The Law of The Tendency For The Rate of Profit To Fall - Part 33

Fall In the Value Of The Variable Capital (17)

Looking back to the table presented in Part 28, the effect of rising productivity on “The Rate of Profit” can be easily seen. As described there, the real impact of this falling rate of profit, and that which Marx draws out in his analysis in Chapters 13 and 15, is on the continually falling proportion of the unit price of each commodity comprised of the wear and tear of fixed capital, of variable capital, and of surplus value, and the consequent rise in the proportion of the price accounted for by the circulating constant capital, i.e. the raw and auxiliary materials. It is these changing proportions that are the basis of the “Falling Rate of Profit”.

Taking that table, the percentage of each of these components in the price of the commodity change as follows.

Year	Fixed Capital	Material	Variable Capital	Surplus Value	Total Output	Price Per Unit
1	6.67	26.67	33.33	33.33	3000	1.00
2	4.55	31.82	26.67	36.97	5250	0.84
3	3.07	38.97	19.83	38.13	9520	0.68
4	2.11	47.66	14.05	36.18	16972	0.56
5	1.49	55.38	10.39	32.75	27922	0.48
6	1.09	62.38	7.81	28.72	42785	0.43
7	0.84	68.89	5.86	24.41	61498	0.39
8	0.67	73.63	4.65	21.05	82419	0.36
9	0.55	77.29	3.82	18.34	105270	0.35
10	0.46	80.53	3.15	15.86	129994	0.33

The importance of these changed proportions, as Marx sets out, is that, as the total quantity of use values, dumped on the market, explodes in this way, although the market value of each commodity unit falls significantly (here by two-thirds), this supply faces increasing difficulty in obtaining sufficient demand, because of price elasticity. The more likely it becomes, therefore, that any change in consumer preferences will result in market prices falling below this market value, and so the now much smaller (smaller in absolute terms even more than in proportional terms) profit margin will be wiped out.

From the other side, the massively increased proportion of material now in each commodity unit, finds its expression in a much higher demand for that material, which may lead to rising material prices. Any rise in material prices may then be unable to be passed on into end product prices for the reasons Marx points out in Capital III, Chapter 6, which means again that the profit margin may be wiped out.

Yet, as suggested in Part 28, this substantial drop in the “Rate of Profit” goes along with a substantial rise in the annual rate of profit, because the rise in productivity that is behind it, brings about a corresponding rise in the rate of turnover of capital. The turnover of Capital in Year 1, was completed with the production of 3000 units of output. If we take this as the baseline of production required for one turnover period, therefore, we can examine how the rate of turnover rises, by comparing this 3000 units, with the output in each subsequent year. Dividing that output by 3000 gives the number of turnovers of capital for that year. Examining that, and using the formula provided by Marx, we obtain the following for the rate of turnover, and the annual rate of profit for each year.

Year	Number of Turnovers	Annual Rate of Profit %
1	1.00	50
2	1.75	97
3	3.17	177
4	5.66	278
5	9.31	383
6	14.26	477
7	20.50	544
8	27.47	598
9	35.09	641
10	43.33	662

In reality, as Marx makes clear, in discussing the working period, as capital develops, and begins to supply large merchant capitals, the quantity of production constituting such a working period tends to increase. The consequence is that the rate of turnover does not necessarily rise in the proportions suggested. On the other hand, the introduction of these large merchant capitals itself speeds up the process of circulation, which increases the rate of turnover, and the same is true for the development of modern financial systems. In addition, improved transport systems, as well as the introduction of things like “Just In Time”, can act to reduce working periods, because shipments can be sent of smaller quantities more frequently.

The tendency for the rate of profit to fall, as a result of rising productivity, is important in respect of understanding the fall in profit margins, which can make the potential for crises greater for the reasons cited above, but, given that those smaller profit margins necessarily go along with a rising mass of profit, and rising annual rate of surplus value, it cannot be an explanation for periods of stagnation, or falling investment.

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