Marx and The Profits Squeeze
Paul seems to have made the same mistake that many make in relation to Marx's law of a falling rate of profit, particularly in relation his theory of crises, which is to fail to recognise that Marx outlines two very different sets of conditions under which the rate of profit may fall. The first set of conditions relate to a fall in the rate and mass of surplus value, the second to a rise in the rate and mass of surplus value. The significance of the difference is that it is the first set of conditions that create the conditions where crises are more likely, and the second which arise as a consequence of the measures adopted by capital to respond to the crisis.
Bob Sutcliffe put it well when he said that it comes down to a question of two different ratios – the rate of surplus value s/v, and the organic composition of capital c:v.
The first set of conditions involve the rate of profit falling because the rate of surplus value falls, and even the mass of surplus value may fall. These are the conditions outlined by Smith, Malthus and Ricardo as the basis of their theories of the tendency for the rate of profit to fall. For Smith, it comes down to capital growing faster than the working population. These are the conditions Marx analyses in Theories of Surplus Value, Chapter 21, in relation to Hodgskin. Firstly, if capital grows faster than the labour supply there is only two ways to expand surplus value. One is via absolute surplus value – extending the working day or intensifying the working day. The second is via relative surplus value, or reducing the proportion of necessary labour within the working-day.
Both have limits in relation to a fixed number of workers. As set out earlier, the amount of absolute surplus value is limited, for each worker, by the physical limits of the working-day. Reductions in the value of labour-power can increase the amount of relative surplus value, but the amount of necessary labour cannot fall below zero, so again, there is limit given a fixed amount of labour, even to the amount of relative surplus value that can be produced. So, if the amount of labour exploited can't be increased further, there is a limit to the amount of surplus value that can be produced. That is what Marx also says at the start of 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.”
Moreover, as Smith says, and as Marx also says, in Chapter 15, if capital accumulates faster than the supply of labour, competition between capitals pushes up wages, so the rate of surplus value falls, and thereby the mass of surplus value falls, causing profits to be squeezed. These are the conditions that start to apply about 12-13 years into a new long wave uptrend. After about 25 years, they start to approach levels whereby the squeeze on profits makes crises of overproduction more and more inevitable. It's the condition Marx describes in Value, Price and Profit, in relation to agricultural wages between 1849-59, its the condition that arises around 1914, and again described by Glyn and Sutcliffe, in relation to the 1960's, and the early stages of it could be seen in 2007/8.
Ricardo, who followed Malthus' theory of population, argued that the labour supply does expand fast enough to meet the needs of capital, but he argues that in order to feed the workers, less and less fertile land must be cultivated. So, the price of agricultural products, and rents, rise. Wages rise accordingly, squeezing profits, whilst even so, wages don't rise enough to cover the rise in food prices, so living standards fall.
So, as Sutcliffe points out, in these conditions of rising wages, profits get squeezed because the rate of surplus value falls. These are also the conditions Marx sets out in Capital III, Chapter 15, and in more detail in Theories of Surplus Value, Chapter 15,16,17 and 18. As Marx points out, in these chapters, there are two ways the other important ratio, the organic composition of capital, can change. It can change because the value composition changes, or because the technical composition changes.
If there is some fall in productivity, the value of commodities that comprise constant capital, particularly raw material, will rise. This causes c:v to rise. If the same value of capital is employed, it must result in less constant capital, and less labour being employed, and so less surplus value being produced. So, the rate of profit must fall. If the value of capital employed is increased accordingly, so that the use values consumed are reproduced on a like for like basis, the same amount of surplus value is produced, but it now requires more capital to produce it, so the rate of profit falls. This fall in the rate of profit arises for the opposite reason to the one Marx describes in his law of the tendency for the rate of profit to fall. His law is based on rising social productivity, whereby the unit value of commodities fall, not rise. His law is based upon c:v rising because the technical composition rises, as a consequence of the rise in productivity, so that a greater mass of c is processed by a given mass of labour. It means that the mass of surplus value, and rate of surplus value rises.
But, as Marx sets out in Theories of Surplus Value, Chapter 15, and others, if the prices of materials rise, it may mean that less of them can be processed, which means that less labour is employed, and less surplus value is produced. These are also the conditions he discusses in Capital III, Chapter 6.
Its these kinds of conditions, associated with the conditions created by the long wave uptrend that cause a squeeze on profits, and make crises of overproduction more likely. Its to respond to those conditions, at the conjuncture of the end of the uptrend and start of the downtrend, that capital begins to seek out new technological solutions that results in a new Innovation Cycle, and the cluster of new technological innovations that introduce a period of intensive accumulation, replacing labour and existing technologies, undermining wages, and so on, and creating the actual conditions for Marx's law of a falling rate of profits, based upon a rise in the technical composition of capital.
Similarly, as Marx sets out in Theories of Surplus Value, if a fall in productivity, of the type Ricardo describes, results in the value of wage goods rising, so that wages rise, that results in a fall in the organic composition of capital, c:v, but it is again a fall due to a fall in the value composition, not the technical composition. In other words, it does not signify that relatively more labour is employed, thereby producing more surplus value. It means that the same amount of labour, or even less labour, is employed, but that the cost of employing this labour has risen so that s/v falls, and so s/c+v also falls, causing again the rate of profit to fall because of a profits squeeze, and not because of Marx’s law of a falling rate of profit.
A failure to understand these two diametrically opposed conditions under which the rate of profit falls, and the reason it then falls – profits squeeze, or profits rise – is a failure to understand the location of these two opposing conditions, at different points within the long wave cycle, and thereby to prevent yourself from understanding their role in determining the periodicity of the long wave itself. I'm surprised, given that Paul identified the relation between the two, and given that he has studied my past work on this relation, that he missed this vital distinction.
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