A Fall In the Marxian Rate of Profit?
In the first ten posts in this series, I have tried to clarify the Marxist theory, in relation to the rate of profit, Marx's law of a falling rate of profit compared to that of his predecessors, Marx's explanation of the process of social reproduction, and from it his definition of the circuit of industrial capital, because without a correct understanding of that, it's impossible to understand the basis of the self-expansion of capital, or to correctly measure the extent of that expansion. I have, therefore, also attempted to clarify Marx's definition of the turnover period of capital, because without a correct determination of the rate of turnover, it is impossible to determine the annual rate of surplus value, or annual rate of profit, which is the true measure of the potential for capital accumulation. I will now look in closer detail at the headline conclusions that Michael Roberts has presented in his blog post, before later examining his analysis in more detail.
What I have noticed, in the past, in looking at the mass of data that Michael provides, is how frequently that data actually contradicts the basic argument he presents. Michael Roberts in the data he presents writes,
“There has been a fall in the rate of profit in 2017 from 24.4% in 2016 to 23.9% in 2017. Indeed, the US rate of profit on this measure has now fallen for three consecutive years from a post-crash peak in 2014. This suggests that the recovery in profitability since the Great Recession low in 2009 is over. The AK measure confirms Marx’s law in that there has been a secular decline in the US rate of profit since 1946 (25%) and since 1965 (30%).”
But, he makes no distinction, here, between a fall in the rate of profit due to a fall in the rate of surplus value, or rise in the value composition of capital, i.e. a Smithian/Ricardian squeeze on profits, as opposed to a fall, in the rate of profit, due to rising productivity, which results in a rise in the rate of surplus value, a decline in the value composition, but a rise in its organic composition, due to a sharp rise in its technical composition. In other words, he does not distinguish between the Smithian/Ricardian theory of a falling rate of profit and the Marxian theory. But, it's precisely that distinction of these different causes of a fall in the rate of profit that Marx highlights in distinguishing his law of a falling rate of profit from those of his predecessors! If you don't distinguish between these different causes of a fall in the rate of profit, you can't claim that any such fall is attributable to Marx's Law, rather than the Smithian/Ricardian law, or indeed the Malthusian Law; its like not distinguishing between parasols and umbrellas. It means being unable to correctly understand the economic weather, and what the outlook for it is. That is why, for as long as I can remember, Michael, on his blog, has been predicting that, as a result of a falling rate of profit, investment was going to sink, and a new crisis was at hand, if not this year, next year, and as each year has passed, without the predicted crisis arising, so it is simply deferred to the next year.
Its no wonder that the URL for Michael's blog is “thenextrecession”, because that is what underlies his approach. It starts from a mistaken belief that having failed to convince workers of the desirability of Socialism, the best hope is that they should become so disenchanted with capitalism that almost anything can be seen as an improvement. It starts from a view not of Socialism as a development of human society beyond what capitalism has made possible, as an uplifting, aspirational view of Socialism that is progressive, and forward looking, but on the basis of a crude “Anti-Capitalism”, so that even a retreat from the advances that capitalism has made possible is seen as a way forward, so long as it provokes workers into expressing hostility to it. Rather than being Marxist in outlook, it is actually Sismondist, and thereby shares all of the Malthusian, catastrophist deficiencies of Sismondism. The trouble is that the “anti-capitalist” hostility expressed under such conditions, always assumes the form of reaction, such as in the form of Trump, Orban, Brexit, Le Pen, and so on.
It's no wonder then that these sections of crude socialists share the same catastrophist dreams as the reactionaries on the right, as both see the onset of some crisis as the only credible means they can see of winning over the masses to their ideas. The reactionaries have history on their side in such dreams, the crude socialists do not.
Michael, also says,
“Marx’s law is also confirmed because the driver of changes in US profitability depends on the relative movement of the two Marxian categories in the accumulation process: the organic composition of capital and the rate of surplus value (exploitation). Since 1965 there has been the secular rise in the organic composition of capital of 21%, while the main ‘counteracting factor’ in Marx’s law, the rate of surplus value, has fallen over 4%. Conversely, in the neo-liberal period from 1982 to 1997, the rate of surplus value rose 16%, more than the organic composition of capital (7%), so the rate of profit rose 9.5%. Since 1997, the US rate of profit has fallen over 5%, because the organic composition of capital has risen over 14%, outstripping the rise in the rate of surplus value (5.4%).”
