Tuesday, 28 October 2014

The Law Of The Tendency For The Rate of Profit To Fall - Part 56

Conclusion (2)

In Capital III, Marx and Engels again set out the role of the rate of turnover on the annual rate of surplus value, and consequently on the annual rate of profit. They do so, specifically in Chapter 4, and they also mention its role, at length, in Chapters 9, 10, 13, and 18 to particularly warn against the dangers of simply treating the rate of profit, on the basis of the annually laid-out capital, as opposed to the capital advanced for one turnover period. Yet, nearly all the arguments over whether the rate of profit has been rising or falling over recent decades, as well as being really a measurement of the rate of surplus value rather than the rate of profit, have been based on measurement of profit relative to the annually laid-out capital rather than the advanced capital.

Having described at length how the rate of turnover of the circulating capital significantly impacts the annual rate of surplus value, and annual rate of profit, Marx and Engels in their explication of the Law, then again do so on the same basis that the entire work has been written. It focusses on the essential features of the Law without adding in this further complexity. The explanation of the Law is given on the basis of a single turnover of the capital, just as the initial description of the rate of profit, and development of a general rate of profit had been done. The rate of profit is repeatedly stated as being s/C, where s is the total surplus value for the period, and C is the advanced capital. But, as Engels warns,

“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. 

On the other hand, the profit made in the course of a year is merely the sum of profits on commodities produced and sold during that same year. Now, if we calculate the profit on the cost-price of commodities, we obtain a rate of profit = p/k in which p stands for the profit realised during one year, and k for the sum of the cost-prices of commodities produced and sold within the same period. It is evident that this rate of profit p/k will not coincide with the actual rate of profit p/C, mass of profit divided by total capital, unless k = C, that is, unless the capital is turned over in exactly one year.”

Capital III, Chapter 13 

Engels then goes on to provide three examples which show the effect of the process, by which the organic composition of capital rises, causing the rate of profit to fall, and yet, which at the same time, cause the annual rate of profit to rise. And these examples, and the discussion in Chapter 13, of the rate of profit as defined for the purposes of describing the Law, as profit in relation to the cost-price of commodities, p/k, as opposed to the annual rate of profit, illustrates the other problem of the discussion over it.

Marx and Engels, had a particular reason for using this definition of the rate of profit in explaining the Law. Part of Marx's reason for setting out the Law was to show that the formulation of previous economists such as Mill, Say and Ricardo was wrong. They believed that the falling rate of profit was connected to a falling mass of profit. Marx wanted to show that even as the rate of profit fell, the mass of profit must rise, because these are caused by the same process of an expansion of capital and rise in social productivity. The reason that p/k falls is because productivity rises, as a consequence of an expansion of capital. This is manifest in a massive expansion of the quantity of commodity units produced. The profit per unit falls, but not by as much as the quantity of units produced expands, so the mass of profit continually rises, despite these falling profit margins. The two things are different sides of the same phenomena.

In other words, the Law as set out by Marx and Engels is really a Law of falling profit margins, because as Engels sets out above, p/k is the same thing as the total surplus value divided by the total laid-out capital plus wear and tear of fixed capital, because the former is p multiplied by the total quantity of commodity units, and the latter is k multiplied by the total number of commodity units. Its on this basis that these falling profit margins create the potential for crises of overproduction, even as and even because the actual rate of profit, the general annual rate of profit is rising, along with the mass of profit.

Because, the annual rate of profit is rising, i.e. the profit measured against the capital actually advanced including the fixed capital, and along with it the mass of profit, this causes capitalists to expand rapidly, it causes former managers and workers to borrow money-capital to set up in business themselves and so on. As a consequence, the total quantity of commodity units produced increases rapidly, whilst profit margins decline. For the reasons set out in Capital IIIChapter 6, of this sharp rise in activity, pushing up demand and therefore the market price of inputs, including labour-power, those profit margins get squeezed even more. The more these profit margins are squeezed, the higher the potential for overproduction, for the number of commodities thrown on to the market to rise so much that demand fails to expand enough to absorb it all, at market prices that are higher than the cost-price.

As I'll examine next, its for this reason that the Law cannot be seen as the basis, and certainly not the only basis of Marx's theory of crisis.

No comments: