No, Marx Did NOT Get It Wrong!

On the Andrew Marr Show, today, Marr said that one of the main predictions made by Marx, in Capital, was that the capitalist system would collapse because of an irretrievable crisis. Marx was wrong, said Marr, and John McDonnell agreed with him. But, Marx did not get it wrong, precisely because Marx never made any such prediction, in fact, he says the exact opposite! The idea that capitalism would collapse because of what some earlier economists saw as an irreversible decline in the rate of profit is firmly rejected by Marx. Here is what he says, in that connection in response to Adam Smith, for example.

“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.” 

Theories of Surplus Value, Chapter 17, footnote 1

This argument, that Marx predicted such a collapse of capitalism, due to some such crisis, is like the other claim made by Marx's opponents that he had an Iron Law of Wages, which meant that workers would become increasingly impoverished is the exact opposite of the truth. In both cases, the argument that is presented as being that of Marx is actually the argument put by others, that Marx specifically rejects! Either it shows that those who make these claims have not read what Marx actually wrote, or they are incapable of understanding it, or else they are deliberately falsifying what Marx said.

It was not Marx who advocated an Iron Law of Wages, but Ferdinand Lassalle, and his followers. Marx specifically rejects it in his Critique of the Gotha Programme, where he writes,

“...the system of wage labour is a system of slavery, and indeed of a slavery which becomes more severe in proportion as the social productive forces of labour develop, whether the worker receives better or worse payment. And after this understanding has gained more and more ground in our party, some return to Lassalle's dogma although they must have known that Lassalle did not know what wages were, but, following in the wake of the bourgeois economists, took the appearance for the essence of the matter.

It is as if, among slaves who have at last got behind the secret of slavery and broken out in rebellion, a slave still in thrall to obsolete notions were to inscribe on the program of the rebellion: Slavery must be abolished because the feeding of slaves in the system of slavery cannot exceed a certain low maximum!”

The idea that capitalism must collapse because of some “permanent crisis”, as seen above is not the position of Marx, but the position he argues against! Adam Smith believed that profits would eventually be eaten away, because he thought that capital would grow more quickly than the working-class, and consequently, the demand for labour would exceed the supply of labour, thereby pushing up wages, at the expense of profits. Adam Smith knew exactly where profits came from. He knew following on from the Physiocrats that a portion of the working-day is required to reproduce the workers' labour-power, and a second portion, of the working day, thereby constitutes surplus labour. As soon as landed property and capital appear, Smith says, this portion of surplus labour is appropriated by the landlord and the capitalist as profit and rent.

It is the scarcity of land and capital that enables the landlord and capitalist to appropriate this surplus, but as labour becomes scarce, wages must rise at the expense of profits. This is what Smith sees as being behind the falling rate of profit, as profit itself is squeezed, and leads to the conclusion of some ultimate crisis.

As seen above, Marx rejects this argument. And in turning to the argument put by David Ricardo against Smith, he says,

“The rate of profit has a tendency to fall. Why? Adam Smith says: As a result of the growing accumulation and the growing competition between capitals which accompanies it. Ricardo retorts: Competition can level out profits in the different spheres of production (we have seen above that he is not consistent in this); but it cannot lower the general rate of profit. This would only be possible if, as a result of the accumulation of capital, the capital grew so much more rapidly than the population, that the demand for labour were constantly greater than its supply, and therefore wages—both nominal and real wages and in terms of use-value—were constantly rising in value and in use-value. This is not the case. Ricardo is not an optimist who believes such fairy-tales.”

Theories of Surplus Value, Chapter 16 

Ricardo's argument for the falling rate of profit follows on from the population theory of Malthus. Malthus was the ideologist of the old landed aristocracy. He argues that the growth of capital, contrary to Smith, leads to a growth of population, i.e. of workers, and this growth of population exceeds the potential of agriculture to expand food production. The consequence will then be that workers will starve, to reduce this population. Malthus' answer to the problem is that the non-capitalist unproductive sections of the population such as the landed aristocracy, the clergy, the state flunkeys, etc. should have a bigger share of the surplus to consume unproductively, and in that way capital will not grow so rapidly, and the working-class will not expand so rapidly along with it.

