Capital Vol. III Part III: The Law of the Tendency of the Rate of Profit to Fall
Chapter 14. Counteracting Influences
(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 collective resource for those brave souls who take on Vol. 3.)
The rate of profit does not just plummet downward toward destruction and crisis everyday. Like any other observation we can make about the structural contours of a relation, once we understand the inherent tendencies within this relation we have to put it in a wider context of other relations to see how this wider context mediates the potency of our initial observations. For instance, we know that the wage relation pits workers and capitalists against each other in diametrically opposed material interests. Yet the extent of exploitation and the level of class struggle are mediated by all sorts of other factors like the political strength of both classes, the value of the means of subsistence, etc. Yet these other factors don’t change the basic form of wage-labor. They merely mediate its expression.
More important though is to understand the notion of tendency more deeply. It was until I read Paul Sweezy’s critique of the Tendency of the Rate of Profit to Fall (TRPF) in his classic “Theory of Capitalist Development” that I began to understand the importance of the inner relation between a tendency and a counter-tendency. Of course, I completely disagree with Sweezy on this point. Sweezy points out that many of Marx’s counter-tendencies are linked to the same force as the tendency, the development of the social productivity of labor. He says, for instance, that we can’t privilege the rising organic composition over the rising rate of surplus value because both are caused by a rise in productivity (By introducing more machines into the labor process we raise the organic composition thus lowering the rate of profit, but we also cheapen subsistence goods raising the rate of exploitation and thus the rate of profit.) Sweezy argues that because the tendency and counter-tendency are bound up in the same force that there is no way to determine the dominance of one over the other. It makes more sense, he argues, just to talk about a net change in the rate of profit, not some tangly mess of tendencies and counter-tendencies. Similarly, David Harvey dismisses those who give primacy to the TRPF because of the “complex interaction effects” of all of these counter-tendencies.
Thus, when Sweezy develops his underconsumptionist theory of crisis (the theory which would become the defining backbone of the ‘monopoly school’ or ‘monthly review school’) he treats counter-tendency differently. He identifies a long-term tendency towards underconsumption and stagnation which is mediated by a set of external counter-tendencies. The state mops up surplus capital, the state stimulates demand, foreign markets are opened up, etc. Each tendency is external to the logic of the basic drive to underconsumption. Thus he is able to argue that in the end all of these counter-tendencies will run-out, leading to a long-term tendency towards stagnation.
In critiquing Sweezy’s approach we can bring out what is really crucial and distinctive about Marx’s approach.The whole point of a tendency is that it is generated by the same forces that make for a counter-tendency. And because of this inner relation of a tendency with its own limits, with its own opposite, we get three possible types of motion. This is motion and dynamism generated from an internal contradiction. In his Frontiers of Political Economy Guglielmo Carchedi lists 3 types of tendencies:
1. The tendency dominates and the counter-tendencies are fluctuations around a tendential point. ie the wages
2. The Counter-tendency dominates, the tendency causing aborted and incomplete motions toward a tendential point that is never reached. ie the average rate of profit…
3. Cyclical movement where either the tendency or counter-tendencies are dominant given the point in the cycle.
The TRPF is of the latter, cyclical type. At the rise of a boom constant capital is cheap and the rate of surplus value high. Over time the successive development of the means of production can only squeeze so much more surplus from workers. Every time you double the productivity of a worker you get half as much more SV from them, yet they require twice as much constant capital. And as the mass of surplus value grows relative to the amount of workers in the economy the only place for it to go is into constant capital. It doesn’t matter if the constant capital is getting cheaper. The mass of profit is always getting bigger and more and more of it is going into constant capital while the amount going into wages is falling.
All economic laws act as tendencies and thus all of them have counter-tendencies that are inherent to their internal logic. For instance, there is a tendency for capitalists to overproduce without regard to their markets. But at the same time there is counter-tendency to respond to market signals (falling prices and devaluation) and reallocate capital to more productive investments. This is a dialectical phenomenon. Forces have relations to their opposites. This relation creates a type of motion.
In contrast, Sweezy’s approach is not dialectical but positivistic. He defines underconsumption and its counter-tendencies in isolation, not relationally. Once defined positivistically he brings them into interaction. But this doesn’t allow for any theory of motion. So instead of some sort of cycle we get a theory of long-term stagnation. I wonder if we can even push this critique farther and ask if all theories of stagnation must be missing some crucial dialectical notion of motion…..
