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Lewis Corey

The Decline of American Capitalism

PART THREE
Contradictions of Accumulation

CHAPTER VIII
The Fall in the Rate of Profit

THE fall in the rate of profit manifests itself as a tendency and not in absolute form. For capitalist production struggles incessantly to prevent the rate from falling and to raise it. Both the falling tendency and the struggle against it condition the most fundamental aspects of capitalist development.

The tendency of the rate of profit to fall is determined by changes in the composition of capital, the increase in the productivity of labor, and the conditions under which surplus value and profit are produced and realized. A fall in the rate of profit may result from causes which do not involve changes in the composition of capital, such as a rise in the prices of raw materials not offset by a general price rise, excessive competition (the old composition being unchanged) forcing prices down to unprofitable levels, or a restriction of markets and sales due to changes in consumer habits and demands. But these are temporary and limited in scope. The primary cause of the tendency of the rate of profit to fall is the change in the composition of capital and the forces thereby set in motion.

Capitalist enterprise continually strives to raise profits by increasing the productivity of labor. This is done by enlarging the scale of production and displacing labor with more efficient equipment working up larger amounts of raw materials, thus lowering the proportion of variable to constant capital. The capitalists, who, in their calculations, convert values into prices of production, i.e., into costs, imagine that constant capital itself produces profit because they include a profit on its consumed portions in figuring costs and selling prices. But as only its own used-up value is incorporated in commodities, constant capital produces no new value and no surplus value; labor, living labor alone produces surplus value, of which profit is the realized form. If the rate and mass of surplus value remain the same after an increase in constant capital, a fall ensues in the rate of profit because the surplus value is now a smaller ratio of a larger total of invested capital, on which the rate of profit is calculated. It can be otherwise only if the elements of constant capital are considerably cheapened; in this case the old or even a higher rate of profit may be secured. The higher composition of capital, however, increases the rate of surplus value: while the living labor incorporated in a commodity falls, the unpaid portion, representing the surplus value, rises. But this rising tendency of surplus value is accompanied by antagonisms which set in motion its opposite, the tendency of the rate of profit to fall. The rise in surplus value produced by the higher productivity of labor can result in a rising rate of profit only under certain definite conditions: if the rise in the value of labor’s surplus product is greater than the rise in the value of constant capital, if all the new fixed capital is set in motion by labor, if prices and profits are not lowered by competition, if markets absorb the enlarged output of commodities and permit complete realization of surplus value and profit. [1*] It is the fact that these conditions are rarely, if ever, present simultaneously which activates the tendency of the rate of profit to fall.

Underlying the falling tendency of the rate of profit is an increase in the productivity of labor and in the scale of production, which result in a larger mass of commodities and profit. But capital investment tends to increase more than output, more than the realization of surplus value and profit. If the rate on the larger mass of profits, calculated on a still larger mass of capital, falls, there follows an accelerated investment of capital to overcome the fall in the rate, by an increase in the mass of profits. Again there are changes in the composition of capital, greater productive capacity and output, aggravating the contradiction between the absolute development of production and the limited conditions of consumption. This contradiction exerts a downward pressure on the rate of profit in two ways:

Prices and profits are lowered by the intensified competition resulting from an output of commodities beyond the limited conditions of consumption of existing markets.

An excess capacity of production arises, whose costs are a burden upon realized profits.

Excess capacity is peculiar to capitalist production, which tends to develop the power to produce beyond the power to consume. (This also affects excess capacity in the industries producing capital goods, as in final analysis the demand for these goods depends upon the ability of the industries producing consumption goods to dispose of an increasing output.) It is not a problem in itself, but the concrete expression of the factors underlying the tendency of the rate of profit to fall. An excess capacity of production appears in two forms: in a capacity used to produce goods which saturate markets and depress prices and profits, and in an unused capacity, an idle equipment which is unused because demand is insufficient. The two forms interpenetrate, flow one into the other, are combined in the same enterprise: both tend to lower the rate of profit.

