Marx’s law of profitability by Michael Roberts From his book The Great Recession Nobody argues that the world capitalist economy moves in a straight upward path. Everybody recognises that it is subject to ‘turbulence’, booms and slumps, even crises. In these periods of slump or crises, people’s lives are disrupted, jobs are lost, businesses go bust, families are made homeless etc. Can we say why these crises come about? The orthodox bourgeois econo- mists say they are the result of interference in the market economy by the state, by monopoly power (mainly trade unions) or as the result of ‘bad’ policies that do not allow capitalists the freedom to make profits (too high taxes or interest rates etc). There is no inherent fault in the capitalist mode of production that generates periodic crises in the economy. Followers of the Marxist economic tradition would disagree. For us, the capitalist system is not only unjust, unequal and barbarous. It is also shot through with periodic failure. The primary reason is that the productive forces that provide prosperity and a better life are only unleashed under capitalism if there is a profit for the owners of capital. In other words, the productive forces are privately owned and turned into ‘capital’, so society only benefits if that capital is invested in production. If the profit is not there, things and services that people need are not produced. So profits and the profitability of capital are key to the health of the capitalist mode of production. Marx argued that capitalism will suffer periodic crises precisely because the owners of capital will not be able to generate sufficient profits indefi- nitely to sustain an untrammelled growth in production and living stand- ards. For that reason, capitalism may be the most expansive mode of production seen on the earth so far, but it is also most wasteful, unequal and crisis-ridden. Human beings can do better. Why cannot capitalists generate sufficient profits indefinitely so that the world’s productive forces can expand smoothly forever? Marx argued that the most important law of the motion of capitalism that explained periodic crises was the law of the tendency of the rate of profit to fall. (K Marx, Capital Vol III, Part III, Chapter 13) Of course, each capitalist business, large or small, earns a different amount of profits. And each earns a different rate of profit, as measured by the amount of profits produced in, say a year, against the amount of money capital that the capitalist owner had to put into the business. Marx argued that the only way to understand the forces at work in a whole economy was to aggregate all the profits and capital in all the businesses and come up with an average rate of profit. He then said that, if this average rate of profit dropped so low as to cause the capitalists to stop investing further in production, the economy would go into crisis. There would be what modern economists call a ‘recession’ or ‘slump’, with all that entails for jobs and living standards for the mass of working people and their dependents. What could make the average rate of profit in the capitalist economy fall to such a low level, and for that matter what would make it rise? Marx starts from the fundamental fact that nothing is created without human beings spending time making or delivering it. Under capitalism, however, that labour time has been appropriated by the owners of capital (namely those that own and control the plant and equipment, raw materials and the money to buy them). Production depends on workers, but production does not happen without the say-so of the owners of capital. They own the means of production. Thus, the labour time of the workers is turned into a certain value that the owners of capital measure against the costs of employing their workers and the cost of setting up the businesses and supplying the necessary raw materials and services. Only if the workers expend labour time is there any production and any profit. The workers get paid a certain amount for their time. The capitalists own and control the product of their labour and sell it in the market. The difference between the revenues of those sales and cost of employ- ing the workforce is what Marx called the surplus-value that the own- ers of capital had appropriated over and above the value of the production paid to the workers for their time. From the capitalists’point of view, the capital invested in paying the work- ers is variable, in that the workers add more value. Marx called that variable capital. But the capitalists also have the costs of setting up and running the businesses. Factories, offices and supplies cannot add any production value in themselves. But they still have to be paid for. From the capitalist viewpoint, this is constant capital. In any one period, the capitalists put up money for variable capital (workforce) and constant capital (plant and machinery etc). At the end of the production period, they sell the production in the market and re- ceive revenues to cover their original money capital and more. The rate of profit is thus the surplus value (s) created by the workers divided by the sum of the cost of variable (v) and constant capital (c), or (s/c+v). Marx argued that over a whole economy, there was tendency for that rate of profit to fall. And indeed, after a period of time, it would fall, causing an