Sunday, 2 December 2018

Interpreting US Profits (12) - The Extent of The Influence of the Tendency for the Rate of Profit to Fall

The Extent of The Influence of the Tendency for the Rate of Profit to Fall

In Theories of Surplus Value, Chapter 23, Marx shows that there is nothing in the accumulation of capital that itself necessitates a fall in the rate of profit. He says, for example, 

“If one worker can spin as much cotton as 100 [workers spun previously], then the supply of raw material must be increased a hundredfold, and this is moreover brought about only by the spinning-machine which enables one worker to control 100 spindles. But if simultaneously, one worker produces as much cotton as 100 workers did previously and one worker produces a spinning-machine whereas previously he produced only a spindle, then the ratio of value remains the same, that is, the labour expended in the spinning, [in the production of] the cotton and the spinning-machine remains the same as that expended previously in spinning, the cotton and the spindle.” 


Marx's comments here are particularly relevant in terms of the controversy over the role of The Law of the Tendency for the Rate of Profit to Fall. First of all, he says, 

“It is an incontrovertible fact that, as capitalist production develops, the portion of capital invested in machinery and raw materials grows, and the portion laid out in wages declines. This is the only question with which both Ramsay and Cherbuliez are concerned. For us, however, the main thing is: does this fact explain the decline in the rate of profit? (A decline, incidentally, which is far smaller than it is said to be.) Here it is not simply a question of the quantitative ratio but of the value ratio.” 


In other words, as described earlier, the determining factor for Marx, in his Law, is the technical composition of capital. As productivity rises, as a result of new machines being introduced, a given amount of labour processes a greater mass of material. But, as Marx's quote above shows, if that also results in a proportional fall in the value of the fixed capital, and materials there could be no change in the organic composition of the capital, or, therefore, the rate of profit. As Marx says, in Capital III, if capital simply accumulates on the same technical basis, there is no basis for a change in the organic composition of the capital, or, therefore, for a fall in the rate of profit on that basis. 

But, similarly, as he sets out above, if there is such a change in the technical relations, but it results in the value of the machines, and the raw materials declining proportionately, it would also not give rise to a change in the rate of profit, because there would have been no change in the organic relation between the value of the constant capital, and the new value created by labour. However, because such a technological change, and rise in productivity signifies that less labour-time is required to reproduce labour-power, it implies a rise in the rate of surplus value, and so a rise in the rate of profit arising from that cause. On the other hand, if there is no change in technology, but an accumulation of capital results in the reserves of labour running short, so that a) the mass of absolute surplus value cannot be raised, and b) wages start to rise simply due to the effect of demand and supply for labour, then relative surplus value will also be reduced, causing the rate of profit to fall from this other cause. 

Marx's argument is that although the value of fixed capital falls, as a proportion of the total output value, as well as the proportion of the new value created by labour, the value of material as a proportion of total output rises, because although the value of materials falls due to rising productivity, the quantity of material processed rises by a larger proportion. 

A spinning machine is absolutely more expensive than a spinning-wheel (though over a relatively short period of time, even the absolute value of a spinning machine will fall to less than the initial value of a spinning wheel) but it is relatively cheaper, in relation to output. If a spinning wheel has a value of £100, and produces 100 metres of yarn per day, but a spinning machine has a value of £200, but produces 1,000 metres of yarn per day, the spinning wheel's relative value is £1 per metre, whilst the spinning machine's relative value is only £0.20 per metre. And, in many cases, the fixed capital that replaces former fixed capital is itself absolutely cheaper from the start. A kilometre of fibre optic cable is probably cheaper than a kilometre of copper cable (the former is made of glass, produced from abundant sand, the latter from the relatively scarce copper that must be dug as ore from the ground and then smelted and purified) but also, because it can carry 200 times as much information, it represents, relatively, only 0.5% the cost of the former. A single PC costing £500, today, has more processing power than a mainframe computer costing £2 million in the 1970's. The cost of decoding DNA has fallen from around $3 billion to just $1000!!! So, it's not just that the relative cost of this fixed capital falls relative to the fixed capital it replaces, but in relatively short periods, it becomes absolutely cheaper too. 

Marx notes the difference between the ability to reduce the value of the fixed capital relative to the raw material, but also the ability to reduce the physical quantity of fixed relative to materials. 

“While the circulating part of constant capital, such as raw materials, etc., continually increases its mass in proportion to the productivity of labour, this is not the case with fixed capital, such as buildings, machinery, and lighting and heating facilities, etc. Although in absolute terms a machine becomes dearer with the growth of its bodily mass, it becomes relatively cheaper. If five labourers produce ten times as much of a commodity as before, this does not increase the outlay for fixed capital ten-fold; although the value of this part of constant capital increases with the development of the productiveness, it does not by any means increase in the same proportion.” 


A factory building can accommodate a significant increase in output without the need to expand the building; a single new machine might physically replace several older machines and so on. Marx argues that it's because a large part of raw material consists of organic produce that its value cannot be reduced in the same way, but there are numerous counters to that. Firstly, agricultural production has also been raised significantly with the application of science and fixed capital; large scale industrial farming, in new lands, has reduced agricultural prices; an increased proportion of raw material comprises manufactured goods; new synthetic materials have been introduced; a large part of consumption now is services, not manufactured goods. In fact, as I have set out previously, because it depends upon a rise in the technical composition of capital causing a rise in the organic composition, whereby although the unit value of materials fall, causing the value composition of capital to fall, the organic composition rises, because the rise in the proportion of material processed rises more than its proportional fall in value, and in modern economies, where 80% of new value and surplus value production arises from service industry, that condition does not apply. Service industries do not process materials into material products. 

