The Law of The Tendency For The Rate of Profit To Fall - Part 3

The Law and Modern Catasrophism

In Part 2, it was described how Marx rejected the catastrophism behind the explanation of a falling rate of profit, put forward by the Malthusians, Ricardians and other political economists that preceded him. But, there is no shortage of similar catastrophists today. For, the last 50 years I have listened to Malthusians claiming that the fuel was imminently about to run out, and that the environment was being destroyed, that global population was unsustainable and so on. In fact, the real price of oil today is less than it was fifty years ago, and there is no indication it is about to run out, as new methods of extraction, such as fracking, along with more efficient methods of using it, continually push out the date of “peak oil”. Similarly, both air and water quality in the UK are much improved to what they were when I was a child 50 years ago, large areas of industrial wasteland that was heavily polluted has been reclaimed into parkland, and global food production has increased way more than population, so that the number of people suffering famine is less, not more, today than it was fifty years ago. In fact, the global population is in a much better position today, on every metric, be it literacy, poverty, life expectancy or whatever, compared to what it was fifty years ago.

But, there is no shortage of such catastrophists, when it comes to the global economy, either. They tend to be concentrated on both extremes of the political spectrum, and for obvious reasons. Both extremes, over the last fifty years, have been increasingly marginalised. Finding it impossible to persuade the majority that their vision of how the future should look is better than their current condition, they fall back on the hope that the current condition itself will become so bad that almost any other future would look better! Such a view is totally alien to the ideas of Marx, who not only continually stressed the progressive, revolutionising role of Capitalism, but did so in the context that, as a result, it created the very basis by which the new mode of production would, and was, growing out of it. Socialism springs from the powerful shoulders of Capitalism, it does not slither out of its carcass.

Some Marxists have taken Marx's comment near the start of Capital III, Chapter 15,

“On the other hand, the rate of self-expansion of the total capital, or the rate of profit, being the goad of capitalist production (just as self-expansion of capital is its only purpose), its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population.” (p 241-2)

to justify their claim that the law of the tendency for the rate of profit to fall, is the basis of Marx's theory of crisis. 

The discussion over the falling rate of profit is largely based on false premises. When Marx uses the term “Rate of Profit”, he uses it in its capitalist context, i.e. it is what we would call the profit margin, the proportion of surplus value to cost prices of the commodity, or what amounts to the same thing, the annual surplus value as a proportion of the laid-out capital for the year. In Capital III, Chapter 13, Marx makes this clear by examining the way the surplus value falls as a proportion of the price of each commodity unit.

What is ironic is that Marx's analysis of this “Rate of Profit”, and its falling tendency was designed to refute the catastrophist interpretations of it by Malthus and Ricardo and others. The reason Marx says the concept was important for these previous economists, and for capitalists, is precisely because of their catastrophist interpretation of it, i.e. that it is some kind of Natural Law, which leads inevitably to the collapse of capitalism under its own weight, as the generation of surplus value reaches these supposed limits. Marx thought this was nonsense and says so!

In Theories of Surplus Value Marx writes,

“A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”

The irony is that those who promote the idea of the falling rate of profit as the basis of crisis do so, in the same kind of catastrophist manner as did Malthus and Ricardo, against whom Marx was arguing! It is undeniably true that aside from the “countervailing forces” to the falling rate of profit, described by Marx in Capital III, Chapter 14, this rate of profit, i.e. the profit margin, must fall for the reasons described. But, Marx and Engels believed that this rate of profit used by the capitalists and the political economists was a fraud! In Capital III, Chapter 4, therefore, Marx distinguishes the real rate of profit from this bourgeois counterfeit version. He calls the real rate of profit, the “annual rate of profit”.

“To make the formula precise for the annual rate of profit, we must substitute the annual rate of surplus-value for the simple rate of surplus-value, that is, substitute S' or s'n for s'. In other words, we must multiply the rate of surplus-value s', or, what amounts to the same thing, the variable capital v contained in C, by n, the number of turnovers of this variable capital in one year. Thus we obtain p' = s'n (v/C), which is the formula for the annual rate of profit.”

And later in Capital III, Chapter 13, Marx and Engels emphasise this point. Marx writes,

“However, the rate of profit, if calculated merely on the elements of the price of an individual commodity, would be different from what it actually is. And for the following reason:”

and Engels adds,

“[The rate of profit is calculated on the total capital invested, but for a definite time, actually a year. The rate of profit is the ratio of the surplus-value, or profit, produced and realised in a year, to the total capital calculated in per cent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide.]” 

And, of course, the latter will almost never be the case, and the same causes of a rise in the organic composition of capital bring about an equal rise in the rate of turnover.

Whilst it MAY be the case that the rate of profit (profit margin) may fall as a result of a rise in the organic composition of capital, the same process means that it MUST be the case that the annual rate of profit rises, because any rise in the organic composition of capital brings about the same proportional increase in the rate of turnover of capital. Because that increase in the rate of turnover of capital results in the release of capital (alongside any rise in the mass of surplus value due to the rise in productivity, reduction of capital value, rise in rate of surplus value) it MUST result in a rise in the annual rate of profit.

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