Marx's Law of The Falling Rate of Profit and That of His Predecessors
A calculation of a rate of profit that omits the value of c (means of production consumed in the production of means of production that must be reproduced in kind, out of current output, and which constitutes a revenue for no one) is wrong from the start. It is only a calculation of profit (surplus value) over v, and the ratio s/v is not a calculation of the rate of profit, but of the rate of surplus value.
If this is the rate of profit Michael means, then all he is really showing is that the rate of surplus value is falling, whereas what he wanted to show was that the rate of profit was falling, and even more than that. What he wanted to show was that the rate of profit was falling consistent with Marx's Law of the Falling Rate of Profit. That the rate of surplus value might be falling, is not surprising at this stage of the long wave cycle. A fall in the rate of surplus value is, of course, what Ricardo confused with the fall in the rate of profit. He, like Smith, thought it was the explanation for the long term law of a falling rate of profit. Marx, however, showed that, whilst, at various periods of boom and exuberance, when capital begins to be overproduced, this fall in the rate of surplus value occurs, as wages rise, this is not the cause of the law of the tendency for the rate of profit to fall. In Capital III, Chapter 6, and in Theories of Surplus Value, Marx shows that not only, at such times, might wages rise, but there may be sharp rises in the prices of raw materials, as demand for them rises, and supply can't match the demand. The rise in these input prices then can't be passed on in final product prices, and have to be absorbed out of the profit.
“Since the rate of profit is s/C, or s/(c + v), it is evident that every thing causing a variation in the magnitude of c, and thereby of C, must also bring about a variation in the rate of profit, even if s and v, and their mutual relation, remain unaltered. Now, raw materials are one of the principal components of constant capital. Even in industries which consume no actual raw materials, these enter the picture as auxiliary materials or components of machinery, etc., and their price fluctuations thus accordingly influence the rate of profit. Should the price of raw material fall by an amount = d, then s/C, or s/(c + v) becomes s/(C - d), or s/((c - d) + v). Thus, the rate of profit rises. Conversely, if the price of raw material rises, then s/C, or s/(c + v), becomes s/(C + d), or s/((c + d) + v), and the rate of profit falls. Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material.”
(Capital III, Chapter 6)
The importance of this compared to the use of historic pricing is obvious. Suppose, we take the production of cotton goods. Ignore fixed capital. We have:
c 100 + v 100 + s 100 = 300, s`= 100%, r` = 50%.
Now suppose that before this output is sold, the value of cotton falls by 50% due to a rise in productivity, for example due to the introduction of the cotton gin. On Marx's basis of the use of current reproduction costs, the value of c, is immediately revalued to 50, the output value, also falls to 250, as competition from other producers buying cotton at its now lower price forces it down. But, th surplus value, produced only by labour remains 100. So, we have:
c 50 + v 100 + s 100 = 250, s` = 100%, r` = 66.6%.
The rate of profit has risen, and the validity of this can be seen from the fact, that previously the 100 of profit would only have enabled accumulation of 50%. It would have bought 50 more units of cotton, and 50 more units of labour-power. But, now, the same 100 of profit enables accumulation at the rate of 66.6%. It enables 66.6 more units of cotton to be bought, and 66.6% more units of labour. Marx sets out many such examples, in Theories of Surplus Value, Chapters 12-18.
However, suppose we adopt the historic pricing model. It says that the change in value can be used to price the current output, but not the price of the commodities that were consumed in its production. So here, we would have:
c 100 + v 100 + s 50 = 250, s` = 50%, r` = 25%.
The current value of output must fall to 250, as in the previous current reproduction cost calculation, because that is indeed its current reproduction cost, based upon the now lower value of cotton used in its production. But, if we then have to calculate the cost of production not on the current value of cotton, but on its historic price, and because the value of labour-power has not changed, the difference between the cost of production, and the value of the end product, falls to 50, even though labour has continued to produce the same amount of new value as it did previously, and has continued to be exploited at the same rate of exploitation. So, now according to this historic price valuation method, we have to conclude that profit/surplus value is not solely determined by labour, by the amount of new value it produces relative to the value of labour-power, but is also determined by external changes in the value of constant capital, by the consequence of capital gains or losses!
Suppose, instead the value of cotton had risen, due to say a crop failure that reduces the amount of cotton produced by a given amount of labour. On a current reproduction cost basis, a la Marx, we would have
c 200 + v 100 + s 100 = 400, s` = 100%, r` = 33.3%
In other words, the 100 of profit, would now enable accumulation of 33.3%. It would now buy 33.3 more units of cotton, at its new higher current cost, and would leave enough profit to buy an additional 33.3 units of labour-power.
On an historic cost basis, however, we would have:
c 100 + v 100 + s 200 = 400, s` = 200%, r` = 100%.
Here, the current value of output is 400, as calculated on the basis of the current reproduction cost of that output, which includes the now higher value of cotton consumed in its production. However, in calculating the rate of profit, historic pricing means that the price paid for the cotton, not its current value is the denominator. So, the cost of production, based on this historic price, remains just 200, whilst the output value has risen to 400, due to the higher value of the consumed cotton. The profit, the difference between cost of production and selling price of the output, then becomes, 200, even though the labour continues to produce only 100 of surplus value. The additional "surplus value"/profit, has arisen not from labour, but from the capital appreciation of the cotton, which occurs outside this production process. It means that labour is no longer the only source of new value, and thereby of surplus value. It totally destroys the labour theory of value.
Such sharp rises in raw material prices were seen after the start of the new long wave upswing in 1999. It then leads to a splurge of investment, which ultimately results in a large rise in their supply, after about 12-13 years, which leads to a partial overproduction, in these spheres, and sharp drops in their prices, as seen in 2014.
