MIA > Archive > Harman > Explaining the Crisis
THE PICTURE MARX presented a hundred years and more ago showed capitalism as a system built on contradictions. He portrayed the owners of capital – the bankers and industrialists – on the one hand driven to ever more grandiose plans for expanding the output and scale of industry through massive investments; on the other hand ever more afraid of taking the risks involved. As a result bursts of expansion give way to spells of slump.
At one moment industry is working to full capacity, building new factories, bringing in new machinery, developing human skills – expanding the ‘productive apparatus’, as Marx calls it; the next moment there is massive stagnation and waste as the factories stand idle, the machinery rusts, and unemployment grows.
Moreover, said Marx, these ‘explosions, cataclysms, crisis’ ... ‘regularly recurring, lead to their repetition on a higher scale’. [1] He pictures for us a system marked by ever deeper slumps, interspersed with ever shorter periods of boom, a system unable to cope with the amount of wealth that it has the potential to produce.
The greater the social wealth, the functioning of capital, the extent and energy of its growth ... the greater is the industrial reserve army [unemployment] ... the greater is official pauperism. This is the absolute general law of capitalist accumulation. (Marx’s emphasis) [2]
The more the capitalist system developed, Marx insisted, the more unemployment and poverty would grow. [3] It is this, he contends, that damns the capitalist ‘mode of production’ – the capitalist way of organising society in order to produce wealth – to historic doom in the same way that ‘the guild system, serfdom and slavery’ were doomed before it. [4]
Just as societies based on these ways of producing wealth had entered into irreversible decline after a period in which they flourished, so Marx said that capitalism too would enter into such decline. Indeed, when he began work on the first draft of Capital (usually known as the Grundrisse) in 1857, he believed that this phase of irreversible decline had already started. And nearly 30 years later, when Engels wrote the preface to the English edition of Capital: One in 1886, he felt able to conclude:
The decennial cycle of stagnation, prosperity, overproduction and crisis, ever-recurrent from 1825 to 1867, seems indeed to have run its course; only to land us in the slough of despond of permanent and chronic depression. The sighed-for period of prosperity will not come; as often as we seem to perceive its heralding symptoms, so often do they again vanish in the air. [5]
Marx was, of course, mistaken in 1857 and so was Engels in 1886. Likewise later thinkers who thought they saw the ‘final crisis of capitalism’ in the great slump of the 1930s were to discover they were wrong too.
The failure of such prophecies has led to a tendency even among many Marxists to reject the fundamentals of Marx’s theoretical analysis of capitalism. Some have openly revised Marx’s model of capitalism by rejecting one or other of the ‘laws’ which he considered fundamental to the system. Others give verbal acceptance to Marx’s analysis, but throw in so many riders (in the form of ‘countervailing economic factors’) that they rob the analysis of its ability to tell us anything about the real world.
Yet we are now once again in a period in which the symptoms of Marx’s ‘final crisis’ seem to be present. All the phenomena which Marx pointed to are referred to daily in the media – rising levels of unemployment on an international scale, seemingly irreversible trends towards economic stagnation, frenetic but short-lived speculative booms followed by ever deeper recessions, long-term declines in profit rates, a general feeling that something has gone wrong with the dynamo of the system. Is this merely another illusion? Or is it indeed the vindication of Marx’s analysis?
The contention of this book is that the present deepening crisis can be seen as flowing from Marx’s basic model of capitalism. It is therefore wrong to reject the fundamentals of his analysis, as some do. It is also wrong merely to throw all sorts of addenda on to Marx’s account and deprive it of any explanatory power.
Instead, the amendments that we must make in order to explain the course of the capitalist system since Marx’s time must show how, at certain stages of its development, the system itself produces ‘countervailing factors’ which counteract the pressures towards decline – and how it ceases to produce these factors at later stages. Only on this basis can we see how capitalism could enjoy long spells of prosperity – particularly in the 1950s and 1960s – yet also enter long periods of stagnation and crisis in the 1880s, the 1930s, and again in the past ten years.
At the very centre of Marx’s account of the crisis-prone nature of capitalism stands what he called ‘the law of the tendency of the rate of profit to fall’ (for the sake of brevity we will call this the ‘falling rate of profit’). As capitalism grows, says Marx, so the rate of profit, the rate of return on capital investment, tends to fall, and this is a direct result of the way capitalism develops the forces of production, of the way growth takes place.
Latter-day Marxists often deny that the ‘falling rate of profit’ is central to Marx’s analysis. It has become fashionable of late to argue that there are ‘several’ theories of crisis to be found in Marx’s writings, of which the ‘falling rate of profit’ is but one. [6] Many Marxists reject it entirely. [7] Others accept it, but in a way that seems to deny it any force, saying that it should be called ‘the law of the tendency of the rate of profit to fall and its countervailing tendencies’. [8]
Now it is true that the theory of the ‘falling rate of profit’ does not stand alone in Capital. It is complemented by an account of how other factors in the economy interact to cause periodic crises – the role of credit and money, the disproportion between different sectors of production, the wearing out of ‘fixed capital’ (buildings and machinery), the low level of consumption of the mass of workers. But it is Marx’s belief in the ‘falling rate of profit’ that enables him to assert that capitalism is doomed by the very forces of production which it itself unleashes.
The other factors causing crisis could come and go. But since profit is the central aim of capitalism, any fall in the rate of profit appears as a threat to the system itself. As Marx put it:
The rate of self-expansion of capitalism, or the rate of profit, being the goal of capitalist production, its fall ... appears as a threat to the capitalist production process. [9]
This was why, Marx noted, those economists before him who had observed falling profit rates had viewed them with horror. For it created the ‘feeling that the capitalist mode of production meets in the development of the productive forces a barrier which has nothing to do with the production of wealth as such’ which ‘testifies to the merely historical, transitory character of the capitalist mode of production’ and to the way that ‘at a certain stage it conflicts with its own further development’. [10] It showed that ‘the real barrier of capitalist production was capital itself’. [11]
The claim, then, that there was a ‘law’ of the falling rate of profit was not just one more element in Marx’s account of capitalism. It was central to his contention that capitalism was a doomed system. It tied his analysis of the economic mechanisms of capitalism into his general account of history as a succession of different ‘modes of production’. And it showed the impossibility that any tinkering with the system, any self-regulation by capitalists, would be able to ward off crises, since any such self-regulation was bound to break down when the rate of profit fell below a certain point and replaced ‘the operating fraternity of the capitalist class’ [12] with a bitter mutual struggle for survival.
At the centre of Marx’s argument is the point that, as capitalism progresses, each worker uses more and more ‘means of production’ – tools, machinery and so on – in his or her work. In Marx’s day, for instance, the development of power looms meant that the weaver who previously worked one loom at home became the minder of up to ten looms in the weaving shed of a large mill. This process has continued to today, when a relatively small number of workers may control a highly-automated production line. The ‘means of production’, of course, include not only tools and machinery, but everything from office blocks to transport systems as well.
