Socialist Studies
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Marx
and the
Falling Rate of Profit
Introduction
Some
people who are concerned with what Marx wrote about the average rate
of profit believe that he confidently predicted that it would go on
falling indefinitely. This is not correct.
The
tendency for the average rate of profit to fall was noticed by economists
long before Marx. Both Adam Smith in his WEALTH OF NATIONS (1776)
and David Ricardo in his PRINCIPLES OF POLITICAL ECONOMY some forty
years later both held their own respective but untenable theory to
explain it.
Adam
Smith saw the accumulation of capital being governed by the extent
of the competition and the growing division of labour. Smith believed
that competition exhausts capital accumulation thereby slowing down
the economy and reducing the rate of profit to a minimum.
David
Ricardo, on the other hand, attributed the falling rate of profit
to the cost of corn and Malthus's law of population.
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He believed that
as the value of corn increases so does the wage at the expense of
profit and, consequently, the rate of profit is forced down to a minimum.
It
was in his criticism of the general economic theories held by Smith
and Ricardo that Marx came to address the question of the falling
rate of profit. Marx showed that the fall in the rate of profit derived
from the main laws of the movement of capital itself.
By
the 1860's when Marx came to consider the question of the falling
rate of profit it was no longer the comparatively simple one it had
once appeared to be. (It was in this decade that Marx prepared the
unfinished draft which Engels would subsequently edit as volume III
of CAPITAL after Marx's death).
Far
from feeling confident about the question of the falling rate of profit,
Marx was clearly uncertain and puzzled. At the beginning of Chapter
XIV of the third volume of CAPITAL he wrote:
"If
we consider the enormous development in the productive powers of social
labour over the past thirty years (1835-65) alone, compared to all
earlier periods, and particularly if we consider the enormous mass
of fixed capital involved in the overall process of social production
quite apart from machinery proper, then instead of the problem that
occupied previous economists, the problem of explaining the fall of
the rate of profit, we have the opposite problem of explaining why
this fall is not greater or faster. Counteracting influences must
be at work, checking and cancelling the effect of the general law
and giving it simply the character of a tendency, which is why we
have described the fall in the general rate of profit as a tendential
fall" (CAPITAL III p.339, Penguin edition p. 1981).
Marx
then commented briefly on half a dozen counteracting influences which
tend to raise the average rate of profit, but he did not even attempt
to evaluate the final outcome of one tendency lowering the average
rate of profit and others raising it. The counteracting influences
Marx highlighted were:
(i).
More intense exploitation of labour. The process of capital
accumulation brings in machinery and division of labour. These factors
increase the rate of surplus value by increasing the intensity of
exploitation of labour power. Similarly, a lengthening of the working
day increases the rate of exploitation.
(ii).
Reduction of wages below their value. This is a cyclical factor
caused during periods of high unemployment where the effects of competition
between workers looking for work influence the profit rate. Marx believed
this "one of the most important factors checking the tendency
of the rate of profit to fall".
(iii).
Cheapening of the elements of constant capital. The means of
production are cheapened by increases in the productivity of labour,
and this tends to offset the increase in the mass of means of production
used.
(iv).
The relative surplus population. Increase in productivity makes
workers redundant and forces down wages, checking the tendency to
substitute means of production for labour, and also encouraging the
creation of new labour intensive industries that reduce the average
composition of capital.
(v).
Foreign Trade. Foreign trade increases the rate of surplus
value by lowering the rate of labour power because it is possible
to buy cheaper foreign food consumed by workers. It also allows cheaper
foreign means of production to be brought. Marx also mentions in passing
that exporting capital may also prevent the fall in the rate of profit.
(vi).
The increase in share capital. Marx, in passing, adds one further
counter-tendency. As capitalism develops into joint-stock companies
made up of numerous shareholders a portion of the capital invested
can be treated as interest-bearing capital yielding lower rates on
unearned income than the general rate of profit. Such capital does
not affect the general rate of profit and hence does not contribute
to the fall in the profit rate. It must be noted that Marx also considered
the theoretical possibility of where interest-bearing capital did
not affect the profit rate.
These
six counteracting influences were just stated by Marx with very little
rigorous presentation and analytical investigation. There could even
be other factors besides those mentioned above which also acted against
the profit rate falling.
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Is
there a contradiction in Marx's Analysis of the falling rate of profit?
Some readers of volume III of CAPITAL think that Marx contradicted
himself. On page 318, for example, he wrote:
"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…"
while
on page 343 he wrote:
"the
same factors that produce the tendency for the rate of profit to fall
also moderate the realization of this tendency".
