Wages and The Profits Squeeze
But, as Marx points out, just because Smith is wrong in the longer term, that does not mean that these periods where labour-power is in short supply, causing a squeeze on profits, do not occur in the short and medium term. This is a normal part of the cycle of capital accumulation over the long wave. It's what leads to there being long periods where capital accumulation proceeds on an extensive basis of rolling out more of the existing technologies, followed by other periods of innovation, and the rolling out on an intensive basis of new technologies that replace the old technologies as well as replacing labour. Marx points to the period between 1849 to 1859, as such a period, for example, in agriculture, where wages rose due to labour shortages, which provoked capital to introduce a series of agricultural machines and innovations.
Glyn and Sutcliffe pointed to a similar phenomenon in the 1960's, of rising wages leading to a squeeze on profits. As Bob Sutcliffe wrote, in his 1983 book, “Hard Times”
“When some economists began to assert more than ten years ago that a long-term decline of profitability was taking place this fact was heavily contested.
In the first place it was contested by pro-capitalist economists who wished to deny that any serious defect was showing up in the system they supported. But, secondly, it was also disputed by many socialists. The opposition to the idea came on the one hand from Marxists who had under the impact of the boom developed a semi-Keynesian view of the capitalist economy which led them to believe that it could no longer descend into deep crises characteristic of the pre-Keynesian era. Also opposition came from those whose view of socialism, revolutionary as it sometimes sounded, conceived of the anti-capitalist struggle as basically a moralistic one concerned above all with redistribution from the rich capitalists to the poor workers...
As the weight of evidence for the fall in profitability mounted, however, the fact came to be more widely accepted apart from the few who preferred the interpretation that it was a capitalist deception to justify economic austerity to workers.” (p 38-9)
But, this leads to the question of what caused this fall in the rate of profit. There, are in fact, two reasons why the rate of profit might fall, related, as Sutcliffe says, to two fundamental ratios, the rate of surplus value, and the organic composition of capital. The organic composition of capital is the relation of constant capital to variable capital. Because it is only variable-capital that produces surplus value, those capitals that have a high organic composition of capital will have a lower rate of profit, because the rate of profit relates the surplus value to the total capital constant and variable laid out to produce it. The rate of surplus value is the ratio of the surplus value only to the variable-capital. The rate of surplus value may be rising, therefore, whilst the rate of profit falls, and vice versa. In addition, the mass of surplus value produced is not only a function of the rate of surplus value, but also of the mass of labour employed. If the rate of surplus value is 100%, and 10 workers are employed each on wages of £10, the mass of surplus value is £100, but if the number of workers employed rises from 10 to 20, and this increased demand for labour-power leads to a rise in wages to £12, so that the rate of surplus value falls to 66.6%, with each worker now producing only £8 of surplus value, that does not stop the mass of surplus value rising from £100 to £160, a rise of 60%! A failure to understand these differences was what led Ricardo and his followers into a dead end. As I'll show later, its also what leads current financial pundits into error over rising corporate earnings.
From what has been said earlier, its clear that, at times, the rate of profit can fall because existing technologies are rolled out more extensively, more workers are employed, which causes existing labour supplies to be used up, and thereby for wages to rise squeezing profits, whilst, at other times, in response to this squeeze on profits, capital introduces waves of new labour-saving technology, which removes this limitation of labour supplies, and pushes down wages, raising the rate of surplus value, but which, by raising the level of productivity also thereby raises the organic composition of capital, which in turn causes the rate of profit to fall. It was not the law of the tendency of the rate of profit to fall that causes crises of overproduction, but the overproduction of capital that leads to the excess demand for labour-power, which causes wages to rise, which causes profits to be squeezed, and the rate of profit to fall! Sutcliffe points out,
“This is often combined with an implicit suggestion that Marxist theory of economic crisis is basically an extension of what Marx called the law of the tendency of the rate of profit to fall. This is the opposite way round from what Marx himself intended.” (p 42)
Rather than it being that law which was the basis for the fall in profits of the 1960's, and 70's, which in turn led to the repeated crises of overproduction manifest throughout the 1970's and early 1980's, the falling rate of profit was the result of rising wages. Sutcliffe says,
“There is very powerful evidence to support the idea that once the vast pool of unemployed and underemployed labour after the war was used up by the major capitalist economies, the low level of the reserve army of labour strengthened the bargaining position of trades unions on wages and other questions to a degree which was unacceptable to the capitalist class and which threatened further profitable accumulation.” (ibid)
Trades unions, particularly organising large concentrations of workers in the largest enterprises, facilitate this process, but as Engels points out,
“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.”
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