Its not that the technical composition of fixed capital to labour rises, i.e. more factories, more machines per worker (actually this tends to fall, as individual factories employ more workers, more complex machines replace hand tools, or less complex machines), but that the complexity and size of the fixed capital rises, and along with it the value of this fixed capital rises relative to labour.
“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.”
(Theories of Surplus Value, Chapter 23)
A machine with 50 spindles, might replace 5 machines with 10 spindles. Each of these machines employed a worker, so that now 4 workers are replaced. The requirement for this is that the new machine's additional cost is less than the wages of the 4 displaced workers, over its expected lifetime. In terms of output, and in terms of the ratio of material to labour, the share of labour has declined to approximately a fifth of what it was previously. But, in terms of the ratio of fixed capital to labour, the technical ratio has remained the same. Its still one machine to one worker. However, now, the machine has a value of, say, £250, whereas, previously, a 10 spindle machine had a value of £100. If wages are £100 per worker, £400 in wages has been saved, making it profitable to employ the machine, as it brings a £250 saving (it costs £150 more than the replaced machine), whilst output remains the same. But, previously, the value of machine to labour was 1:1, and it is now 2.5:1. In fact, because labour has been laid off, wages, which might previously have risen above the value of labour-power, because of a shortage of labour, will be reduced. If the machine reflects a general rise in technical development, and rising social productivity, then it means that the value of wage goods will fall, so that the value of labour-power, and wages will fall. In that case, if wages fall to £75, the ratio of fixed capital to wages rises to 3.3:1.
The significance of this can be seen by comparing this with the situation in terms of the new value created, rather than as against wages. If we assume a 100% rate of surplus value as the starting point, then we had a fixed capital of £500, and new value created of £1,000, with £500 of this new value being returned to the worker as wages. Discounting raw material costs, and assuming that this is over the lifetime of the machine, fixed capital accounts for a third of the output value, with labour accounting for two-thirds, with wages accounting for a third, and profit accounting for a third. The rate of profit is 50%. With the new machine, if wages remained constant, this becomes £250 fixed capital, £100 wages, and £100 profits. Fixed capital now accounts for 55% of output value, with wages and profits each accounting for 22.5%. The rate of profit falls to 28.6%.
It might be thought that, under these conditions, there is no reason for the capitalist to introduce the machine, because their profit falls from £500 to £100, and their rate of profit falls from 50% to 28.6%. However, there are two other factors, here. Firstly, unless this producer is an oligopolist, who determines the market value of this commodity, they will continue to sell their output at, or near to, its initial market price. In other words, they will sell all of their output for the original £1500. But, their cost of production is now only £350, so that their actual profit rises to £1,150, and their rate of profit rises to 328%. Secondly, although, when all other producers of this commodity introduce this machine, its market value will fall, eliminating this surplus profit, each producer is forced by competition to introduce the machine, because, otherwise, their own individual value of production will be greater than the market value, so that they will make less than average profits, or even losses, and will lose market share.
Competition always forces producers to accumulate capital, and expand output, when the market itself is expanding, for this very reason, even if the increased accumulation of capital, results in a lower rate of profit. This is what drives the extensive accumulation of capital, up to the point when it creates a crisis of overproduction, because the accumulation of capital grows faster than the available labour supply/social working-day, so that absolute surplus value cannot be increased further, and the technical composition of capital/technological level of society, prevents any increase in relative surplus value. Indeed, the relative shortage of labour causes wages to rise, and surplus value/profits to be squeezed.
As Marx puts it,
“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.”
(Capital III, Chapter 15)
It is, in fact, this condition that leads individual capitals to engage in innovation so as to be able to find new machines, new technologies to replace the existing ones, so that labour can be replaced, and these higher wages saved. This is the point, when capital accumulation moves from being extensive to being intensive. The advantage for the individual producer, able to introduce such a machine, is obvious from the above example. But, in so far as the creation of a relative surplus population resulting from a more general introduction of such new technologies, results in a fall in wages, the benefits for capital are even more clear. The capital which comprised £250 fixed capital, £100 wages, and £100 profits produces a rate of profit of 28.6%, but if the rise in productivity, and creation of a relative surplus population causes wages to fall to £75, then profits rise to £125, and the rate of profit now rises to 71.4%, which is half as much again as the original position. Of course this does not include raw material, the quantity and value of which is unchanged. So, for example, if the value of raw material is £500, we have an initial rate of profit of 33.3%, and this becomes 15.15%. For the individual capital that first introduces the new machine, they continue to sell their output at a price of £2,000, their costs now being £825, giving them a profit of £1,175, or a rate of profit of 142%.
This illustrates why, in order to overcome crises of overproduction, capital seeks to engage in such a technological revolution, so as to raise productivity, create a relative surplus population, and thereby drive down inflated wages, and push down the value of labour-power/raise the rate of surplus value. But, in doing so, it creates the conditions described by Marx that lead to his Law of the Tendency for the Rate of Profit to Fall. That is the proportion of total output value accounted for by fixed capital, and labour declines, whilst the proportion accounted for by raw materials rises. As it is only labour that creates new value, and, thereby surplus value, this means that, over the long-term, a tendency for the rate of profit to fall is created, even though it rises compared to the period of crisis and overproduction. However, as Marx describes, the same rise in productivity offsets this tendency. It reduces the value of fixed capital, it reduces the value of materials, it reduces the value of labour-power, and so raises the rate of surplus value. It also, brings about new more efficient means of using raw and auxiliary materials, so that the quantity of them used in production does not rise proportionate to the rise in output. That is most noticeable in relation to the use of new materials, and more efficient use of energy, for example. Finally, the rise in productivity, causes production and circulation times to be reduced, so that the annual rate of surplus value, and annual rate of profit rises.
“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.”
(Theories of Surplus Value, Chapter 23)
As noted earlier, technological development means that, in fact, the material used in new types of fixed capital may be less than that in the fixed capital it replaces. A transistor uses less material than a valve, a microchip less than a transistor, a diesel tractor less than a steam tractor, and so on. The use of different materials may mean that, although the same quantity is used, it is more durable. Marx notes that far more durable steel rails replaced iron rails on railways, metal replaced wood in the construction of machines, and so on. The mainframe computer of the 1950's was built from valves, and occupied an entire room; the mainframe computer of the 1970's saw valves replaced by transistors, but it still took up an entire room, and required air-conditioning systems to cool the room due to the heat produced by the machine. Such a mainframe computer cost around £2 million. By the early 2000's, a personal computer, utilising microprocessors, and fitting on a desk, had more processing power than the 1970's mainframe, and cost only around £500. That meant that 4000 of them could be bought for the same price as a 1970's mainframe. Where the mainframe employed say 10 workers, as programmers, operators and data entry clerks, each PC employed an operator, meaning that the same amount of fixed capital now set in motion 400 times as much labour.
The same fall in value that occurs for fixed capital also applies to raw material, as a result of rising social productivity, the development of new materials, and so on. Most importantly, however, this role of raw materials is only significant, in terms of the Law of the Tendency for the Rate of Profit to Fall, in economies such as that Marx was describing, which are based on manufacturing. In modern economies, where 80% of new value and surplus value is created in service industry, raw material processing is not significant, and so its role in relation to the fall in the rate of profit disappears.
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