The Law of The Tendency For The Rate of Profit To Fall Is Defunct - Part 1 of 5

Marx's Law of the Tendency for the Rate of Profit to Fall has become defunct for modern capitalism. Marx's Law, as opposed to those of his predecessors, such as Smith, Ricardo and Malthus, is based upon rising social productivity, which leads to a rise in the proportion of the value of circulating constant capital (raw materials) in final output. However, modern capitalism is dominated by service industries, not manufacturing industries. Approximately, 80% of value and surplus value production, in modern economies, derives from service production. The processing of raw materials, as part of this service production, therefore, does not exist, or constitutes only a tiny part of the production process. The fundamental condition for the Law to operate, consequently, does not exist under modern capitalism, which makes it defunct.

Adam Smith, following on from the Physiocrats, understood that surplus value is created in production. The labourer, creates new value by the act of purposive labour. The amount of value created is equal to the amount of labour performed. However, the labourer only requires a portion of what they produce during this time to reproduce their labour-power. It was Smith's failure to distinguish between labour and labour-power that led him into confusion, however. Smith recognised that the division of the day into necessary labour and surplus labour was the basis for the surplus value being appropriated by landed property, or capital. It was able to do this, Smith believed, because labour was plentiful, and capital was scarce. So, Smith believed that labour was sold by the worker below its value, and capital was sold above its value.

Smith believed that capital would accumulate faster than the growth of the labour supply, and so wages would rise, and profits fall. Smith believed this fall in the rate of surplus value was the explanation for the law of the falling rate of profit, and he thought that ultimately it would mean that profits would disappear.

Ricardo, did not share Smith's belief that capital would accumulate faster than the labour supply. He recognised that, increasing productivity means that the effective supply of labour can continue to be increased, relative to the demand for it. However, Ricardo, like Malthus, believed that as industry expanded, and as the industrial workforce expanded, the consequence would be that the demand for food for the workers and of agricultural products/minerals as raw material increased, the land would not be able to meet these demands without the cost of doing so rising. This concept of diminishing marginal productivity is what lies behind Ricardo's theory of the law of falling profits, and behind his theory of rent, and is also behind modern marginalist theories. As agricultural prices were then driven up, Ricardo argued, wages would have to rise, which would act to cause a squeeze on profits, and these higher agricultural prices, he believed would lead to higher rents, again causing a further squeeze on profits. This was his explanation for the law, and led him to fear that the mass of profit must ultimately decline, leading to an inevitable catastrophic collapse of capitalism itself.

Marx demonstrates, at length, that these explanations were wrong. Marx was willing to accept Smith's argument that capital can expand faster than the supply of labour-power, and this will lead to rising wages, and a squeeze on profits. In Value, Price and Profit, Marx describes such a situation in the period between 1849 and 1859, in agriculture. But, like Ricardo, Marx notes that such conditions can only ever be temporary causes of a squeeze on profits, because capital responds by introducing new labour-saving machines, that create a relative surplus population, and so lead to wages falling, and the rate of surplus value and mass of profit rising.

“Take, for example, the rise in England of agricultural wages from 1849 to 1859. What was its consequence? The farmers could not, as our friend Weston would have advised them, raise the value of wheat, nor even its market prices. They had, on the contrary, to submit to their fall. But during these eleven years they introduced machinery of all sorts, adopted more scientific methods, converted part of arable land into pasture, increased the size of farms, and with this the scale of production, and by these and other processes diminishing the demand for labour by increasing its productive power, made the agricultural population again relatively redundant. This is the general method in which a reaction, quicker or slower, of capital against a rise of wages takes place in old, settled countries. Ricardo has justly remarked that machinery is in constant competition with labour, and can often be only introduced when the price of labour has reached a certain height, but the appliance of machinery is but one of the many methods for increasing the productive powers of labour. The very same development which makes common labour relatively redundant simplifies, on the other hand, skilled labour, and thus depreciates it.” 

As Marx puts it, in Theories of Surplus Value, Chapter 17,

“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.” 

Periods of time exist, Marx says, where the accumulation of capital is extensive. In other words, the pace of technological change is slower, and so more of this existing technology is rolled out, more of the same kinds of machines, alongside more workers to operate them. The longer such a period continues, the more existing labour supplies are used up, and so wages tend to rise, pace Smith. This causes the rate of surplus value to fall, and consequently causes profits to be squeezed. But, this is not the basis of the Law of The Tendency for The Rate of Profit to Fall, Marx explains, because such conditions are only temporary, and, moreover, the Law is based upon a rising rate of surplus value and mass of profit, not a profits squeeze. What creates the conditions for the Law to operate, Marx sets out, is not extensive capital accumulation, but intensive capital accumulation. That is, faced with labour shortages and high wages, capital seeks out new labour-saving technologies. Instead of introducing just more of the same type of machines, it introduces new types of machines, each one of which replaces several of the older machines, so that either the same amount of production can be undertaken by fewer machines, and fewer workers to operate them, or else the same quantity of machines and workers can produce a much larger volume of output.

As Marx says,

“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”

(Capital III, Chapter 15)

These new technologies are, in fact, introduced to deal with the rise in wages and squeeze on profits that facilitate crises of overproduction. The new technologies that are introduced are the basis of the Law of The Tendency for the Rate of Profit to Fall, and are thereby the means for capital to resolve the causes of crises of overproduction, not the cause of those crises, as some have wrongly claimed. These new technologies, by raising productivity, i.e. raising the volume of raw material processed by any given number of machines, and mass of labour, raise the proportion of the total value of output accounted for by that material, and consequently reduce the proportion of that value accounted for by machines and other fixed capital, as well as the proportion accounted for by labour, including, therefore, the proportion of unpaid labour, or surplus value. It is this fact that the proportion of the value of each unit of output consisting of circulating constant capital rises, whilst the proportion accounted for by labour, and so surplus value falls, that results in the tendency for the rate of profit, i.e. the profit margin, to fall. However, this goes along with an increase in the mass of the surplus value produced, as the rate of surplus value rises, and more labour absolutely is employed.

Ricardo and Malthus were also wrong, Marx demonstrates, following James Anderson, because this same rise in social productivity causes agricultural productivity to also rise. Even if industrial productivity rises faster than agricultural productivity, that does not change the fact that agricultural productivity rises absolutely, and so causes the value of agricultural products/minerals/raw materials to fall. This fall in the value of food causes the value of labour-power to fall, which means that the rate of surplus value rises. The fall in the value of agricultural products, and minerals reduces the value of circulating constant capital, which acts to raise the rate of profit, counterbalancing the tendency to fall due to the higher proportion of raw materials in final output.

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