How does the tendency of the rate of profit to fallwork ?

[Leon5]

I've read a little into marxist economics and understand things such as the labor theory of value , Variable capital and constant capital etc.

However when reading about the tendency of the rate of the profit to fall I understand that its caused by their being more and more constant capital in relation to variable capital but I can't get my head round how it makes the rate of profit to fall . Could someone please this to me as I understand it is vital to the eventual descent of capitalism into either "socialism or barbarism"? Thanks

[Gustav HK]

The theory is like this:

If we have s = surplus value, v = variable capital, c = constant capital, p' = rate of profit = s/(v+c), and s' = rate of surplus value = s/v, then:

p' = s/(v+c) => p' = (s/v)/((v+c)/v) = (s/v)/(1+c/v).

Thus, if the rate of surplus value remains the same, but there is more constant capital in relation to variable capital, the rate of profit would fall.

Q.E.D.

[Gustav HK]

Only labour can create new value, constant capital is "dead labour" it only transfers its value.

[u.s.red]

Capitalism demands that human labor be replaced by machines. And as more machinery is used relative to human labor, the gross profit produced becomes enormous. Thus, GM can produce 10x more cars with robots and generate x+ times more profit.

However, the rate of profit has to decline. Originally, $100 of human labor and $100 of machines might produce a profit of, say, $50, or a rate of 25% profit. The capitalist must replace human labor with machines or his competition will destroy him. Thus, $50 of human labor and $500 of machinery might produce a profit of $100, but at a rate of 19%, and so on.

The reason for this is that a machine cannot produce a profit, a robot cannot be made to bleed; yet the capitalist is compelled to replace human beings with machines. It was Adam Smith who originally showed the tendency of the rate of profit to fall, not Marx. Of course, Marx made it famous.

There is a writer on this site, Paul Cockshott, a Scotsman, (Scotsperson?) who is a computer scientist at, I think, University of Glasgow, who posted research showing actual evidence of the decline of the rate of profit of capitalist economies over the past several decades. I've always thought the U.S. GDP figures show a decline from about 20% in 1929 to about 5% now, although, at the same time there has been an astronomic increase in the total amount of profit. China's economic rate of profit continues to climb, just as Marx predicted, even though China is only a marginal or maybe a pre-socialist economy.

At the current rate the capitalist rate of profit will disappear in 2050, I predict. :D

[Zulu]

The capitalists naturally tend to exploit the most easily accessible and cheapest resources first (raw materials, labor, land, technologies), which gives them the highest rate of profit. Then if they want to expand their business they have to go on to invest into and exploit the more expensive resources.

Also, the bourgeois theory of consumer value states that the first iteration of a product is the subjectively the most valuable for the consumers ("the first candy is the tastiest"), so to keep people buying your stuff you need to improve (invest into) quality and marketing, or lower the price (which you also have to do as the market gets saturated by your competitors), or both.

However, the modern capitalism, which is the monopoly capitalism, has ways of partially circumventing all these problems. First of all it reduces competition, then it can conduct a discriminative pricing policy, create artificial deficit when necessary, stimulate unnatural demand and inflation, and most importantly manipulate the accessibility to the resources. But in the end it all comes now down to the credit stimulation and the "economy of bubbles", which means essentially, that the actual profitability of production is close to zero or even negative.

When it eventually all pops, it will leave the capital only with one solution to attempt to save itself (and the profits): exploit the labor to the extreme, to the point of some kind of neo-slavery. Most likely though, the capitalism will simply collapse (as predicted), at which point the former financial oligarchy will institute some kind of a global fascist corporation and conduct various genocidal measures against the general population, including the former petty bourgeoisie now indebted up the ass, which will also coincide with extreme deficit of the basic consumer goods. George Soros has practically admitted all this in his recent interview, by the way.

That's how the tendency of the rate of profit to fall works.

[Leon5]

Thanks guy for your replies

So basically as time goes on because there is more and more constant capital in relation to variable capital which reduces the rate of profit. Is this correct ?

However I still don't understand exactly why you can't make a profit out of constant capital could someone clarify this please how come it doesn't value like labour does?

[Paul Cockshott]

There is a writer on this site, Paul Cockshott, a Scotsman, (Scotsperson?) who is a computer scientist at, I think, University of Glasgow, who posted research showing actual evidence of the decline of the rate of profit of capitalist economies over the past several decades. I've always thought the U.S. GDP figures show a decline from about 20% in 1929 to about 5% now, although, at the same time there has been an astronomic increase in the total amount of profit. China's economic rate of profit continues to climb, just as Marx predicted, even though China is only a marginal or maybe a pre-socialist economy.


The rate of profit in China is a little difficult to compute due to the way you have to infer the capital stock from the data in the china statistical yearbook I have only calculated it until 2005. The general trend was down, as one would expect if the organic composition was rising, but in 2003 2004 there was a sharp upward spike in the profit rate there.