If we unpick that, it shows, yet again, that the reality is the opposite of what Michael wants to suggest. Firstly, Michael, here, again, makes no distinction between a rise in the value composition and a rise in the technical composition of capital, resulting in a rise in the organic composition. Yet, Marx makes clear that when he refers to changes in the organic composition of capital, what he really means is a change in deriving from the technical composition.
“Between the two there is a strict correlation. To express this, I call the value composition of capital, in so far as it is determined by its technical composition and mirrors the changes of the latter, the organic composition of capital. Wherever I refer to the composition of capital, without further qualification, its organic composition is always understood.”
It is that, which is the basis of his law of a falling rate of profit, i.e. rising social productivity, causes the technical composition to rise, more material (circulating constant capital) to be processed by the same amount of labour, so that c:v rises. This occurs, because new technological innovations raise labour productivity, and these innovations are introduced most notably following periods of crisis, when labour shortages have created a limit for the expansion of absolute surplus value, and when rising wages also reduce relative surplus value.
Marx notes that his law of a falling rate of profit is not a consequence of labour being exploited less, but of it being exploited more!
“The rate of profit does not sink because the labourer is exploited any less, but because generally less labour is employed in proportion to the employed capital.”
(Capital III, Chapter 15)
Examining Michael's statement, therefore, what do we see? It is clear from the chart he provides. After 1965, there is a secular rise in the “organic composition of capital”, but Michael does not analyse whether this rise in the organic composition is, as Marx says, due to a rise in its technical composition, due to rising productivity, and a concomitant rise in the rate of surplus value, as a given amount of labour processes an increased quantity of material, or whether it is due to a rise in the value composition of capital, whereby slowing or declining productivity, causes the value of the material components of constant capital to rise.
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| Source: Michael Roberts |
In the period 1965-82, the period described by Glyn and Sutcliffe, in Workers and the Profits Squeeze, we find their thesis upheld by the data presented in Michael's chart. According to Michael's chart, during this period, the rate of surplus value fell by 21.9%. The rate of surplus value falls either because, in Ricardian terms, social productivity falls, causing the value of wage goods, and thereby of labour-power/wages to rise, or else because, in Smithian terms, the demand for labour exceeds the supply, at current wages, so wages rise. Given that Marx's law of the tendency for the rate of profit to fall is premised upon a rising rate of surplus value, due to sharply rising levels of productivity, it's clear that, during this period, there is no support for the thesis that the rate of profit fell due to the Marxian Law. Rather, what we see is the rate of surplus value declining sharply, as, first, limitations on the extension of the social working-day begin to appear, which limits the expansion of absolute surplus value, and then, as labour shortages become more acute, wages rise, squeezing relative surplus value, reducing the rate of surplus value, and thereby squeezing profits, and the rate of profit.
That is also what Marx predicts will happen at that stage of the cycle, but his prediction of that has nothing to do with his law of the tendency for the rate of profit to fall. Rather, its the situation that Marx describes in Capital III, Chapter 15.
“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.”
Its that, which leads to increasing crises of overproduction, in the Marxian sense, that increases in capital accumulation, no longer result in an increase in surplus value, because the additional labour employed no longer produces additional absolute surplus value, and instead puts a further demand on tight labour markets, causing wages to rise further, and thereby causes relative surplus value also to then fall. Its in response to these repeated crises in the crisis phase of the long wave that capital searches out new labour-saving technologies, that replace labour, create a relative surplus population, reduce wages, and thereby raise the rate of surplus value, but which also reduces the value of wage goods, thereby reducing the value of labour-power, and so again raises the rate of surplus value. It is those conditions that lead to the application of Marx's law of a falling rate of profit, along with rising rates of surplus value, a rise in the technical composition of capital, and consequent rise in the organic composition, which in turn creates the conditions for ending the crises of overproduction, and of creating the conditions for a new rise in the rate and mass of profit, as the basis of the new upswing in the long wave cycle.
