Tendency of the rate of profit to fall

[Matty_UK]

Firstly-I found a graph aaages ago that showed the average annual rate of profit of the last century and illustrated how it's been in steady decline since the 60s. Can someone link me to a similar graph to prove to non-communist friends that capitalism is fundamentally flawed.

Secondly-I don't really understand the theory.

This is what I do understand. As there is technological innovation, a greater number of use values (commodities?) are produced per unit of capital invested. But as machinery replaces people the share of constant capital (spent on machines) increases and labour input per product unit declines.

Then the argument goes that only human labour can produce new value. But I don't understand at all why only human labour produces new value.

Also, I've heard capital accumulation plays a part but I'm not sure what this part is. I would also like that explained please.

Thirdly-Are there any bourgeois criticisms of this theory, and if so what are the counter-criticisms?

[ComradeRed]

I hope you don't mind, my post is long, mathematical, and rambling

I'm doing the math on the fly, so I do not guarentee any final opinion on it; I may post later (aha, I was wrong here, it should be dadada).

Firstly-I found a graph aaages ago that showed the average annual rate of profit of the last century and illustrated how it's been in steady decline since the 60s. Can someone link me to a similar graph to prove to non-communist friends that capitalism is fundamentally flawed.

Sorry wouldn't know where to look, though I wouldn't put too much weight on the reliability of the more recent years' profits.

Corporations found out they could simply lie about their profits and get away with it (most of the time, there are some exceptions e.g. Enron). It would be enormously difficult to get an accurate measurement of the profit within a decade or so, but there is no reason to think that it would be reliable prior to then (from about late 1970s to present I would say is "iffy" data).

Sorry, can't help though

Secondly-I don't really understand the theory.

This is what I do understand. As there is technological innovation, a greater number of use values (commodities?) are produced per unit of capital invested. But as machinery replaces people the share of constant capital (spent on machines) increases and labour input per product unit declines.

Then the argument goes that only human labour can produce new value. But I don't understand at all why only human labour produces new value.

Also, I've heard capital accumulation plays a part but I'm not sure what this part is. I would also like that explained please.

I'm gonna reply to this later, since I'm formulating a mathematical explanation and it's not an easy thing to do in several minutes

Thirdly-Are there any bourgeois criticisms of this theory, and if so what are the counter-criticisms?

There are boat loads of bourgeois criticisms of Marxist economics, but specifically this? Hmmm...nothing comes to mind specifically, but the Austrian "Economists" might have something.

[Son of a Strummer]

I have been very interested in this subject. I wrote a paper on it a couple of years ago.

This is what I do understand. As there is technological innovation, a greater number of use values (commodities?) are produced per unit of capital invested. But as machinery replaces people the share of constant capital (spent on machines) increases and labour input per product unit declines.

Then the argument goes that only human labour can produce new value. But I don't understand at all why only human labour produces new value.

This is not such a bad start although it should be mentioned that the idea that "only human labour can produce new value" is actually a premiss underlying the falling rate of profit; being as it is the ontological assumption underlying the theory of surplus value, it is clearly not a following point of the argument.

At the elementary level required to understand the gist of the theory the math is easy (the math becomes considerably more complex the deeper one dives into the theory).

Here is the basic formula: p = S/ (C + V)

where,

p = profit rate
S = the rate of surplus value, representing the relation of surplus to socially necessary labour (s/v)
C = constant capital, capital laid out for past labour inputs embodied by the machinery tools, raw and auxillary materials
V = variable capital, wages paid to living labour

The argument goes something like this... Obviously according to the forumla if Surplus Value (the numerator) falls relative to the denominator (C+V) (perhaps because the working class militates for lessening of the rate of exploitation), then profits will fall. Instead, for heuristic purposes, Marx chose to demonstrate that "even if the rate of surplus value was constant (ie: did not fall) there was nevertheless a tendency for the rate of profit to fall, and furthermore this tendency was a concomitant of rising productivity." (Lebowitz, 1976.) The expansionist thrust of capitalism manifests itself in a continuous development of the productive forces shaped according to the objective of profit maximization. In the quest of individual capitalists for profit, technology is continually revolutionized for the purpose of realizing greater productivity of labour. This greater productivity of labour enables a smaller quantity of living labour to set a larger quantity of constant labour (past labour) in motion. The progressive replacement of living labour by past labour ultimately narrows the base from which surplus labour can be drawn. The proportion of the definite quantity of past labour in the form of machinery, buildings, raw and auxillary materials etc., to the definite number of living labourers is what Marx referred to as the technical compositon of capital. The expression of this relationship in terms of value is what Marx designated the organic compositoin of capital (C:V). It is the thesis that capitalist development is characterized by a rising organic composition of capital which lies at the heart of his tendential law of the falling rate of profit.

To quote my own paper, [quote}"Inasmuch as productivity develops evenly across the key sectors of the economy to correspond with the growth in the rate of the technical composition then the organic composition does not rise, and there is no reason to expect a fall in the rate of profit. However, Marx's argument hangs on the specific assumption of a natural tendency towards uneven development of productivity. Why did Marx believe that this specific condition would prevail?[/quote}

To make a long answer short Marx believed that while marginal improvements in productivity tended to constantly cheapen existing production long term changes in productivity involving the implementation of more extensive systems of machinery and an associated expansion of the requirement for raw materials, puts systemic upward pressure on the value of both elements of constant capital.

To quote Marx...