Marx uses two ways of describing the relationship between the workers and the means of production. Each expresses a different facet of that relationship. From the point of view of the workers, or ‘living labour’, Marx refers to the means of production as ‘dead labour’, since all – tools, machines, factories and so on – are the product of labour by workers in the past, so can be seen as an accumulation of that labour. From the point of view of the capitalist, he describes these same means of production as ‘constant capital’ – to the capitalist they represent capital investment. The workers employed to operate the means of production are ‘variable capital’.
In the course of the argument we will need to refer to both sets of terms, so it is well to set out here that they refer to the same relationship.
For the capitalist, anyway, spending on the means and materials of production grows much faster than spending on employing workers. So the very process of capital accumulation involves an increase in the ratio between the two, between ‘constant capital’ and ‘variable capital’.
It is a law of capitalist production that its development is attended by a relative decrease in the variable in relation to constant capital and consequently to the total capital set in motion ... This is just another way of saying that owing to the distinctive methods of production developing in the capitalist system, the same number of labourers, i.e. the same quantity of labour power, operate, work up and productively consume in a given time span an ever-increasing quantity of means of labour, machinery and fixed capital of all sorts – and consequently a constant capital of an ever-increasing value. [13]
So the level of investment in means of production must grow much more quickly than investment in workers taken on to work those means of production.
This is an expression of that golden factor sought after by all capitalists: higher productivity, the same number of workers turning out an ever greater number of goods.
The growing extent of the means of production as compared with the labour power incorporated with them is an expression of the growing productiveness of labour. The increase of the latter appears, therefore, in the diminution of the subjective factor of the labour process as compared to the objective factor. [14]
Marx called the ratio of the physical extent of the means of production to the amount of labour power employed on them the ‘technical composition of capital’, and the ratio of the value of the means of production to the value of the labour power employed the ‘organic composition’. [15] The growth of the technical composition of capital takes place as the same amount of labour power moves larger means of production and more material of production:
This change in the technical composition of capital is reflected again in its value composition, by the increase in the constant constituent of capital at the expense of the variable constituent ... This law of the progressive increase in the constant capital, in proportion to the variable, is confirmed by every step. [16]
So an ever greater investment in means of production – and therefore in total capital – is needed to employ the same amount of labour power.
The reason this happens is competition – the need of each capitalist to push for greater productivity in order to stay ahead of competitors. But however much competition may compel the individual capitalist to take part in this process, from the point of view of the capitalist class as a whole it is disastrous.
Capitalists measure the success or failure of their undertakings not in terms of the total profit they bring in (what Marx calls the ‘mass of profit’) but in terms of the profit per unit of investment, the rate of profit. The source of profit is the surplus value created by the exploitation of living labour – so the mass of profit depends on the amount of labour power employed, the number of workers. [17] But if the level of investment in labour rises more slowly than the total investment, then the source of profit also rises more slowly than total investment. The profit per unit of investment therefore, the rate of profit, must tend to fall. [18]
If, as Marx argued, the rate of profit does tend to fall as the capitalist system develops, then this does help us explain many of the problems that beset the system in crisis. It would, for example, explain why the system could tolerate rising real wages at one stage in its development but find them too much at a later stage: with the lower average rate of profit, any rise in real wages would tend to force the least efficient firms into bankruptcy. Likewise public expenditures: if the rate of profit falls, the necessary taxation becomes a greater burden.
The reason why investment in new parts of the globe have failed to compensate in recent years for the weakness of US capitalism is also made clearer if the rate of profit on those investments is tending to fall. And Keynesian methods of managing the economy, while they may iron out some of the other pressures that bring the pattern of boom and slump, will have no effect on a long-term fall in the rate of profit.
But if we try to relate Marx’s claims concerning the falling rate of profit to the known facts about past crises, then three problems arise.
Firstly, some important crises – and particularly that of 1929 and after – have not followed immediately from some fall in average profit rates.
Secondly, if the ‘falling rate of profit’ is an inexorable law, then it is difficult to see how capitalism has escaped from being in permanent crisis since the 1880s. It is true that Marx talked of ‘countervailing tendencies’ which would counteract pressures towards crisis, but he hardly believed that these could prolong the rapid expansion of the system by more than a century.
Thirdly, studies indicate that the factor which Marx singled out as causing the rate of profit to fall – the rise in the organic composition of capital – stopped operating in Britain at about the time Marx laid down his pen, and in the US by the 1920s. We will look more closely at the factual evidence later, but it is worth noting here that some calculations seem to indicate a renewed rise in the organic composition in the past 10–15 years.
The important point is that the failure of the organic composition of capital to rise, for a long period, caused some questioning of Marx’s arguments – and in the case of some Marxists, wholesale rejection of them. Marx himself listed countervailing tendencies which could, at times, offset the downward path of the rate of profit. Faced with the three problems outlined, many critics of Marx’s ‘law’ have found it easy to argue that these countervailing tendencies in fact cancel out this ‘law’ altogether.
If Marx’s ‘law’ is to be of any use in explaining the current crisis, it must be able to face up to these objections and to the factual evidence from the years since 1880. It can do so. If certain ‘countervailing tendencies’ are seen to be built into the structure of capitalism for a certain period of its development and not just presented as afterthoughts (as Marx himself, unfortunately, tended to present them), then and only then can it be seen how they have failed to operate at other periods.
So let us look at the main arguments against Marx’s ‘falling rate of profit’ and at the countervailing tendencies that have been seen to counteract it at certain times.
It has been argued against Marx that increases in productivity are often brought about by innovations that are in fact ‘capital-saving’ rather than labour-saving. For example the American radical economist Eric Olin Wright argues:
For the value of constant capital to rise, there must be a net excess of labour-saving technical innovations over constant capital-saving innovations ...
In a competitive struggle, it does not matter whether costs are cut by savings on labour or savings on capital ...
In fact several plausible arguments can be made that suggest in advanced capitalist economies there should be a tendency for a relative increase to occur in selective pressures for capital saving over labour-saving technical innovations ... [19]
Marx himself refers to ‘a few cases’ in which increased productivity is not accompanied by a rising organic composition [20], without explaining why there should only be a few such cases, and again suggests that one of the ‘countervailing tendencies’ is that: ‘New lines of production are opened up, especially for the production of luxuries ... These new lines start out predominantly with living labour ...’ But he does not explain why capitalism cannot be continually entering into ‘new lines’ based upon labour intensive innovations, so permanently countering the tendency of the rate of profit to fall.
It is not possible to defend Marx’s main contention that capital accumulation must be capital intensive merely by asserting the fact. [21] But there exists in Marx’s writing the outlines of a watertight explanation that can easily be filled out.
The first part of the explanation flows from the very way in which capital accumulation proceeds. With each round of production new surplus value is produced. The individual capitals which own this surplus value are forced by competition (other things being equal) to plough as much as possible of it into the expansion of production in the next round.
All methods for raising the social productive power of labour ... are at the same time methods for the increased production of surplus-value or surplus product, which in its turn is the formative element in accumulation ... The continual re-transformation of surplus value into capital now appears in the shape of the increasing magnitude of the capital that enters into the process of production. This in turn is the basis of an extended scale of production, of the methods for raising the productive power of labour and of accelerated production of surplus value ... [22]
Or, as Marx puts it in the Grundrisse [23], ‘productively employed capital is always replaced doubly’ – it transmits its own value to the commodities produced and it involves the creation by workers of additional surplus value that finds embodiment in those commodities.