In other words, in response to the repeated crises, labour-saving technologies are introduced. Labour is made redundant, and the unemployed workers push down on wages, causing the rate of surplus value to rise. This does not mean that absolutely fewer workers are employed. The labour force grows each year due to population growth. It means only that out of this larger workforce, a greater proportion of workers are unemployed, and that with higher productivity, a given increase in output requires fewer workers to achieve. That means that the lower wages causing a higher rate of surplus value, brings about a higher rate of profit, and in so far as more labour is employed, absolutely, the mass of profit also rises. However, the rise in productivity means that a given amount of labour now processes a greater quantity of material. Although the mass of profit rises, therefore, it rises by a smaller proportion than the rise in the mass of material processed, so that the ratio of c:(v + s) rises,(the technical and thereby organic composition) and that results in a fall in the rate of profit, even where the ratio of s:v, i.e. the rate of surplus value also rises. This is the opposite of the conditions that apply in that phase where crises of overproduction arise due to falls in the rate of surplus value, and a consequent squeeze on profits.
In this period 1965-82, therefore, as we see, in Michael's chart, the rate of surplus value declines sharply. As would be expected, its concomitant is not a sharp rise in the technical composition of capital, but a modest decline in the value composition of capital. The same fall in productivity that causes the rate of surplus value to fall, is also manifest in a stagnation or fall in the technical composition of capital. In fact, in Michael's chart, we see exactly the same kind of process that Marx describes in Theories of Surplus Value, Chapters 12-18. His chart shows a modest fall in the organic composition, which under Marx's law of a falling rate of profit, should result in a rise rather than a fall in the rate of profit. Marx's law is that the rate of profit falls as the organic composition of capital rises, and rises where the organic composition of capital falls. But, to understand why that is, you have to understand Marx's definition of the organic composition as being determined by the technical composition, not the value composition. As Marx describes in Theories of Surplus Value, Chapter 12-18, changes in the value composition of capital, have completely different effects on the rate and mass of profit as compared to changes in the technical composition of capital.
It is precisely the rise in the technical composition, which means that relatively less immediate labour is employed, compared to the mass of processed material, that causes the rate of profit to fall. If the composition of capital rises, because the same quantity of material is processed by the same amount of labour, but wages fall, then, rather than falling, the rate of profit will rise, because this is a change in the value composition of capital, not a change in its technical composition. If the composition of capital falls, not because more living labour is employed, relatively, thereby producing more surplus value, but rather because the same amount of labour is employed on higher wages, then, rather than rising, the rate of profit will fall, because the rise in wages (v), means that c + v will rise, causing the rate of profit to fall, and further, because v rises, s falls, so that the rate of profit falls for this further reason, of a fall in the rate of surplus value.
Its precisely, because this fall in the organic composition, shown in Michael's chart, between 1965-1982, is due to changes in the value composition rather than the technical composition that the result is a fall rather than a rise in the rate of profit. This change in the relation here, is due to the fact that whilst the technical composition does not change much, a rise in wages, causes the relation between c:v to fall. That is precisely what would be expected to occur according to Marx's actual theory, because during this period, of extensive accumulation, there is no large rise in productivity, more of the same technology is simply rolled out, along with more labour, and more materials. 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)
This is confirmed in the rest of the data presented in Michael's chart. In the period 1982-97, which is the period which covers the tail-end of the crisis phase of the long-wave cycle (1974-87) and most of the stagnation phase of the cycle (1987-1999) we see the rate of surplus value rise sharply by 16%, as all of this new technology is introduced in a period of intensive accumulation, which replaces labour, and causes productivity to rise. In the period of intensive accumulation between 1982-97, we see the organic composition of capital rise by 7%, along with a rise in the rate of profit of 9.5%.
What this again illustrates is that the rise in the organic composition is driven by a rise in its technical composition, which is itself driven by the same rise in productivity that causes the rate of surplus value to have risen by 16%. Some of the rise in the rate of surplus value, here is due to the fact that wages, which were inflated in the previous period, due to labour shortages, fall back, due to excess labour supplies. But, as Marx sets out in Theories of Surplus Value, the major effect is that as productivity rises, the value of wage goods falls, causing the value of labour-power to fall. If most of this 16% rise in the rate of surplus value is attributable to rising productivity, it might be expected to cause a similar percentage rise in the technical composition of capital. The fact that the organic composition rises, by only 7%, suggests that a 16% increase in the mass of material processed, is offset by a fall in the unit value of the material itself, due again to rising social productivity, reducing the value of inputs, and of fixed capital.
