate of profit resembles the teeth of a saw that tapers downwards.

At bottom, as we show later, the 1974 crisis was not an oil crisis, or an inflation crisis: it was a crisis of profitability. In a diagram on p. 251 Armstrong shows manufacturing profit rates in Europe, Japan and the USA recovering after 1974, but never returning to the levels seen in the ‘golden years’.

We will now pass the torch to Robert Brenner. Brenner wrote an article entitled The economics of global turbulence, which took up the whole issue of New Left Review issue 229, May/June 1998. He effectively updated his analysis in a book, The boom and the bubble, published in 2002. We have criticisms of Brenner’s analysis, as we have of Glyn and his colleagues. Our critique of Brenner is at Rate of profit and capitalist crisis. Brenner’s writings are undoubtedly the most authoritative on the world economy within the Marxist tradition over the last ten years, as Armstrong, Glyn and Harrison’s were for the earlier period. The statistical analysis of both sets of writing is usually unassailable – but see the Appendix.

In his earlier work Brenner begins, “Between 1970 and 1990, the manufacturing rate of profit for the G-7 economies taken together (the biggest capitalist economies) was on average about 40% lower than between 1950 and 1970…the radical decline in the profit rate has been the basic cause of the parallel, major decline in the growth of investment and with it the growth of output, especially in manufacturing over the same period. The sharp decline in the rate of growth of investment – along with that of output itself is – I shall argue, the primary source of the decline in the rate of growth of productivity, as well as the major determinant of the increase of unemployment. The reductions in the rate of profit and of the growth of productivity are at the root of the sharp slowdown in the growth of real wages.” (p. 7-8). This is Brenner’s central thesis. And we agree with him. What we need to find out is why this happened.

On page 8 of The boom and the bubble Brenner has a diagram showing the fall in average profits in the 1970-1993 period compared with the golden years of 1950 – 1970. The US sees falls from 24.3% to 14.5%, Germany 23.1% to 10.9%, Japan 40.4% to 20.4% and the G-7 as a whole from 26.2% to 15.7%. Moreover output, net capital stock, gross capital stock, labour productivity and the real wage all follow the trend set by the net profit rate. It is clear that profit determines the whole rhythm of capital accumulation.

How Glyn explains the falling profit rate

Glyn et al. suggested that the profit share was falling because of the rising share of national income that went to wages. Class struggle explained the crisis! For a time their explanation seemed to fit the facts, but the Marxists remained unconvinced. After all, the 1970s was a period of sharply fought class struggle. Here is Brenner’s criticism of the profits squeeze thesis. (These points are taken unchanged from our critique of Brenner, Rate of profit and capitalist crisis.)

First ‘the universality of the long downturn’. “…none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune.” (1998 p.22)

Second ‘the simultaneity of the onset and various phases’. “The advanced capitalist economies experienced the onset of the long downturn at the same moment – between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 1974-75, 1979-82 and from 1990-91.” (ibid. p.22) How is it possible, Brenner asks, for the different course of the class struggle in different countries to produce these global trends?

Last, ‘the length of the downturn’. “Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach.”…”it is almost impossible to believe that the assertion of workers’ power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century.” (ibid. p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself. Marx said, “To put it mathematically: the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable.” (Capital Volume I p. 770)

Marx realized that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

Marx and the tendency for the rate of profit to fall

In Capital Volume III Marx wrote three chapters on The law of the tendential fall in the rate of profit. They are The law in itself (ch. 13), Counteracting factors (ch. 14) and Development of the laws’s internal contradictions (ch 15). This law is also referred to in the Grundrisse, where Marx describes it as “in every respect the most important law of modern economy and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated” (p. 748). We shall argue that Marx was right and that crisis in the post-War capitalist economy can be explained in terms of Marx’s theory.

We are assuming here that the reader has a basic grasp of the process of extraction of surplus value (exploitation), at least in outline, as explained in Capital Volume I and in pamphlets such as Wage labour and capital and Wages, price and profit. Why, in view of its importance, does Marx wait till Volume III (which was not published in his lifetime) to explain this law? The answer lies in Marx’s method. Rosdolsky, in The making of Marx’s Capital, gives what we believe to be a definitive account of Marx’s plan for his work on Capital. In 1865-66 he came up with a four volume project:

• Book I      Production process of capital
• Book II     Circulation process of capital
• Book III   Forms of the process as a whole
• Book IV   The history of theory (This became the three volumes of Theories of surplus value)

(Rosdolsky p. 13)

So before he can explain the tendency for the rate of profit to fall, Marx has to show how the drive by individual capitalists to maximise their own profits leads to the emergence of a general rate of profit. We shall do the same. These issues are to be dealt with in the discussion of capitalist production as a whole.