They
have failed to notice Marx's presentation, which was to treat each
factor separately. All that Marx was saying on page 318 was that if
the tendency for the rate of profit to fall because of the increase
of constant capital to relative variable capital was the only factor
then the rate of profit must fall continuously. And the statement
on page 343 was not a generalisation but referred only to the matter
dealt with in the sub-section, namely: "cheapening of the
elements of constant capital".
Anthony
Brewer of the Department of Economics, University of Bristol, in his
A GUIDE TO MARX'S CAPITAL (1984 p. 145), says of this that Marx:
"gives
no good reason to expect the "tendency" to prevail over
the "counteracting influences".
On
the other hand Joseph Gillman in his THE FALLING RATE OF PROFIT (New
York 1958, p. vi) treats it as if Marx was saying that a downward
tendency would prevail and that the rate of profit was therefore bound
to fall (see the critical review of Gillman's book in THE SOCIALIST
STANDARD, June 1960).
Brewer
and Gillman both comment on the unreality of wondering about the falling
rate of profit a century or more after Marx wrote about the subject.
Adam Smith and David Ricardo could think of capitalism lasting indefinitely
but not Marx. In his expectation it would have been abolished before
now but the working class, for example, have persistently voted for
capitalist politicians at general elections and have not taken conscious
political action in line with their own interests. Gillman quotes
in this connection the passage in Volume 1 of CAPITAL (page 837) which
concludes:
"Centralisation
of the means of production and socialisation of labour at last reach
a point where they become incompatible with their capitalist integument
(skin). This integument is burst asunder. The expropriators are expropriated".
Nevertheless
Marx gave no time limit for the establishment of Socialism. What he
did say was that Capitalism would not collapse and that Socialism
was contingent on being established, consciously and politically,
by a Socialist working class through its own efforts; an important
point Gilman missed altogether.
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Has
the average rate of profit fallen?
It
might appear to be a simple matter to compare the present average
rate of profit with what it was in the 1860's and note whether it
has fallen and if so by how much. It isn't at all a simple matter.
In
the 1860's little statistical information was available. There is
much more information available now but, then as now, it is rarely
in a form which fits in with Marx's definitions.
Much
of the information in Company Profit and Loss accounts and Balance
Sheets is unreliable and misleading. The Government Statistical Office
publishes figures for the total of the gross trading profits of companies
but apparently the Office does not publish a corresponding estimate
for the total of Capital invested, without which it is not possible
to calculate the average rate of profit.
From
the information that is available it is possible to draw certain fairly
reliable conclusions:
(a).
In Britain and the US the average rate of profit has not been falling
continuously since the 1860's. If they had we would surely expect
that by now the rate would be approaching zero.
(b).
It is possible for the average rate of profit to rise in certain periods
of the trade cycle and fall in others.
(c).
The fall, or rise, of he average rate of profit or the average rate
in certain industries, may be due to causes other than those Marx
dealt with.
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The
average rate of profit in the 1890's
On
12th March 1895 Engels wrote to Conrad Schmidt about the average rate
of profit (see correspondence of Marx and Engels, Martin Lawrence
1934, page 527).
Engels
warned Schmidt against expecting the average rate of profit to be
a precise figure ("say 14.876 or 934 %") and went
on to say this:
"In
reality the rates of profit vary from business to business and from
year to year according to different circumstances, and the general
rate of profit only exists as an average of many businesses and a
series of years".
Engels
also raised the question with Schmidt, in connection with an article
Schmidt had written about Capital Volume III (see Engels "ON
MARX'S CAPITAL" Progress Publishers, Moscow, 1956, page 104).
"especially
to be emphasised here is the proof of how the Marxian derivation of
average profit from surplus value for the first time gives an answer
to the question not even posed by the economists up to now: how the
magnitude of this rate of profit is determined, and how it comes about
that it is, say 10 or 15 percent and not 50 or 100 per cent".
Are
we, on the strength of these statements by Engels, entitled to believe
that in 1895 it was Engels' view that the average rate of profit was
somewhere between 10% and 15%? He was in as good position as anyone
to form a useful opinion.
If
so we can say with some confidence that the average rate of profit
has not constantly fallen in the past 100 years or so. In his book
"A GUIDE TO MARX'S CAPITAL", Brewer shares this view:
"In
theoretical terms, the problem is that Marx described a "tendency"
together with a number of "counteracting influences" that
have the opposite effect. He gives no good reason to expect the "tendency"
to prevail over the "counteracting influences". There has
been, in practice, been no consistent falling trend in profit rates"
(p.145).