The rate of profit rises here, because although the conditions that underlie Marx's Law apply, i.e. new labour saving technologies replace labour, and thereby reduce the potential for expanding the mass of surplus value, relative to the mass of capital employed, that same rise in productivity, raises the rate of surplus value, because wages are reduced, and relative surplus value rises, and the value of constant capital is itself depreciated by that rise in social productivity. It shows the point referred to earlier, that as Marx says, the fall in the rate of profit due to the long-term tendency is much less than it is said to be, and is offset by its concomitant factors, such as the fall in the value of the commodities that comprise the constant capital. Once the factor of a rising rate of surplus value comes into play, enhanced by the development of new higher profit spheres of production, the result is a rise in the rate, as well as the mass of profit.
Moreover, the data provided by Michael refers only to the ordinary rate of surplus value, i.e. the amount of profit in the year in proportion to the laid-out variable-capital/wages for the year. But, as I have described in the first ten posts, this ordinary rate of surplus value is misleading. What is determinant is the annual rate of surplus value. Because, the rate of turnover of capital rises, more or less proportionately to the rise in social productivity, not only does this cause the ordinary rate of surplus value to rise, but it causes the annual rate of surplus value to rise even more. It means less variable-capital need be advanced to produce a given annual amount of profit. That means that, the annual rate of profit rises, but also as Marx describes in Theories of Surplus Value, Chapter 22, it results in a release of variable-capital, which can be used as revenue, or for accumulation. This large release of capital, flows initially into the money markets, which causes interest rates to fall, and thereby also stimulates the fantastic asset price bubbles, which were seen to inflate in the 1980's, and after.
What this again illustrates is that the rise in the organic composition is driven by a rise in its technical composition, which is itself driven by the same rise in productivity that causes the rate of surplus value to have risen by 16%. Some of the rise in the rate of surplus value, here is due to the fact that wages, which were inflated in the previous period, due to labour shortages, fall back, due to excess labour supplies. But, as Marx sets out in Theories of Surplus Value, the major effect is that as productivity rises, the value of wage goods falls, causing the value of labour-power to fall. If most of this 16% rise in the rate of surplus value is attributable to rising productivity, it might be expected to cause a similar percentage rise in the technical composition of capital. The fact that the organic composition rises, by only 7%, suggests that a 16% increase in the mass of material processed, is offset by a fall in the unit value of the material itself, due again to rising social productivity, reducing the value of inputs, and of fixed capital.
The rate of profit rises here, because although the conditions that underlie Marx's Law apply, i.e. new labour saving technologies replace labour, and thereby reduce the potential for expanding the mass of surplus value, relative to the mass of capital employed, that same rise in productivity, raises the rate of surplus value, because wages are reduced, and relative surplus value rises, and the value of constant capital is itself depreciated by that rise in social productivity. It shows the point referred to earlier, that as Marx says, the fall in the rate of profit due to the long-term tendency is much less than it is said to be, and is offset by its concomitant factors, such as the fall in the value of the commodities that comprise the constant capital. Once the factor of a rising rate of surplus value comes into play, enhanced by the development of new higher profit spheres of production, the result is a rise in the rate, as well as the mass of profit.
Moreover, the data provided by Michael refers only to the ordinary rate of surplus value, i.e. the amount of profit in the year in proportion to the laid-out variable-capital/wages for the year. But, as I have described in the first ten posts, this ordinary rate of surplus value is misleading. What is determinant is the annual rate of surplus value. Because, the rate of turnover of capital rises, more or less proportionately to the rise in social productivity, not only does this cause the ordinary rate of surplus value to rise, but it causes the annual rate of surplus value to rise even more. It means less variable-capital need be advanced to produce a given annual amount of profit. That means that, the annual rate of profit rises, but also as Marx describes in Theories of Surplus Value, Chapter 22, it results in a release of variable-capital, which can be used as revenue, or for accumulation. This large release of capital, flows initially into the money markets, which causes interest rates to fall, and thereby also stimulates the fantastic asset price bubbles, which were seen to inflate in the 1980's, and after.
