Wednesday, 12 August 2015

Capital III, Chapter 13 - Part 1

The Law As Such

In Theories of Surplus Value, Marx says that the Law of the Tendency For the Rate of Profit To Fall, is important for capitalist production. Marx also says that the Law has been important for all preceding political economists, though they had not been able to explain its basis. These comments by Marx have been misinterpreted, to give his own explanation of the Law a greater significance than Marx himself gave to it.

The suggestion that it is this Law which is the basis of Marx’s theory of crisis, for example, is wholly spurious. Marx nowhere makes any such suggestion. In Theories of Surplus Value II, for instance, Marx explains his theory of crisis at length. In almost fifty pages he does not mention the Law even once to explain crises. In the one reference to the falling rate of profit, he says the exact opposite.

“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.”

If a falling rate of profit were to be a cause of crises, what would it be? It could only be that at some level of return, productive-capital decides that the risk to capital is greater than the potential return, and so stops investing, and even stops reproducing existing capital. But, if that is the case, then we should have a permanent state of crisis of the type Marx says does not exist. If the rate of profit falls more or less continuously, as a result of a rising organic composition of capital, then the rate of profit today – even in a period when it is relatively high – must be below its rate at the time of the first crisis of overproduction in 1825. But, if the rate of profit was already low enough in 1825 to cause capital to refrain from investing, it must always be below such a level today!

Of course, some catastrophists believe such a permanent crisis does exist, so they are prepared to perform any number of statistical gymnastics to deny that capitalism is growing, in the same way that Stalinist economists claimed that workers living standards were falling in the West, during the 1950's and 60's, even though it was apparent they were rising sharply.

Marx's comments, in fact, have a different meaning to this. Firstly, the tendency for the rate of profit to fall is important for capitalist production for the very reasons Marx has just been setting out, in previous chapters. That is the whole basis of the process whereby an average rate of profit is formed relies on the fact that the rate of profit is high where the organic composition of capital is low, and tends to fall in those spheres where the organic composition of capital gets progressively higher. This in itself makes the law important for capitalist production, because it means that it is this law, which is behind the movement of capital from low profit/high organic composition spheres into high profit/low organic composition spheres. In other words, the Law is important for capitalist production because it explains the allocation of capital.

The Law of Falling Profits was important for all previous political economy, because it was seen by them as a threat to the existence of capitalism itself. In fact, Marx explains why they were wrong in that view. That is what his quote in relation to Adam Smith, in Theories of Surplus Value, was about. They were wrong, because their theories of the falling rate of profit were wrong.

The falling rate of profit for previous political economy had been the equivalent for capital to what Malthus' theory of population had been for workers. Malthus believed that population must grow faster than the ability to feed it, so real wages would fall as the price of food rose, and workers would starve so as to reduce the population. This same conception is behind Ricardo's theory of falling profits, and Marx comments, in Theories of Surplus Value, that for Ricardo, the falling rate of profit operates as a law of nature. The basis of this law is derived from Ricardo's theory of rent. As capital expands, more workers are employed. The demand for food rises, and because land is limited, less fertile soil is brought into use. The price of food rises, and because food comprises the major part of workers' expenditure, it causes the value of labour-power to rise, even if rises in productivity cause the prices of other wage goods to fall. Wages, must then rise, and as wages rise, profits must fall.

Other economists explained the fall by similar methods, for example, a tendency for the rate of interest to rise, for rent to rise and so on. Its to show that these are not the explanation that Marx conducts his analysis, before examining the role of rent and interest.  What all these explanations had in common is that as well as a falling rate of profit, they all involve, at least at some point, a falling mass of profit as well. Marx shows this is fundamentally wrong.

What Marx demonstrates is that not only does the rate of profit tend to fall, despite the mass of profit remaining the same or even rising, but the very process which implies a falling rate of profit itself necessitates a rising mass of profit! Given that later Marx says that as capital develops, the fall in the rate of profit is cancelled out, for the bigger capitals, by this increase in the mass of profit, it can be seen just how far the law is from being a cause of capitalist crises.

Its within this context that Marx’s explication of the law should be read.

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