This
may be so, but we cannot share with Brewer the view that Marx expected
"the eventually collapse" of capitalism. This view
was the standard theology of the Social Democrats and, later, the
Bolsheviks. A. Bogdanoff, in his revised 1223 edition, A SHORT COURSE
OF ECONOMIC SCIENCE", wrote that:
"Capitalism
in its latest stages reveals symptoms of the deepest degeneracy which
must lead to its inevitable collapse" (p.370).
Ironically
it was Russian State Capitalism that collapsed and with it the anti-working
class doctrines which supported it.
Marx
held no such view that capitalism would collapse.
Marx
in fact wrote:
"…capitalist
production moves through certain periodical cycles. It moves through
a state of quiescence, growing animation, prosperity, overtrade, crisis
and stagnation" (WAGES, PRICE AND PROFIT in Selected Works,
p. 440).
He
emphasised this point again in THEORIES OF SURPLUS VALUE, VOLUME II:
"Permanent
crises do not exist" (p. 497).
Those
who believe that Socialist consciousness rises when there is economic
crises and economic depressions are not supported by history. The
Great Depression of the late 19th century, the trade slump of the
1930's and the trade crises in the three decades; 1970-1990 did not
see a corresponding rise in socialist consciousness and political
action. The Socialist case against capitalism exists whether it is
in a boom or in a crisis.
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Gillman
on the average rate of profit in the US
In
the book by Joseph Gillman referred to above he examined all the evidence
to find out whether in fact the average rate of profit had continuously
fallen (On Gillman's erroneous reading of Marx he believed Marx expected
it to do so).
Gillman
emphasised the great difficulty experienced in obtaining information
and being certain of interpreting it correctly. He reached the following
tentative conclusion:
"The
results show that whereas for the years before about World War I the
historical statistics seem fully to support these theories of Marx,
after that war the series studied appear generally to behave in contradiction
to the Marxist expectations. The explanation could be that our statistics
or our procedure, or both, are wrong (Preface p. vii).
At
page 84, Gillman published his table showing the average rate of profit
in US manufacturing industries from 1880 to 1952. Between 1880 and
1921 the rate was falling, from 69% to 18% in 1921.
After
1921 the rate more or less continuously rose and in 1950, 1951 and
1952 was 40%, 38% and 37% respectively.
The
academic debate has continued unabated and now takes the form of a
medieval dispute on how many angels can be found on a pin's head.
Much of the writing on the falling rate of profit is found in Capital
and Class published by the mis-named Conference of Socialist Economics
(CRE) whose members either support policies associated with State
capitalism (nationalisation) or a mixed capitalist economy. No where
in there writings do they apply Marx's theories to the political struggle
and the abolition of the wages system.
Another
example of this academic parasitism in living off Marx's Capital could
be found in Quantitative Marxism (ed. P. Dunne, Polity Press 1991).
A particularly poor paper in the book was written by Lord Desai. Entitled
Methodological problems in Quantitative Marxism, Dessai not only rejected
Marx's analysis of the question of the fall in the rate of profit
but pompously substituted his own "model" to explain the
question, a model which is indistinguishable in its content from the
vulgar economics Marx attacked in the 19th century for its apologetic
shallowness. Ironically, Lord Dessai was once an economic adviser
to the Chancellor of the Exchequer, Gordon Brown.
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Financial
Times summaries of Company Reports (1984-5)
For
many years the FINANCIAL TIMES published monthly summaries of company
accounts, including a figure described as "Net Return on Capital".
In
1884-5 the average net return in respect of over 700 "industrial"
companies showed that for the latest year the average was about 16%
and for the previous year in respect to the same companies, 15%.
It
may be assumed that these figures give a rough indication of "average
profitability" as the FINANCIAL TIMES describes them. The
"profit" figures used in the calculation were "Profits
before interest and tax". The "capital"
were "net fixed assets -excluding tangibles such as goodwill
- plus current assets, less current liabilities, except bank overdrafts".
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Profits
of British Manufacturing Companies 1948-1977
For
the 30 years 1948-1977 the Government Statistical Office published
each year the number of workers employed by the manufacturing companies,
the total wages and salaries bill, and total gross trading profits
of the companies. They did not publish information which would have
shown directly the course taken by the average rate of profit but
indirectly the figures suggest the rate of profit must have been falling.
What
is possible to calculate, is the relationship between total profit
and the total wage and salary bill. Breaking the 30 years into three
10 year periods, the percentage relationship between profits and wages
was as follows:
Years |
Profits |
| |
|
1948-1957 |
Profits
57% of wages |
1958-1967 |
Profits
43% of wages |
1968-1977 |
Profits
33% of wages |
This,
however, was not an example of an industry modernising itself by increasing
investment in constant capital relative to variable capital, but an
industry which from the 1950's onwards was progressively less and
less able to stand up to the competition of cheaper goods from Japan,
Germany and elsewhere. The volume of sales declined, at home and abroad.