In a ‘pure capitalist system’ (one in which there were only workers and capitalists, all other classes having been destroyed, and in which the capitalists were forced by competition to behave as the pure embodiment of capital by investing all their surplus value), the mass of surplus value would increase with every cycle of production ad infinitum. The capitalist class would have ever greater quantities of surplus value at its disposal and would be under competitive pressure to invest this in an ever-larger scale of production.
As Michael Kidron has put it, Marx’s argument assumed that ‘... All output flows back into the system as productive consumption. In a closed system like this, allocation would swing progressively in favour of investment.’ [24]
That in itself does not automatically mean a rise in the ratio of ‘dead labour’ to ‘living labour’. The investment may be ‘capital-saving’. If scientific knowledge is progressing and being applied as new technologies, then some of these technologies may employ less machinery and raw materials per worker than old technologies. To give a relatively recent example, the production of newspapers using phototypesetting and lithopresses is less capital-intensive than the old method using linotype machines and letterpresses.
But that is not the end of the argument. It shows only that at any one time there will be some new technologies that are capital-saving. The important point, however, is: what will be the average result of new technologies? Will they save capital or increase it?
If we take the argument one stage further, it can in fact be shown that if there is a massive amount of profit-seeking investment in the hands of rival capitalists, then the overall tendency will be for the average investment to increase capital, to be capital-intensive.
Firstly, the most competitive capitalists in each line of business will be those who introduce most innovations. At any given level of scientific and technical knowledge some of these may indeed be capital-saving. But when all these have been employed, there will still be other innovations (or at least capitalists will suspect there are other innovations) to be obtained only by increasing the level of investment in means of production.
Secondly, the fact that some technical progress can take place without any rise in the ratio of capital to labour does not mean that all the advantages of technical progress can be gained without such a rise.
The point can be simply illustrated by assuming, for a moment, a state of affairs in which in a given field of production new scientific knowledge is not emerging, and in which all existing techniques possible at a given ratio of capital to labour have been exhausted. In this situation, a capitalist who uses more means of production per worker can expect to get access to improved techniques of production which may have been known about in the past but could not then be used because the ratio of means of production to labour was too small – the capital was not available to develop them. By contrast, a capitalist who does not increase his means of production per worker will be stuck with the existing techniques.
Thirdly, if an individual capitalist can increase the ratio of capital to workers he will be able to invest in innovations that need more capital as well as those that need more labour. If he cannot increase this ratio then he will benefit only from those innovations that need more labour – and he will lose out in competition with those who can.
In the real world, every operating capitalist takes it for granted that the way to gain access to the most advanced technical change is to increase the level of investment in means of production or ‘dead labour’ (including the ‘dead labour’ accumulated in the results of past research and development). It is only in the pages of the most esoteric journals of political economy that anyone imagines that the way for the Ford Motor Company to meet competition from General Motors or Toyota is to cut the level of physical investment per worker. The capitalist usually recognises that you cannot get the benefits of innovation without paying for it. His firm may by accident stumble upon a particular innovation that requires less capital per worker, but the only way he can guarantee getting such innovations is to increase his level of investment.
If the capitalist cuts the amount of investment in means of production per worker, he might still stumble upon some innovation unknown to his competitors. But luck such as this is also available to the capitalist who increases his investment in means of production per worker, while he can also match the innovations stumbled on by his competitors and obtain technical advances unreachable by those who cannot afford his ‘capital-intensity’. Since, in theory at least, there is no limit to the possible increase in the ratio of means of production to workers, there is no theoretical limit to possible innovation based on this method of competition.
For these reasons, other things being equal, we can expect there to be always more innovations calling for increased capital than those calling for less. The average amount of means of production per worker – Marx’s ‘technical composition of capital’ – will rise.
Only one thing could stop the pressure for this rise: if for some reason there was a shortage of profit-seeking investment. In such a case the capitalists would be forced to forego hopes of achieving the innovations possible through greater investment and settle for those they might stumble upon by accident.
The fact that the physical size of the means and materials of production grows in relation to the labour force does not mean that cost of investment necessarily grows faster than the labour force. For, as Marx himself recognised, the very technical progress that follows from increasing the ratio of dead to living labour tends to cut the amount of labour required to produce each machine, factory or unit of raw material.
Once again, this is a factor referred to by Marx.
The value of the constant capital does not increase in the same proportion as its material volume ... The same development which increases the mass of the constant capital in relation to the variable reduces the value of its elements as a result of the increased productivity of labour, and therefore prevents the value of constant capital, although it continually increases, from increasing at the same rate as its material volume ... [in] isolated cases the mass of the elements of constant capital may even increase, while its value remains the same or falls ... [25]
In other words, machines grow more powerful and complex. But they themselves are made by using techniques which are ever advancing and reducing the number of person-hours required to make them. So although one machine might be twice as powerful and productive as the machine it replaces, it could cost less. The ‘technical composition’ of capital would increase, but the ‘organic composition’, the ratio of the value of dead to living labour, would remain the same or might even fall.
Marx notes that this ‘is bound up with the depreciation of existing capital which occurs with the development of industry ...’ The fact that a machine can be replaced by one which requires fewer hours of labour to produce (because productivity has advanced), means that the value of the machine to the capitalist falls. A portion of its value has to be written off, at a speed much faster than the physical wearing out of the machine.
This depreciation or ‘devaluation’ of constant capital has been most picked on as disproving Marx’s law – for example by Hodgson, Steedman, Himmelweit, Okoshio and Glyn. These critics argue that technical progress means that goods are always being produced more cheaply than in the past. If a rise in the ratio of dead to living labour in a certain industry increases productivity, then the price of its output will fall compared to the output of other industries. But that in turn will reduce the costs of investment in these industries in the next production cycle. Cheaper investment throughout the economy will cheapen further production, both of the means of production itself and of consumption, and so on. [26] So lower investment costs will raise the rate of profit.
At first glance the argument looks convincing. It is, however, false. It rests upon a sequence of logical steps which you cannot take in the real world. Investment in a process of production takes place at one point in time. The cheapening of further investment as a result of improved production techniques occurs at a later point in time. The two things are not simultaneous.
The investment a capitalist makes today is no cheaper because, once operating, it makes it possible to make the same investment more cheaply in future. The rate of profit is a measure of the surplus value accruing to the capitalist compared to the amount he has laid down in investment in the past. It is not a measure of the surplus value he gets compared with the cost of his investment if he were making it afresh. The point has added importance when it is remembered that the real process of capitalist investment takes place in such a way that the same fixed constant capital (machines and buildings) is used for several cycles of production. The fact that the cost of the investment would be less if it took place after the second, third or fourth round of production does not alter the cost before the first round of production. [27]
This argument has been well put by Ben Fine and Lawrence Harris. They claim that in Marx’s writings there is a distinction between the concept organic composition of capital and value composition of capital. The organic composition is the comparison of investment in means of production and labour in terms of ‘old values’, whereas the value composition is a comparison in terms of the ‘current value of means of production and wage goods consumed’. ‘Changes in the organic composition are directly proportional to changes in the technical composition, whereas changes in the value composition are not ...’ [28]
For the capitalist it is the ‘old’ composition, the organic composition, which is the vital thing. For capitalism is based not just on value but upon the self-expansion of the values embodied in capital. This necessarily implies a comparison of current surplus value with the prior capitalist investment from which it flows. The very notion of ‘self-expanding values’ is incoherent without it.
