Falling rate of profit

[Nehru]

Comrades,

I am hearing many different ideas about this, and they all contradict each other. Could someone explain in simple terms how this is inherent to capitalism?

Thanks,
G

[citizen of industry]

Capitalist industries tend toward automation. Any new technical development means a company can produce more than the competition at the same cost. But they have to sell the additional products, so they sell at a lower price and take more of the market share. The other industries soon catch on, and the process starts anew. Assuming supply and demand are equal, the value is determined by the amount of labor in the product. Prices tend to fall to this point. Automation decreases the amount of labor inherent in the product. On top of that, the higher unemployment rises and wages fall the less consumers there are - supply is far greater than demand, prices drop and crisis happen.

A simple read on this is Marx's Wage Labour and Capital. It's a lot easier to digest than Capital and only about 30 pages long.

[Dunk]

The basic argument is actually pretty simple. If capitalists see the concrete stage of commodity production (c) as an annoying step in between an initial investment (m) and profit (m1) it is in their interest to decrease the amount of time spent in this concrete stage while getting the most possible value out of it. This is basically what it means to increase efficiency. Workers produce more commodities per labor-hour, thus increasing the physical productivity relative to the initial investment.

The problem is that the more efficient capitalists are at producing commodities the less those commodities are worth. And this is simply because increased efficiency means less labor input per commodity and therefore less value, meanwhile more spending on labor-saving, efficient machines. So the very actions that capitalists take to generate more profit create a falling rate of profit.

Does that help?

[Nehru]

Does that help?

Thanks, but couldn't they cut down on variable capital to avoid this falling rate.

[La Comédie Noire]

Thanks, but couldn't they cut down on variable capital to avoid this falling rate.

Yes and they can play around with the length and intensity of the working day as well. As I understand it, there is a lot of room for maneuver.

[Nehru]

Thanks, guys. I understand this tendency of the rate of profit to fall, but how is overproduction inevitable in capitalism? Some examples would help.

[citizen of industry]

Simply because as prices fall, companies have to sell more products to make the same amount of profit. But they only pay the workers the minimum wages - enough to reproduce their labor power - and automation increases unemployment. Another word for overproduction is underconsumption. And you can see it every day wherever you are - department stores filled with products and supermarkets bursting with food (a lot of which gets thrown away every night), while people go hungry and can't afford to buy anything.

[Nehru]

Simply because as prices fall, companies have to sell more products to make the same amount of profit. But they only pay the workers the minimum wages - enough to reproduce their labor power - and automation increases unemployment. Another word for overproduction is underconsumption. And you can see it every day wherever you are - department stores filled with products and supermarkets bursting with food (a lot of which gets thrown away every night), while people go hungry and can't afford to buy anything.

Is it something like this: since workers aren't given full value of their labor, they cannot (as consumers) buy everything they produce (as workers). So supply is more, and demand less - and hence overproduction.

[Lynx]

Is it something like this: since workers aren't given full value of their labor, they cannot (as consumers) buy everything they produce (as workers). So supply is more, and demand less - and hence overproduction.
You can also say "spending = income". Going into debt is a way to get around this, temporarily. But workers cannot spend more than they earn in the consumer market.

[citizen of industry]

Is it something like this: since workers aren't given full value of their labor, they cannot (as consumers) buy everything they produce (as workers). So supply is more, and demand less - and hence overproduction.

That's how I understand it, yes. On top of that the more technological production becomes, the less human labor required (higher unemployment, more competition among workers = lower wages), and the more productivity is enhanced. Factories are exploding with products without consumers to buy them. So businesses spend huge amounts on advertising to create more want, and holding companies try to corner the market internationally and fix a monopoly price on things.

I'm no Marxian economist though. I can't put any of that into formulas. I read Marx and try to dumb it down for myself.

[A Revolutionary Tool]

Thanks, guys. I understand this tendency of the rate of profit to fall, but how is overproduction inevitable in capitalism? Some examples would help.

Take for example the destruction of livestock and crops while there was a sea of unemployed/impoverished workers during the Great Depression, probably the best example of how crazy capitalism is. Wages were being pushed down and there was mass unemployment. People couldn't make a profit off of their livestock and crops so they would destroy them to raise the prices on them so that they could make a profit. Forget that there were millions of people starving, some even to death, you don't count in the market if you can't buy in the market.

[Ilyich]

I found this video (http://www.youtube.com/watch?v=-e8rt8RGjCM) helpful.

[DaringMehring]

Check on Henryk Grossman I think his work is still considered the best, on this subject.

[S.Artesian]

Yes, I agree, Grossmann's work is about the best.

Check this thread in which some of these same issues are discussed:

http://www.revleft.com/vb/why-capitalism-prone-t159144/index.html

[Dunk]

Looks like I have some reading to do!

[CAleftist]

Is it something like this: since workers aren't given full value of their labor, they cannot (as consumers) buy everything they produce (as workers). So supply is more, and demand less - and hence overproduction.

Yep. And as I understand it, this contradiction was traditionally solved by lowering supply. But of course, a certain British economist attempted to solve this contradiction in capitalism in the 1930s through a theory of stimulating demand...even though the Great Depression ended through a world war's destruction of massive amounts of surplus-value and the pent-up demand that resulted.

