The Tendency For the Rate of Profit to Rise

In Capital Vol III Part III, Marx sets out his theory on “The Law of the Tendency of the Rate of Profit to Fall.” See: Capital Vol III.

Right at the beginning Marx shows how the same quantity of Variable Capital (Labour Power), and the same rate of surplus value creates varying rates of profit depending upon the division between Constant Capital (machinery, buildings, raw materials) and Variable Capital, or as Marx calls it the Organic Composition of Capital. So:

If c = 50, and v = 100, then p' = 100/150 = 66⅔%;
c = 100, and v = 100, then p' = 100/200 = 50%;
c = 200, and v = 100, then p' = 100/300 = 33⅓%;
c = 300, and v = 100, then p' = 100/400 = 25%;
c = 400, and v = 100, then p' = 100/500 = 20%.

Marx demonstrates that as a result of progress this Organic Composition naturally increases, and so there is a tendency over time for the Rate of profit to fall. As with many other parts of Marx’s Capital, this part has caused some controversy over the years. For some Marxists the “Tendency” bit of Marx’s description of his theory has been ignored turning it simply into a “Law” that the rate of profit must fall, and this has been placed at the heart often of these Marxists explanations of Capitalist crises, and also of the need for imperialism i.e. for Capital to seek out new sources of Labour Power to consume. What such writers tend to minimise is the other parts of Marx’s theory here where he outlines why the Theory is only a tendency, why there are countervailing effects which mitigate this tendency. I intend to demonstrate here why not only does modern capitalism have features which mitigate the tendency for the Rate of profit to fall, but why the very nature of modern capitalism means that these countervailing effects result not in a tendency for he rate to fall, but for it to rise.

First, let us consider why it is that the Organic Composition of Capital rises. Marx sets out a number of causes I intend to concentrate on just some, the reader can investigate all of them via the link above. Firstly, Capital needs to create a Reserve Army of labour. It needs this for several reasons. IN the first place capitalism is a dynamic system. Capital moves from one area of production to another in search of higher rates of profit, which in part are a function of changes in consumer demand. Not only Capital as Constant Capital has to move, but Capital in the form of Labour Power has to move too. But, there must arise necessary frictions. Labour will not be in the right place, will not be of the right type etc. Moreover, Capital expands as economic growth takes place, and this expansion will continually mean that more labour power is required. The movement of Capital from one area to another, and the expansion of Capital can only take place if there is available Labour Power to be employed i.e. if there is always a reserve of Labour. Secondly, if wages are to be kept down to the Value of Labour Power then the demand of Labour Power must not exceed its supply, and preferably if workers are to be forced sellers of their Labour Power – and they must be so if they can be persuaded to remain wage slaves i.e. to provide part of their Labour Power gratis to the Capitalist – Supply must be greater than demand. For example, Marx sets out that even as late as the last third of the 18th century, even landless labourers still had the ability through the utilisation of the Common Land etc. to provide enough of their daily requirements for themselves that Capitalists could only persuade them to work 3 days a week to cover their additional needs. The result was that the supply of Labour Power remained low, and the conditions upon which it was sold were so favourable to the workers that Marx says Capitalists found they were unable to make any sizeable profit. The early industrial Capitalists were forced to accumulate Capital not as they do today through the appropriation of Surplus Value from many workers, but by keeping their own consumption to a minimum, often below that of their workers. This was despite Laws remaining on the Statute book from the 15th century setting a Minimum length of Working Day etc.

One means by which Capitalists can create this Reserve Army of Labour is by utilising where possible machinery instead of Labour Power. Provided the cost of the machinery (which ultimately means the amount of Labour Time needed for its production) is less than the cost of the Labour Power it displaces there is an incentive for the Capitalist to make this substitution. Consequently, there is a natural tendency for the amount of machinery used in production to rise, and for Labour Power to fall. As Marx sets out above, the consequence must be that the Rate of profit declines.

Secondly, technological developments mean that improved machinery can hugely increase the productivity of labour. Even if we assume that this technological development causes the cost of the machinery to remain constant, the same amount of Labour Power will now consume a much larger quantity of raw materials etc. Suppose the Capital of a firm is made up of £100 of machinery, £100 of Materials and £100 of Labour Power. With a 100% rate of Surplus value the Surplus Value will be £100. The Rate of Profit will be 100/300 or 33.3%. Now assume a new machine is developed which costs the same as the previous machine, but which doubles the productivity of the Labour Power consumed. The same amount of Labour Power now requires twice the materials previously used up. The situation now is £100 in machinery, £200 in Materials, and £100 in Labour Power. With the rate of Surplus Value remaining the same the Rate of Profit is now 100/400 or 25%.