The formation of a general rate of profit

Marx divides the value of a commodity into constant capital such as plant and raw materials (c), variable capital which is the outlay on wages (v) and surplus value, conventionally divided into rent, interest and profit (s). The capitalist doesn’t care about all this stuff about c + v + s. All he knows is that he lays out a sum of money at the start of the production process and ends up with more (this circuit of capital is money – commodity – more money or M – C – M’). So he calculates his total capital  regardless as to whether it is spent on constant or variable capital. (We shall call total capital C in accordance with Marx’s usage. Note that we earlier symbolised it as K, as is usual in national income accounting.)

The capitalist works out his rate of profit based on total capital. The individual capitalist is not interested in the origins of surplus value. Indeed in his account books, and in the consciousness of the capitalist class, surplus value disappears as a separate category altogether.

One important observation from this is that the capitalists can sell their commodities below their value and still make a profit. Capitalists are continually trying to undercut one another, concerned as they are with market share and trying to win the war of competition. This still further pushes the origins of surplus value out of vision.

We have to be careful here. When we dealt with the value of a commodity, we resolved it into c + v + s. Now c (constant capital) consisted of two parts: fixed and circulating capital. The capitalist keeps separate records of the two, for they have consequences as to how he spends his precious money. This distinction between fixed and circulating capital (with wages seen as just another part of circulating capital) is another reason why the origins of surplus value are obscured. Circulating constant capital passes its entire value to the final product. An example would be the chocolate sprayed on to a Mars bar. We are mainly talking about raw materials here. It is fairly obvious that the chocolate is constant capital in the sense that it only passes its own value to the chocolate bar. It does not magically add value to the final product.

Then there is fixed constant capital, such as plant and machinery. When we examine the value of a commodity, we realised that a machine may help to produce millions of commodities and does not pass all its value to each one. The value it passes on can be explained by the notion of depreciation. The machine costs £1 million and produces a million commodities and is then worn out. We can assume that it passes value of £1 to each commodity it helps us produce. If the capitalist charges £1 depreciation in calculating the costs of each commodity, and puts £1 aside every time one is sold, he will have enough money to buy a new machine when it wears out. It is quite likely that the ‘straight line’ depreciation we have suggested is simplistic. The machine may become out of date before it wears out. Like buying a new car, its resale value may decline sharply as soon as the workers start using it. For now all we need to establish is that it is the depreciation of fixed constant capital that contributes to the value of the commodity.

But it is a different matter when the capitalist comes to think about his profits, which he calculates against his total capital (C). The whole point about the investment in fixed constant capital is that it locks away his money for years. So the rate of profit is calculated on the total capital advanced, whether used up or not.

The rate of profit is therefore s/C – surplus value divided by total capital. We are still assuming that all the surplus value is taken by the manufacturing capitalist at this stage. But remember that rent and interest, incomes which go to other sections of the ruling class, all come from the unpaid labour of the working class.

How is the rate of profit determined within an industry? An industry standard of technology is established by competition among the existing firms. Firms either keep up by producing commodities at the socially necessary labour time prevailing at the time, or they go to the wall. Occasionally laggard firms can maintain a fly-by-night existence if they have access to cheaper labour or some other advantage to compensate for their lack of productivity. But generally you don’t have farming with ploughs and oxen competing with farming conducted with combine harvesters. We may regard the achievement of higher productivity by accumulating capital and applying relatively more fixed capital in the form of machinery etc. to the production process as a basic tendency of capitalism.

Though technology and productivity may be standardised within an industry, it is obvious that different industries have very different levels of technology from one another. What is important from the Marxist point of view is that they therefore have very different organic compositions of capital.

The organic composition of capital measures the ratio of constant to variable capital in the production process or the proportion of dead to living labour. It is often presented symbolically as c/v. Now let’s look at an apparent problem when we have capitals of different organic compositions in different industries.

To keep things as simple as possible we will assume that the rate of exploitation is the same in both industries. We will also assume that all the fixed constant capital is used up over the production period we are studying, one year. There are only two industries in our simplified model:
I c350 + v50 +s50.  Profit rate = 50/400 = 12½%

II c50 + v50 + s50. Profit rate = 50/100 = 50%

So the same rate of surplus value produces a very different rate of profit depending on the different organic composition of capital in different industries. But this contradicts everything we know about the nature of capitalism. Capitalism is production for profit. The rate of profit is the central determinant of capital flows. Marx was well aware of this when he outlined the labour theory of value in Capital Volume I. In Volume III he explained that the consequence of the formation of an economy-wide rate of profit was that surplus value was redistributed between the different industrial sectors. As a result commodities are sold at money prices tending to their prices of production, a modified value.