This does not necessarily mean that the actual accounting procedures used by a firm calculate the rate of profit by comparing the profit with the original capital. They may instead use the current replacement cost of capital as the denominator in their rate of profit calculations. But in that case, before making the comparison they must deduct from their profits the loss in value of their original capital due to the effect of technical progress in reducing the amount of socially necessary labour needed to replace it. The effect is the same. The devaluation of capital does not serve to halt a decline in the rate of profit, but to accentuate it. It reduces the organic composition of capital only through reducing the overall mass of profits – and with it the rate of profit too. [29]
In any case, there is an argument that calculations based on the original cost of investment better capture what is at stake for capitalists when they make investment decisions. For what they want to be sure of before investing is that they will earn an adequate rate of profit on the investment they are making now, not on what it would cost them to make it some years hence. This is their prime consideration, even though when it comes at some point in the future to estimating the rate of profit then achieved, they may, for reasons of convenience (because of the difficulty in calculating the combined historic cost of investments made at successive points in time) compare their profit, with deductions for depreciation made according to rough and ready procedures, to the replacement cost of their capital.
If, for example, the capitalist has borrowed capital from the bank with which to start production, he will have to pay back the original value of that capital, not the amount he would have borrowed some time later to invest in the same means of production, when they may have become cheaper. If those means of production are depreciating quickly, that therefore increases his problems. His fixed capital declines in value more quickly in the second and subsequent rounds of production than in the first. The same portion of means of production is used up in the production process, but it is worth less. So the value of constant capital which is passed over into the value of the commodities produced is also less. The value of the capitalist’s output falls – and he has greater difficulty in paying back what he owes to the bank. The fall in the value of capital due to increased productivity therefore eats into surplus value.
This is exactly what is happening in sections of the printing industry at the moment. In a year’s time a typesetting machine may cost only half as much as it does now. New technology is making it cheaper. But this does not make life easier for the printing firm. Quite the opposite. To survive, the firm must recoup what it spent on the machine before it faces competition in 18 months time from rivals who will get the machine at half the present price. In other words, the speed of technological change is forcing the firm to try to recover the cost of its investment far more rapidly than in the past.
So increased productivity does accelerate the rate at which constant capital depreciates. But far from easing the problems of the average capitalist, this makes them worse. For it means that unless capitalists can increase the rate of exploitation, they have to use a growing amount of surplus value to pay for that depreciation.
In any case, the cheapening of the cost of new physical means of production cannot be the crucial factor when it comes to the pressures for the organic composition of capital to rise. Our argument earlier as to why the organic composition must rise had to do not just with the growth in the physical stock of means and materials of production; it had to do above all with the continual growth of the mass of surplus value seeking an outlet for investment. We argued that at any point in time, the more of this surplus value an individual capitalist can get hold of and invest in means of production, the more productivity-increasing innovations he will be able to introduce compared to his competitors. It is the investment of greater amounts of surplus value in means of production that concerns him, not just the expansion of the amount of physical means of production, at his disposal.
A capitalist may be able to buy today a machine which is twice as productive as one he paid the same price for a year ago. But that is no help to him if a rival is using greater accumulated surplus value to buy a machine four times as productive. The individual capitalist can stay in business only if he spends as much as possible of his surplus value on new means of production. If the means of production become cheaper, that only results in his having to buy more of them in order to achieve competitive success.
So if there is more surplus value available for investment that there was previously then the organic composition of capital will tend to rise, other things being equal. It makes no difference if the physical means and materials of production are cheaper – that just causes more of them to be employed.
There is only one condition under which there will not be this pressure for the value of constant capital to expand – if technical change is devaluing the old means of production so fast that the value of output does not even cover the cost of the original investment. Then the capitalist is making a loss; there is no surplus value; and the rate of profit is negative. [30]
But in that case the condition for the organic composition of capital to fall would be negative accumulation, a negative rate of profit, and therefore a complete breakdown of the system! [31]
Marx lists as one of his ‘countervailing tendencies’ the ability of capital to increase the rate of exploitation of each worker, even as the organic composition of capital rises. [32] So there are fewer workers per unit of investment; but each worker is contributing more surplus value.
Increased exploitation can mean increasing the length of the working day, increasing the physical intensity of labour, or cutting real wages. But it does not have to involve any of these things.
The technical advance associated with more means of production per worker has the effect of raising the productivity of the worker. In a single hour or day he or she produces more than he/she did previously for the same exertion of labour. So the amount of labour he/she has to exert to produce goods equivalent to his/her own consumption falls. And the amount of the working day’s labour which the capitalist can take as surplus value rises.
For example, technical advance may mean that the workforce of a certain country can produce twice as many goods of all sorts as they could ten years earlier. The country’s capitalists can then increase their profits, even if living standards remain the same – for the goods required to maintain living standards can be produced with half the previous number of hours of labour; the other half can go into producing more goods for sale abroad, and therefore more profits.
The ratio of surplus labour to necessary labour can grow as the means of production advance – even if there is no fall in real wages. As Marx wrote:
The tendency of the rate of profit to fall is bound up with a tendency for the rate of labour exploitation to rise ... Both the rise in the rate of surplus value and the fall in the rate of profit are but specific forms through which growing productivity is expressed under capitalism. [33]
This has led to criticisms of the very notion of a ‘law’ of the falling rate of profit to which the rise in the rate of exploitation is merely a countervailing factor. For instance, Sweezy argues:
It seems hardly wise to treat an integral part of the process of rising productivity separately and as an offsetting factor; a better procedure is to recognise from the outset that rising productivity tends to bring with it a higher rate of surplus value ... 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 rate of profit will change becomes indeterminate ... [34]
Marx himself does deal with this argument. His contention is that however much the rate of exploitation rises, it is not possible for the total surplus labour (and hence surplus value), extracted from each worker to rise above the length of the working day.
Take the example of a firm which employs a static workforce of 30,000. Even if it worked them as long as was physically possible each day (say, 16 hours) and paid them no wages, its daily profit could not exceed the value embodied in 30,000 × 16 hours labour. There is a limit beyond which profit cannot grow.
But there is no such limit on the degree to which investment can grow. So a point will be reached where profits stop growing, even though competition forces the level of investment to continue rising. The ratio of profits to investment – the rate of profit – will tend to fall.
Marx’s argument on this point has been reformulated in more precise mathematical terms since his day and is now generally accepted even by critics who reject other parts of his argument. [35]
In recent years it has been argued, against Marx, that changes in technique alone cannot produce a fall in the rate of profit. For, it is said, capitalists will only introduce a new technique if it raises their profits. But if it raises the profit of one capitalist, then it must raise the average profit of the whole capitalist class. So, for instance, Steedman states: ‘The forces of competition will lead to that selection of production methods industry by industry which generates the highest possible uniform rate of profit through the economy ...’ [36] The same point has been made by Andrew Glyn [37], by John Harrison [38], and has been elaborated mathematically by Okishio [39] and Himmelweit. [40]
They conclude that capitalists will only adopt capital intensive techniques that seem to reduce their rate of profit if that rate is already being squeezed by a rise in real wages. Wages, not the organic composition of capital, hit the rate of profit.
