Capital Vol. III
Part III. The Law of the Tendency of the Rate of Profit to Fall
(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good resource for those brave souls who take on Vol. 3.)
Though the other chapters in Part 3 present some room for debate this chapter is pretty straight-forward. At times the awkwardness of a first draft shows itself, like in this gem of a passage: “because even a larger unpaid portion of the smaller total amount of newly added labour is smaller than a smaller aliquot unpaid portion of the former larger amount”. But despite occasional awkward turns of phrase we get a pretty well fleshed out presentation of ideas.
Marx begins by point out what by now must be obvious: Given the equation for the rate of profit (total surplus value over total investment in capital, variable and constant) any increase in constant capital expenses not compensated for by an increase in the mass of surplus value will cause a falling rate of profit. That is, if we hold the rate of surplus value constant then any increase in c means a decrease in profit.
Many critics of the falling rate of profit (FRP here, though most people use TRFP- tendency of the rate of profit to fall) theory focus on Marx’s ambivalence between an increase in the technical or physical amount of constant capital and an increase in the actual value of constant capital. It is clear, just from the 2nd paragraph of this chapter, that Marx is well aware of this difference. He says that the technical composition grows faster than the organic or value composition. The increasing amounts of raw materials, partially finished commodities, machines and other fixed capital that the capitalist buys are bought for cheaper and cheaper prices as rising productivity lowers their prices. Yet Marx seems to think that this decreasing cost of constant capital is not strong enough to stem the greater influence of the growing mass of constant capital on the total cost of constant capital. Some 20th century Marxists preferred to see the rising organic composition and the falling cost of constant capital as two equally strong forces acting against each other, the balance to be decided by historically specific factors. It is clear from this 2nd paragraph, and elsewhere in Part 3, that Marx did not see the two forces in this way. He saw the falling costs of constant capital as a lesser counteracting force operating within the context of a larger, overarching movement of rising organic composition.
Guglielmo Carchedi has an interesting approach to this issue of tendencies and counter-tendencies in his book “Frontiers in Political Economy”. First of all, to say that something is a tendency, to say that it is tendential, means that there are forces moving society in this direction. But this is different from saying that something is determinate, that it will necessarily happen a certain way. If a phenomenon is tendential then we don’t know to what extent this tendency will be manifested or to what extent it will be held back by some counter-tendency. Tendencies are primary because they are the state to which the countertendencies tend. Countertendencies are secondary because they are the deviations around this tendency. After distinguishing between present and future tendencies Carchedi goes on to explain 3 types of present tendencies: In the first type the tendency dominates and the counter-tendency creates fluctuations around the tendency such as in the concept of equilibrium price in neoclassical economics. In the 2nd type the tendency and counter-tendency create a temporal, cyclical movement, such as in the tendency toward a falling rate of profit. In the third case the counter-tendency dominates so that the tendency is never realized. This is the case with the Average Rate of Profit- a phenomenon never reached because of the constant fluctuations in capital investment and technology.
In order for this rising organic composition to cause a fall in the rate of profit it mustn’t be confined to just one sphere of production, but must be spread out over much of the economy. Though Marx doesn’t expand upon this point much here it has been raised by critics of the FRP. Some have pointed out that as capital has spread over the globe it has always encountered cheap labor that can be highly exploited without the need for mechanization. We have seen such a huge growth in labor-intensive industries overseas in our lifetime. We have also seen a huge growth in the service sector. But here I am getting away from Marx’s chain of argument in this chapter. I will have to return to these issues at another time.
The basic trajectory of this rising organic composition and falling rate of profit lies in the development of the social productivity of labor. We would hope that making the labor process more productive would be a good thing, but in the context of capitalist production this rising productivity is not developed in order to further socially useful ends. Labor productivity is developed solely in order to appropriate the surplus value of that labor in larger and larger quantities. This tells us that the FRP isn’t just a theory about some accidental minor flaw in the way capitalism reproduces itself. It is a theory about a fundamental contradiction within capitalism, one the gets to the core of the antagonistic social relations at the heart of capitalism: the contradiction between use-value and exchange value.
