Marx’s Law of the Tendency for the Rate of Profit to Fall

Capitalist crisis and the class struggle

In Capital Volume Three, chapter thirteen, Karl Marx distilled the essence of a commodity to its fundamental components.

He found that a commodity was made up of three parts;

Capital (c). This includes everything used in the means of production, plant, machinery, raw materials, intellectual property. Everything a worker requires to produce a product.

Wages (v). This is to pay for the ability to work but not work put in as we’ll see.

Surplus Value (s). This is the profit or value obtained from utilising labour power (v) to work the means of production (c).

From this we can see that Commodity = c+v+s.

There are two formulae we can draw on to show the rate of exploitation of labour and also the rate of profit.

Rate of Surplus Value (s/v) = % | Rate of Profit (s/c+v) = %

This was one of the elements that Marx would draw together to expose the laws that underpin modern capitalism and makes it unique as an economic system.

Zentralbibliothek Zürich Das Kapital Marx 1867

Calculating rates of exploitation and profit

The following are two examples of the rate of exploitation, the ratio of labour (v) to surplus value (s), and profit.

Example 1. c (capital) = 80, v (wages) = 20, s (surplus value) = 20.

As the workers’ wages = 20 the rate of exploitation (s/v)* 20/20 (multiply the answer by 100 for the percentage) = 100%.

The rate of profit (RoP) is (s/c+v) 20/80+20 = 20%.

Example 2. c = 20, v = 80, s = 40.

As the workers’ wages = 80 the rate of sv = 50% (wages have increased more than s) and the rate of profit = 40%.

There is a higher RoP (labour is more productive) though a lower rate of exploitation (sv).

Note that under capitalism workers never receive the full fruits of their labour.

* The rate of exploitation is at the heart of the class struggle between workers and capitalists.

Accumulation of capital lowering the rate of profit

The accumulation of capital is unique to capitalism and marks it out from all other economic systems. The examples below shows how this works and why it compels capitalists to compete.

Example 1. c = 500, v = 100, s = 200. As the workers wages = 100 the rate of sv = 200% and the rate of profit = 33%.

Example 2. c = 600, v = 100, s = 200. As the workers wages = 100 the rate of sv = 200% and the rate of profit has dropped to 29% because of the greater outlay on capital (c).

This is not the whole story, the new machinery will increase the productivity of the worker, the number of commodities produced will increase.

The initial advantage of the capitalist mentioned above can represented by reducing (v), the amount of socially necessary labour time for each commodity.

c = 600, v = 80, s = 200. As the workers wages = 80 the rate of sv (mass of profit) increases = 250%, the rate of profit remains 29%.

However competition soon intervenes to lower the price causing a reduction in (s)

Now we see:

c = 600, v = 80, s = 150. The rate of surplus (s/v) drops to 188% but the rate of profit also falls, to 22%.

As the mass of profits falls several things can happen as the capitalist class seek returns on investment.

• Investment strike; they cease investing in the productive economy
• Move into non productive activities such as stock market speculation and fine art
• Attack government expenditure. In particular spending that benefits the working class, health and the welfare state. This type of spending is also known as the social wage as it is extracted from the surplus value of capitalists
• Recession, a need to destroy the accumulated organic capital of weaker competiters (mainly through bankruptcy) to restore competitiveness

The Tendency for the Rate of Profit to fall (TFPF) is a dominant force amongst the tendencies and is only ever temporarily overcome.

A crisis doesn’t automatically follow a slump in profitability. In response to falling profitability capitalists move into other areas in search of higher returns. That delays the impact of the drop in profitability in the productive sectors of the economy.

When a crisis occurs it may express itself in different ways, a financial crash, a bursting property bubble and so on.

Photograph of Marx taken by John Mayall in 1875

Why the Tendency for the Rate of Profit to Fall occurs

Why doesn't constant capital just get cheaper in the same way we see with the widgets they produce?

This can happen in some cases as component parts may drop in price.

But this doesn’t entirely cancel out the effect of the rising accumulation of capital, the effect is temporary.

A good example is the semi conductor industry. Investment in new plant counted in the hundreds of millions a few decades ago. Now they are now counted in their billions.

With reducing the socially necessary labour time (the amount of time needed to make a product), each improvement in technique makes production more efficient and brings about an increase in the consumption of material. Capital increases in proportion to labour value.

Capitalist crisis’ are primarily a crisis of profitability

Competition between capitalists compels them to invest. Any advantage gained by one capitalist over other capitalists is short-lived.

The advantage that the original capitalist enjoyed is cancelled out by competition and the rate of profit falls. The mass of profits may be greater than previously but that too will reduce under pressure of competition.

But there is a limit to how far this cycle can continue. Eventually a point is reached where the return on investment is too low to justify further investment.

Capitalists are faced with a choice, either increase the rate of exploitation (longer hours, less wages) or invest their surplus value somewhere else.

Investment is a significant part of economic activity. In the advanced economies it’s around twenty percent to twenty five percent of GDP. When investment declines it can have a significant rippling impact throughout an economy.

Many mainstream economists regards economic crisis as a crisis of demand. Consumers don’t have enough money to buy goods. Put differently, workers are unable to buy the products they produce.

For Marxists this is a tautology. The very nature of capitalist exploitation depends on this feature, otherwise there would be no profit. Also not all production is for general consumption, for example machinery and luxury yachts.

For Marxists capitalist crisis’ are primarily a crisis of profitability.

Gary Hollands - 2013