Marx’s own writings provide a simple answer to any such argument. It is that the first capitalist to invest in a new technology gets a competitive advantage over his fellow capitalists which enables him to gain a surplus profit, but that this surplus will not last once the new techniques are generalised.
What the capitalist gets in money terms when he sells his goods depends upon the average amount of socially necessary labour contained in them. If he introduces a new, more productive, technique, but no other capitalists do, he is producing goods worth the same amount of socially necessary labour as before, but with less expenditure on real concrete labour power. His profits rise. [41] But once all capitalists have introduced these techniques, the value of the goods falls until it corresponds to the average amount of labour needed to produce them under the new techniques. The additional profit disappears – and if more means of production are used to get access to the new techniques, the rate of profit falls.
For example, let us take a firm producing under the average conditions for its industry. It has a constant capital of 50 units, variable capital of 50 units, and the surplus value produced is also 50 units. It turns out 150 units of output in a single production period. Its rate of profit, therefore, is the surplus value divided by the total capital (50/100) or 50 per cent. We will call this Stage One:
|
STAGE |
|
Constant |
|
Variable |
|
Surplus |
|
Output |
|
Output |
|
Rate of |
|
|
50 |
50 |
50 |
150 |
150 |
50% |
Now assume that the firm is marginal compared to the whole industry – in other words its output is so small that a change in its costs of production will hardly affect the average for the industry as a whole. It introduces a capital-intensive technique which enables it to produce the same amount of goods with the same constant capital, but half the workforce. Because costs throughout the industry remain the same, the price the firm gets for its output remains unchanged, even though its input costs have fallen. Its rate of profit will rise:
|
STAGE |
|
Constant |
|
Variable |
|
Surplus |
|
Output |
|
Output |
|
Rate of |
|
|
50 |
25 |
75 |
150 |
150 |
100% |
The surplus value gained by the firm at this stage includes not only surplus value produced directly inside the firm. It includes excess surplus value accruing to the firm from the economy as a whole because its production costs are less than the average. So its total surplus value and its rate of profit both rise. It is profitable to introduce the new technique.
But precisely because the new technique is more profitable than the old, other firms will adopt it. It will cease to be ‘marginal’ and average production costs throughout the industry will begin to fall. With falling costs, firms will begin to reduce their prices in order to grab a larger share of the available market, and average prices will fall towards the new average social costs of production.
Eventually a point will be reached where the new technique prevails throughout the industry – Stage Three. The firm now finds:
|
STAGE |
|
Constant |
|
Variable |
|
Surplus |
|
Output |
|
Output |
|
Rate of |
|
|
50 |
25 |
25 |
150 |
100 |
33% |
The new techniques have now cut the rate of profit for the industry as a whole.
The paradox involved in this process is that for each individual firm the initial effect of introducing the new technique will have been to raise the rate of profit – and this was true even for the very last firm to change to the new technology. Before changing over, it will have been producing its goods at the old, higher costs of production, but receiving only the new, lower price for them. Its rate of profit will have fallen to nothing. By introducing the new technique it will raise the rate of profit to the new industry average of 33 per cent. [42]
We have shown that the cheapening of the means and materials of production due to technical progress could not counter the pressures that force down the rate of profit on the total capital.
However Marx did not simply view the capitalist system as made up of total capital (or, as it is usually called, ‘capital-in-general’). Total capital is composed of individual competing capitals. These individual capitals are afflicted by periodic crises of the system (in part brought about by the long term decline in the rate of profit) which drive some of them out of business, with their means of production either passing out of use or being bought up by other capitals.
In this lies part of the secret of capitalism’s historic ability to overcome the effects of the ‘law’ of the falling rate of profit.
The crisis means that huge chunks of capital lose their value – machines rust, goods are unsold or only sold at greatly reduced prices, large amounts of credit have to be written off. If this process were distributed evenly over all the capitals, it is difficult to see how they would ever recover from the crisis. But in fact, because some capitals go out of business, those that remain are able to avoid having to pay for the devalued capital. Not only do they succeed in passing the cost of the crisis on to those that go under, they also often succeed in enhancing the value of their own capital by buying up means and materials of production on the cheap, in other words at less than their current value in terms of labour time.
The surviving capitals get the benefits of past investment made by other capitals, but do not need to worry about covering the original cost of that investment with their profits. They only have to worry about covering its present value (reduced because of technical progress): indeed, with luck they can get control of the investment at less than its present value. The old owners could not gain any benefit from the way in which technical progress was continually decreasing the value of their investment because devaluation was for them a depreciation change against profit; the new owners gain nothing but benefit, for the old owners have borne the cost of depreciation in going bankrupt and they, the new owners, reap all the further profits to be made.
The critics of Marx’s law see the cheapening of the means of production as a smoothly operating mechanism that enables capitalism to expand without facing a falling profit rate. But, in fact, this mechanism can work only in so far as crises enable some capitals to benefit at the expense of others. To offset the ‘law’ the cheapening of the means of production has to find expression in enforced depreciation as whole capitals are destroyed. [43] As Marx put it:
The periodical depreciation of existing capital – one of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital value through the formation of new capital – disturbs the given conditions under which the process of circulation and reproduction takes place, and is therefore accompanied by sudden stoppages and crises in the production process. [44]
Crises are in part provoked by the tendency of the rate of profit to fall, but in turn counteract that tendency:
Crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium. [45]
What is more, the crisis can reduce or stop the pressure for the organic composition of capital to rise.
The destruction of value during a crisis includes destruction of some of the total surplus value. This does not prevent further accumulation, because even if the capitalist class as a whole has less total surplus value at its disposal, this is shared between a smaller number of capitals. Each individual capitalist sees a rise in the amount of profit he can expect in relation to the cost of his investment – a rise in his rate of profit – even though the surplus value accruing to the capitalist class as a whole may have fallen.
The crisis has one final effect of great importance. It reduces the total amount of surplus value in the system as a whole. In doing so, it reduces total funds available for investment. Each individual capitalist knows that his rivals have more difficulty than previously in finding the wherewithal for new, enlarged investments. So there is less pressure for the capitalist to expand his own investment in order to stay in business.
There will be a reduction in the pressure for capital-intensive forms of investment. So a by-product of the crisis is a slowing-down of the rise in the organic composition of capital.
Under such circumstances a modest rise in the rate of exploitation may be sufficient to offset the downward tendency of the rate of profit. And, in the immediate aftermath of a great crisis, with high levels of unemployment, workers will often accept such an increase in the rate of exploitation.
Once periodic crises are taken into account, there is no difficulty in explaining at least some of the failure of the organic composition of capital to rise as fast as Marx’s model would seem to suggest it should. Indeed, it can be argued that provided the crises are deep enough, there is no reason at all why there should be a long-term tendency for the organic composition to rise through cycle after cycle, or for the rate of profit to fall. But if that is so, why should crises become ever more serious? Why need the system ever exhaust its ability to expand the forces of production?