This is the basis for the Tendency of the rate of Profit to fall, and there are strong empirical grounds for believing that over a long period Marx’s theory here is valid. But Marx also sets out the reasons why this theory is no “Iron Law”. One of the first reasons that can be cited is that outlined above. The process of utilising machinery is not merely a matter of utilising more machinery of the same type. This will tend to be true for particular periods, but due to innovation there will be entire periods when the Value of Constant Capital in the form of machinery is depreciated. The very process of development reduces the Value of Constant Capital, and with this falling Value comes also a fall in the Organic Composition of Capital. If we take the example above, but with a slight modification we might have:
£50 Machinery, £100 Materials, £100 Labour power, £100 Surplus value. Rate of profit 100/250 = 40%.

Here the new machine does not enhance the productivity of Labour and so the same quantity of labour does not set in motion more materials, it is simply that the cost of the machine has fallen, causing a fall in the Organic Composition of Capital and a consequent rise in the rate of profit. But, the same can be said of the other inputs too. Increasing productivity can also reduce the amount of Labour Power required to produce not just the machinery, but also the materials consumed. Increasing productivity can result in the wage goods bought by the worker becoming much cheaper, and so the Value of Labour Power falls meaning that in a given working day the worker reproduces their wages in a shorter period, and so more of the working day is appropriated by the Capitalist as Surplus Value. So we have.

1)
Machinery £50, Materials £50, Labour Power £100, Surplus Value £100 – Rate of profit 100/200 = 50%.

2)
Machinery £50, Materials £50, Labour Power £50, Surplus Value £150 – Rate of profit 150/150 = 100%.

Here if we assume a working day of 8 hours then formerly the worker worked for 4 hours to reproduce their Labour power, and provided the remaining 4 hours gratis to the Capitalist. If rising productivity means that the Value of Labour Power is halved, the worker now reproduces their wages in just 2 hours, the remaining 6 hours now being appropriated by the Capitalist i.e. the rate of Surplus Value rises from 100% to 300%.

Over a long period as Kondratieff demonstrates there is clear evidence of this countervailing tendency to operate too. At the end of the periods of Long Wave expansion when demand for Labour Power has reached a peak, when the cost of all inputs including machinery and materials are at their highest, and consequently when the Rate of profit is lowest, there is a strong incentive for innovation, for means to build a better mousetrap, to find cheaper materials, cheaper labour power, or to be able to use less labour Power etc. But innovation does not happen to order. The innovation cycle tends then to correspond more to periods of downturn, and the base technologies developed during this period are taken up only sporadically. It is the new Long Wave upswing which sees them incorporated into new products and new methods of production – just as the base technologies of IT and biotechnology developed over the last 20-30 years, are only now beginning to revolutionise production, and to be incorporated into ever new items of consumption. As Kondratieff also shows the position in respect of materials is more complex. During the Long downswing demand for materials necessarily falls at least relatively. But, the producers of these materials having invested huge amounts of Capital in new mines etc. need to operate this Capital at pretty much a constant level. Supply remains constant or slightly increases at least for part of the time, whilst demand falls. Prices fall. The response is for raw material producers to abandon the search for new materials, to stretch out existing machinery to the end of its life etc. By the end of the Long downswing Capital investment in these industries is low, and exploration is almost non-existent. Existing mines are becoming exhausted, and marginal production costs rising. When the new long upswing arrives then Supply cannot increase rapidly enough to meet demand. Prices rise – just look at the rise in the price of Copper, Lead and other metals over the last 7 or 8 years corresponding to the beginning of the new K cycle. As the demand for Labour Power rises and new reserves of labour are employed the demand for wage goods such as food increases – again look at the rise in soft commodity prices over that period as demand from the millions of new workers in India and China raises demand – the current rise in the price of wheat is a special case caused not just by the above, but the additional effect of the demand for alternatives to oil through bio-fuel causing a switch of production from food to ethanol. It is only the more than compensating effect of the rising productivity caused by the introduction of new production methods developed in the Innovation cycle which prevents these rising prices from choking off the new upswing, together with the fact that at the beginning of the upswing not only is Labour Power still in abundance – because the existing workers now form a bigger reserve - but also because new sources of Labour Power – for example China, India – now provide a new source of Labour power where the Value of labour power is lower, and consequently the Rate of Surplus Value – particularly as the latest techniques can still be employed to gain the highest productivity from this labour – is much greater.

