Becca Bor explores the Marxist economic concept of the Tendency of the Rate of Profit to Fall, for Rebel’s series on Marx 101.
One of the central contradictions of capitalism is that economic crises are intrinsic to the system. There are some mainstream economists who claim that capitalism is “self-regulating” – something we hear a lot – though we are never provided with any evidence for this claim. They argue that there are cycles of booms and busts, but that the system regulates itself on average based upon supply and demand. Big economic crises – they claim – are caused by external forces to the economic system – such as famine, war or political instability.
However, Marxists understand that crisis is not external to the capitalist system but rather inherent to its functioning. Capitalism is not a rational system as a whole, but rather an anarchic one. Certainly, from their own perspective, individual capitalists may make entirely rational decisions as they drive towards their own expansion and profit. But this is often at the expense of a wider, logical coordination amongst capitalists as a whole that would prevent impending crises, and often their own long-term profitability declining.
Marx, in Capital Volume III, points to a central contradiction within capitalism that leads towards crisis, namely that there is a tendency for the rate of profit to fall, as capital expands and grows.
This theory is hotly debated by many Marxists today – some argue that Marx made assumptions that cannot be proven; however, Marxists who critique this theory still point to crisis as inherent within capitalism.
That said, in order to weigh in on the debate on the tendency of the rate of profit to fall, you have to understand what Marx was arguing in Capital Volume III.
To understand the theory of the tendency of the rate of profit to fall, let’s revisit the basic tenets of capitalism.
“Accumulate. Accumulate. Accumulate.”
Capitalism is a system of accumulation. In order to stay afloat, capitalists must expand. Capitalists reinvest much of the surplus value that is squeezed out of workers back into the production process, which in turn produces more surplus value. This is what Marx called the accumulation of capital.
In Capital Volume I, Marx explains the central tenet of capitalism:
Accumulate, accumulate! That is Moses and the prophets! ‘Industry furnishes the material which saving accumulates.’ Therefore, we save, i.e. reconvert the greatest possible portion of surplus value or surplus product into capital! Accumulation for the sake of accumulation, production for the sake of production: this was the formula in which classical economics expressed the historical mission of the bourgeoisie in the period of its domination.
Importantly, this accumulation of capital is not based on capitalist greed. Though, plenty of capitalists are greedy and power hungry. The need to accumulate is predicated on the need to expand in order to stay competitive with other capitalists. And, since accumulation is based on competition, it is by nature unplanned across the different sectors of the economy.
In essence, capitalist crises are the outcome of the unplanned character of capitalist production.
In order to accumulate more, capitalists must increase productivity. But there are limits to the exploitation of labour to produce surplus value. There is only so much labour a worker can perform in a given amount of time.
However, technological advancements, and new tools and materials, can all increase productivity immensely. For example, the number of tables a worker can make in a day by hand is significantly fewer than how many she can make using machinery.
In Marxist terms, a commodity is produced using a combination of constant capital (machinery, tools, raw materials) and variable capital (human labour) – a commodity can then be said to be made up of constant and variable capital. Both are necessary for production and their ratio is referred to as the organic composition of capital – the higher it is, the more the capitalist invests in constant capital (machinery/tools/materials) in relation to the amount the capitalist invests in human labour.
One central theory of Marxist economics is that surplus value is created by labour power, and not by constant capital. Therefore, as the capitalist increases the investment in machinery, the proportion of new surplus value that capitalist can squeeze out of the production process decreases or falls.
In other words, because of capitalist accumulation, the need to increase productivity, and the compulsion towards investing more heavily in constant capital, there is a tendency for the rate of profit to fall.
Labour Theory of Value
Profits are based on the surplus value that is produced by workers. It is the productivity of workers beyond what they make up in wages, which gets pocketed by the boss. For example, if you work an 8-hour day, you might produce the equivalence of your wage and the running costs of the workplace in the first four hours, and what you produce during the rest of your working day is controlled by the boss – it can be reinvested or pocketed.
Commodity prices are based loosely on the socially necessary labour time it takes to produce the commodity. The more human labour, the more expensive an item is; the less labour, the cheaper.
Capitalist competition works like this:
Capitalists A has been selling tables for €100 based on the socially necessary labour time. Then he invests in a machine that allows his workers to make 10 times the number in the same amount of time. So, he starts to sell his tables at €10, which undercuts all his competitors and he can sell more and make more money in the short term.
However, his competitors will start investing in this new machine as well, so in time, all the table manufacturers are using this machine, producing 10x the number of tables in the same amount of time, and the average price will come down accordingly. This then, wipes out Capitalist A’s competitive advantage.
And the cycle continues. The more the capitalist invests in constant capital, the more mass production of cheaper products, and an attempt to squeeze surplus value out of a shrinking proportion of labour.
So, what are the real-life consequences of this?
With automation often comes redundancies. The more a capitalist relies on machinery, the fewer workers they need. The immediate impact is to reduce investment in variable capital (labour) and consequently make the remaining workers less secure, leading to downward pressure on their wages.