[S.Artesian]

Is it something like this: since workers aren't given full value of their labor, they cannot (as consumers) buy everything they produce (as workers). So supply is more, and demand less - and hence overproduction.

That is not Marx's analysis of overproduction. Marx explicitly rejects "underconsumption" as the equivalent of overproduction. Capital does not produce for consumption. It produces for accumulation; accumulation depends on the specific organization of labor and its relation to the means of production.

Overproduction has its origin precisely in that organization of production for accumulation of value.

[citizen of industry]

Where does Marx explicitly reject underconsumption as the equivalent of overproduction? Of course capital produces for accumulation, but what causes periodical crisis? A massive surplus of unpurchased goods. If those goods were purchased, there would be no crisis. But they can't be purchased due to the means pf production, i.e; wage labour. Were they overly produced or bought in too few amounts? Enlighten me on the distinction.

[S.Artesian]

Where does Marx explicitly reject underconsumption as the equivalent of overproduction? Of course capital produces for accumulation, but what causes periodical crisis? A massive surplus of unpurchased goods. If those goods were purchased, there would be no crisis. But they can't be purchased due to the means pf production, i.e; wage labour. Were they overly produced or bought in too few amounts? Enlighten me on the distinction.

Sure. Volume 2, Chapter 20 for one:




It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption). But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and ―simple‖ (!) common sense, such a period should rather remove the crisis. It appears, then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, and at that always only as the harbinger of a coming crisis.*



There are other quotes from other works, which I'll dig up if I find time, but a close reading of volume 2 makes it clear that what Marx is dealing with is "productive consumption" of capital consuming capital for the expansion of value, and that individual consumption is driven precisely by the success or failure in the reproduction of such productive consumption.

Think about : What is the origin of surplus value? It is in the dispossession of the laborer from the conditions of laborer, thus compelling the laborer to sell his labor-power, in which he reproduces the value of the means of subsistence and a "over" product, and an "over" value, in a surplus product, a surplus value.

How then does capital ever experience any expansion, any reproduction, if the issue is inadequate consumption rather than..... valorization, the expanded accretion of surplus value in the process of production?

[S.Artesian]

In vol 3 Marx gives his analysis of the cause of crises, and of overproduction:


A fall in the rate of profit and accelerated accumulation are different expressions of the same process only in so far as both reflect the development of productiveness. Accumulation, in turn, hastens the fall of the rate of profit, inasmuch as it implies concentration of labour on a large scale, and thus a higher composition of capital. On the other hand, a fall in the rate of profit again hastens the concentration of capital and its centralisation through expropriation of minor
capitalists, the few direct producers who still have anything left to be expropriated. This accelerates accumulation with regard to mass, although the rate of accumulation falls with the rate of profit.

On the other hand, the rate of self-expansion of the total capital, or the rate of profit, being the goad of capitalist production (just as self-expansion of capital is its only purpose), its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population. Those economists, therefore, who, like Ricardo, regard the capitalist mode of production as absolute, feel at this point that it creates a barrier itself, and for this reason attribute the barrier to Nature (in the theory of rent), not to production. But the main thing about their horror of the falling rate of profit is the feeling that capitalist production meets in the development of its productive forces a barrier which has nothing to do with the production of wealth as such; and this peculiar barrier testifies to the limitations and to the merely historical, transitory character of the capitalist mode of production; testifies that for the production of wealth, it is not an absolute mode, moreover, that at a certain stage it rather conflicts with its further development.

In short, overproduction is always the overaccumulation of the means of production as capital which cannot exploit a mass of labor at a sufficient intensity to offset the decline in the rate of profitability.

[S.Artesian]

More from volume 3:


Over-production of capital, not of individual commodities – although over-production of capital always includes over-production of commodities – is therefore simply over-accumulation of capital. To appreciate what this over-accumulation is (its closer analysis follows later), one need only assume it to be absolute. When would over-production of capital be absolute? Overproduction which would affect not just one or another, or a few important spheres of production, but would be absolute in its full scope, hence would extend to all fields of production?

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.
Notice how the increased variable capital, the increase ability to consume is in fact a manifestation of overproduction. Notice that Marx says nothing about reduced ability to consume being a source of overproduction.

And later he says this:


Over-production of capital is never anything more than over-production of means of production –of means of labour and necessities of life – which may serve as capital, i.e., may serve to exploit labour at a given degree of exploitation; a fall in the intensity of exploitation below a certain point, however, calls forth disturbances, and stoppages in he capitalist production process, crises, and destruction of capital. It is no contradiction that this over-production of capital is ccompanied by more or less considerable relative over-population. The circumstances which increased the productiveness of labour, augmented the mass of produced commodities, expanded markets, accelerated accumulation of capital both in terms of its mass and its value, and lowered the rate of profit – these same circumstances have also created, and continuously create, a relative overpopulation, an over-population of labourers not employed by the surplus-capital owing to the low degree of exploitation at which alone they could be employed, or at least owing to the low rate of profit which they would yield at the given degree of exploitation.