Many forms went out of business or curtailed their operations and
between 1956 and 1977 the total number of jobs declined from 8,559,000
to 7,382,000.
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Production,
wages and profits 1981 -1993
Experience
shows that whatever long-term changes may take place the average rate
of profit falls in depressions and rises again as production expands.
There
is good indirect indication that this may have been taking place since
1981, as evidenced by the relationship between total gross company
trading profits and total wages and salaries.
A
useful method of illustrating the variations of profits from year
to year is to express them as a percentage of total wages and salaries.
The table in Appendix 2 below shows, for
each year, the official estimate of total "Gross Trading Profits"
as a percentage of "Income from Employment". The
Decades covered are from the 1930's to the 1990's.
Income
from employment covers all employees in work which, of course, falls
when unemployment rises, particularly in a trade depression. Unemployment
was generally very low from 1946 to 1976 and was high in 1981-83 and
1989-1993. Income from employment also takes into account changes
in average weekly pay. Company profits largely reflect the state of
trade in home and foreign markets.
It will be noticed that the figures do not show any long-term trend
either for profits to rise, or to fall. The periods in which the percentages
were high are in the beginning, 1946-1951, and towards the end, 1982-1988,
with generally lower percentages in the middle years, 1966-1976.
The
figures show that the variations up and down are not at all related
to whether the government is Labour or Tory despite the fact that
the Tories have been in power longer during this period than Labour.
There is only a minute difference between the average for the 16 years
of Labour Government, 22.9%, and that of the 33 years of Tory Government,
22.18%. Of the 6 years in which the percentage is highest (above 27%),
3 are years of Labour Government and 3 are years of Tory Government.
Of the 6 years when the percentage were lowest (under 20%), 3 are
labour and 6 are Tory. The high rates of profit in the period 1946-1951
will have been helped by the receipt of Marshall Aid from the US,
and by the fact that Japan and Germany, due to war damage, were more
or less out of the world market. The low rates in 1974-1976 were probably
due to the formation of OPEC and the enormous rise in the price of
oil in 1973.
What
has been happening from the 1980's onwards is that capital invested
has increased and the employers have been able to get a big increase
of total production -some 21% between 1981 and 1987 - with almost
no increase in the number of workers in employment. The decline between
1989 and 1992 is explained by the trade depression of the period where
the average rate of profit fell.
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Summary
Is
there a political point to the tendency for the rate of profit to
fall? In the context of the three volumes of CAPITAL it plays its
role in explaining economic crises and exploitation which is part
of a larger argument against capitalism in that it can never be run
in the interests of the working class.
The
capitalist left have often tried to draw their own political views
of the falling rate of profit from claiming that it will lead to the
collapse of capitalism and chaos from which a new society will emerge.
As we have shown this was not Marx's view.
A
recent writer believes there is another political point to be drawn.
In his book "THE FALLING RATE OF PROFIT: RECASTING THE MARXIAN
DEBATE" (Pluto Press 1994), Stephen Cullenberg, Associate Professor
and Chair of the Department of Economics at the University of California-Riverside
stated:
"…not
far below the surface of the debate, are different views on the political
significance of the falling rate of profit, which gives this debate
a particular urgency and vitality. Roughly, these political positions
are of two types: (a) if the rate of profit must necessarily fall
that provides the basis for a revolutionary transformation to socialism,
or, alternatively, (but if it doesn't fall, then political action
will necessarily be reformist and capitalism can only be slowly transcended,
if ever" (abstract p. 2).
Is
this correct? Are revolution and the establishment of Socialism dependent
upon the rate of profit to fall? This was again not Marx's view. As
early as the COMMUNIST MANIFESTO Marx rejected economic determinism
and fatalism. He wrote:
"The
essential condition for the existence, and for the sway of the bourgeois
class, is the formation and augmentation of capital; the condition
of capital is wage-labour. Wage-labour rests exclusively on competition
between the labourers. The advance of industry, whose involuntary
promoter is the bourgeoisie, replaces this isolation of the labourers,
due to competition, by their revolutionary combination, due to association.
The development of Modern Industry, therefore, cuts from under its
feet the very foundation on which the bourgeoisie produces and appropriates
products. What the bourgeoisie therefore produces, above all, are
its own gravediggers. Its fall and the victory of the proletariat
are equally inevitable" (taken from THE COMMUNIST MANIFESTO
AND THE LAST HUNDRED YEARS, Socialist Studies, 1948
p. 73).