While this is beneficial for the capitalist in the short term, since a reduction in the workforce means less investment in labour, in the long term, it leads to a problem for the capitalist: namely, a reduction of the workforce heightens the organic composition of capital, thereby, increasing the tendency of the rate of profit to fall.
A secondary problem for the capitalist system is unemployed workers cannot afford to consume the commodities and services produced, thereby leading to further problems of profitability.
Again, Marx explains that these are not voluntary, optional actions taken by capitalists, but rather the logical out workings of a system based on accumulation and increased productivity. In Capital, Volume III, Marx illustrates:
No capitalist ever voluntarily introduces a new method of production no matter how much more productive it may be, and how much it may increase the rate of surplus value, so long as it reduces the rate of profit. Yet, every such new method of production cheapens the commodities. Hence, the capitalist sells them originally above their process of production, or, perhaps, above their value. He pockets the difference between their costs of production and the market prices of the same commodities produced at higher costs of production. He can do this… because his method of production stands above the social average. But competition makes it general and subject to the general law. There follows a fall in the rate of profit – perhaps first in this sphere of production and eventually it achieves a balance with the rest, which is, therefore, wholly independent of the will of the capitalist.
Paradoxically, even as the mass of profit increases, the rate or the ratio of profit to investment decreases. As Marx explains in Capital Volume III, “the same reasons that produce a tendential fall in the general rate of profit also bring about an accelerated accumulation of capital and hence a growth in the absolute magnitude or total mass of the surplus labour appropriated by it.”
However, capitalists do everything they can to mitigate this issue. The strategies they use to offset the tendency of the decline of the rate of profit are referred to as countervailing tendencies or counteracting influences.
One strategy is to increase the absolute level of surplus value by having workers work more. We see this all the time, such as when lunch breaks are cut from an hour to forty-five or thirty minutes. Or, a morning tea break or smoke break is cut.
Another strategy is to ensure that the machines that were invested heavily in never stay idle. A boss might increase the hours of production from a single eight-hour shift to two eight-hour shifts, or even three shifts in 24 hours. This way the value stored up in machines is not lost. They are always in motion, being laboured by workers to create surplus value. This is referred to as round the clock production.
Another method is to increase the relative level of surplus value. Instead of a worker making their wage in 4 hours and the other 4 hours of work is surplus, the employer tries to make the worker more productive; making up their wage in 2 or 3 hours and the other 5 or 6 hours is surplus labour. This is referred to as ‘lean production’, and in the work place we often hear this referred to as ‘efficiencies’ in labour.
For example, companies often hire consultancy firms to follow around workers to find ways to make them more efficient. Some might have teams of workers compete with each other. Others get bonuses for most sales or making the most units or seeing the most clients, others might get commission.
Another method for increasing relative surplus value is to cut wages. This is often directly related to automation, but also in crises, such as the current COVID-19 pandemic, employers will be able to use the economic downturn to slash wages and terms and conditions. Under austerity, we have seen cuts to employer pension contributions, the raising of retirement age, cuts to annual leave entitlement, etc. These are all ways that the employer reduces his investment in variable capital, without reducing the productivity of the workers.
In a rational world, the advent of machinery and automation would allow workers to work less, and have a less stressful work life. It would remove the necessity to do some of the more mundane jobs, and free workers up to do more creative work. But we do not live in a rational world. Because of the tendency of the rate of profit to fall, capitalists intensify the exploitation of workers, in order to eke out every last bit of surplus value possible, as they invest in more constant capital.
Crisis of overproduction
This drive to accumulate and profiteer causes there to be more commodities produced than can be sold profitably on the market. An increase in productivity tends towards mass production, which in turn leads to a glut in production, causing prices to fall rapidly, forcing capitalists to cease production, which in turn leads to mass layoffs, and small or inflexible firms go under. Often, larger firms then gobble up stock and/or machinery from these collapsed firms at discounted prices.
Crises can actually help restart the system so profitability can be restored, but this is done through horrendous destruction. Not only the destruction of people’s lives, employment and wellbeing, but also of capitalist firms and constant capital (machinery).
Whilst Marx lays out this contradiction within capitalism, he does not, however, suggest that it will in itself dismantle the system. Rather he suggests that it will intensify the crises, causes more and more immiseration for workers.
It is worth noting again the claim by mainstream economists that it is ‘external forces’ which cause crises and how Marx’s theory refutes it. The problem is internal to the system.
This fact is important. Over the long-term no amount of political management or intervention can change this reality. Those who want to reform capitalism, who want to give it a kinder, less exploitative edge, will have to reckon with economic crises. Because when they arrive, capitalists fight with all their might to save their profitability, using every tool at their disposal to make workers pay and to squeeze every ounce of productivity from labour.
That is why that even with the most left wing, progressive governments and the most intelligent of policies, if capitalism itself is not overthrown, capitalists will always fight tooth and nail to maintain profitability, regardless of how brutally they need to reorganise society to do so.
Socialists, therefore, set our sights and build our strategy on ending the anarchy of capitalist competition through a democratically planned economy based on solidarity, cooperation and human need.