The more intensively, completely, continuously the means of production are used by labor, the greater is the yield of surplus value and profit, assuming that the necessary market conditions exist [2*]; the yield decreases in proportion to diminishing utilization of the means of production. Labor can produce surplus value only if it sets in motion fixed capital and raw materials, and these can be made to yield profit only if set in motion by labor. If an enterprise operates below its capacity, no surplus value is produced by the labor which might be employed and no profit yielded by the capital incorporated in the unused capacity, whose costs eat into the produced and realized surplus value and profits and reduce the rate of profit on the total invested capital. [3*]

Thus a downward pressure is exerted on the rate of profit by unused capacity, a destructive yet inescapable aspect of capitalist production and expansion. The unused capacity may be relative or absolute, but it becomes continuously larger as variable capital decreases in favor of constant capital, particularly the fixed portion. Another contradiction arises: labor costs are variable, they can be lowered as output falls; the costs of capital equipment are fixed, they must be met regardless of output. The problem is aggravated by some variable costs becoming semi-fixed. Fixed and semi-fixed costs (interest, depreciation, insurance, taxes, management, merchandising costs, some costs of labor and raw material) do not vary or vary only partly with variations in output. [4*] The costs are no problem, are compatible with a rising rate of profit, if production is continuous and up to or near capacity; they become a burden on realized profits as production falls below capacity. For the fixed and semi-fixed costs must be met, whether they are earned or not; but as no surplus value is produced by the unused capacity, the mass and rate of profit are lowered.

The greater the scale of production, and the higher the composition of capital and the productivity of labor, the greater is the pressure of unused capacity on the rate of profit. Operating below capacity in small-scale industry, with its lower composition of capital, is not necessarily fatal because variable labor costs are greater than fixed or semi-fixed costs: as output falls the workers who are fired are not a cost of variable capital and involve no direct loss, while losses on the costs of unused capacity are not great. Operating below capacity in large-scale industry, with its higher composition of capital, is fatal because fixed and semi-fixed costs are greater than the variable costs of labor: as output falls the workers who are fired still involve no direct loss on variable capital, but this is now relatively unimportant in comparison with the great losses on the costs of unused capacity. In small-scale industry, where low fixed and semi-fixed costs absorb a small part of the output, 25% operation might mean breaking even and 50% operation mean substantial profits. In large-scale industry, where high fixed and semi-fixed costs absorb a large part of the output, 25% operation might mean disastrous losses, with operation of 50% or more necessary to break even. But after the point at which fixed and semi-fixed costs are earned, the rate of profit in large-scale industry tends to rise sharply because of its higher scale of operations and the productivity of its labor.

Because of the conditions identified with unused capacity, the larger mass of profits “earned” in large-scale industry may coincide with a fall in the rate of profit. This perpetually tempts an enterprise to use all of its capacity. But operating 100% of capacity does not necessarily avert a fall in the rate of profit. For where markets are limited, the use of excess capacity may mean an output of commodities which the markets cannot absorb. Competition is sharpened. Prices may drop to unprofitable levels. Or if they do not, prices may become indirectly unprofitable through an increase in advertising and other merchandising costs. In either case the rate of profit falls. As the upward movement of prosperity reaches its climax it creates more intensive efforts to raise the productivity of labor, which augments excess capacity, and more use of excess capacity to capture markets, in order to overcome the tendency of the rate of profit to fall. But markets are limited, they shrink relatively, as capitalism develops the forces of production more than the forces of consumption. Efforts to raise the rate of profit may succeed, but only temporarily, because the rise augments excess capacity and competition, and hastens overproduction, cyclical breakdown, and a disastrous fall in the rate of profit. Thus the rate of profit falls because of an excess capacity used under market conditions which do not permit complete realization of surplus value and profit.

That the rate of profit tends to fall is an observable and acknowledged fact. [5*] An indirect proof is the constantly larger capital investment necessary to produce a unit of product. In American manufactures, fixed capital rose 1,758% from 1849 to 1889, output only 1,170%. [1] The ratio of output to fixed capital was 2 to 1 in 1889 and 1.4 in 1929; on a different statistical basis the ratio was 1.8 in 1923 and 1.6 in 1929, a fall of 11% in six years. The direct proof is the rate of profit itself (Table II). In 1924-29, the mass of profits rose, with two interruptions during minor cyclical depressions, but the rate of profit fell. In every year the rate on both fixed and total capital was below 1923; and on total capital the rate of profit was below 1925 in every subsequent year. The mass of profits rose in 1928-29 (a rise interlocked with the approaching cyclical breakdown), but even in these peak years the rate on fixed capital was below 1923, and the rate of profit (total capital) was below both 1923 and 1925. Clearly capitalist production is a perpetual struggle against a falling rate of profit. The rate falls and rises and falls in prosperity. It falls precipitously in minor depression: a fall of 33.7% in 1924 over 1923 and of 22.5% in 1927 over 1926. And it falls disastrously in major depression: a fall of 77.3% in 1930 over 1929 and of 81.5% over 1923; a fall below zero in 1931. (In the first quarter of 1933, 205 large corporations with a “net worth” of $7,443 million had a deficit of $14,831,000; in the second quarter, marked by a speculative revival of industry, they had net profits of $86,878,000, or a rate of profit of 1.1%.) [2] Exclude depressions, minor and major, and the tendency is still definitely downward. Average yearly profits rose from $3,209 million in 1923 and 1925 to $3,542 million in 1926, 1928 and 1929, but the rate on fixed capital fell from 13.5 to 12.9 and the rate of profit (total capital) from 8.3 to 7.2 – a fall of 4.4% and 13.2% respectively. While the rate of profit was falling, the rate of surplus value rose uninterruptedly and was 27.1% higher in 1929 than in 1923. The rate of profit in 1931 fell below zero, but the rate of surplus value fell only 8.6% and was still 16.1% higher than in 1923. Capital investment increased more than the realization of surplus value and profit, hence the fall in the rate of profit, which forced the investment of more capital (including profits retained as surplus) in an effort to overcome the fall. [6*]