The central thrust of Marx's argument is that the working class make
revolutions and do so because they come to realise that capitalism
cannot be made to work in their interests, that reforms and political
leaders from across the political spectrum cannot abolish class exploitation,
social alienation, poverty and unemployment. Of course Socialism is
only possible when a socialist majority exists to take conscious and
political action. Until then capitalism will pass from one crisis
to the next, one war to the next and one life of class privilege and
power to the next.
We
have looked at the question of the falling rate of profit, not as
an academic exercise, but to see its relevance to the anarchic movement
of capitalism from one trade depression to the next and the exploited
position of the working class in this movement. Testing the fall in
the rate of profit meets difficulty by the unavailability of statistics
within the framework in which Marx posed the question and carried
out his research. No information exists for the organic composition
of capital or the rate of surplus value since all statistics are collected
in terms of market prices.
Marxian
Economics is important. It forms a large field in the battle of ideas.
If Feudalism defended itself ideologically with theology then capitalism,
by and large, defends itself with economic theory. Although it is
useful to remember, with Engels, that "Economics deals not
with things but with relations between persons and in the last resort,
between classes", the arguments put forward by academic economists,
journalists and politicians have to be largely refuted in economic
terms as much of Capital sets out to do because relations between
classes under capitalism are "always attached to things and
appear as things" (Blaming workers for inflation and giving
banks the power to mystically create credit at the stroke of the pen
are just two examples). Propagating socialist ideas will not succeed
by unsupported rhetoric. Clarity, argument, rigorous debate supported
by the facts separates scientific socialism from utopian speculation.
It might be hard work but the class struggle is just that.
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Appendix
1
Part
III, of CAPITAL VOLUME III, "The Law of the Tendency of the
Rate of Profit to Fall" is not easy reading since Marx introduces
a number of unfamiliar concepts. The chapters in question are The
Law as Such, Counteracting Influences and Internal Contradictions
of the Law which are set out from pages 211 to266 of the translation
edited by Frederick Engels.
The
fundamental contradiction of accumulation, in the Marxian sense of
the word, is that the process of capital accumulation has a tendency
to attack the very motive which drives it forward, the rate of profit.
Marx
expresses the rate of profit for capital in general by the ratio of
total surplus value to total capital invested. Marx gives the equation
as r = S/(C+V).
The
rate of profit then depends on two pivotal relationships. First is
the rate of exploitation. Second is the ratio of constant capital
to variable capital. This latter ratio Marx called "the organic
composition of capital".
The
organic composition of capital is either measured as the ratio of
constant capital to variable capital (C/V) or as the ratio of constant
capital to total capital (C/ (C+V).
Accumulation
of constant capital can occur without a subsequent increase in the
organic composition of capital if it can be met with an increase in
variable capital; that is an increase in the working class employed
and exploited in the process of production.
However,
if this occurs, the supply of labour to be exploited will fall and
wages and salaries begin to rise as workers in employment struggle
to use their favourable position to gain better pay and working conditions
at the expense of profit.
Historically,
what has happened is that capitalists introduce labour saving machinery
with displaced workers either finding themselves unemployed or absorbed
elsewhere in employment.
The
use of machinery increase productivity. What took an architect a week
to draw on a drawing board now takes a day's work using computer aided
design. Mechanisation may allow a fall in necessary labour time or
an increase in relative surplus value.
Nevertheless
this raises a problem for the capitalists. The organic composition
of capital under these new conditions of mechanisation has a tendency
to rise. The amount of dead labour represented by equipment, machinery,
computers and buildings rises relative to the employment of living
labour. However, as Marx showed in CAPITAL VOLUME I, dead labour or
constant capital cannot create additional surplus value. The rate
of profit will therefore fall, unless the rate of exploitation increases
and the mass of surplus value grows.
This
is how Marx posed the problem and, after setting out a number of "counteracting
tendencies" and commenting on the "internal contradictions
of the law" is how he left it.
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Appendix
2
Year |
Total
Gross Trading
Profits of Companies
as % of total wages
and salaries |
| |
|
1938 |
22.8 |
1946 |
25.4 |
1951 |
29.3 |
1964 |
23.9 |
1970 |
18.7 |
1973 |
21.9 |
1974 |
19.5 |
1975 |
17.8 |
1979 |
25.4 |
1981 |
19.65 |
1982 |
21.0 |
1983 |
23.9 |
1984 |
26.0 |
1985 |
27.42 |
1986 |
24.47 |
1988 |
28.2 |
1989 |
26.3 |
1990 |
21.0 |
1991 |
18.4 |
1992 |
18.6 |
1993 |
19.4 |
Source:
Office of National Statistics
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