On the general question of what determines the rate of profit over time it is governed by the equation

Pe = (g +t)/(1-u)

where Pe is the dynamic attractor of the rate of profit,
g is the rate of growth of the proletariat,
t is the rate of growth of the productivity of labour
and u is the share of profit that is unproductively consumed by the capitalist class.
This equation is the dynamic solution to the Marxian theory of the rate of profit, and predicts future profit rates very accurately about 3 years ahead.

The key factor is the growth of the proletariat and the degree to which profits are unproductively wasted. To recover from the profit slump of the late 70s capitaliste economies encouraged immigration to push up g and shifted the use of profit from productive investment to the unproductive financial sector boosting u. The combined effects of these two changes meant that in Europe and the USA the decline in the rate of profit was halted. Japan which did not allow immigration and which still tried to accumulate productively has seen profits tend towards zero.

In the long run if the rate of population growth is zero, the rate of profit moves towards a very low ceiling set by the rate of improvement of labour productivitity. If one includes the effect of stock depreciation induced by rising labour productivity the rate of profit in a country with a fixed population tends to zero.

[u.s.red]

Thanks guy for your replies

So basically as time goes on because there is more and more constant capital in relation to variable capital which reduces the rate of profit. Is this correct ?

However I still don't understand exactly why you can't make a profit out of constant capital could someone clarify this please how come it doesn't value like labour does?

The capitalist is in business to make a profit. Hey buys labor and material, variable and constant capital, puts them to use and then sells the result. If he pays $10 for labor "power" or wages and $10 for material or machinery, tools, etc, then he has a product which contains $20 of capital.

"Our capitalist stares in astonishment. The value of the product is exactly equal to the value of the capital advanced." Capital, Vol I, Ch. VII.

How is the capitalist to make a profit if he puts $20 into the system only to get $20 out? There must be a way to get more value out of the system than the capitalist puts in. The problem is solved by the peculiar nature of the commodity "labor." It is the one commodity which creates more value than it uses.

"What really influenced him [the capitalist] was the specific use-value which this commodity [labor] possesses of being a source not only of value, but of more value than it has itself." Chap VII

Thus, the capitalist pays $20 for wages and material, but receives additional value of $10 (the profit, surplus value) for which he paid nothing. The "vulgar" economists even today claim that the extra $10 comes from the magic of the market.

As to your specific question, why can't constant capital produce a profit? One way to think of it, I think, is to look at a computer. By itself it is a machine, constant capital. It can't produce anything unless a human operates it, even if only indirectly. A human being acting alone can create a profit, as, for instance, a slave.

One human operating a computer system can create a massive profit, but at a tiny rate of profit. One human as a slave can create a tiny profit, but at a huge rate of profit.


I suppose it is obviously a lot more complex, but that is how I understand it.

[u.s.red]

To recover from the profit slump of the late 70s capitalist economies encouraged immigration to push up g and shifted the use of profit from productive investment to the unproductive financial sector boosting u.d by rising labour productivity the rate of profit in a country with a fixed population tends to zero.

Not only was physical immigration encouraged, but also jobs were "emigrated" to cheap labor, such as china, india, etc. The effect in both cases was the same, a slowing of the decline in the rate of profit.

however, this immigration/emigration of cheap labor can't continue forever. The Chinese are even starting to rebel against dangerous working conditions at Apple factories. It doesn't look like Africa will be a cheap source of labor for the production of wal-mart t-shirts.

What next? The discovery of natives on the moon who will make t-shirts?

[Paul Cockshott]

it is because value added in an industry is roughly proportinal to labour employed, it is not proportional to capital employed.

[u.s.red]

it is because value added in an industry is roughly proportinal to labour employed, it is not proportional to capital employed.

So, the rate of profit decreases as labor employed decreases, although aggregate profit can increase enormously. Which is why capital goes through the characteristic depressions, crises: capital increases to such an extent that it cannot be recycled using the capitalist "relations" of production. Then capital must be destroyed to start the whole thing over again.

[Paul Cockshott]

So, the rate of profit decreases as labor employed decreases, although aggregate profit can increase enormously. Which is why capital goes through the characteristic depressions, crises: capital increases to such an extent that it cannot be recycled using the capitalist "relations" of production. Then capital must be destroyed to start the whole thing over again.

That is roughly right, but you should be careful not to exaggerate here. There is not always capital destruction in the process. The rate of profit has been more or less flatlining in Japan for 20 years but that has not led to large scale capital destruction. It is more a matter of profit being a disequilibrium phenomenon from the long term historical standpoint. It is a phenomenon intimately associated with the accumulation of capital as the growth of the proletariat. When that growth ceases, capital accumulation slows to a stop and the continued rationale of capitalist profit as a means of furthering economic growth vanishes. In the process the propertied classes can only maintain profitability by transforming themselves into an unproductive stratum similar to previous exploiting classes.