"what becomes cheaper is the individual machine and its component parts, but a system of machinery develops, the tool is not simply replaced by a single machine, but by a whole system, and the tools which perhaps played the major part previously...are now assembled in thousands. Each individual machine confronting the worker is itself a colossal assembly of instruments which he formerly used singly...But in addition, the machine contains elements which the old instrument did not have. Despite the cheapening of the individual elements, the price of the whole aggregate increases enormously and the [increase in] productivity consists in the continuous expansion of machinery. (Marx, Theories of Surplus Value, Part III, p.366)

A critical consequence of the introduction of new systems of machinery for a rising organic composition of capital is expanded requirement for raw materials. For Marx production of raw materials constituted a natural barrier to the even development of productive forces which was considerably more difficult to surmount because raw material production is bound up with organic processes that preclude their full transformation,

[quote} The development of productivity in different lines of industry proceeds at substantially different rates and frequently even in opposite directions...Productivity of labour is also bound up with natural conditions, which frequently become less productive as productivity grows- inasmuch as the latter depends on social conditons...Consider the mere influence of the seasons, for instance, on which the bulk of raw materials depends for its mass, he exhaustion of forest lands, coal and iron mines, etc." (Marx, Capital Vol III, 255). [/quote]

If productivity in production of raw materials lags sufficiently, and the price realised in the sale of commodities do not suffice to replace those materials consumed during production, then the entire process of capitalist production can be disrupted or it can become impossible to continue production on the previous scale provided by the expansion of machinery. When contradictions involving relative over-production cannot be overcome the predictable outcome is "corrective" crisis. These recurring crises are manifested in bankruptcies, depreciation and destruction of fixed capital, capital flight, capital strike, intensified competition among capitalists scrambling to reduce their share of losses to a minimum, increasing centralization as only the largest firms are able to compensate for the fall in the rate of profit through their mass of profit, and rising unemployment and falling wages (Marx, Capital, Vol III,109, 251).

A close study of the material reveals that many commentators are wrong to interpret the doctrine of the falling rate of profit as an argument concerning a secular limit to the capitalist mode of production- ie: as a central plank of a breakdown theory. Instead the falling rate of profit should be seen as a barrier to capitalist growth that constantly confronts it as a challenge, and which is a determining factor in its development in particular directions. In response to this depressing force confronting profits capitalists constantly revolutionize the means of production, feel pressures to increase the rate of exploitation, intensify the sales effort, expand the world market, depress wages through the introduction of labour-displacing machinery, etc. However when these measures are not enough to overcome the barrier, the result is typically crises causing unemployment, through which some of the existing capacity is destroyed, by which capital is centralized, and the social power of the dominant capitalists is magnified.

The falling rate of profit is a barrier rather than an absolute limit to the capitalist mode of production. As Michael A. Lebowitz notes, "it is conscious human beings who recognize that capital is its own barrier, who are the Limit to capital...The Limit is the proletariat, created, united, and expanded by capital in the course of its development. (Lebowitz- Marx's Falling Rate of Profit: A Dialectical View, Canadian Journal of Economic, 1976.)

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Now a few notes on the status of the theory in economics. Among the bourgeois economists, Bohm-Bawerk of the Austrian school is known for the most systematic critique of Marxist theory. However it should be recognized that the theory is highly contentious even among Marxist economists. Unfortunately many critiques are off-base because they are insufficiently dialectical. Many have assumed that Marx's arguments are confined to the expression of contradictions inherent to the sphere of production when in reality he was arguing that the rate of profit was dependent upon the synthesis of the process of production and circulation. According to his method, his concepts progress dialectically so that for example by the third volume concepts like surplus value are "no longer the same as that which emerged from Volume I; it is now the annual rate of surplus vale, a concept which draws upon the turnover period (production time and circulation time) of capital and thus the number of turnovers which capital can make in a year". (Lebowitz referencing Marx, 1976, p. 245)

The great Marxist economist Paul Sweezy offered illuminating criticisms of the FROP in his The Theory of Capitalist Development (1942). Notably he found fault with Marx's decision to assume a constant rate of surplus value extraction, even for heuristic purposes. Sweezy argued that Marx's analysis up to that point had stressed in various ways the adaptibility and variability of the rate of surplus value; including the creation of industrial reserve armies which had a depressing effect on wages and thus increased surplus value. According to Sweezy, "if both the organic composition of capital and the rate of surplus value are assumed variable, as we think they should be, then the direction in which the profit changes becomes indeterminate...there is no general presumption that changes in the organic composition of capital will be relatively so much greater than changes in the rate of surplus value that the former will dominate movements in the rate of profit." Sweezy points out the assumption of a constant rate of surplus value contradicts other parts Marx's theory- "it would appear, therefore, that Marx was hardly justified, even in terms of his own theoretical system, in assuming a constant rate of surplus value simultaneously with a rising organic composition of capital. (Sweezy, 1942, 101)

Among the economists who have looked closely into the issue perhaps Michael A. Lebowitz has penetrated the most deeply. He is equipped with the advantage of being able to comprehend the texts in their original language and thus has been able to explain the nuances involved with Marx's occassionaly idiosyncratic conceptions. He also is equipped with a knowledge of dialectics that allows him to understand the evolution of Marx's concepts and the importance of a holistic interpretation of Capital. Nevertheless even as faithful and respectful intepreter as Lebowitz recognizes important defects in the FROP. He demonstrates mathematically that using Marx's method the profit rate initially rises rather than falls as a result of the increasing organic composition. In a later work he argued that insofar as the barrier of rising organic composition results from bottlenecks originating in raw materials production Marx inappropriately saw it as a barrier exclusive to capitalist production when in fact what he identified was a natural barrier which took a specific form under capitalist production. Recently, on a political economists mailing list when the question was asked whether the FROP was an article of science fiction, Lebowitz responded, "Yes. what else?."

[Matty_UK]

Cheers Strummer