As the law of the falling rate of profit is not absolute, but a tendency, it may be checked temporarily: the rate may even rise. It is significant, accordingly, that the rate of profit fell in 1924-29. [7*] It fell in spite of the unusual upsurge of prosperity; of the great expansion in old and new industries, which yielded exceptional profits; of the sharp rise in the productivity of labor and in the rate of surplus value; of the fall in the prices of capital goods and raw materials, and its tendency to increase profits; of relatively constant prices and decreasing costs; of the export of capital, which “immobilized” billions of surplus capital and eased the downward pressure on the rate of profit.

Underlying the general rate of profit are the rates in separate industries and enterprises. While the fall in the general rate of profit may be checked or it may even rise, some of the underlying rates always fall. In separate industries and enterprises the rate of profit may rise, fall, stand still, or disappear. In 1923-27, among 381 industrial corporations and 129 public utilities, the average yearly increase in profits ranged from 0.4% in iron and steel to 22.5% in automobiles, and decreases ranged from 1% in automobile accessories to 10.5% in clothing and textiles and 48.6% in coal mining; in nine groups the average yearly increase in profits exceeded 10%, in four groups it was below 10%, and in six groups the decrease in profits produced deficits. [3] This uneven working of the falling tendency of the rate of profit is one of its most important manifestations. For it creates and aggravates disproportions and disturbances even if the general rate is rising. A higher rate in one group of enterprises may be the result of losses in another group. Competition is intensified. Capitalists redouble their efforts to plunder one another. Exploitation of the workers becomes greater. Capital flows into industries with a higher rate of profit, where it increases excess capacity. Speculation is encouraged. The instability of capitalist production and prosperity becomes more acute. As some of the underlying rates of profit are always falling, the tendency of the rate of profit to fall always exerts its pressure; and always, consequently, there are efforts to overcome the tendency, particularly as a small fall in the general rate may coincide with a large fall in some of the underlying rates. If a fall in the rate of profit is accompanied by a rise in the mass of profits, it neither lessens the lag of wages behind profits nor overcomes the contradictions of accumulation: the fall is itself one of the contradictions. (The fall in the rate of profit is independent of the fictitious fall often produced by the over-capitalization of monopolist combinations, by “marking up” capital values to hide profits, beat down wages, or cheat investors, and thus swell the incomes of predatory financial capitalists. Where a fall in the rate of profit is produced by overcapitalization, the results are not, however, fictitious, for it forces management to strive for higher profits, and thereby intensifies competition and the drive toward overproduction.)