[u.s.red]

That is roughly right, but you should be careful not to exaggerate here. There is not always capital destruction in the process. The rate of profit has been more or less flatlining in Japan for 20 years but that has not led to large scale capital destruction. It is more a matter of profit being a disequilibrium phenomenon from the long term historical standpoint. It is a phenomenon intimately associated with the accumulation of capital as the growth of the proletariat. When that growth ceases, capital accumulation slows to a stop and the continued rationale of capitalist profit as a means of furthering economic growth vanishes. In the process the propertied classes can only maintain profitability by transforming themselves into an unproductive stratum similar to previous exploiting classes.

Two questions:

1. As proletariat growth ceases, then capital accumulation slows to a stop. Yet world population continues to grow. Are you suggesting that there is a mathematical relation between the number of a population and the accumulation of profit? In other words, the rate of growth of population is related to the rate of growth of profit?

2. As to the capitalist class becoming unproductive and exploitative, aren't they that already?

[Paul Cockshott]

Two questions:

1. As proletariat growth ceases, then capital accumulation slows to a stop. Yet world population continues to grow. Are you suggesting that there is a mathematical relation between the number of a population and the accumulation of profit? In other words, the rate of growth of population is related to the rate of growth of profit?
World wide population is still rising so capitalism is not yet exhausted as a system. In developed countries like Japan and Europe the natural rate of population growth is near zero, but in the middle east for example, there is still rapid population growth and in Egypt for example the rate of profit is rising.



2. As to the capitalist class becoming unproductive and exploitative, aren't they that already?
They have always been exploitative, but historically they played a hugely important role in developing the productive forces via capital accumulation. In a mature capitalist economy accumulation tends to stop and that progressive role becomes to say the least questionable.

[u.s.red]

World wide population is still rising so capitalism is not yet exhausted as a system. In developed countries like Japan and Europe the natural rate of population growth is near zero, but in the middle east for example, there is still rapid population growth and in Egypt for example the rate of profit is rising.

.

Are there any studies, etc. which show a mathematical relation between population growth and the rate of profit?

Is there a cause and effect relationship?

[Deicide]

The capitalists naturally tend to exploit the most easily accessible and cheapest resources first (raw materials, labor, land, technologies), which gives them the highest rate of profit. Then if they want to expand their business they have to go on to invest into and exploit the more expensive resources.

Also, the bourgeois theory of consumer value states that the first iteration of a product is the subjectively the most valuable for the consumers ("the first candy is the tastiest"), so to keep people buying your stuff you need to improve (invest into) quality and marketing, or lower the price (which you also have to do as the market gets saturated by your competitors), or both.

However, the modern capitalism, which is the monopoly capitalism, has ways of partially circumventing all these problems. First of all it reduces competition, then it can conduct a discriminative pricing policy, create artificial deficit when necessary, stimulate unnatural demand and inflation, and most importantly manipulate the accessibility to the resources. But in the end it all comes now down to the credit stimulation and the "economy of bubbles", which means essentially, that the actual profitability of production is close to zero or even negative.

When it eventually all pops, it will leave the capital only with one solution to attempt to save itself (and the profits): exploit the labor to the extreme, to the point of some kind of neo-slavery. Most likely though, the capitalism will simply collapse (as predicted), at which point the former financial oligarchy will institute some kind of a global fascist corporation and conduct various genocidal measures against the general population, including the former petty bourgeoisie now indebted up the ass, which will also coincide with extreme deficit of the basic consumer goods. George Soros has practically admitted all this in his recent interview, by the way.

That's how the tendency of the rate of profit to fall works.

Which interview? Can you provide a link?

[Paul Cockshott]

One of my students did a good web site that applies the formula I showed earlier which takes into account population growth and accumulation etc to predict profit for each country three years ahead and then compare it with what actually happened.
http://compbio.dcs.gla.ac.uk/cgi-bin/profits/home.cgi
You can select any country and see how the profit rate predicted by the theory compared to what actually happened.

[Zulu]

Which interview? Can you provide a link?


http://www.thedailybeast.com/newsweek/2012/01/22/george-soros-on-the-coming-u-s-class-war.print.html

[u.s.red]

One of my students did a good web site that applies the formula I showed earlier which takes into account population growth and accumulation etc to predict profit for each country three years ahead and then compare it with what actually happened.
http://compbio.dcs.gla.ac.uk/cgi-bin/profits/home.cgi
You can select any country and see how the profit rate predicted by the theory compared to what actually happened.

According to the web site the study was done in 2009. Has there been anything showing what has happened since 2009? Also, it looks like the graph shows profitability vs. time; I thought the purpose was to show profitability vs. population change. ? The graph shows profitability decline from about 27% to 14% from 1969-2005 in the U.S. But didn't the rate of population in the U.S. rise during that period?

[Paul Cockshott]

There are two lines one for the prediction of what profits will tend to given population growth and the rate of accumulation, the other for the actual rate of profit. The prediction based on population growth tends to show the rate of profit as it will be 3 years later.

Nobody has put the work in to update the figures since 2009

[Lucretia]

This video explains it nicely:

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