Malthus had actually stolen much of his work relating to agriculture, and his theory of rent from the Scottish farmer and economist James Anderson, but Anderson had shown that, in fact, there was no limit to the expansion of agricultural productivity, and that innovations levelled out discrepancies in the fertility of different lands. Malthus never acknowledged the source of his ideas, and simply presented the opposite conclusions to Anderson, in his apologia for the landlords.

Ricardo, who unlike Malthus, was the ideologist of the industrial capitalists, adopted Malthus theory of population, but unlike Malthus, he concludes that the effect would be for capitalist agriculture to move on to ever less fertile land so that agricultural productivity would fall. As a result, food prices would rise, and workers wages, which have to reproduce the workforce by exchanging for the physical use values required for workers' consumption, would thereby rise. As wages rise, then like Smith's argument, this causes profits to fall. In addition the rise in food prices, causes rents to rise, further squeezing profits, and also the cost of raw materials, such as cotton are pushed up.

It is this squeeze on profits that Ricardo sees as being an inevitable result of the expansion of capital, and of the workforce, and which leads him to fear that the system must thereby ultimately collapse. But, Marx shows that this catastrophism is completely false too. As he said in response to Smith, “Permanent crises do not exist.” In fact, as Marx shows following Anderson, there is no limit to the potential for agricultural productivity to rise, and so no reason why food prices or raw material prices have to rise. Moreover, Ricardo assumes that production always proceeds on the most fertile soil, and then goes to the less fertile, but often it doesn't.

Agricultural production often started close to settlements, which might have been close to rivers, but not necessarily near the most fertile soil. Moreover, as Marx shows, there are many reasons why what was the most fertile soil gets overtaken by others, that some lands are closer to markets and so on, as well as technology generally raising the level of soil fertility and productivity.

What is more, Marx shows, Ricardo's argument about the falling rate of profit is based on two fallacies.

“1. The false supposition that the existence and growth of rent is determined by the diminishing productivity of agriculture;

2. The false assumption that the rate of profit is equal to the rate of relative surplus-value and can only rise or fall in inverse proportion to a fall or rise in wages.”

(ibid)

This is false Marx says, again restating the point made in relation to the Iron Law of Wages. Wages rise, because productivity rises, so that far more use values are produced with much less labour, which reduces the unit value of each commodity. So, workers can have higher living standards, even though an increasing portion of their labour goes to produce profits not to cover their wages. But, the other side of this rising productivity is that a larger and larger proportion of production is comprised of the raw materials that this labour processes. Each worker now turns more seed into grain and other agricultural products, more cotton into yarn, more yarn into cloth, and so on.

Consequently, if we look at the way the value of a metre of cloth is made up, it may originally have comprised £10 for the yarn, and £10 for the value of labour added, divided into £5 wages and £5 profit. But, if productivity rises, the same labour might now process £20 of yarn into cloth, so that now 2 metres of cloth are produced, whose value is made up £20 for yarn, £10 for the new value created by labour, still divided into £5 for wages, and £5 for profits. Originally, the rate of profit was £5/£15 = 33.3%, but it is now only £5/£25 = 20%.

And contrary, to the argument put by Smith and Ricardo, even if the actual amount of profits, and rate of surplus value rises, this may be the case. Suppose as a result of the rise in productivity, only £4 is required to reproduce labour power and £6 now goes to profit, so that the rate of surplus value rises from 100% to 150%. The mass of profit has risen by 20% from £5 to £6. The rate of profit is now £6/24 = 25%, as opposed to 33.3%.

The long run tendency for the rate of profit to fall, Marx says is not as Smith, Malthus and Ricardo believe because profits themselves are squeezed, but is due to the mass of profit increasing, as a result of rising productivity, but this very rise in productivity causes the mass of processed material to rise in value to such an extent that the rise in the mass of profit still represents a fall in the rate of profit.

As Marx puts it,

“I have already shown that Ricardo’s view of rent is wrong. This then cuts out one of the grounds for his explanation of the fall in the rate of profits. But secondly, it rests on the false assumption that the rate of surplus-value and the rate of profit are identical, that therefore a fall in the rate of profit is identical with a fall in the rate of surplus-value, which in fact could only be explained in Ricardo’s way. And this puts an end to his theory. The rate of profit falls, although the rate of surplus-value remains the same or rises, because the proportion of variable capital to constant capital decreases with the development of the productive power of labour. The rate of profit thus falls, not because labour becomes less productive, but because it becomes more productive. Not because the worker is less exploited, but because he is more exploited, whether the absolute surplus-time grows or, when the state prevents this, the relative surplus-time grows, for capitalist production is inseparable from falling relative value of labour.”