And now for a look at those counteracting tendencies…
I. INCREASING INTENSITY OF EXPLOITATION
If the rate of profit is s/(v+c) then obviously an increase in the rate of exploitation will increase profits. But how is the rate of exploitation increased? Much of the time the rate of surplus value is increased by increasing the social productivity of labor, by having the same amount of or less workers put into motion more materials or more machines. Thus, while profits rise, the organic composition of capital (v/c) rises as well. In order for a rising rate of exploitation to arrest the falling rate of profit the organic composition must remain stable or change slower than the rate of exploitation.
A rise in absolute surplus value through the lengthening of the working day or hiring more workers can potentially raise the rate of surplus value without changing the composition of capital. Workers work longer and produce a higher rate of surplus value but they aren’t working up more constant capital in relation to the variable capital. The amount of labor being employed is not shrinking in relation to constant capital. This would have the opposite effect of the falling rate of profit. Of course the ability to extract absolute surplus value does imply a growing mass of fixed capital to employ the new laborers so we can’t really argue that there would be no alteration in the composition of capital.
In Volume 1 Marx talks about the historical and theoretical limits to a rise in absolute surplus value. The working day can only be increased so long given the state of class struggle. The working population can only be increased so much relative to the size of capital before wages start to rise. Thus capitalists turn to relative surplus value.
Relative surplus value is produced by the increasing the social productivity of labor. The means of subsistence are cheapened by decreasing the socially necessary labor time for means of subsistence. Or individual firms produce at under the socially necessary labor time driving this average level of productivity up through competition. Either way a rising organic composition is implied which means a falling rate of profit even as the rate of exploitation rises.
Here Marx even says that the struggle over relative surplus value is the “real secret of the tendency of the rate of profit to fall.” This relates to my question at the end of the previous chapter as to whether relative surplus value was at the heart of Marx’s theory of rising organic composition. It seems from this passage that it is and that I must be misreading the passage in chapter 13 that I thought suggested otherwise.
One further point, a point Paul Sweezy should have understood but didn’t: There is a limit to the amount of surplus value you can squeeze from a worker. Let’s say that I work 8 hours a day, 4 hours of necessary labor and 4 hours of surplus labor. My boss decides to double my rate of exploitation changing the proportion to 2 hours of necessary and 6 hours of surplus. In so doing I require twice as much constant capital. This doubling of constant capital produces 2 extra hours of surplus. He then decides to double my productivity again. This changes the proportions to 7 hours of surplus and 1 hour of necessary labor. This time the constant capital has doubled but the surplus has risen by half as much. If we continue the procedure each doubling of constant capital produces half as much additional surplus value. This why the rising rate of exploitation is a counter-tendency and not a tendency.
II. DEPRESSION OF WAGES BELOW THE VALUE OF LABOUR-POWER
Marx doesn’t talk about this here even though he says it is a major factor in arresting the FRP. The depression of wages below the value of labor power belongs to an analysis of competition, which doesn’t happen in this volume. What does Marx mean by this? Clearly prices of production involve competition. The theory of prices of production are a theory of capitalists in competition equalizing the profit rate. I am very interested in Marx’s order of operations so I want to make sure I understand this statement. I think Marx’s order of operations begins in this volume with a look at the rate of profit as an effect of the capital-capital relation. This allows him examine the falling rate of profit which requires an understanding of capital-capital relation and the wage-labor relation. Everywhere here the law of value still operates cleanly. It may take on different quantitative expressions with the price of production, but there are no disturbances in supply and demand which keep market prices from equalling their prices of production. In the real world forces like monopoly and state regulation or just the daily disturbances away from equilibrium force prices away from their prices of production. But we can’t understand these market interferences without first understanding value and prices of production. We measure the strength of monopoly by looking at the degree to which monopoly forces price to diverge from value. Thus value comes first, then the deviation. The same goes for the commodity called labor power. Wages can be depressed below the value of labor power. But we can’t understand this deviation until we understand the price of labor power first. Thus competition which alters the law of value from operating freely is secondary in the primary analysis of the law of value. We first must look at the falling rate or profit and the natural countervailing tendencies that grow out of the basic formal structure of the rate of profit before we look at other forces which alter the ability of the law of value to express itself.
III. CHEAPENING OF ELEMENTS OF CONSTANT CAPITAL
This countervailing tendency is probably the one that has led to the biggest critique of the falling rate of profit. In physical terms, the amount of machines and raw materials can increase per worker but this doesn’t mean that the value of these means of production must increase. The same social productivity which demands more machines and materials also decreases the value of these materials. Marx has already qualified, multiple times, his description of the rising organic composition by saying that the value of means of production rises more slowly than their mass. Here he devotes just two short paragraphs to the topic and doesn’t really ever give a reason as to why this tendency isn’t strong enough to serve as a long term fix.