economic crisis. Why is there a tendency for the rate of profit to fall? The reason is inherent in the capitalist mode of production. Capitalism is a system of production where individual owners of capital (or limited companies with lots of small owners or shareholders) compete in the market place to sell their goods at a profit. So there is an inherent drive to keep costs down relative to likely sales revenues. Assuming, for the moment, that the price that a business is going to get for its product or service is fixed by the market, then each business can raise (or just maintain) profits either by lowering the costs of employing the workforce or by lowering the costs of raw materials and offices etc. The latter costs are usually fixed or out of the control of the individual capitalist, so the big drive is to lower labour costs. Capitalists can do this by reducing the workforce to the minimum re- quired to make the business function. Or they can make an existing workforce work harder or longer. These measures will either raise the absolute size of surplus value created by the workforce or its relative value compared to the costs of employing the workforce (the rate of surplus value), or both. In the modern capitalist world, the most effective way of raising the rate of surplus value is to introduce new technology that can either reduce the number of workers needed or increase how much they produce in the same period of time, or both. The rate of surplus value will rise and, other things being equal, so will profits and the rate of profit. But other things are not equal. New technology means more money capital must be invested in machinery. Most important, Marx said, the amount of capital devoted to machinery and technology will rise relative to the amount of capital invested in the workforce. So there will be a tendency for the value of constant capital (c) to rise relative to variable capital (v). Marx called this ratio: the organic composition of capital, or c/v. If the organic composition of capital (c/v) rises, then, unless the rate of surplus value (s/v) rises as fast or faster, the rate of profit (s/c+v) will fall. Marx argued that under capitalism, the forces of competition and the drive for profit will mean that the organic composition of capital will rise. If it is rising, it is because capitalists are cutting back on labour and substi- tuting machinery. More technology may well raise the productivity of the workforce, but a smaller workforce will reduce the amount of value pro- duced, as only workers expending labour time can add value. Thus rela- tively more spent on technology and relatively less on labour will tend to reduce the amount of value produced for each unit of money capital in- vested. There is a tendency for the rate of profit to fall. However, Marx identified a whole number of ‘countervailing tendencies’ that could mean either the organic composition of capital would not rise or the rate of profit would still rise even if it did — for a while (K. Marx, Capital Vol 1I1, Part III, Chapter 14) And that last point is key. The countervailing tendencies were just that. The tendency for the organic composition of capital would exert itself and so would the tendency for the rate of profit to fall. Eventually, such would be the effect on the average rate of profit and the mass of profits in the economy, that it would push many capitalists into bankruptcy and others to stop producing (as much). There would be an economic crisis. Of course, this is where it all gets controversial, especially among Marx- ist economists themselves! The first big argument is that many econo- mists who consider themselves Marxists reckon that Marx made such important theoretical errors in his explanation of the law of the tendency of the rate of profit to fall that it just does not hold up. The second big argument against Marx’s rate of profit theory is that it is just not empirically correct. The average rate of profit has not fallen over time and, even more significant, the organic composition of capital has not risen to explain it. Marx is just plain wrong, they say. So with Marx wrong both theoretically and empirically, his explanation of economic crisis falls to the ground. The critics say we should look else- where for an explanation of economic crisis. Many fall back on the inadequate theories of the orthodox bourgeois economists or alternatively try to work out a bastardised Marxist version that does not rely on Marx’s rate of profit theory. I hope to try and answer these critics and defend Marx’s theory of prof- itability and crisis both theoretically and empirically. The aim is not just to defend Marx, but also to show that his profit theory is both relevant and crucial to understanding through what stage world capitalism is currently passing. The graph in the next chapter shows the movement in the average rate of profit and the organic composition of capital in the US since 1945. The US is the biggest and most important capitalist economy. As such, it provides the best indicator of the laws of motion of capitalism, just as Marx found Britain was in the 19th century. And this graph provides strong empirical confirmation of Marx’s analysis of the capitalist economy and his explanation of the nature of capitalist crises. From it, we can draw some startling conclusions, as the next chapter will try to show. |