(ibid) 

Marx does see that at various times, at points in the cycle, the argument put by Smith and Ricardo does apply. There are times when the demand for labour reaches such a level, due to the expansion of capital, that wages get pushed higher, and so squeeze profits, and its during such periods that crises can erupt. So, for example he says in Capital III, Chapter 15,

“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

And later in the chapter he explains how this leads to an overproduction of capital, i.e. a situation where capital can no longer act as capital, by producing surplus value.

“As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.” 

(ibid)

But, precisely because “Permanent crises do not exist”, the answer to such overproduction is at hand, because as Marx says at the start of the chapter, in the earlier quote,

“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”

And so, capital begins a campaign to develop new technologies, to raise productivity to raise “the intensity of exploitation”, which creates a relative surplus population, so that the demand for labour-power no longer exceeds its supply, and wages fall, pushing the rate of surplus value higher. But, it is precisely these conditions, of innovation, of rising productivity as a means resolving a crisis of overproduction, which lead to the conditions of a tendency for a falling rate of profit, as once more this higher level of productivity implies a given amount of labour processing an expanding mass of material. And this revolution in technology also reduces the value of existing fixed capital, which becomes morally depreciated. As a result, this causes a rise in the rate of profit, because less value, less social labour-time, is required to reproduce it on a like for like basis.

Moreover, when Marx talks about the rate of profit here he means something specific, and something different to the general annual rate of profit. When Marx talks about the tendency for the rate of profit to fall, what he is talking about is the rate of profit in the sense that capitalists describe it as essentially the profit margin. In other words, take all of the costs incurred during the year (c + v), that is the costs of material, of wear and tear of fixed capital, and of wages, and then measure the surplus value made during the year against it. So, Marx says,

“Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay.” 

(Theories of Surplus Value, Chapter 16)

(Incidentally, there was a very weird blog post by Tony Northfield, in which he derives a rate of profit totally at odds with Marx, as I pointed out in a number of comments.)

So, its quite easy to see why this profit margin can be getting generally smaller, over time, whilst the actual general annual rate of profit gets larger. Its not a strict analogy, but think of it like with a big supermarket as against a small grocer. The supermarket might operate on much smaller profit margins than the small grocer, but makes not only much larger profits, but a much larger real rate of profit, i.e. the rate of profit on the capital they advance. That is because the supermarket makes a smaller margin, but on a vastly bigger volume of sales, and it turns its capital over much faster than does the small grocer. 

The same thing with big industrial capitals, there annual rate of profit is calculated on the capital they advance, not on the capital they lay out. Because, they turn over their capital at a very rapid rate, and a rate that continually increases as productivity rises, they sell on lower profit margins, and yet make huge profits, and a high annual rate of profit, because the capital they advance, i.e. what they have to put up to cover wages, and materials, is far less than the capital they lay out. Each time they sell their output, say every week, the capital they advanced comes back to them, and the same capital is advanced again, so that the advanced capital may be only a fiftieth of the laid-out capital.

Moreover, as Marx points out, every time some new line of production comes into existence, where the rate of profit is high, the effect of this over time, as a result of the averaging of the rate of profit, is to cause the average annual rate of profit to rise, contrary to what Smith believed. Marx writes,

“Furthermore : if a new branch of production comes into being in which a disproportionate amount of living labour is employed in relation to accumulated labour, in which therefore the composition of capital is far below the average composition which determines the average profit, the relations of supply and demand in this new trade may make it possible to sell its output above its cost-price, at a price approximating more closely to its actual value. Competition can level this out, only through the raising of the general level [of profit] , because capital on the whole realises, sets in motion, a greater quantity of unpaid surplus-labour. The relations of supply and demand do not, in the first instance as Ricardo maintains, cause the commodity to be sold above its value, but merely cause it to be sold above its cost-price, at a price approximating to its value. The equalisation can therefore bring about not its reduction to the old level, but the establishment of a new level.” 

(ibid)

In short, Marx never predicted that capitalism would collapse as a consequence of some inevitable catastrophe, any more than he predicted that workers would become increasingly impoverished. Those claims are ones made by others that Marx specifically and rigorously rejected. The claims are aunt sallies thrown up by Marx's enemies, from time to time, which simply demonstrate they have never read what he actually said.