Marx, however, also sets out limits to the compensating effects. The simplest example is in relation to the degree to which Labour Power can be exploited. Machinery can replace Labour Power in the Production process, and in so doing raise the productivity of Labour Power. The result is that the Rate of Surplus Value rises, thereby causing the rate of profit to rise. But as Marx, explains there are limits to this. The working day cannot be longer than 24 hours. Even if the productivity of Labour rises so that the amount of time out of this 24 that a worker requires to meet their own needs falls to just 1 hour, leaving 23 hours to be appropriated by the capitalist, the amount of surplus value appropriated will still be less than from 24 workers who provide just 1 hour of surplus value for the Capitalist.

This then in brief – as I said above the reader should read Marx’s theory in detail at the link to Capital provided above – is Marx’s theory. I now intend to set out why modern Capitalism rather than having a tendency for the rate of Profit to fall, has trhe opposite a tendency for the rate of profit to rise.

1) The cost of Capital. In the last 20 years the rate of technological change has speeded up considerably. In the last 10 years it has speeded up even faster, and in the last 5 faster still. The reason for this is quite simple – the development of cheap computing power, whose power doubles every 18 months. This cheap computing power now means that its application to a whole range of other technologies has revolutionised them too, in a way that a reliance purely on human brain power could never have done. The unravelling of the human genome is a striking example with the actual task accomplished ultimately within about 18 months, when it was first considered when the task began that it would be either impossible or a lifetime’s work. Yet during the time from the beginning of the project, just a few years, computing power had increased so exponentially that in the end the sequencing became quite easy. The ability then to use this power in relation to other technologies, bio-technology for instance, or in relation to nano-technology, has revolutionised production already, and is revolutionising consumption too. The consequence is that the cost of Capital is being reduced dramatically, whilst the effectiveness of that Capital is rising exponentially.

2) The Nature of Production and Consumption. A recent survey reported by CNN stated that by 2012 30% of Britons would be dollar millionaires. A look around any estate other than the most deprived shows a working class that can no longer be described meaningfully as a slave class, other than in Marx’s restricted meaning of that term as having to give part of its labour away free to the capitalist as a condition of employment. Marx’s working class spent most of its wages on the basics of living, food, shelter and clothing. That is no longer the case. Although the recent rise in house prices – itself a function of the fact that an increasing number of single people who in previous generations would have lived with their parents now demand a home of their own, along with the increasing number of people with two or more homes – means that a large portion of workers income is spent on shelter, the proportion spent on food has continued to decline, and even here at least some is spent not on food itself, but on eating out i.e. entertainment really. Similarly with clothing an increasing amount is spent not just for the necessity of clothing but on paying for a designer label, or the latest fashion etc. On top of that is an increasing amount spent on things such as mobile phones and other electronic gizmos, on entertainment, and other services.

The nature of this consumption is completely different from the type of consumption theorised by Marx, and the nature of the production of these items of consumption is different too. Marx looked at the consumption of luxury goods by the rich. In general he concluded the organic composition of Capital in these industries was lower than in the production of wage goods. The reason was that the nature of the production required a higher degree of skilled labour power. One of the reasons a luxury good is a luxury good is because it is more unique than something mass produced. An expensive piece of jewellery cannot simply be reproduced over and over again by a machine, cannot be churned out by unskilled labourers. It requires the labour power of a skilled artisan. Such workers do not abound, their labour power is not simple labour but complex labour valued at several multiples that of an unskilled worker. An 8 hour day of such a worker might then be equal to 72 or 144 hours of an unskilled worker. The Surplus Value appropriated in a single day might amount to 36 or 72 hours, even allowing for the higher wages of the artisan.

