The Falling Rate of Profit and Its Significance

D. The Falling Rate of Profit and Its Significance

Marx represented as “the most important law of political economy . . . that the rate of profit has a tendency to fall with the progress of capitalist production” (MECW

D. The Falling Rate of Profit and Its Significance 307

33: 104). But – unlike Ricardo – he did not dismiss out of hand the Smithian principle of “competition of capitals” generating a falling profit rate, but rather accepted it as explaining certain “temporary phenomena”: “it appears that Adam Smith’s view is correct in one aspect, overlooked by his opponents, that it explains certain temporary phenomena of modern industry, but does not explain the general phenomenon which is involved in the normal decline of the rate of profit; all it does is to explain merely temporary general fluctuations, which are later again balanced out” (93). (We shall elaborate the temporary fall in the rate of profit in our discussion of crises in Chapter 11, pp. 341, 348–9, 351). It emerges that by “profit” in that context Marx intended specifically industrial profit to exclude other categories of surplus value; thus his allowance “does not in fact imply that the rate of profit in general sinks, but rather the rate of profit which appears directly as industrial profit. It implies that there merely takes place a different distribution, since in fact a considerable part of the surplus value is pocketed by the moneyed interest and the fixed income men, instead of the industrial capitalists themselves.” But in analyzing the secular trend of the profit rate the term was to be understood to include all varieties of surplus value: “Since the general rate of profit is nothing but the ratio of the total amount of surplus value to the total amount of capital employed by the capitalist class, we are not concerned here with the different branches into which surplus value is divided, such as industrial profit, interest, rent. . . . We are concerned . . . with a fall in the rate of the total surplus value” (104). Again: “when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus value which is seized in the first place by [the] industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent)” (MECW 32: 94). The rate of profit, in the inclusive sense of total surplus value relative to capital advanced, “may fall, although, for instance, the industrial profit rate rises proportionately to interest or vice versa, or although rent rises proportionately to industrial profit or vice versa.”

The “industrial” capitalist in these passages is not to be taken literally considering the references to rent which is paid solely in agriculture. 16 But there remains the problem that absolute rent emerges as a differential between the “value” and “costs” of corn, costs including the “industrial” profit rate which excludes rent. Marx must then be mistaken in stating that the falling rate of profit, is to be understood as inclusive of rent. More simply stated, if industrial profit “regulates” agricultural profit then the analysis of the falling profit rate logically applies solely to the industrial sector, “industrial” read literally. In order to proceed, we shall simplify matters by assuming an absence of landed property as Marx sometimes did in Capital itself.

∗∗∗ 16 See also: “Rent is . . . simply a name for a part of the surplus value which the industrialist has to

pay out, in the same way as interest is another part of surplus value which, although it accrues to him (like rent), has to be handed over to someone else” (MECW 32: 470).

1861–1863 I: Surplus Value – Profit, Rent, and Interest

A main feature of the analysis is allowance for an increase in the rate of surplus value along with the rising organic composition of capital in the course of accumu- lation. 17 Thus: “The rate of profit falls, although the rate of surplus value remains the same or rises, because the proportion of variable to constant capital decreases with the development of the productive power of labour. The rate of profit . . . falls, not because labour becomes less productive” – as Ricardo had it – “but because it becomes more productive. Not because the worker is less exploited, but because

he is more exploited . . . for capitalist production is inseparable from falling rela- tive value of labour” (MECW 32: 73–4). Similarly, Marx describes the “double manifestation” of the “[t]he development of productive power”: “In so far as [it] lessens the necessary (paid) part of the labour employed [v], it raises the surplus value, because it raises its rate, or it raises it when expressed as a percentage [s/v]. However, in so far as it lessens the total amount of labour employed by a given capital [c/v], it reduces the numerical factor by which the rate of surplus value is multiplied, hence it reduces its amount” (MECW 33: 109). On balance, how- ever, since the increase in s/v is limited relative to that in c/v ; the profit-rate tends downward: “For the rate of profit to remain the same, the rate of surplus value (or the rate of exploitation of labour) would have to grow in the same ratio . . . as the magnitude of the variable capital falls relatively. . . . It is already strikingly appar- ent from one single circumstance that this is only possible within certain lim- its, and that it is rather the reverse, the tendency towards a fall in profit – or a relative decline in the amount of surplus value hand in hand with the growth in the rate of surplus value – which must predominate, as is also confirmed by experience” (110).

The “circumstance” intended relates to the absolute maximum to the working day: “If the normal day = 12 hours, 2 workers who perform simple labour can never add more than 24 hours . . . , of which a definite part replaces their wages. The surplus value they produce cannot, whatever the circumstances, be more than an aliquot part of 24 hours” (110–11). Accordingly, if “2 workers are necessary in the new mode of production where 24 were necessary in the old one, in proportion to a given amount of capital, then if the surplus labour in the old mode of production = 1/12 of the total working day, or = 1 hour, no increase in productive power – however much it raised the rate of surplus labour time – could have the effect that the 2 workers provided the same amount of surplus value as the 24 in the old mode of production” (111; also 32: 433).

Other limits to the fall in v (or increase in s/v) reflect characteristics of agriculture akin to a sort of diminishing returns, at least relative to industry: “The development of productive power is not even. It is in the nature of capitalist production that it develops industry more rapidly than agriculture. This is not due to the nature of

17 The rising organic composition (c/v) is attributed to Cherbuliez (MECW 33: 106–7).

D. The Falling Rate of Profit and Its Significance 309 the land, but to the fact that, in order to be exploited really in accordance with its

nature, land requires different social relations. Capitalist production turns towards the land only after its influence has exhausted it and after it has devastated its natural

qualities” (MECW 32: 433). 18 Second, there is the circumstance that agricultural products sell at value not cost price – the source, of course, of Absolute Rent: “An additional factor is that, as a consequence of landownership, agricultural products are more expensive compared with other commodities, because they are sold at their value and are not reduced to their cost price. They form, however, the principal constituent of the necessaries.” And thirdly, “if 1/10 of the land is dearer to exploit than the other 9, these latter are hit ‘artificially’ by this relative infertility, as a result of the law of competition” (433–4), Marx silently applying the marginal-cost rule.