In fact, Marx shows that his Law requires that productivity is rising, that relative surplus value is rising, and so the rate of surplus value, and mass of surplus value is rising, so that the mass of consumed material (and thereby its total value, even where its unit value is falling) rises faster than the rise in the new value created by labour. Understanding Marx's analysis of the rate of profit, and changes in it, comes down to two different ratios, the technical composition of capital, and the value composition of capital, that are combined in the organic composition. Marx's law of the tendency for the rate of profit to fall depends upon a rise in the technical composition of capital. By contrast, the value composition of capital may rise, whilst causing a rise in the rate of profit. If wages fall, the ratio of c:v will rise, but v:s will also fall, and the proportion of s:(c + v) will rise causing the rate of profit to rise. Yet, Michael completely ignores this vital distinction, as described by Marx, between the role of the technical composition and the value composition of capital. Instead, Michael refers only to changes in the organic composition, whether those changes are a consequence of changes in the technical composition or the value composition. Marx himself, as far back as Capital I, explained that the determinant was the technical composition, the relation between the physical mass of material to the physical mass of labour, and that whenever he refers to the organic composition, it is only to be understood in that light, i.e. a rise in the value of the constant capital to the variable-capital, driven by a rise in the technical composition.
The technical composition of capital measures the physical mass of means of production in proportion to the physical mass of labour. In one industry, the technical composition of capital may be high, for example, where 100 kilos of clay are processed into pottery by 10 workers, working a 10 hour day, compared to say jewellery production, where only 1 kilo of gold is processed by 10 workers, working a 10 hour day. If productivity rises, this technical composition will rise. A machine introduced in each industry might mean that 200 kilos of clay, or 2 kilos of gold, is now processed into the respective end products. If we assume that 1 kilo of clay has a value of £1, and one hour of labour creates a value of £2, with a 100% rate of surplus value, then originally, we had
c £100 + v £100 + s £100 = £300, s`100%, r` 50%, which becomes
c £200 + v £100 + s £100 = £400, s` 100, r` 33.3%,
and if gold has a value of £100 per kilo,
c £100 + v £100 + s £100 = £300, s` 100%, r` 50%, which also becomes
c £200 + v £100 + s £100 = £400, s` 100%, r` 33.3%.
It's quite clear, here, that the rate of profit has fallen in both industries, even though the rate of surplus value, and mass of surplus value has remained constant. The rate of profit has fallen, because the rise in the technical composition of capital means that more constant capital (material) is processed by the same amount of labour.
In fact, as Marx sets out in Capital, and in Theories of Surplus Value, this increase in the technical composition, generally goes along with the actual accumulation of capital. During long periods, in each industry, this accumulation of capital takes place on the basis of extensive accumulation. That is there are no major changes in technology. It simply involves more of the same machines being put into production, and a corresponding number of additional workers to operate those machines, and a corresponding rise in the amount of material processed. As Marx says, in Capital III, Chapter 15,
“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.”
Marx makes the same point in Theories of Surplus Value, Chapter 21, in response to Hodgskin.
“If the population grows at the same rate as capital, then there is no reason whatsoever why I should not be able to extract from 8x workers with £800 the [same rate of] surplus labour that I can extract from x workers with £100. Eight times 100 C makes no greater demand on 8 times x workers than 100 C on x workers.”
As Marx puts it, in 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. And the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour.”
So, if the level of technology remains relatively constant, so that the technical composition of capital, and the rate of exploitation, remains more or less constant, then capital can continue to expand, with no impact on the rate of profit, so long as capital can continue to expand the social working-day, by either increasing the length or intensity of the individual working-day, or else by increasing the number of workers, by recruiting women, children, peasants, immigrants etc. who form part of the latent reserves of labour. Only when this can no longer be done, must capital look for the alternative means of raising the mass of surplus value, by creating a relative surplus population, through the introduction of new labour-saving technologies.
During such periods, of extensive accumulation, the technical composition may rise, slowly, simply because of economies of scale, but, generally speaking, any such modest rises are counteracted by falls in the value of fixed capital, and circulating capital, and in the value of labour-power, so that they would not cause a fall in the rate of profit. It's only when the social-working-day cannot be expanded, so that the mass of surplus value cannot be increased, and so that wages rise, that this causes a squeeze on profits, through a fall in the rate of surplus value, but that is the opposite condition to that described by Marx as the basis of his Law.
It's the rise in the technical composition of capital that drives Marx’s Law of the Tendency for the Rate of Profit to Fall. That rise in the technical composition is driven by the introduction of new labour saving technologies, in response to the rise in wages, and inability to expand the social working-day. As productivity rises, so a given amount of labour processes a greater mass of material, and even if the unit value of this material also falls, its total value will rise relative to the value created by the labour employed to process it. If the value of gold falls from £100 per Kilo to £80 per kilo, we would have, for example,
c £160 + v + £100 + s £100 = £360, s` 100%, r`38.46%,
so that although this mitigates the fall in the rate of profit, it still falls from its original level.
The other situation here might be that as a result of the rise in productivity, the value of wage goods falls, so that the rate and mass of surplus value rises. Suppose, that we have
c £160 + v £90 + s £110 = £360, s` = 122.22%, r` 44%.
This is generally the condition Marx describes, for the operation of his Law. That is the new labour saving technology leads to rising social productivity. That cheapens the commodities that comprise the constant capital, but the total value of constant capital rises, because the quantity of it consumed in production rises at a faster pace than the fall in its price. It also cheapens wage goods, reducing the value of labour-power, and increasing the rate and mass of surplus value. But, this rise in the mass of surplus value, is proportionately less than the rise in the total value of the raw material now being processed. So, a rising mass of capital, a rising rate and mass of surplus value goes along with a fall in the rate of profit, because of the large rise in the mass of material processed, i.e. in the technical composition of capital.
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