In the BBC’s Money programme last week an example of this in relation to consumption under modern capitalism was given. It looked at the phenomena of the new super rich celebrity. Take one example, David Beckham. 50 years ago the equivalent was say Stanley Matthews. Yet Stanley Matthews made nothing like the money of David Beckham, nor did the companies – football teams – to whom he sold his Labour Power make the kind of profits that modern football clubs make. Why? Fifty years ago, the income that a football club made was derived from the fans coming through the turnstiles. Even allowing for average gates twice the size of today that was a limited source of income. But today, the rapid development of technology means that via the Internet, via satellite TV around 3 million Chinese workers alone watch English Premier League football every week – why is another matter. Yet there are a limited number of David Beckham’s and Premier League matches to watch. Marx said that it was only possible to determine the multiple of complex labour to simple labour a posteriori by what the market was prepared to pay for the complex labour in relation to simple labour. The vast expansion of the market due to new technology means that this multiple has expanded hugely. Or more correctly, it might be that the Value of David Beckham’s labour power is no greater than that of Stanley Matthews other than for the natural rise in the value of labour power over time, but were Beckham to be paid at the same rate then the Football Companies would make much bigger profits still. The limited availability of the Labour power needed enables the suppliers of the labour power to negotiate a higher wage out of those much larger profits. The Programme gave many other similar examples. Vanessa may, for instance who demonstrated that the Internet means that where she would have been able to sell her albums much less widely had she had to tour the world to promote them the global village removes that necessity. Or the celebrity chefs, or the celebrity fund managers looking after the wealth of that increasing number of super rich or British dollar millionaires, and so on. In short the nature of consumption for these types of goods on a much larger scale is more like the kind of Luxury consumption described by Marx, where the most important aspect of the cost is not the Constant Capital or materials employed, but is the complex labour of the worker. As this type of consumption takes up a larger and larger proportion of consumption overall then this must because of the lower organic composition of Capital in these industries result in an increasing rate of profit.

But this tendency can be seen in many other forms of consumption. The designer label clothes consume no more material, require no more and no more expensive machinery to produce than some non-designer clothing. The higher price comes from no other reason than that some consumers can be conned into paying over the odds for the label, and the designer’s labour likewise becomes more valuable. A Jaguar S type consumes no more materials than a Ford Mondeo, and probably no more expensive materials either. The higher price arises from the label, and the higher price with effectively no greater employment of Constant Capital means a higher rate of profit. Whereas at one time the Jaguar was once a luxury brand, consumed only by a few, now it is fairly commonplace.

Similarly, if we look at other items of consumption we find that in fact the materials used are negligible. A mobile phone, a PC, an LCD TV, the various services we use such as cinema, theatre etc. In fact a mobile phone probably uses far less materials than did the old type of land line, the LCD certainly less than a CRT screen. Again the largest component in the value of these products is not the Capital or material used in the production, but the intellectual labour that went into their development etc. Look at the huge amounts now spent on Computer games, yet a CD or DVD takes very few material resources to produce, very little in the way of Constant Capital. But it does take the labour of skilled games programmers. Or music. When I was first collecting records 40 years ago to amass 1,000 records consumed a fair amount of vinyl. Now 20 times that amount can be stored on a tiny stick, instead of the cost of transporting all the vinyl etc to record shops the music can be downloaded all over the world instantaneously over the Internet.

In short the nature of consumption has changed naturally as a result of rising living standards. The basic requirements for existence that once composed the majority of consumption are almost taken for granted by workers in developed economies, increasingly by workers in developing economies, and probably in 50 years time by workers everywhere as economic growth speeds up, and Africa is industrialised. As Marx predicted when he criticised Lassalle’s Iron Law of wages the natural tendency of capitalism to raise living standards means that expenditure on these previous types of consumption increasingly diminishes. An increasing proportion is spent on other goods and services whose nature is more akin to the luxury goods formerly only consumed by the rich, and the nature of these goods and services is that they have a higher component of complex labour, and a lower component of Constant Capital. In addition the exponential development of technology has revolutionised production techniques massively reducing the cost of Capital – I have previously referred to the Media for instance, where the cost of Media Production equipment has fallen so much that rather than this being an industry where the normal process of concentration of Capital occurs, almost anyone can set up their own Media Production company, and sell their product to the TV or Internet. According to one recent TV series – “Visions of the Future – the development of nano-technology, means that in the not too distant future every home will be able to have their own fabricator like that on Star Trek, which will simply manipulate individual atoms to produce whatever you want. We are seeing bio-technology used to produce alterntive to fuels, and bio-technology and nano-technology will long before domestic fabricators are available produce for Capitalist enterprises cheap alternatives for any materials they require.

For all these reasons modern capitalism is characterised increasingly not for a Tendency for the rate of profit to Fall, but for it to rise.