[e)] Compound Interest: Fall in the Rate of Profit Based on This
An underlying concept, in Hodgskin's analysis, is that, as the amount of capital per worker rises, the amount of surplus value/profit that the worker produces must also rise if the rate of profit does not fall. Hodgskin refers to the return on capital as interest. As Marx points out in Capital III, interest, as well as rent and taxes are only separate divisions of the surplus value, after it has been realised as profit by the capitalist. Marx quotes Hodgskin.
““A mere glance must satisfy every mind that simple profit does not decrease but increase in the progress of society—that is, the same quantity of labour which at any former period produced 100 quarters of wheat, and 100 steam-engines, will now produce somewhat more [… ] In fact, also, we find that a much greater number of persons now live in opulence on profit in this country than formerly. It is clear, however, that no labour, no productive power, no ingenuity, and no art can answer the overwhelming demands of compound interest. But all saving is made from the revenue” (that is from simple profit) “of the capitalist, so that actually these demands are constantly made, and as constantly the productive power of labour refuses to satisfy them. A sort of balance is, therefore, constantly struck” (loc. cit., p. 23).” (p 298)
Because Hodgskin remains confined within the Ricardian framework, his conception, here, is based on the idea that, in order to increase, or even maintain the rate of profit, the mass of profit must increase, which requires a rise in the rate of surplus value. But, Hodgskin concludes, there are limits to how much this rise in the rate of surplus value can continue, without wages themselves actually declining below what is required for the reproduction of labour-power. So, on this basis, he concludes that there is this “balance struck” between capital and labour. As I've shown before, there is a logical flaw in this idea about there being a limit to how far the rate of surplus value can be raised. I will come back to it later.
Marx describes the way actual capital accumulation is the equivalent of compounding. That is, if a given capital is £100, and produces £10 of profit, all of which is accumulated, the capital is then £110, and if it now produces the same 10% profit, the profit in the second year will be £11, which if all accumulated means the capital is now £121, and so on. So, measured over a period of years, the actual amount of profit would result in a much higher annual rate of profit than 10% on the initial £100 capital.
“Thus the capital will have multiplied itself sevenfold over a period of 20 years. According to this yardstick, if only simple interest were paid, it would have to be 30 per cent per annum instead of 10 per cent, that is, three times as much profit, and the more we increase the number of years that elapse, the more the rate of interest or the rate of profit calculated at simple interest per annum will increase, and this increase is the more rapid, the larger the capital becomes.” (p 298)
I've also referred to this in another context, in relation to current conditions. The price of shares and bonds has risen inexorably over the last thirty years. In order that the yield on these assets should even remain constant, therefore, the amount of dividends and bond interest paid must rise by a proportionate amount. These assets are treated as capital which, somehow, produces these returns in the same way that a pear tree produces pears. But, in reality, the dividends paid on shares, and the interest paid on bonds, depends not on any intrinsic quality of those assets, but on the ability of the actual productive-capital to produce profits. If we take a company with £1,000 of productive-capital that has been financed by an equivalent amount of borrowing, represented by the issue of 1,000 £1 shares, it may produce £100 of profit, or 10%. The shareholders may be paid the market rate of interest, say 5%, on their loaned money-capital, as dividends. That leaves £50 that may be accumulated by the company as additional capital.
However, shares are traded on stock markets. If the price of these shares rises, say to £2 per share, then, if its expected that they continue to produce a yield of 5%, it would mean that £100 in dividends would have to be paid out. That is the equivalent of the whole profit of the company, which means that no profit is then available for capital accumulation. If the company does not expand its capital, then, unless its rate of profit rises, for some reason, its mass of profit cannot expand beyond this £100. So, if the price of the shares rises further, say to £2.50, the yield must inevitably fall, here, to 4%.
Hence, we have seen the phenomenon described by Andy Haldane, at the Bank of England, that, in the 1970's, only about 10% of profits went to dividends, whereas today it is more like 70%, and yet dividend yields have been falling. In fact, yields were falling because asset prices were rising for reasons wholly separate from any increase in profits. As yields fell, the Directors whose role is to protect the interests of the owners of fictitious capital (shareholders, bondholders) compensated by increasing the proportion of profit going to dividends. But, as they did so, that kept the prices of fictitious assets inflated whilst denuding the resources for real capital accumulation and profit growth, which thereby further undermines the real basis of providing future dividends.
In a similar way, if the employed labour produces £100 of profit, where £1,000 of capital is employed = 10%, then, if the consequence of capital accumulation is that £5,000 of capital is employed, the employed labour must produce £500 of profit, for the same 10% rate of profit to be maintained. That would require two things. Firstly, there is no change in productivity, and so no change in the technical composition of capital, secondly, that the population rises proportionate to the accumulation of capital so that there are adequate supplies of labour. Otherwise, demand for labour would exceed supply, wages would rise, profits would fall, and along with it the rate of profit.
“We have seen that over 20 years, capital increased sevenfold, whereas, even according to the “most extreme” assumption of Malthus, the population can only double itself every twenty-five years. But let us assume that it doubles itself in twenty years, and therefore the working population as well. Taking one year with another, the interest would have to be 30 per cent—three times greater than it is. If one assumes, however, that the rate of exploitation remained unchanged, in 20 years the doubled population would only be able to produce twice as much labour as it did previously (and [the new generation] would be unfit for work during a considerable part of these 20 years, scarcely during half this period would it be able to work, in spite of the employment of children); it would therefore produce only twice as much surplus labour, but not three times as much.” (p 299)
It might be expected then, as indeed Adam Smith did expect, that the accumulation of capital exceeds the growth of the labour supply. Wages would then rise, and profits fall, until they eventually disappeared. But, of course, as Marx has shown, whenever any such situation arises (a crisis of overproduction of capital), capital responds by engaging in a search for labour-saving technologies, and a subsequent period of intensive, rather than extensive, accumulation. The process of capital accumulation goes along with a process of raising the level of social productivity – more acutely during these periods of intensive accumulation – so that the technical composition of capital rises. Capital does not then require that, in this case, the labour supply trebles, rather than doubles, over the 20 years, because each unit of this labour now produces 50% more than it did previously.
However, and this is a point made, though in a different manner, by Hodgskin, Marx's explanation for the tendency for the rate of profit to fall, is that, if less labour is employed, relatively, then the amount of profit it produces must also fall, relative to this larger mass of capital, and so the rate of profit falls. If £1,000 of capital employs 10 workers, who produce £100 of profit, the rate of profit is 10%, but, if £2,000 of capital employs 18 workers, who produce £180 of profit, the rate of profit is 9%. The mass of labour employed, and the mass of profit have both risen by 80%, but the amount of labour has fallen, relatively, and along with it the profit has also fallen relatively.
That assumes that the rate of surplus value itself remains unchanged, which, as Marx says, is not tenable, because the rise in social productivity assumed here, as the basis of this tendency, also means that the value of labour-power falls, as wage goods become cheaper. In fact, that same principle means that raw materials and fixed capital also fall in value, which also results, therefore, in a rise in the rate of profit.
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