Marx also clarified that technical progress in the luxury sector contributes to general profit-rate decline. The case is prefaced by reference to the motivation behind the introduction of new techniques which applied quite generally:

No capitalist voluntarily employs a new mode of production, even though it may be much more productive, and however high the ratio in which it increases the rate of surplus value, if it reduces the rate of profit. But every new mode of production of this kind cheapens the commodity. He therefore starts by selling it above its costs of production, and above its value. He is able to do this because the average labour time socially required for the production of this commodity is greater than the labour time required under the new mode of production (the total amount of labour time contained in the constant and variable capital). His mode of production stands above the socially average level. Competition generalises this and subjects it to the general law (MECW 33: 147–8).

As for “the capitalists who work under the old conditions of production [they] must sell . . . below the value, since the labour time they need for the production of those commodities now stands above the labour time socially necessary for their production. In a word – and this appears as an effect of competition – they too must adopt the new mode of production, in which the ratio of the variable capital to the total amount of capital advanced has fallen” (149). And “[t]hen the fall in the rate of profit takes place, a law which is therefore completely independent of the will of the capitalist” (148). In this trend the “unproductive” or luxury sectors are in no way set apart: “there takes place a reduction in the value of the commodities, and a reduction in the number of workers exploited, without an increase of any kind in relative surplus value. This situation in the unproductive spheres of production – those not producing relative surplus value – is of substantial influence, if one considers the capital of the whole society, i.e. of the capitalist class, from the angle that the total amount of surplus value falls in proportion to the capital advanced – hence that the rate of profit falls” (149).

18 See Chapter 4, pp. 124–5 for a more detailed account of agricultural productivity conditions.

1861–1863 I: Surplus Value – Profit, Rent, and Interest Marx at one point raises the question why empirically the profit rate had not

fallen faster than its actual decline, without unfortunately referring to specific data regarding the latter: “If one considers the development of productive power and the relatively not so pronounced fall in the rate of profit, the exploitation of labour must have increased very much, and what is remarkable is not the fall in the rate of profit but that it has not fallen to a greater degree” (111). This could be explained partly “by the general circumstance that so far the immense increase of productive power in some branches has been paralysed or restricted by its much slower development in other branches. . . . ” More generally, Marx allowed periods of unchanged organic composition: “despite the constant daily changes in the mode of production, capital, or a large part of it, always continues to accumulate over

a longer or shorter period on the basis of a definite average ratio between those organic components, so that no organic change occurs in its constituent parts as it grows” (141). And beyond this, “the fall in variable capital in comparison with total capital – and this fall accompanies every development of productive power – does not occur to the same degree as productive power develops, because an ever more considerable portion of the capital enters into the value of the commodities, into the valorization process, only in the form of annuities,” possibly alluding to used-up capital or c ′ in the terms of Capital (149–50). For all that, the “tendency” is insisted upon: “The rate of profit therefore does not diminish in the same proportion as capital grows . . . although the growth of capital – to the extent that it depends on the development of the productive forces – is continuously accompanied by a tendential fall in the rate of profit.”

The high significance for Marx of the falling profit rate is apparent. In the first place, he relates it to increased “concentration,” both as cause and effect:

This fall in the rate of profit leads to an increase in the minimum amount of capital – or a rise in the level of concentration of the means of production in the hands of the capitalists – required in general to employ labour productively, both to exploit it, and to employ no more than the labour time socially required for the manufacture of a product. And there is a simultaneous growth in accumulation, i.e. concentration, since large capital accumulates more rapidly at a small rate of profit than does small capital at a large rate of profit. Once it has reached a certain level, this rising concentration in turn brings about a new fall in the rate of profit (112).

Similarly: “Once the new invention has been introduced generally, the rate of profit becomes too small for a small capital to be able to continue to operate in the given branch of industry. The amount of necessary conditions of production grows in general in such a way that a significant minimum level comes into existence, which excludes all the smaller capitals from this branch of production for the future. It is only at the beginning that small capitals can exploit mechanical inventions in every sphere of production” (140–1).

E. Materials, the Luxury Sector, and the General Profit Rate 311 Increased risk tolerance on the part of small firms is a further consequence: “The

mass of the lesser, fragmented capitals are therefore ready to take risks. Hinc crisis” (112). Marx adds that “[t]he so-called plethora of capital refers only to the plethora of capital for which the fall in the rate of profit is not counterbalanced by its size. (See Fullarton [1844: 161–6].)”

A primary concern is the potentially depressing effect on accumulation, for “[p]rofit . . . is the driving agency in capitalist production. . . . Hence the anxiety of the English political economists about the reduction in the rate of profit.” But the accumulation rate is only adversely affected should total profit fall: “As long as the rate of profit falls more slowly than capital grows, there is a rise in the amount of profit and therefore the rate of accumulation, although relative profit declines . . . ” (113). Marx here commends Ricardo and others for appreciating the danger: “That this mere possibility disturbs Ricardo (Malthus and the Ricardians similarly) shows his deep understanding of the conditions of capitalist production. . . . What makes Ricardo uneasy here is that profit – the stimulus of capitalist production and the condition of accumulation, as also the driving force for accumulation – is endan- gered by the law of development of production itself ” (114).