The logical conclusion of this line of argument is to see crises as simply a way – a painful but effective way – for the system to rationalise itself, necessary hiccups in its endless movement. The economic turmoil of the last decade then becomes no more than a process of rationalisation and restructuring, a necessary process of transition to a new period of growth. [46]
But this is to overlook the impact on rationalisation-through-crisis of another key feature of the dynamic of capitalism as shown by Marx. Marx’s account of capitalism is not of a system that simply undergoes the same motions, year after year, decade after decade, continually reproducing itself in an essentially unchanged form according to fixed and immutable economic laws.
There is, it is true, recognition of the abstract, apparently timeless, laws which govern the motions of any society that has become subject to the dictates of capital: the peculiar features of commodity production which subordinate producers to the unplanned interaction of their products; the uncontrollable drive to the self-expansion of value which follows once labourers become separated from the means of production and labour power itself becomes a commodity; the resultant tendencies for the rate of profit to decline on the one hand and for there to be repeated economic crises on the other; the way in which crises can restore the conditions for further self-expansion of capital.
But even such a minimal outline of the abstract cyclical motions of capitalism implies something else: that the system undergoes continual self-transformation as the abstract laws of capitalist production change the relationships of the different units of capital to each other and to the working class. The rising organic composition of capital is itself one aspect of these changes. Another is the tendency towards increasing concentration of capital (the units of production getting ever larger) and centralisation of capital (the units getting fewer in number). Crises, at the same time as overcoming the problems associated with the tendency of the rate of profit to fall, push forward the level of concentration and centralisation of capital.
About the concentration and centralisation of capital over the last century, there should be no argument. Successive waves of bankruptcies, takeovers, mergers and nationalisations have reduced the number of major firms and increased the proportion of capital under their control. So, for instance, in Britain in 1910 the top 100 firms produced 16 per cent of total output; by 1970 they produced 50 per cent. In the US in 1950 the top 200 firms controlled 49 per cent of assets. By 1967 they controlled 58.8 per cent. Of course, in such economies new businesses do come into being. But so too do others disappear – more often than not in larger numbers.
The same tendency has operated on a world scale. Before the First World War new national capitalisms, such as Germany and the US, were still able to emerge as viable competitors with British capitalism, which had dominated until then. But as the present century has passed, it has become increasingly difficult for further new capitalisms to gain a similar position in the world. New areas of industrial expansion have usually been offshoots of the existing world leaders – as Hong Kong is to Britain or Taiwan to the US.
The exceptions to this have been where competitive capitals within a country have been more or less completely replaced by state capitals – in Russia, Eastern Europe and a number of third world countries. But even in these cases the pattern of the last two decades has been one of increasing integration into – and subordination to – the operations of the giant corporations of the West. [47]
Concentration and centralisation have important effects on the way in which the basic laws of motion of capitalism find expression. The larger the units of capital and the more a few of them dominate the system, the more difficult it becomes for a cyclical crisis to open up a new period of expansion. While there were a large number of relatively small firms, some could go bust without damaging others. But with a few very large firms, the destruction of any of them can do immense damage to the operations of others.
Each giant closely interacts with the others – through supplying components or raw materials, through provision of finance, through acting as a market for output. The futures of the great steel corporations cannot be separated from those of the giant shipbuilding and auto firms; the oil, chemical, plastics and artificial fibre manufacturers increasingly form a single complex of interests; the stability of whole national economies continues to depend upon the well-being of a handful of banks, which in turn become dependent upon particular giant enterprises or states to whom they have lent immense sums. If any one of these giants goes down, it threatens to bring about the progressive collapse of the others that are dependent on it. Hence the fear in 1981, 1982 and 1983 that the indebtedness of countries such as Poland, Mexico and Brazil would wreck the world’s banking system. This, in turn, would have caused devastation to the industrial capitals of other countries. Instead of crisis allowing the efficient to expand at the expense of the inefficient, it can inflict untold, random damage on efficient and inefficient alike.
Under such circumstances, the cyclical motions of the system do not operate automatically to counter the rising organic composition of capital and the falling rate of profit. When crises come, they depreciate the capital of the survivors as well as those driven to the wall, forcing profit rates still further down instead of rapidly restoring them. And fearing the threat of such an eventuality, the giant firms inside each country tend to draw together to prop each other up, hoping at best to postpone crisis indefinitely, at worst to use the power of the state to impose its consequences on the capitals of other countries.
But the effect of this can only be to prevent crises acting as the main countervailing influence to the long-term tendency of the rate of profit to fall. [48]
The more the concentration and centralisation of capital takes place, the less should we expect the system to be able to evade the consequences of Marx’s law. If in its youth the countervailing tendency due to crisis could operate as powerfully as the law itself for long periods of time, in its old age the reverse should be the case. Declining profit rates should drag the system down into a slough of permanent stagnation, of short spurts of half-hearted expansion interspersed with long cyclical rises which resolve nothing.
The picture of capitalism we have used so far in order to explain Marx’s law and the countervailing factors has been an abstract one. In it there are only capitalists and workers. The capitalists are forced by competition to accumulate all their surplus value. The only form of competition between them is through trying to undercut each others’ selling price on the market. The state and the use of force against the capitalists of other countries hardly exists in this model of the system.
The real history of capitalism is rather more complicated than this. Capitalism grew up in a pre-capitalist environment, in which there were not only capitalists and workers but pre-capitalist exploiting and exploited classes, lords and serfs; even under aging capitalism other social classes continue to exist between the two great classes. Capitalists have always used some surplus value for things besides accumulation – for goods for their own consumption and that of social groups dependent on them, for waging wars against pre-capitalist ruling classes, for the enslavement of colonies and for wars against one another. Competition has never been just price competition – it has always involved as well at least some expenditure on advertising, bribery, and the use of force to prise open markets.
What is more, the role of the state was central in aiding infant capitalism’s entry into the world, was crucial in enabling it to dispose of its pre-capitalist rivals as it entered adulthood, and is inextricably linked with all its operations in its dotage.
The move from the abstract outline of the main components of the system to the concrete circumstances in which they operate necessarily affects the way in which Marx’s law works out.
One such effect was included by Marx in his list of ‘countervailing factors’. Each capitalist economy operated within a world economy, and ‘foreign trade’, he argued, could offset the tendency of the rate of profit to fall. He pointed to two ways in which this could occur: firstly through access to cheaper raw materials, thus reducing production costs, and secondly through allowing investment in areas where the wages were lower and the rate of profit higher. [49]
Fifty years after Marx, Lenin, following the English liberal economist Hobson, suggested another important effect: capital could be exported to colonies and semi-colonies which could not find a profitable outlet for investment at home. Lenin himself did not explore explicitly the way this related to Marx’s law. But it is not difficult to do so. In the period 1880 to 1913 something like 15 percent of the British national product went into overseas investment.
If there had not been this overseas outlet for funds seeking investment, then each individual firm in Britain would have lived in fear that its rivals would use those funds to get a competitive edge through a vast expansion of the means of production at home. This fear would compel each firm to engage in just such an expansion. The increased availability of funds for investment at home would therefore have increased the organic composition of capital, and so would have led to a considerable fall in the rate of profit.
