Rate of Profit to fall for dummies

So heres an easy non Marxian way to understand one cause of Capitalist Crisis, the tendancy of the rate of profit to fall

Lets say you have 2 shoe companies, both taking half of the shoe market, they each have 10 workers who are paid $10 an hour to produce shoes that cost $30, they produce 1 shoe and hour. Other expenses, machines, advertising, materials and so on cost $10 an hour per worker, so both companies make a healthy $10 profit an hour.

So heres what you have.

In one hour, 1 company makes 10 shoes which sell for $300, of that $300, $100 goes to wages, $100 goes to non-labor cost and overhead, and $100 is the profit. Both companies do this and they maintain half the market share, since they both sell the shoes for $30.

Now Company A, buys a new machine, making it possible for 1 worker to produce 2 shoes per hour .... But its a fancy machine, so its gonna cost the company $5 more in non-labor cost, but check it out, 200 shoes per hour rather than 100, means $600 in revenue rather than $300, and only $50 dollars lost per hour, a pretty good deal.

So Company A: buys the machine, Company B knows this, and figures "OH NO, I gotta get the machine too, otherwise I'm going out of buisiness." So Company B buys the machine.

Now here is your problem, you have 2 companies, making double the amount of shoes, thats 400 shoes per hour rather than the 200 before.

As you can see, supply is bigger than demand, Shoe prices drop, to $15 per shoe.

This will probably happen before as company A will drop the price to under cut acompany B, knowing they can make a good profit doing so, then company B follows.

So heres what you have, Both companies pay their workers in all $100 per hour, Their non labor costs are $150, shoe prices have dropped to $15 so they are selling for about the same $300 (they doubled production but prices dropped), assuming they sell all their shoes, now their profits are only $50.

Now perhaps double the shoes do not sell, but the same amount are being sold, now we have a real problem. If they are only getting in $150, but paying $100 in wages and $150 in non-wage cost, they arn't making profit, they are LOOSING profit, this is a giant problem. So what happens? We have to cut, invariable what is cut is labor.

Now you might say "just cut the workers and you'll be back to pre-machine levles." Sure, thats easy for you to say, BUT you've got company A watching company B, and who ever scales down first is surrendering potential market share, ultimately there will be a tug of war, lay offs, and a gradual raising of price.

The price will not go up back to $30, because both companies have less profits but a larger production capability, so all it takes is one company to raise productivity somewhat and undercut the other one.

Now lets say you've gotten back to market equilibrium, 5 workers have been laid off in each company after a back and forth, so wage cost for both companies is $50, and non wage cost is $150, per hour 10 shoes are made per company. But now the shoes cost $25 ... why? Because all it takes is one company to hire 2 more people, and increase their productivity by 4 shoes, meaning 2 people will be hired, producing 2 pairs worth $50 only paying them $20, and then starts the price war all over again.

There you have it, over time, these new machines cost these companies $50 in profit each.

Yet you might say "why not just not buy the machines in the first place?" Not an option, as long as there is another company that might buy one first, you'll HAVE to buy one, lest you get undercut in the market.

Now then you combine this with the lack of demand you recieve from loosing 5 workers, who may potentially buy shoes, (even more on a macro level), and your profits will drop even more.

I hope I explained it relatively simply.

BTW, I simplified this a lot, obviously this is only a tendancy and other things can offset it, I left out other things, which Marx explained but are included in traditional keynsian economics.

This is one reason Capitalism requires constant expanding markets, and purpetual growth, match that with other factors, like competition for investment, maximizing profits for the owners, and lowering employment due to productivity leading to lower demand, and you have Capitalism so prone to crisis its like a steel roller coaster on balsa wood tracks.

Ways this is counteracted.

In the real world profits generally do go up for a while and this phenomenon takes a while to show itself.

1. generally the raise in non-varaible cost is not as high, meaning what happens is that profits do not take as dramatic a hit, infact sometimes they still raise for a while because the effect is sticky, but they'll raise slower and slower.

2. dropping cost of labor, or wage suppression, this is a real issue, but its much harder to do, and when this happens you end up with a classic demand shortage.

3. Government, the government almost always will buy up extra supply, or increase demand artificially, this is one reason for the HUGE US military industrial complex.

4. expanding markets, more people to sell too ...

5. Fictitious capital, this is more complicated and works more on a macro level, basically in short, new markets are invented, (the housing bubble is an example of this)

6. Outsourcing.

7. Cartelization, this is very difficult, but does happened.

8. destruction of competition, happens all the time, buyouts, mergers and so on, one company wins the war.

9. New products, hey we have new and improved shoes, throw away the last ones, or have products non-durable.

10. Lower non-wage costs ... tax cuts ... something else, cheaper advertising (ammerican apparal tried this and failed), this is more difficult.

And I'm sure a bunch more I did'nt think off.

Although in the end, you can't espape the inevitability of collapse.

Seems that you have offered up a synopsis on how a capitalist community increases production, and reduces cost.

You would now need to explain why a socialist community would not be interested in doing the same, or explain how they would (if they are so interested).

:cool:

You really are a one trick pony, and its a really shitty trick.

Hi Gacky,

I followed your advice and came here too.

First off, I think your assumption of static demand is wrong. Demand may go up to 400 shoes from 200 before. What you are saying that increase in productivity is bad because it leads to surplus capacity. This is not always true. Productivity has been rising since the industrial revolution as better machines and technology were invented. But consumption goes up because of higher wages.

We all eat better, wear more clothes, shoes, better housing than our ancestors one hundred years ago. It is only recently that wages stagnated and that's because of china going capitalist unleashing cheap workers on the world. But that's temporary.

Only the Destruction of Capital Value can really systemically lower the rate of profit. A massive decrease in prices is required for booms. That means it would be great if a bunch of humans got killed and cancel on their debt, when factories rust etc.

Of caorse the assumption of static demand is wrong, thats why this is a "tendancy," given static demand, neo-liberal economics and liberal economics states that capitalism can function given static demand, Marx proved it cannot.

Wages stagnated in the 1970s, way before jobs started going to China.

Increase production, reduce cost and reduce price. Once this price falls bellow the Actual Value, no profit is made.

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