Why had political economists before Marx been unable to unlock this mystery? Prior to Marx the phenomenon of crisis and falling profit rates were the subject of all sorts of theorizing. Ricardo tied falling profits to the falling productivity of land. His theory is typical of bourgeois theories of crisis which paint crisis as a result of external forces. Marx’s theory is unique in that it argues that crisis is internal to capitalism. It thus reveals the historical limits to capital- that capitalism can develop the productivity of labor only up to a certain point before it goes into crisis. After that point the social relations of the system (appropriation of the surplus labor of this production by the capitalist class) cannot be sustained without a massive destruction of capital value. Classical political economy’s failure to understand this comes from two issues. Firstly it failed to distinguish between variable and constant capital. Marx’s big innovation in this regard to was to understand the difference between the exchange value and use value of labor power, and thus to realize that the interrelations between variable capital, constant capital and surplus value. The other error of the classical economists was that they did not treat profit in its pure form, surplus value, apart from its division between the different parts of the capitalist class as rent, interest, etc. This led to confusion between the rate of surplus value and the rate of profit. It is Marx’s distinction between these two rates which allows him to build his theory of the falling rate of profit. These are important points about Marx’s method and it is crucial that we develop our understanding Kapital with them in mind.
Marx takes the time to elaborate on this second innovation of his: the treatment of surplus value separately from its division into different parts. He says that to treat interest before treating profit is backwards and to back up his argument he compares the difference between interest rates and profit rates of different countries at different stages of capitalist development to show that we can’t understand the interest rates prior to the profit rates.
The other countervailing influence that is often argued can arrest the FRP is a rising rate of exploitation. Marx will discuss this in chapter 14 but here he briefly argues that the rate of exploitation can rise and profits can fall at the same time. This should be obvious from the equation- the matter is the degree to which c increases in relation to s. Marx is arguing that the total amount of labor, regardless of its division between surplus and variable labor, is declining in relation to the total expenditure on capital.
As with everything in Marx, it is the relative proportions not the absolute magnitude that matter. The absolute magnitude of surplus value is always growing. This is what M-C-M1 tells us. Money is invested in production and it creates more money. This “more money” must be reinvested in larger proportions. Thus capital accumulates. Thus the total mass of surplus value is always growing. In the course of this accumulation capital is concentrated in larger and larger fixed capital expenditures. Capital is concentrated and centralized. There is a finite amount of labor to be employed, but there is an infinite amount of constant capital that can be added to this capital expenditure over time. The only limit is the falling rate of profit. It’s not that less labor is being employed. The absolute mass of laborers employed increases as capital brings more and more of the mass of humanity under its power. But in relative terms, in relation to the total capital expended on production, the amount of labor employed decreases. Marx is so emphatic on this idea of a rising mass of surplus value and a falling rate of profit that he repeats it over and over in different versions throughout part 3. Such is the nature of a rough draft.
If the total mass of surplus value is always growing where does all this new surplus come from? Capital brings more and more workers into the labor force. It does this through geographical expansion and population increase. Marx makes a brief venture into a theory of population at the bottom of page 218 (Soviet edition) to argue that the demand for labor can raise wages, making marriages more stable and thus increasing the population gradually. At the same time the repelling of labor from capital (see the discussion of these cycles of employment and relative unemployment in Vol. 1) can be an incentive for rapid population increase as families have more children in order to increase their family income. Obviously this is not a full-fledged theory of population and I don’t think it is intended to be. But it does point to some real observable realities about the relation between population, capital and unemployment. This growth of population is a source of absolute surplus value.
The other source of more surplus value is from relative surplus value. Increases in social productivity decrease the prices of wage goods thus cheapening labor power relative to surplus value. The concentration of capital by itself raises the productivity of labor (see part 1 chapter 5).