In the 2nd short paragraph he does talk about depreciation which is often mentioned as a limit to this counter-tendency. Depreciation of existing capital happens when improvements in social productivity mean that cheaper means of production are being created which lower the market value of the already owned capital. Now, just because the current value of the means of production falls, this doesn’t mean that capitalists that already owned these machines can just subtract the difference from their balance sheets. If my means of production are devalued this means that I have to sell my commodities at a loss and eat it. My rate of profit, measured on my total capital investment, falls because of the depreciation. This is the argument made by the TSSI and others. Notice that it hinges on this notion of temporality. The only way to argue that depreciation lowered the organic composition of capital on already existing capital would be to argue that time was static and that all rates of profit should be measured in some timeless void. (The debate over how to measure the cost of fixed capital (whether at its historical cost or its current cost) is a hot topic. For more see the debates between Andrew Kliman and Michael Husson.)
Yet here in this paragraph it seems unclear as to whether Marx makes this temporal distinction. He seems to be saying that depreciation can arrest a falling rate of profit. He says, “The foregoing is bound up with the depreciation of existing capital (that is, of its material elements), which occurs with the development of industry. This is another continually operating factor which checks the fall of the rate of profit, although it may under certain circumstances encroach on the mass of profit by reducing the mass of the capital yielding a profit. This again shows that the same influences which tend to make the rate of profit fall, also moderate the effects of this tendency.” This doesn’t seem like a good defense of the TSSI reading, yet I can’t see how Marx could be correct in claiming that depreciation of fixed capital arrests a falling rate or profit.
IV. RELATIVE OVER-POPULATION
Here we are discussing an external counter-tendency.
Overpopulation relative to the demand for labor cheapens labor. This takes away some of the urgency in the quest for relative surplus value. If labor is easily exploitable why bother mechanizing and investing in more efficient means of production? Marx argues that this counter tendency is not strong enough to check the TRFP because most industries follow a trajectory of low to high organic composition. As time progresses the raising of absolute surplus value is less and less useful and the pursuit of relative surplus value gradually increases. The organic composition slowly rises.
Now I think Marx is accurate in describing this gradual rise in organic composition in many industries. But it certainly isn’t true in all industries. This is another area in which the falling rate or profit is sometimes critiqued. In our lifetime we have seen a dramatic rise in the service sector. Some argue that this means a more labor-intensive capitalism. I wonder though if this is really the case with the service sector. Take a hotel for instance. I bet most hotel jobs are classified as service jobs. Now the ratio of constant capital to wages in a hotel isn’t nearly as high as in a auto-factory. Still, a hotel spends a lot of money on fixed capital and energy costs. It’s not exactly a low organic composition industry either. How many of these service jobs really have truly low organic compositions? I’m curious if there has ever been an attempt to actually chart organic composition in various industries. This would certainly add a lot to the debate. Erik Olin Wright cites a 1972 paper by Mario Cogoy on this subject and concludes that, “Even a strong proponent of the rising organic composition thesis such as Cogoy has to admit that the meagre data which support his views are as equivocal with the data which oppose them.”(I haven’t read Cogoy’s paper myself as it appears to be in French though he did write a 1973 paper on the topic in response to Paul Sweezy which I may take a look at.) Of course not all jobs classified as “service sector” are productive labor. The financial industry is often characterized as a service industry but these are not productive industries and so they do not figure into accounts of organic composition. And we can’t forget that the rise of the “service sector”, both unproductive and productive, came as a response to the crisis of the 1970’s which was a crisis of large industry with high organic compositions.
V. FOREIGN TRADE
This is also an external counter-tendency.
Foreign trade allows capital to seek out cheaper inputs, thus lowering the cost of constant and variable capital. This raises the profit rate. But this also encourages the growth of accumulation which tends to raise the organic composition which tends to lower profit rates. Like the decreasing value of constant capital Marx always sees the overall trajectory of accumulation itself as the primary motive force in falling profits. If anything foreign trade is a means of postponing these falling profits. This idea of displacing crisis geographically doesn’t really appear in any mature form in Marx, as far as I know, but it is a key part of David Harvey’s analysis of the geography of capitalist accumulation. Marx does here say that there is a need for an “ever-expanding market” though he doesn’t give a reason for this here. I assume that, true to his argument in volume 1, that this means that capital is always in search of more labor power and more raw-materials, though he could also mean, as the underconsumptionists argue, that this ever-expanding market comes from the need to sell-off surplus product.