The higher composition of capital and the tendency of the rate of profit to fall involve the general problem of “overhead costs” – those “costs of production” which, whether necessary or unnecessary, do not fall correspondingly with a fall in output. As industry becomes increasingly large-scale, all sorts of unforeseen costs arise and eat into profits; many of the costs puzzle the capitalist and are described as “hidden.” (Among the “hidden costs” recently discovered are older employees over forty who are ruthlessly thrown upon the scrapheap.) There are limits to an increasing scale of profitable operation, technical limits in productive efficiency and economic limits in markets; although the limits are flexible they often result in efficiency losses and in a lower rate of profit among the larger and most heavily capitalized enterprises. Displacement of labor, particularly by automatic machinery and apparatus, produces an increase in the technical, managerial, and supervisory staffs, whose functions are being increasingly mechanized; their costs are not as variable as the costs of labor. The costs of merchandising and advertising increase enormously under pressure of excess capacity, relatively limited markets, and aggravated competition. The necessity of efficient and continuous production, because of the burden of fixed and semi-fixed costs, results in growing expenditures on management engineering and personnel and “welfare” work, including espionage, to insure efficiency, crush unionism, and prevent strikes – particularly to prevent strikes which might interfere with continuous operation. Costs formerly almost wholly variable now develop many aspects of fixed costs, an antagonistic result of the efforts to lower the variable costs of labor. An increasingly larger minimum labor force is required where a plant operates below capacity or shuts down. Losses accumulate on stocks of raw materials when output or prices fall. The rapidity of technical change quickens the rate of obsolescence of mechanical equipment, resulting in large losses and the necessity of larger depreciation allowances. (Scrapping “obsolescent” equipment is often sheer waste, justified competitively, not socially.) Debts and interest charges pile up, as a result of the pressure for more capital to enlarge production and check the tendency of the rate of profit to fall, introducing rigid and unwieldy elements in the financial structure, which intensify the instability of prosperity and prolong depression. All of these overhead costs are involved, in one aspect or another, with excess capacity [8*], the result of changes in the composition of capital and the increasing productivity of labor the devils who spoil the best of all possible worlds by exerting downward pressure on the rate of profit.

These problems arise out of contradictions in large-scale production. The economy of large-scale production involves increasing the productivity of labor, and reducing the amount of paid labor (wages) incorporated in a commodity. Thus, while the prices of commodities fall, more surplus value and profit may be realized on the production and sale of a larger mass of cheapened commodities. An enterprise using more productive methods, which are its exclusive possession, can sell below the market price but above its prices, or costs, of production, and thus “earn” a higher rate of profit. But the more productive methods cease being an exclusive possession, or still more productive methods are introduced. Competition beats down prices; excess capacity develops or becomes greater. The rate of profit begins to fall.

Essentially the contradiction is this: The economy of large-scale production depends upon measurably full operation and profitable sale of the output. But capitalist industry is incapable of continuous and planned utilization of all the available means of production, because it is incapable of commensurately developing the conditions of consumption. Industry is tormented by unused capacity and forced to operate below capacity. In large-scale industry the margin of profit rises greatly beyond a certain point, but profits fall greatly when output falls below that point. Where formerly small changes in output meant small changes in profits, small changes in output now mean large changes in profits, and large changes in output mean disastrous losses which must be met out of reserves and working capital, because of the high proportion of fixed and semi-fixed costs which do not fall or fall only slightly as output falls, and if the capacity of an enterprise is fully utilized, it may result in so saturating markets that prices fall and cancel (in terms of profit) the economy of large-scale production.

Aside from depression, there is always an excess capacity in industry which tends to offset gains from the increasing productivity of labor and the economy of large-scale production. In the peak years 1928-29, American industry was capable of producing at least 20% more goods, many industries from 25% to 75% more. This excess capacity, varying in space and time but always tending to increase, is a result of the fundamental contradiction: capitalist production tends toward an absolute exploitation of labor, an absolute production of surplus value and profit, but their realization is limited by limitation of consumption among the mass of the people. Wages lag behind profits, investment income increases more than consumption income, production and consumption are not balanced, all because of the institutional greed for accumulation. In one of its aspects, excess capacity, which is a portion of capitalized surplus value, represents possible consumption of which the workers have been deprived.

Excess capacity and its downward pressure on the rate of profit increasingly torment large-scale industry. Why, then, large-scale industry? Being itself capitalist production, small-scale industry also was afflicted by excess capacity and the falling tendency of the rate of profit, although not in the severer forms of to-day. The struggle against the fall led to a higher composition of capital. Often, not always, small-scale industry, particularly in the luxury trades, may still yield a higher rate of profit. But its field is limited, as manufacture of the characteristic products of modern industry requires large amounts of machinery and apparatus, of fixed capital, and, consequently, of raw materials. Competition, moreover, forces a lowering of costs, which is accomplished by raising the productivity of labor and enlarging the scale of production. By increasing its constant capital, a small-scale enterprise secures at the start competitive advantages and “earns” a rising rate of profit. This dooms small-scale industry, which is destroyed by the “free” competition it depends upon. Other enterprises enlarge the scale of their operations and change the composition of their capitals, and eventually competition, restricted markets, and excess capacity reverse the rise in the rate of profit. The tendency of the rate of profit to fall is thus strengthened, and is never, save under certain rare conditions and then only temporarily, overcome.

