What is wrong with both the Smithian and Ricardian explanations of the falling rate of profit, is not that they are wrong per se, in other words that they incorrectly describe actual phenomena in the real economy, but that they confuse what are specific and temporary phenomena that cause a squeeze on profits, for a permanent, or long-term tendency. Its not that, at specific times, the demand for labour, as described by Smith, does not rise to a degree whereby wages, as the market price of labour-power, rise, and thereby reduce the rate of surplus value, and thereby cause a squeeze on profits. But, this is not a permanent tendency as Smith believed. Capital responds to this shortage of labour, by finding ways of increasing the social working-day. First it lengthens the individual working-day, including when necessary paying overtime rates. Secondly, it draws additional reserves of labour into the workforce by employing women and children, or peasants, or immigrants. When these means of increasing absolute surplus value are exhausted, it looks to increasing relative surplus value, which it can only do by introducing new labour-saving technologies that create a relative surplus population, which pushes wages down, and the rate of surplus value up.
As Marx put it, in Chapter 17, in response to Smith's argument,
“A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”
In other words, this is not a permanent tendency, for the reasons described above. But, it is a real feature of capitalism at specific points in its cycle, as Marx himself sets out in Capital III, Chapter 15.
“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.”
Indeed, it is this repeated tendency, as capital accumulates extensively, to reach a point where, absolute surplus value cannot be expanded further, by an expansion of the social working-day, because existing labour supplies get used up, and where relative surplus value cannot be expanded, because the same relation of supply and demand for labour causes wages to rise, and so surplus value to get squeezed that, as Marx says here, constitutes a crisis of overproduction of capital. But, that same repeated sequence, whereby capital accumulates extensively, labour supplies get used up, wages rise, profits get squeezed, is also what leads to the repeated cycle that capital seeks to address the squeeze on its profits from rising wages, by innovating, and thereby introducing new labour saving technologies. These new technologies, mean that a relative surplus population is created, so that wages fall, the rate of surplus value rises, causing the mass of profit, and rate of profit to rise. This period is typical of the process that unfolds, during the Crisis or Autumn phase of the long wave cycle.
But, they have a further consequence. By raising productivity, by definition they cause the same mass of labour to process a greater mass of raw material. That causes the technical and thereby organic composition of capital to rise. This rise in the organic composition resulting from the technological innovations, then causes the rate of profit to fall, even as the mass of profit, and rate of surplus value rises. The long-term tendency for the rate of profit to fall is not the cause of the crisis of overproduction, but is the response to it, and the means by which that crisis is resolved! During the Winter or Stagnation phase of the long wave cycle, as wages have been depressed, causing the rate of surplus value to rise sharply, and rising social productivity cheapens wage goods, so reducing the value of labour-power, the same technological developments create more efficient means of using raw materials, the fixed capital stock is hugely depreciated, as a result of moral depreciation, the rate of turnover of capital is increased, so that the annual rate of profit, and thereby average rate of profit is increased. New spheres of production, that are more labour intensive, and constitute new markets, open up with high rates of profit that also raises the average rate of profit, and thereby the conditions are created for the new upswing.
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| Copper acts as a proxy for all primary product prices. Its price rose sharply as the postwar long wave upturn began, before falling for 25 years, during the long wave downturn. When the new upturn began in 1999, copper prices along with all other primary products surged as demand outstripped supply, causing a round of new investment in opening up new lands, and new ways of using raw materials and their replacements. |
Similarly, Ricardo is not wrong to identify that, at times, when, particularly during this new upswing, the demand for raw materials rises sharply, primary product prices rise sharply, and this causes a sharp rise in the value composition of capital. Marx describes those conditions in Capital III, Chapter 6, as well as in Theories of Surplus Value, Chapters 12-22. That rise in the value composition of capital, also causes the rate of profit to fall, and as Marx describes, in Capital III, Chapter 6, to the extent that the higher material prices cannot be fully passed on into final product prices, it also causes a squeeze on profits. But, like the rise in wages that causes a squeeze on profits this is a temporary not a permanent trend. When the new long wave uptrend began in 1999, this feature of sharply rising primary product prices was again seen. But, as soon as it became apparent that it was a sustained rise in prices, that caused a sharp rise in profits for primary product producers, it sparked a surge in exploration and development of new primary product production. It also sparked development of new technologies to produce primary products by more efficient means, such as the development of hydraulic fracking for oil and gas, as well as development of new technologies to utilise primary products more effectively, and develop new cheaper, or more durable/effective synthetic materials, such as the use of carbon fibre, fibre optic cable, and so on. A similar thing was seen in the Spring long wave phase after WWII, when gas and electric replaced coal as a primary source of energy, and when petrochemicals were used to produce a wide range of plastic and polymers to replace existing raw materials, when synthetic fibres replaced cotton, wool and other natural fibres etc.
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| The copper price fell sharply in 2009 due to the effects of the global financial crash, but almost immediately recovered, showing that the economic effects of that crisis were ephemeral, particularly in China. The sustained drop in primary product prices, even though demand for them continued to rise, came in 2014, when all of the investment of the previous 12 years brought all of this lower cost production to bear on supply. |
Capital responds to the over-accumulation of capital, and squeeze on profits from rising wages, by introducing labour saving technologies that create a relative surplus population, thereby reducing wages and raising surplus value, and as a result of rising social productivity, it also reduces the value of labour-power, so again raising the rate of surplus value, and rate of profit. It responds to a squeeze on profits from rising raw material prices, by investing in new lands, mines and production of primary products, which because they are naturally more fertile, and exploited by the latest technologies, are ultimately lower cost, and more profitable, as Marx sets out in Theories of Surplus Value, Chapter 9. It also responds, by investing in more efficient means of producing primary products, and in finding more efficient means of using them, as well as producing synthetic alternatives. At the start of a new long wave upswing, capital can face crises of overproduction, because its demand for raw materials causes these prices to rise sharply, or because insufficient supply of them is available. When, in response to that, capital accumulates in new primary production, and begins to introduce alternatives, which takes around 12-14 years to develop, this can also lead to crises of overproduction, as all of this new supply hits the market, causing primary product prices to drop sharply, as happened in 2014.
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