Theories of Surplus Value, Part II, Chapter 15 - Part 1

Ricardo’s Theory of Surplus-Value

A. The Connection Between Ricardo’s Conception of Surplus-Value and His Views on Profit and Rent

1. Ricardo’s Confusion of the Laws of Surplus-Value with the Laws of Profit 

Those who argue that the cause of crises is the law of falling profits actually enunciate a Ricardian or Malthusian, rather than Marxian, version of that law. Even then, they get the arrow of causation the wrong way around.

So, for example, in a recent post, Michael Roberts wrote,

"The most intense periods of struggle appear to be when the labour movement is reasonably strong in incomes and organisation but when the profitability of capital has started to fall, according to Marx’s law of profitability. Then the battle over the share of the surplus and wages rises. Historically, in the UK that was from 1910 just before and just after WW1; and in the 1970s."

But, this fall in the rate and mass of surplus value, due to rising wages creating a squeeze on profits has nothing to do with Marx's Law of the Tendency for the Rate of Profit to Fall!  It is exactly what Marx was arguing against, as an explanation of that long-term tendency, as it was presented by Smith, Ricardo and Malthus.  It simply demonstrates the way those that have tied their banner to the mast of the Law of Falling Profits, as an explanation for crises, are led to abandon Marx's theory, and to grasp for any instance of a falling rate of profit, as supporting evidence for their claim, even where such instances are caused by factors that not only have nothing to do with Marx's Law, but are attributable to the diametrically opposed conditions, he was describing.

As Marx sets out, in Capital III, Chapter 15, and earlier in Chapter 6, a crisis of overproduction arises when capital has expanded to such an extent, relative to the available labour supply, that any further expansion does not result in any increase in the mass of surplus value, and may result in a reduction in the mass of surplus value. The reason for this is that any further expansion causes wages to rise, and the rate of surplus value to fall. 

“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. 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.” 

(Capital Volume III, Chapter 15) 

In other words, this is the Smithian law of falling profits caused by capital accumulating faster than the supply of exploitable labour, causing the demand for labour-power to rise, wages to rise, and the rate and mass of surplus value to fall. As Marx points out at the start of that chapter, 

“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.” 

The crisis of overproduction is then manifested in a profits squeeze, which results from a fall in the rate of surplus value, caused by rising wages. This is the very opposite of the conditions Marx describes as being fundamental to his law of the falling rate of profit, which is based upon rising productivity, a rising rate of surplus value, and rising mass of profits. In other words, the fall in the mass of surplus value here is a consequence of the overproduction, not vice versa.

The mass of surplus value can rise for one of two reasons, as Marx describes above. Either the mass of labour exploited rises, or the same mass of labour is exploited at a higher rate of exploitation. The mass of labour exploited can rise due to natural increases in the working population. So, 1 million workers working a 10 hour day, produce 10 million hours of new value. If the rate of surplus value is 100%, that means half of this 10 million hours constitutes surplus value. If the working population rises to 2 million, then 20 million hours of new value are created, and 10 million hours of surplus value are produced, an increase of 100%. But, even if the working population remains constant the mass of labour exploited, and mass of surplus value produced can still increase. That can arise because the working-day is extended. If the 1 million workers work a 16 hour day, 16 million hours of new value is created. Even with the same rate of surplus value, the mass of surplus value thereby rises to 8 million hours, an increase of 60%. This is what Marx refers to in the quote from Chapter 15 above. In other words, as capital finds that the growth in the actual working population no longer suffices to provide the additional labour-power it requires, it looks to increase the mass of labour exploited by other means. It brings women and children into the workforce, and it extends the length of the working-day, thereby increasing the amount of absolute surplus value it can obtain. 

But, a point is then reached, whereby having brought women and children, and immigrants into the workforce – as happened, for example, in the post-war boom period, after WWII – so as to increase the mass of labour, having then lengthened the working-day (even paying higher wages for overtime to do so), capital still runs up against this objective barrier. As each firm tries to recruit more labour, it has to compete with other firms to do so, and the competition between them pushes wages higher, and pushes the rate of surplus value lower. The other means of increasing the mass of surplus value, is to increase the rate of surplus value, which means to reduce the level of wages, leaving a bigger portion of the working-day as surplus value, but in conditions where the shortage of labour-power is pushing wages higher, that is impossible. As Marx says, above, 

“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)” 

The rate of profit here falls, because the mass of surplus value itself falls, or, at least, does not rise, even as the capital advanced rises. So, the rate of profit falls. The profit is squeezed as a result of rising wages, and possibly other costs, as set out in Capital III, Chapter 6, or by a rising proportion of rent or interest. 

This latter is, in fact, the explanation for the falling rate of profit put forward by Ricardo, Malthus and others, in contrast to Smith. The work of Glyn and Sutcliffe (British Capitalism: Workers and the Profits Squeeze), showed how this process unfolded during the 1960's and 1970's. John King and Philip Regan, in their 1976 book “Relative Income Shares”, also support the conclusions. They also say, 

“Their conclusions are supported by a careful reworking of the data by Burgess & Webb.” 

(See: The Profits of British Industry, Lloyds Bank Review (April 1974)) 

They go on to cite further confirmation in the work of Thirlwall, Heidensohn, and Zygmant, “according to whom “a steady rise of the wage income ratio since 1950 appears to accelerate in the 1960’s.”. 

(See Thirlwall, “Changes in Industrial Composition in The UK and the US and Labour's Share of National Income 1948-69”, Bulletin of the Oxford University Institute of Economics and Statistics (Nov 1972); Heidensohn and Zygmant, “On Some Common Fallacies in Interpreting Aggregate Pay Share Figures” Zeitschrift fur die Gesamte Staatswissenchaft (Apr 1974)) 

King & Regan conclude the chapter by saying, 

“Glyn and Sutcliffe suggest that the profits squeeze is an international phenomenon, although some of their evidence for other Western economies is rather weak… Convincing evidence of a recent shift to labour in the United States is provided by Thirlwall, and also by Nordhaus. For Germany, on the other hand, Heidensohn and Zygmant show that the wage income ratio has been constant, with perhaps a slight downward tendency since 1956.” (p 27) 

(See also W.D. Nordhaus, “The Falling Share of Profits”, Brookings Papers on Economic Activity (1974)) 

But, Marx explains why, although such periods of profits squeeze undoubtedly occur, as a result of overproduction, this is not the explanation for the long run tendency for the rate of profit to fall. By contrast, Marx shows that, far from the mass of profit/surplus value falling, as Ricardo, Malthus et al have it, what lies behind his law of a falling rate of profit is a rising mass of profit, resulting from more capital being employed, rather than the rate of surplus value falling, in Marx's theory, the rate of surplus value rises, as a consequence of the rise in productivity that causes the rise in the organic composition of capital (c:v), which is the actual basis for the long-term fall in the rate of profit. 

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