As it was, a large portion of the surplus value in the hands of British capitalists passed out of the British sector of the world economy, and so did not raise the organic composition of capital within it. [50]
But in itself this could not be more than a transitory mechanism for offsetting the fall in the rate of profit. It assumed somewhere ‘outside’ the capitalist economy for the surplus. This ‘outside’ existed when capitalism was still restricted to the Western edge of the Eurasian land mass and to part of North America, with pre-capitalist forms of exploitation dominating even in those parts of the rest of the world which were integrated into the capitalist world market. But once imperialism had done its work, and capitalist forms of exploitation dominated more or less everywhere, the ‘outside’ no longer existed. [51]
In a world of multinational corporations, surplus value which flows away from one area, reducing the upward pressure on the organic composition of capital, merely serves to increase the upward pressure elsewhere. The average world rate of profit falls. The world system is driven to stagnation just as the national economy was in Marx’s time.
We can begin to understand why in Britain – the most important imperialist power of capitalism’s early adulthood – the organic composition fell in the 1880s, 1890s and early 1900s, but then started rising again. The impact of empire was beginning to be exhausted.
But the search for empire brought into operation another factor – one which was, crucially, to increase in importance with the weakening ability of empire to offset the falling rate of profit. Capitalism was increasingly an international system. Not just in that capitalists were selling goods abroad, but they were now organising production on a scale that cut across national frontiers. By the time of the First World War the largest firms in the advanced capitalist countries depended upon raw materials in one part of the world, production facilities in another, and markets elsewhere.
Today this trend is even more marked. The seven major oil companies control half the world’s oil output; the giant car firms are all racing towards their own version of the ‘world car’ made of components manufactured in dozens of different countries; while in the computer and aerospace industries firms have to operate internationally in order to stay in business at all.
Yet the only mechanisms that exist with the power to ensure that the rest of society satisfies the needs of the giant firms remain the national states. Each firm – however wide-ranging its international operations – depends upon a national state to protect its operations against any threat of force (whether from other firms or from exploited classes). Indeed, the process of internationalisation of production has taken place step by step with the process (referred to earlier) of monopolisation of each national economy by fewer and fewer giant corporations ever more closely intertwined with the state.
Observation of these two simultaneous, yet apparently contradictory processes – increased reliance on the national state and increased internationalisation – led Lenin and Bukharin to write their classic works on imperialism sixty and more years ago. [52] Their argument was that the contradiction could be resolved only by war. In the modern world, they insisted, ‘economic’ competition between ‘state capitalist trusts’ was more and more supplemented and even replaced by military competition. The great powers were continually partitioning and repartitioning the world as each resorted to violence to protect and reinforce its vital economic interests at the expense of the other. War became as normal a capitalist mechanism as price-cutting, boom and slump.
But war has a consequence of immense importance for the basic trend of the system, for Marx’s ‘law’. [53] Vast amounts of capital are physically destroyed (bombed factories, unharvested crops and so on) and even vaster amounts devalued (as trade patterns are disrupted, goods unsold, credits cancelled). But, typically, the costs of this are borne unevenly – being shifted on to the losers by the winners. War, like crises, enables the mass of surplus value available for new investment in means of production to be reduced, without necessarily reducing the rate of profit for the surviving capitals.
The scale of destruction of values can be massive. Shane Mage, for instance, has estimated the combined effect of the crisis of the 1930s and the Second World War on the US economy: ‘Between 1930 and 1945 the capital stock of the US fell from 145 billion dollars to 120 billion dollars, a net disinvestment of some 20 per cent ...’ [54] A fifth of the existing accumulated surplus value and the additional surplus value produced over 15 years were wiped out.
The history of the twentieth century suggests that at the point when slumps became a very expensive and very painful way for capitalism to offset the tendency of the organic composition of capital to rise, imperialist expansion and war took over.
But war also has its problems. As the forces of production grow, so too do the forces of destruction. Weaponry develops which threatens to destroy the capital of all those involved in military conflict, not just some to the benefit of others. Just as restructuring and ‘rationalisation’ of the world system through slump becomes a very difficult and very painful – even if necessary – process, so does the ‘restructuring and rationalisation’ through war. Just as you would expect aging capitalism to be permanently on the edge of slump, without gaining its benefits for the system, so you would expect it to be permanently on the edge of war, without its rather dubious benefits either.
In the Grundrisse Marx makes, in passing, one remark that points to something of enormous significance for the general theory which he based upon the ‘falling rate of profit’.
There are moments in the developed movement of capital which delay this movement other than by crises such as, e.g. the constant devaluation of part of the existing capital: the transformation of a great part of capital into fixed capital which does not serve as agency of direct production; unproductive waste of a great portion of capital etc. (productively employed capital is always replaced doubly, in that the posing of a productive capital presupposes a countervalue). The unproductive consumption of capital replaces it on one side, annihilates it on the other ... [55] (My emphasis)
Marx is saying that if for some reason capitalists divert some of the surplus value available for investment into some other use, then the pressure is reduced, there is less new capital available for capitals seeking innovations that will cut their costs, and the trend towards capital-intensive investment will be reduced.
The same point was made much more explicitly in the 1960s by Mike Kidron [56] – apparently without knowing that Marx had spelt the argument out (the Grundrisse was not published in English until 1973). He pointed out that Marx’s argument about the falling rate of profit
rested on two assumptions, both realistic: all output flows back into the system as productive inputs through either workers’ or capitalists’ productive consumption – ideally there are no leakages in the system and no choice other than to allocate total output between what would now be called investment and working class consumption; secondly in a closed system like this the allocation would swing progressively in favour of investment. [57]
If the first assumption, that all outputs flow back into the system, was dropped – in other words, if some of these outputs are lost to the production cycle – then there would be no need for investment to grow more rapidly than the labour employed. The law of the falling rate of profit would not operate. ‘Leaks’ of surplus value from the closed cycle of production/investment/production would offset the tendency of the rate of profit to fall. As Kidron put it in a later work:
In Marx the model assumes a closed system in which all output flows back as inputs in the form of investment goods or wage goods. There are no leaks. Yet in principle a leak could insulate the compulsion to grow from its most important consequences ... In such a case there would be no decline in the average rate of profit, no reason to expect increasingly severe slumps and so on. [58]
The argument is impeccable, and Kidron goes on to suggest the form these leaks have taken:
Capitalism has never formed a closed system in practice. Wars and slumps have destroyed immense quantities of output, incorporating huge accumulations of value, and prevented the production of more. Capital exports have diverted and frozen other accumulations for long stretches of time. A lot has, since World War II, filtered out in the production of arms. Each of these leaks has acted to slow the rise of the overall organic composition and the fall in the rate of profit. [59]
Kidron points out that there has always been one way in which capitalists use surplus value which prevents it being used to expand the means of production: when they use it on luxury goods for their own consumption. He suggests that spending by the state on arms – which has expanded enormously this century – should be regarded in the same way.