“The whole difficulty arises from the fact that commodities are not exchanged simply as commodities but as products of capitals, which claim shares in the total mass of surplus value according to their size, equal shares for equal size” (Capital Volume III p. 275)

In our simplified economy, equalisation of the rate of profit, through the flow of capital from the sector with the lower rate of profit to the sector with a higher rate, would produce the following result:

I c350 + v50 + p80 (profit rate = 80/400 = 20%)                             (where p is profit)

II c50 + v50 + p20 (profit rate = 20/100 = 20%)

So in industry I, output of 450 in values has been transformed into 480 in prices of production. In industry II, output of 150 in values has been transformed into 120 in prices of production. Surplus value has been transferred from industry II with a lower organic composition of capital to industry I with a higher organic composition.

One way Marx explains this is by asking us to think of a workplace with two departments, both necessary to produce the commodity. The capitalist who owns them doesn’t actually care where the surplus comes from as long as he gets his hands on it.

Marx concludes therefore that commodities are not actually sold at prices corresponding to their values, but tend to their prices of production, a modified value. In the example above, commodities in industry I are sold above their value and commodities in II below their value. But total values are equal to total prices of production and total surplus value is equal to total profit.

Does this contradict the law of value? Marx presents the process as a historical development. “The exchange of commodities at their values, or at approximately these values, thus corresponds to a much lower stage of development than exchange at prices of production, for which a definite degree of capitalist development is needed” (ibid. p. 277). In the same way, when we look at the labour theory of value, we start off with simple commodity production, and then move on to look at wage labour and capital.

The increasing organic composition of capital

The organic composition of capital measures the ratio of living to dead labour in the production process. To remind ourselves, “By the composition of capital we mean…the ratio between its active and passive component, between variable and constant capital.” (Capital Volume III p. 244) Marx adds, “The organic composition of capital is the name we give to its value composition, in so far as this is determined by its technical composition and reflects it.” (ibid. p. 245).

We have seen how there is a tendency for a uniform rate of profit to be established throughout the economy, despite the differing organic compositions of capital within different branches of industry. This tendency, like any other tendency under capitalism, emerges precisely through individual capitalists searching for a higher rate of profit than the rest.

We have also seen (in the section on Absolute and relative surplus value) that there is an impulsion on every capitalist to raise the productivity of labour. Though there are other ways he can do this, historically and in practice it has been crucial to put more and more machinery (fixed capital) behind the elbow of each worker in order that they can produce faster and cheaper.

There is therefore a tendency for the organic composition of capital to rise over time in those branches of industry where labour saving equipment can be applied, and therefore in the economy as a whole.

Here is an illustration of the capital intensity of modern capitalist production, taken from a newspaper article (Mark Milner, Guardian April 17^th 2007). The General Motors plant producing Astra cars at Ellesmere Port is to be revamped:

• The plant will employ 2,200 workers
• Productivity is likely to rise by 30%
• The plant will produce 180,000 cars a year
• Investment will be 3.1 billion Euros (round about £2 billion)

So each worker will produce nearly 90 cars a year on average. (Of course no worker produces a car single-handed. It is a team effort.) The machinery behind the elbow of each worker is getting on for £1,000,000!

This is casual and empirical but powerful evidence as to the correctness of Marx’s analysis of the dynamics of capitalism – the connection between rising productivity and a higher level of exploitation, the increasing scale of production and the greater mass of dead labour relative to living labour applied in the production process as the system develops.

Marx goes on to specifically link this rising organic composition with the tendency for the rate of profit to fall. “With the progressive decline in the variable capital in relation to the constant capital, this tendency leads to a rising organic composition of the total capital, and the direct result of this is that the rate of surplus value, with the level of exploitation of labour remaining the same or even rising, is expressed in a steadily falling general rate of profit. (We shall show later on why this fall does not present itself in such an absolute form but rather more in the tendency to a progressive fall.) The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour.” (ibid. pp. 318-9)

Explaining the tendency for the rate of profit to fall

Marx presents this tendency as a law. Different people use the word ‘law’ in different senses. Some scientific writers quite legitimately use the term to mean a statistical regularity. In this case there would be a law for the rate of profit to fall if we could observe the rate of profit falling continuously.

We can’t. And Marx is quite clear that is not how the tendency for the rate of profit to fall operates in practice. For him a tendency is a force operating in a certain direction. We shall present the law in Marx’s own words.