Source: Michael Roberts
Furthermore, Marx in Theories of Surplus Value Chapter 23, sets out that the fall in the rate of profit due to the law of falling profits is much less than it is said to be, and is not sufficient to override the other forces that cause the rate of profit to rise. As I indicated in Part 11, that is apparent from Michael Roberts chart showing the movement in the rate of surplus value, organic composition of capital, and “rate of profit”, between 1965-2017. A closer look at the fall in the rate of profit during the different phases of this period, shows that in the boom and crisis phase (1965-82), the “rate of profit” fell by 20.8%, but this is not due to Marx's Law. It falls because the rate of surplus value falls by 21.9%, as productivity growth declines, and wages rise relative to profits. The same conditions apply in the new uptrend phase after 1999 where the rate of surplus value rises by only 5.4%, as productivity growth slows, and wages start to rise, notably prior to 2008, whilst the value composition of capital rises, due to sharply rising prices of materials, at least prior to 2015, causing the “rate of profit” to fall by 5.3%. 

By contrast, in the period when productivity is rising most sharply, due to the introduction of new technologies, between 1982-97, the period when Marx's Law of The Tendency For The Rate of Profit To Fall should operate, the “rate of profit” actually rose by 9.5%, and that is because the rising productivity caused the rate of surplus value to rise by 16%, whilst, although the technical composition of capital, also thereby rises, the value composition of capital falls, due to rising productivity, so that the organic composition rises by only 7%. 

It's clear, therefore, that the Marxian Law of The Tendency For The Rate of Profit To Fall has little or no impact on the rate of profit, because it is more than offset by the other factors that accompany it, such as a rise in the rate of surplus value, falls in the value composition of capital, and rises in the rate of turnover of capital, which releases capital, and raises the annual rate of profit. The main driver of movements in the rate of profit, is not the Marxian Law, but periodic squeezes on profits, due to rising wages, as labour supplies become scarce. But, such squeezes on profits are only temporary, precisely because they provoke a new round of technical innovation, that releases labour, pushed down wages, reduces the value of wage goods, and pushes up the rate of surplus value, and rate of profit. The only role for the Marxian Law of The Tendency For The Rate of Profit To Fall is that which Marx described for it, as its most important role, which is to be the basis for the allocation of capital within the economy between different spheres. It moves capital away from those spheres where the organic composition is high, and the rate of profit lower, and vice versa, thereby bringing about a continual movement towards the average rate of profit, via the changes in prices of production

Marx in Theories of Surplus Value, Chapter 23, sets out how the rise in productivity cheapens machinery and raw materials, but that the total quantity of these increases relative to labour. He concludes, 

“The cheapening of raw materials, and of auxiliary materials; etc., checks but does not cancel the growth in the value of this part of capital. It checks it to the degree that it brings about a fall in profit.” 

So, a tendency for the rate of profit to fall that is “much less than it is said to be” is itself checked sufficiently by the fall in the value of materials, caused by the very same rise in social productivity that is the basis of the law itself! 

In Chapter 23, Marx shows that although the mass of fixed capital rises, and its total value rises (as a result of this increase in its mass) relative to labour, because of the rise in productivity that cheapens the fixed capital, it falls relative to the value of raw materials, whose growth in mass is increased far more, as a result of that very rise in productivity. As Marx also sets out in Capital III, Chapter 6, the value of fixed capital, expressed in the value of wear and tear, also falls along with labour as a proportion of total output. The law of a falling rate of profit is driven by the rise in productivity that causes the mass of raw materials processed to rise faster than both the mass of fixed capital and labour. 

But, as Marx points out in Theories of Surplus Value, Chapter 23, and in Capital III, Chapter 6, this very rise in productivity, which is technologically driven, not only cheapens fixed capital, and raw materials, it also means that even where the mass of machines rises due to accumulation, it rises at a slower pace than the rise in the mass of raw materials, because one new machine replaces several older machines, Moreover, this is also true for some raw materials. For example, a more efficient steam engine not only replaces two or three older, less efficient steam engines, as well as being cheaper, but it also burns much less coal for any given amount of output. 

Since the 1980’s, similarly, the increase in oil consumption has risen by only a seventh of the rise in global GDP, as more efficient use of energy reduces the mass of raw material required to produce a given amount of energy. The same is true of new materials which replace older materials, LED lighting which replaces older forms of lighting that used more energy, and required far more materials for their production, mobile phones that require far less materials than a landline, let alone the materials used in the production of cameras, and so on, which are now combined in a tiny smartphone. And, a similar process to that involved in moral depreciation here applies. In the rural area where I live, the telephone lines in places are still made of aluminium, not even copper. Broadband speeds, in places are at best 5 mbps. The fibre optic cable that replaces the copper wire, is cheaper than copper to produce. But, the fibre is capable of providing speeds of 1000 mbps/1 gbps. So, even if we took the actual cost of fibre per kilometre to be the same as copper, the real cost/value of the fixed capital here has fallen to 1/200 of its previous level!! 

And, of course the major factor that influences this is that 80% of value and surplus value creation now occurs in service industries, where as with extractive industries, raw materials play next to no part in the production process. 

The series will continue next week, looking in more detail at Michael's conclusions, in the light of the foregoing analysis. 

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