This law of a falling rate of profit is a “double edged law” because while the rate of profit is falling the total mass of profits rises. Thus there is an incentive to raise the organic composition of capital in search of this additional surplus value even though less and less profit is squeezed out per capital. In other words the percentage of surplus gained from, say, $100 in invested capital is less and less. Viewed from the perspective of this percentage per $100 of investment it doesn’t make sense why capitalists would raise the organic composition. But if we look at the amount of profit on the total capital invested we see greater and greater masses of profit arising from greater and greater investments in capital. If the profit rate is falling capital requires greater and greater masses of capital investments in order to attain the same or greater mass of profit. The compulsion to accumulate inherent in M-C-M1 acquires an even greater sense of necessity and scale when we realize that investments must increase in size in order to compensate for a falling rate of profit.
This dynamic can be easily seen in the advantages which the large capitalist has over the small capitalist. Smaller firms may have much lower organic compositions and thus much higher individual rates of profit. But why then do firms tend to grow, centralize and crowd out the smaller firms? Firstly, the rate of profit is socially equalized through competition (to the degree that the profit rate tends toward equalization, a tendency never actually reached). Secondly the larger firm realizes a greater mass of profit. This is all the incentive needed for a growth in the size of the firm.
Pages 223-225 contain comments about the understanding of the falling rate of profit in political economy before Marx’s time. Many of the references are indirect and subtle. Never does Marx completely explain the theories he is critiquing, merely saying that these will be the topic of Volume 4: Theories of Surplus Value. Not being an expert in political economy before Marx and not having read Theories of Surplus Value, I can’t fully grasp the entirety of Marx’s argument here. But he seems to be arguing against the simple notion that a fall in the rate of profit is merely a result of the increase in capital investment, ie of the size of the firm. The mass of surplus value and thus the size of the firm is growing. This is obvious. At the same time the rate of profit is falling. This was also an empirical observation in Marx’s time. Merely noticing the coexistence of these phenomenon is not a theory. Marx is claiming that he has actually explained why the seemingly contradictory phenomena appear together.
In a 2003 paper called “The Dialectic of Capitalist Crisis” (http://akliman.squarespace.com/crisis-intervention/) Andrew Kliman specifically references these pages of chapter 13:
“I want to begin with what Marx’s law of the tendential fall in the rate of profit is not. It is not a law of capitalism’s collapse. Nor is it a theory of long-run stagnation, in which the system runs grinds to a halt as the profit rate falls ever closer to zero over time. Marx explicitly denied these ideas, writing that when Adam Smith said that the profit rate tends to fall as more capital is accumulated, he was referring to a permanent effect –– but he was wrong. “Permanent crises do not exist.” Marx also argued that the tendency of the profit rate to fall is constantly overcome by way of economic crises.”
Incidentally the idea that the falling rate of profit is a phenomenon to be explained is crucial. It isn’t that the proof of the FRP is to show that profits are falling. It’s explaining why the profits are falling that Marx was after. Interesting then that much of the modern debate about the Falling Rate of Profit is to whether or not profit rates have fallen at all. Some argue that the capitalist class undertook strategies in the 70’s which restored profit rates and that this crisis has other features not related to a secular decline in profit rates (see Moseley http://www.isreview.org/issues/64/feat-moseley.shtml; Then see Moseley’s retraction of this argument: http://sites.google.com/site/radicalperspectivesonthecrisis/audio-video/audiohistoricalmaterialism2010nyc-originsofthecrisis-moseleyklimanmohun). Others such as Kliman (http://akliman.squarespace.com/crisis-intervention/) argue that there indeed is an empirically observable falling rate of profit. Either way much of the debate has moved away from actually proving whether or not a rising organic composition is the cause of the fall in the rate of profit to whether or not there actually is a fall in the rate of profit. (Actually this is a bit of a simplification. Much of the debate is still on theoretical terms- that is, how to understand Marx’s theory of crisis and whether Marx’s method is complete or requires some modification or even abandonment.)
We have seen that the percentage of surplus realized per $100 invested in capital shrinks while the mass of profits grows. A similar process can be observed in the prices of commodities. As productivity increases the individual commodity becomes cheaper and cheaper because it contains less and less labor. Yet the mass of profits increase. Why? Though each commodity contains less labor, the ratio of surplus labor to necessary labor (labor which goes into reproducing the value of the wage) rises.