“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. It 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%. 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%, we have:

if c = 50 and v = 100, then p’ = 100/150 = 66 2/3 %;

if c = 100 and v = 100, then p’ = 100/200 = 50%;

if c = 200 and v = 100, then p’ = 100/300 = 33 1/3 %;

if c = 300 and v = 100, then p’ = 100/400 = 25%;

if c = 400 and v = 100, then p’ = 100/500 = 20%.

“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.

“If we further assume now that this gradual change in the composition of capital does not just characterise certain individual spheres of production, but occurs in more or less all spheres, or at least the decisive ones, and that it therefore involves changes in the average organic composition of the total capital belonging, then this gradual growth in the constant capital, in relation to the variable, must necessarily result in a gradual fall in the general rate of profit, given that the rate of surplus value, or the level of exploitation of labour by capital, remains the same” (Capital Volume III pp. 317-8, The law itself).

Countervailing factors

Marx deals with the counteracting forces on the tendency for the rate of profit to fall in Part Three of Capital Vol. III. Chapter 13 is ‘The law itself.‘ Chapter 14 is entitled ‘Counteracting factors’. Chapter 15 is ‘Development of the law’s internal contradictions.‘ We can see at once that the ‘law’ does not mean that the rate of profit will always fall. It is not a prediction. The tendency for the rate of profit to fall is a force operating on the capitalist system, as we have seen. This force, in a dialectical way, actually unleashes contradictory forces that may tend to drag the rate of profit up.

Marx mentions six counteracting factors to the underlying tendency for the rate of profit to fall:

• More intense exploitation of labour
• Reduction of wages below their value
• Cheapening of the elements of constant capital
• The relative surplus population
• Foreign trade
• The increase in share capital

Increasing the intensity of exploitation

How can the bosses exploit the workers more? Apart from making workers more productive so as to increase the extraction of relative surplus, Marx realised that they could get exactly the same result without investing in more machinery. Through an offensive on the shop floor they could increase what he called the intensity of labour. In effect workers would be made to do ten hours’ work in eight hours. The main two ways of increasing the intensity of labour is by speeding up the assembly line and by making workers mind more machines.

Generally raising the intensity of labour and increasing its productivity have the same effect. They both raise the rate of exploitation by increased the production of relative surplus value. They both tend to make goods cheaper. We shall therefore consider them together.

Let us begin by assuming that the goods made cheaper are the ones workers buy with their wages, for instance KitKats. Obviously if the price of KitKats fall you don’t feel materially much better off, but this raising of productivity is assumed to be going on all over in the economy. As we discussed earlier (Absolute and relative surplus value), we can assume to start with that the worker works four hours to earn enough wages to buy the elements of her subsistence and four hours making surplus value for the boss class. If productivity for all the items going to make up the wage bundle doubles, then the worker need only work two hours for herself and six hours for the capitalists. Marx is assuming that workers’ real wages (in terms of purchasing power) will remain unchanged. The end result of raising the productivity of labour is thus to increase the rate of surplus value (rate of exploitation) by increasing relative surplus value

Reduction of wages below their value

Second Marx assumes that on average commodities are sold at their value (or rather price of production) for the purposes of his analysis. He was well aware that this is not always the case. In fact, he was by far the finest and most systematic chronicler of his time of the abuses of the capitalist system. He knew that the value of labour power was established by class struggle and had ‘a historical and moral element’. Therefore in practice depression of wages below the value of labour-power is important in practice in raising the rate of profit, not this time by making workers produce more but by paying them less.

Cheapening of elements of constant capital.

Just as the elements of variable capital can be made cheaper through raising the productivity of labour, so can the elements of constant capital. So, though there may be a much greater mass of machinery behind the elbow of each worker, each unit of capital may cost less and the organic composition of capital could be lower. “Also related to what has been said is the devaluation of existing capital (i.e. of its material elements) that goes hand in hand with the development of industry. This too is a factor that steadily operates to check the fall in the rate of profit, even though in some circumstances it may reduce the mass of profit by detracting from the mass of capital that produces profit. We see here once again that the same factors that produce the tendency for the rate of profit fall, also moderate the realisation of this tendency.” (ibid. p. 236)

Though the labourer is working up more and more raw materials over a given period of time, each piece costs less because it takes less time to produce those raw materials. “For example, the quantity of cotton that a single European spinning operative works up in a modern factory had grown to a most colossal extent in comparison with that a European spinner used to process with the spinning wheel. But the value of the cotton processed has not grown in the same proportion as its mass. It is the same with machines and other fixed capital. In other words the same development that raises the mass of constant capital in comparison with variable reduces the value of its elements as a result of the higher productivity of labour, and hence prevents the value of the constant capital, even though this grows steadily, from growing in the same degree as its material volume. i.e. the material volume of the means of production that are set in motion by the same amount of labour power.” (ibid. p. 343)

The relative surplus population

The unemployed can be used as a whip against the demands of employed workers. Then as now the discovery of pockets of workers who will work for wages below the average can be a Klondike for individual sectors of capitalists, and serve to raise the overall rate of profit for the system as a whole.