What we see in this 7% rise in the organic composition of capital is the effect of this sharp rise in social productivity. On the one hand, the value of materials used in production falls – during that period the prices of copper, oil and other materials fell, in real terms – and, technological developments also means that materials are used more efficiently. For example, oil consumption rose by only a seventh of the rise in global GDP, between the 1980's, and 2006.
Global oil consumption rose from 63 million barrels per day in 1980, to 85 million barrels per day in 2006. That is an increase of 35%. But, between 1980 and 2012, Global GDP increased from $18.8 Trillion to $71.8 Trillion (1990 dollars). That is an increase of 282%! Even allowing for the 6 years difference in periods that means that global GDP rose by around seven times the increase in oil consumption. That is also despite the huge growth in the number of cars in places like China, which is now the biggest car market in the world. The reason that oil consumption has increased by only a fraction of the increase in global economic growth is because huge advances have been made in the efficiency of oil use.
The value composition of capital thereby falls, as productivity rises. These new technologies, in microchips, wireless communications and so on, also massively depreciated fixed capital, and the fixed capital stock. But, this rise in productivity means that a greater mass of materials are consumed, and this rise in the mass of materials outweighs the fall in their unit value. Alongside that, the increase in service industries, means that large amounts of fixed capital are introduced in infrastructure, such as the laying down of fibre optic cables, telecommunications routers and switches etc., particularly during the 1990's, that created the basis for the expansion of the Internet, and all of its related service industries in the subsequent period.
Finally, looking at the period 1997-2017, this is again a period of long wave expansion, after 1999. Already, by 2007, wages had started to rise notably, squeezing profits, and caused interest rates to rise, which provided the spark for the 2008 financial crash. As the demand for raw materials spiked in 1999, including demand for food, as the global working-class increased massively in size, and the wages of workers in developing economies spiked by the most of all, that caused a sharp increase in the value composition of capital, witnessed in Michael's chart showing that the organic composition of capital rose by 14.5%, whereas productivity/rate of surplus value rose by only 5.4%. As Paul Mason notes,
“It is this that prompted the British economist Douglas McWilliams, in his Gresham lectures, to nominate the last 25 years as the 'greatest economic event in human history'. World GDP rose by 33% in the hundred years after the discovery of the Americas, and GDP per person by 5%. In the fifty years after 1820, with industrial revolution underway in Europe, and the Americas only, world GDP grew by 60%, and GDP per person by 30%. But, between 1989 and 2012 world GDP rose from $20 trillion to $71 trillion – 272% - and as we have seen, GDP per person increased by 162%. On both measures, the period after 1989 outpaces the long postwar boom.” (Postcapitalism, p 101)
Since 1980, the global workforce has more than doubled, and most of the increase has been in Asia. According to the ILO, the world labour force has grew by around a third in the first decade of this century alone. The number of workers employed in industry has risen by around 30% and the number employed in services has risen by 35%. This incessant demand for labour-power pushed up nominal and real wages significantly, at a global level. That was manifest in a sharp rise in global food demand, as the higher living standards of these workers was first translated into a better diet. The start of the new long wave boom after 1999 enhanced this process. In 2005, Chinese consumption of meat was 2.4 times what it was in 1990, milk 3 times, fruit 3.5 times, vegetables 2.9 times, fish 2.3 times, whilst its consumption of cereals, mostly rice, fell by 20%. The large rise in demand from China, and other developing economies, was part of the reason for the spike in global food prices, at the end of 2007 and beginning of 2008.
The fall in the rate of profit, shown, of 5.3% (taking into consideration all of the criticisms of that rate previously outlined) is not a fall consistent with the Marxian law of a falling rate of profit, as Michael suggests, but is a fall due to a squeeze on profits, due to a stagnation of productivity, and a rise in the value composition of capital, alongside a rise in wages. The latter may not be apparent in the US, UK or in the EU, as after 2008, the implementation of austerity, to restrict economic growth was also used to once again press down on wages. And, as Paul Mason shows in his data, the big increase in living standards came in that huge swathe of new workers in China, Asia, Africa, and in former Stalinist states in Eastern Europe. Yet, just as prior to 2008, even in the US, UK, and Europe, rising economic activity, is causing the demand for labour to rise, with labour shortages already appearing in a range of industries - e.g. there is a shortage of around 45,000-50,000 lorry drivers in the UK - and this is starting to push through into higher wages.
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