Foreign trade can also boost the rate of profit because of imbalances in the rate of profit, value of labor-power, rate of exploitation, and exchange rates between countries. A highly-mechanized first-world country can produce commodities more efficiently than in peripheral nations. When they sell in those markets they do exactly the same thing that a capitalist who produces below the socially necessary labor time does: they sell their commodities in this foreign market above their value but below the socially necessary labor time in the country. Thus they realize higher profits than they would in their home country.
Colonial and peripheral countries often have higher rates of profit which attracts the investment of capital. I don’t quite understand the point Marx is making in regard to Ricardo in terms of investing capital in these countries with higher profit rates…
But this unequal exchange can boost profit rates in both the advanced country and the dependent country. The advanced nation receives more labor through the inequality of exchange. While the dependent nation gives up more labor in exchange, they also receive commodities at prices much lower than they must pay in their own country. If they are buying productive inputs then this can boost the rate of profit in both countries. But regardless of these effects, the overall trajectory of foreign trade is toward a rising organic composition in the home country and over-production for foreign markets.
Before Marx goes onto discussing the last counteracting tendency, stock capital, he takes about a page to summarize his argument about counteracting tendencies. (He does this here, rather than at the end of the chapter, because the last counter-tendency is of a different nature.) The counteracting tendencies don’t “do away with the law, but impair its effect. Otherwise, it would not be the fall of the general rate of profit, but rather its relative slowness, that would be incomprehensible. Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.” It would be nice to get a more thorough explanation of how this effect takes place over long periods of time, what form it manifests itself in, etc. But we don’t get that here. This idea of falling profit rates over long periods of time does correspond with the theory of Long Waves (which I associate with Mandel’s book on Long-Waves) as well as with Kliman’s recent research into long-term profit rates (different than Long Wave theory).
The only new point Marx makes in the summing up is that profit rates don’t fall because of a rise in wages. This was the conservative explanation of the crisis of the 1970’s. We heard echoes of it again when this crisis revealed excess capacity and stagnation in the US auto-industry. Marx says that a rising rate of surplus value can accompany a falling rate of profit. Capital goes into crisis because labor is more productive, not less productive. Of course a rise in wages could squeeze profits. But this runs counter to the entire trajectory of accumulation which tends to decrease the value of labor power. Thus a fall in profits due to rising wages must be seen as an exception to the general tendency of accumulation.
VI. THE INCREASE OF STOCK CAPITAL
This last point is different from the rest because it involves the distribution of surplus value between money-capital, productive-capital, and rent. Interest payments are a deduction out of total surplus value. Thus they are smaller than the total surplus value. Money-capital gets a lower rate of return on investment than the average rate of profit. If we were to calculate the profit rate based on interest payments the TRPF would be even lower. That is why Marx doesn’t talk about this division of the surplus until after he’s talked about the rate or profit in the abstract.
Now, just dividing the mass of surplus value up into interest, rent, merchant capital, productive profit, etc. doesn’t effect the rate of profit. But when people invest in stock they accept a lower rate of return on their investments, called dividends. This keeps the profit rate from equalizing which means that joint-stock companies like railroads don’t enter the equalization of profit rates. If these companies were brought into the equation the profit rate would drop even lower.
I don’t think I fully understand this. Why would issuing stock keep a firms profit from entering into the equalization of the profit rate? It seems that the credit system is a tool for equalizing the profit rate even better. Yes, is smoothes over temporary fluctuations in profitability, but it also unifies all investment decisions around a uniform interest rate.
Flipping through David Harvey’s “Limits to Capital” I found a brief mention of this issue. Speaking of the centralization of capital in his chapter on interest-bearing capital he says, “But the credit system also furnishes means to counter the de-stabilizing effects of technological and organizational change. For example, Marx lists an increase stock capital as one of the influences counteracting the tendency towards a falling rate of profit. Undertakings of particularly high value composition comprised largely of fixed capital can be organized via the credit system so as not to ‘enter into the equalization of the rate of profit’ since they can be produced if they yield ‘bare interest’ only.” (Limits, p.271. The quotes are from Marx.)
Ironically I see a giant question mark next to this passage that I must have drawn when I read this book several years back. But then over the question mark are drawn three exclamation marks to show that on a later rereading I had figured out what it was all about. I then had written, “Brilliant!” underneath the passage. Of course now I don’t remember what was so brilliant or how I had made sense of this. So it goes!
I later posed this question on marxmail and got some long responses from a few different folks, some which disagreed with each other. One day I will get around to sorting this out and posting a better explanation.