Foreign trade

Foreign trade enables capitalists to buy commodities from the cheapest sources in the world and so lowers their costs. It produces a global division of labour and enables national economies to reap the advantages of scale economies within world trade, further cutting costs all round.

Marx also introduces some important concepts that can serve as the base for a theory of imperialism. We cannot pursue these here. Note that Marx is dealing with the formation of national rates of profit, and how they are influenced by cheap imports. Realistic as this was for his time, we might consider whether the twenty-first century, with its vast capital flows, has produced a tendency for a global rate of profit to emerge. In any case we cannot treat foreign trade as a rabbit out of a hat, negating the basic tendencies of capitalist accumulation.

The increase in share capital

Finally Marx points to a tendency then in its infancy. It is now fully realised – a stratum of the capitalist class has become purely parasitic, and lives off the income of shares that their brokers, not they themselves, select. In this case surplus value undergoes a further division, with share dividends approximating to interest-bearing capital.

We have to say that some of Marx’s countervailing tendencies are mentioned very briefly, sometimes in a single paragraph. Fascinating though they are, they are not fully explored in the text. They almost come across as a sort of checklist for further research.

We regard the two most important counter-tendencies as raising the rate of exploitation and cheapening the elements of constant capital. They are the most important because they both explore how the central tendency to raise the productivity of labour that causes the tendency for the rate of profit to fall actually produces its own counter-tendencies.

In the case of raising the rate of exploitation, wage goods are produced faster and therefore cheaper, thus enabling the worker to spend more of her time producing surplus value and less in producing the elements of her own subsistence.

In the second case capital goods are produced faster and therefore cheaper. In this case while the mass of constant capital (what Marx called the technical composition of capital) may rise, the price of those material elements of constant capital (for the organic composition of capital is expressed in money prices) could fall.

Could these counter-tendencies indefinitely offset the tendency for the rate of profit to fall?

Increasing the rate of exploitation. In the example we used earlier, the worker works four hours to produce the elements of her own subsistence and four hours producing surplus value. As a result of new techniques, productivity doubles and the worker is now only working two hours for herself and six hours for the bosses. Her standard of living is unaffected – she can still buy the same bundle of wage goods as before. But there are limits to this process in increasing the rate of exploitation. In mathematical terms the rate of exploitation is bounded by the new value added by the worker (v + s). In mathematical terms, as productivity continues to rise in the wage goods sector, s tends to increase towards (v + s), while v tends to zero. As long as constant capital continues to increase (c tends to infinity), the rate of profit must eventually fall.

Cheapening the elements of constant capital. The cheapening of elements of constant capital through rising productivity tends to reduce the organic composition of capital expressed in market prices. The question is: can this indefinitely offset the tendency for the rate of profit to fall? Marx believed it could not. We agree.

Since this issue has been in contention for more than a century, we cannot treat it fully here. We would refer the reader to the historic debate Tendency for the rate of profit to fall and post-war capitalism – AG and MB. We have included further material on this question in the Appendix.

More recently, Kliman’s Reclaiming Marx’s ‘Capital’: A refutation of the myth of inconsistency has, we believe, definitively rebutted those who argue that ‘Marx got it wrong’ and that by implication there is no long term tendency for the tendency for the rate of profit to fall.

How the tendency manifests itself in practice

Marx’s analysis is actually subtler than many give it credit for.  “There is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time…We have seen how it is that the same reasons that produce a tendential fall in the profit rate 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.” (ibid. p. 331)  In Capital Volume III, Marx even referred to the law as a “double-edged law of a decline in profit rate coupled with a simultaneous increase in the absolute mass of profit, arising from the same reasons.” (ibid. p. 326)

So the rate of profit can fall, and usually does fall, while the mass of profit available to the capitalist class rises. In addition the mass of profit is expressed in a greater and greater quantity of use-values (‘wealth’), each of which involves less and less labour time to produce, and so each has less value congealed within itself.

Secondly, the reader should bear in mind that, “we are deliberately putting forward this law before depicting the decomposition of profit into various categories, which have become mutually autonomous.” (ibid. p. 320) Rent, interest and profit, conventionally presented as the components of surplus value, all vary against one another and all follow their own economic laws. This is very important when we consider the actual onset of crisis.

 November 2007

To be continued….