Thus we can see the same forces that cause the falling rate of profit in the falling prices of commodities. However we can’t calculate the falling rate of profit just by looking at the proportion of c to v to s contained in a single commodity. This is because the rate of profit is calculated on total capital expenses including fixed capital that does not enter directly into the price of a commodity. C does not equal k. Cost price is not the same as total capital invested.
Engels makes an interesting side note about the actual accounting practices used to measure the turnover time of capital. If I may pose my own example in place of Engels’ example, merely because mine is more interesting and contains no math: I was talking an acquaintance who used to grow marijuana and sell it. He grew it indoors which required a lot of investment in grow-lights, hydroponics, and electricity. He explained that this initial expenditure was at first a “drag” but then he explained to me: “But you have to realize that even though you are putting, like hundreds of dollars into this equipment and stuff that after a year it has paid itself off. Everything you make after that is pure profit.” This is exactly the sort of accounting practice that Engels is complaining about. Actually the value of grow-lights and hydroponics enters into the value of the marijuana only to the extent that it is used up. This is the cost-price. The rest of the value is a representation the labor that goes into the growing process (though here my example breaks down because of the monopoly prices gained by selling illegal substances.) It’s not that the first year of selling drugs pays off the equipment and the rest of the years are just some magic profit coming from the market. In reality the price of the marijuana (if we abstract away from monopoly) represents the cost of production to the extent that productive equipment is used up, plus labor time. It thus takes much longer to realize the cost of these investments than my friend thought.
The larger point of Engels’ aside is that we can’t understand the full significance of a commodity’s value without seeing it in relation to the total capital. Again and again we are reminded of the social nature of production in a market society- that all of these private labors only discover their meaning when they are brought to the market and compared with all other private labors- that profit is a result of the exploitation of one class by another, not an individual by another individual.
Marx spends a lot of time repeating the basic theme of falling commodity prices, rising mass of surplus value and falling profit. He then ends the chapter with the following paragraph which makes me scratch my head:
“The analysis of how far a falling rate of profit may coincide with rising prices no more belongs here than that of the point previously discussed in Book I (S. 280-81 [English edition: Ch. XII. — Ed.]), concerning relative surplus-value. A capitalist working with improved but not as yet generally adopted methods of production sells below the market-price, but above his individual price of production; his rate of profit rises until competition levels it out. During this equalisation period the second requisite, expansion of the invested capital, makes its appearance. According to the degree of this expansion the capitalist will be able to employ a part of his former labourers, actually perhaps all of them, or even more, under the new conditions, and hence to produce the same, or a greater, mass of profit.”
We know from Volume one that one of the main drives for innovation, for increasing expenditures on constant capital in order to reduce commodity prices, is this race for this temporary relative surplus value (super profits). As opposed to the other type of relative surplus value which comes from cheapening the means of subsistence, this later type comes from decreasing the individual capitalist’s commodity values below the socially necessary labor time so as to pocket the difference as profit. This sucks the entire industry into a race to lower prices through innovation. What puzzles me here is Marx saying that this point does not belong here in this chapter on the Falling Rate of Profit. I understand that this description is different than the description of the drive just to accumulate a greater mass of surplus value. Yet clearly this drive for temporary relative surplus value is a source of rising organic composition.
When I made my original video about the Falling Rate of Profit I actually exclusively appealed to this notion of relative surplus value to explain the motivation of capitalists to increase the organic composition of capital. I didn’t talk about the rising mass of surplus value at all. It is now clear to me that, here at least, Marx’s main argument stresses this rising mass of surplus value and that this, rather than referring to a specific strategy of creating surplus value, gets to the more fundamental notion of what it means to accumulate. Still I don’t see why Marx would say, as he does in this last paragraph, that the notion of temporary relative surplus value doesn’t belong in this discussion. I may be misreading him.
To make things more confusing in the last bit of the end of Part 3 (See chapter 15, section 4) Marx does talk about temporary relative surplus value as a way of inadvertently causing rising organic composition and falling profit rates. So it goes with an unfinished manuscript. I may also be misunderstanding what Marx means when he says that the discussion doesn’t belong here.