 
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Footnotes

1*. “Production of surplus value is but the first act of the capitalist process of production, it merely terminates the act of direct production ... Now comes the second act of the process. The entire mass of commodities, the total product, which contains a portion which is to reproduce the constant and variable capital as well as a portion representing surplus value, must be sold. If this is not done, or only partly accomplished, or only at prices which are below the prices of production, the laborer has been none the less exploited, but his exploitation does not realize as much for the capitalist. It may yield no surplus value at all for him, or only realize a portion of the produced surplus value, or it may even mean a partial or complete loss of his capital ... Too many commodities are produced to permit of a realization of the value and surplus value contained in them under the conditions of distribution and consumption peculiar to capitalist production.” Karl Marx, Capital, v.III, pp.286, 303.

2*. “The development of industry fixes a constantly increasing portion of the capital in a form in which, on the one hand, its value is capable of continual self-expansion, and in which, on the other hand, it loses both use-value and exchange-value whenever it loses contact with living labor ... The same instruments of labor, and thus the same fixed capital, may be more effectively used by a prolongation of their daily use and by the greater intensity of employment ... a more rapid turnover of the fixed capital ... The entire capital cannot be employed all at once in production, a portion of the capital is always lying fallow ... hence the capital active in the production and appropriation of surplus value is curtailed to that extent. The shorter the period of turnover, the smaller is the fallow portion of capital as compared with the whole, and the larger will be the appropriated surplus value ... The mass of the produced surplus value is augmented by the reduction of the period of turnover. Any such reduction increases the rate of profit, since this rate expresses the mass of surplus value produced in proportion to the total capital employed.” Marx, Capital, v.I, p.431; v.II, p.409; v.III, p.85. If a more intensive use of fixed capital increases surplus value and the rate of profit, a lessened intensity of use, an unused capacity, necessarily decreases surplus value and the rate of profit.

3*. “The larger the fixed capital and the slower its circulation, the larger will be the share of capital lying immobile, and the smaller will be the capitalist’s rate of profit.” I. Lapidus and K. Ostrovityanov, An Outline of Political Economy (1930), p.142.

4*. “Taxes, fire insurance, wages of various permanent employees, depreciation of machinery and various other expenses of a factory run on just the same, whether the working time is long or short. To the extent that production decreases, these expenses rise as compared to the profit.” Marx, Capital, v.III, p.94.

5*. Why, then, do small concerns fail more easily in depressions, when unused capacity mounts? Because the larger concerns have more control over markets and prices, possess larger financial resources, including surplus, and are favored by the banks. They use, moreover, the opportunity of depression to drive their smaller competitors out of business. And in many cases the small concern, if it is small enough and if most of its capital is variable, is only an apparent casualty: it closes down or retires completely, but resumes business when prosperity returns.

6*. The ratio of net income to capital investment fell from a yearly average of 16.2 in 1909-13 to 11.3 in 1923-29. It was 14.1 in 1919, 5.8 in the depression year 1921, 10.8 in 1922, 11.9 in 1923, and 11.2 in 1929. The ratio of net income to gross sales was 15.2 in 1909, 11.5 in 1919, and 10.5 in 1929. Robert R. Doane, The Measurement of American Wealth (1933), p.149. The methods of calculation are different from those in Table II, but the same thing is proven – the tendency of the rate of profit to fall.

7*. The fall in the general rate of profit is not merely a result of the deficits of corporations making no profits, or of the small earnings or losses of smaller enterprises. These are important factors, and they are intertwined with all the contradictory forces set in motion by changes in the composition of capital. Moreover, capitalist production must be considered as a whole. The fall in the rate affects enterprises with enviable records of earnings. Thus the rate of profit on the invested capital of the United States Steel Corporation fell from approximately 8% in 1902 to 4.5% in 1927-29 (the rate rose sharply during the war years of 1916-17). R. Weidenhammer, Causes and Repercussions of Faulty Investment of Corporate Savings, American Economic Review, March 1933, pp.39-40. United States Steel has paid constantly larger dividends, but this has required a still larger reinvestment of earnings. The corporation’s surplus rose from $25,000,000 in 1902 to $700,000,000 in 1929, while its assets increased more than threefold.

8*. “Overhead cost is practically coextensive with unused capacity.” J.M. Clark, Studies in the Economics of Overhead Costs (1923), p.483.

Notes

1. Computed from material in Census of Manufactures for the respective years.

2. Editorial, Profits Under the NRA, New Republic, December 13, 1933, p.118.

3. National Bureau of Economic Research, Recent Economic Changes, v.II, p.641.

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Last updated on 29.9.2007