This argument was bitterly attacked by some ‘orthodox’ Marxists. It was, for instance, denounced by Ernest Mandel as being ‘under the obvious influence of “fashionable” (i.e. bourgeois) economics’, as resting on ‘a truly remarkable confusion between use values and exchange values’. [60]
But insults aside, there is an attempt at an argument against Kidron. All goods that are produced, says Mandel, have the same status (providing they can be sold and the surplus value embodied in them realised). Kidron’s mistakes lie in that:
He is patently confusing the process of production and the process of reproduction. When the capital invested in the various branches of production has been valorised and the commodities in its possession have been sold at their price of production, the surplus value from this capital has been realised, irrespective of whether or not the commodities sold enter into the process of reproduction. [61]
In a footnote Mandel goes on to criticise me for an article I wrote defending Kidron’s account:
Harman claims that the drain of capital into Department III takes capital away from Departments I and II which would have increased the organic composition if it had been invested there. He is quite right. But he forgets that the investment of this capital in Department III likewise raises the organic composition of capital there. How it can stop the rate of profit falling remains a mystery. [62]
Perhaps if Mandel had read the Grundrisse (let alone Mike Kidron or myself) a little more closely, he might have had the key to the ‘mystery’.
What he (following many students of Marx in this century) refers to as ‘Department III' is the section of the economy which produces goods for consumption by the capitalists and their hangers-on. These are goods used neither for the means of production nor to be exchanged (via money) with workers for their labour power.
Such goods, by definition, do not enter into ‘productive consumption’. Goods which form part of the means of production pass on their value to new goods as they are consumed in the production process. Goods which form part of the real wage of workers pass on their value as the workers who consume them create value and surplus value. Goods which are consumed in one way or another by the capitalists end their life without passing their value on to anything else.
The value which is contained in these goods has come into existence through past labour – on this even Mandel is agreed. But it soon passes out of existence without contributing to further capital accumulation – in this respect Mandel is wrong, for it differs radically from the value contained in ‘wage goods’ and means of production. [63]
OK, it might be said, but can’t Mandel be right on another point? Kidron implies that production of arms takes place with a higher organic composition of capital than average. Won’t this immediately lower the rate of profit throughout the economy as a whole, regardless of any effect it might have in reducing the future organic composition of capital?
Kidron himself relied upon the technical formula devised by the (non-Marxist) Polish economist of the turn of the century, von Bortkiewicz, for working out prices from labour values (the so-called ‘solution to the transformation problem’). This showed that the rate of profit was not affected by the organic composition in parts of the economy producing luxury goods for the consumption of the capitalist class itself.
This use of von Bortkiewicz has been attacked on the grounds that he was not a Marxist [64] and that his equations rest on assumptions at variance with Marx’s whole approach. [65] There are problems with von Bortkiewicz’s method. [66] But recently both Anwar Shaikh and Miguel Angel Garcia have produced derivations of prices from labour values, using Marx’s own method systematically applied. [67] It is easy to see how you can draw the ‘von Bortkiewicz’ conclusion from them.
According to Marx, if one part of the economy has a higher organic composition of capital than another, then it would, other things being equal, have a lower rate of profit. But this would lead firms to threaten to move away from this area of production, reducing the supply of goods until prices rose and pushed profit rates up to the average level of the economy. Effectively, by a rise in its prices and a relative fall in the prices of goods it gets from the rest of the economy, enough surplus value would be transferred from other areas of production to raise its rate of profit to the average.
As a result prices diverge from labour values. Let us see how this works out for different sectors of production: for Department I, those industries producing the means of production themselves; Department II, where goods are produced for the consumption of the workers; and Department III, which produces everything else – including luxury goods for the non-productive rich, and armaments.
A rise in the organic composition of capital in Department I, the sector which produces the means of production, means that the investment per worker increases. Investment grows faster than the source of surplus value, so there is downward pressure on the rate of profit in this part of the economy.
The fall in the rate of profit in one Department reduces the average rate of profit for the economy as a whole. But not all firms are affected by this immediately: at first, firms in Department I find they are getting a rate of profit lower than the average, while those elsewhere are getting higher. It is therefore more profitable to invest in Departments II and III.
Capital begins to flow out of Department I, reducing output there. Because demand for the goods produced by Department I now exceeds supply, their prices begin to rise, increasing profits for those firms still in Department I. Correspondingly, the increased capital invested in the other Departments raises output, increases competition, and brings prices down, reducing profits.
The result of this process is that the profits in all Departments eventually stabilise at the new average rate of profit, now lower than previously. The rise in prices in Department I will balance the fall in the rest of the economy, since the amount of value being produced remains the same.
But the process doesn’t stop there. A second stage follows.
When the next round of production takes place, the cost of means of production is higher as a result of the price rises in Department I.
This raises overall production costs.
But those price rises were balanced by price reductions in Departments II and III. Goods from Department II – that is, food, clothing, heating, housing, everything that is needed to maintain the workers – have fallen in price. The same standard of living can be maintained on slightly lower wages – and firms can take advantage of this by reducing the level of real wages, which reduces production costs.
This fall in the cost of labour partly compensates for the rise in the cost of means of production, but only partly – because the fall in prices in Department III, luxury goods and armaments, does not feed back into the production process and so is lost.
So the overall result is that production costs increase slightly and the rate of profit falls a little more.
An increase in the organic composition of capital in Department II, the sector producing goods for workers’ consumption, has an effect similar to that in Department I. The rate of profit in Department II falls; capital begins to flow out; and changes in output and prices follow which bring the whole economy on to a new, lower average rate of profit.
In stage two it is now the cost of labour which has risen, now partly compensated for by a fall in the cost of the means of production – but again only partly, because again the fall in the price of luxury goods and armaments from Department III does not come back into the production process.
So the average rate of profit falls, and then falls a little more.
Department III is the sector of the economy producing goods which are neither means of production themselves, nor goods for the consumption of workers who take part in the production process. They include luxury goods for the non-productive rich, and armaments.
At the first stage, a rise in the organic composition of capital here has the same effect as it does in Departments I and II. The rate of profit tends to fall; capital begins to move out; output falls and the prices of luxury goods and arms rise – followed by the other changes in output and prices which bring the whole economy on to the new, lower average rate of profit.
But things are very different at stage two. The prices of luxuries and armaments are now higher, of course, but none of these feed back into the production process at the next round of production – so there is no further increase in production costs to push down the rate of profit yet further.
In fact, because the prices of means of production from Department I and consumer goods from Department II have both fallen, overall production costs will be reduced. The result will be to raise the rate of profit in the next round of production.
So, whereas a rise in the organic composition in Department I or II causes the rate of profit to fall and fall again, a similar rise in Department III causes it to fall ... and then rise again! [68]
So investment in the output of goods for ‘unproductive consumption’ has two peculiar features. Firstly, any investment in this sector, by destroying surplus value, reduces the pressure throughout the system for the organic composition to rise. Secondly, it also reduces the effect of any such rise on the rate of profit.
These two effects clearly have immense impheations for the dynamic of the capitalist system, in so far as it is determined by the rate of profit.
As capitalist production, accumulation and wealth become developed, the capitalist ceases to be the mere incarnation of capital. The progress of capitalist production not only creates a world of delights; it lays open, in speculation and the credit system, a thousand sources of individual enrichment. When a certain stage of development has been reached, a conventional degree of prodigality, which is also an exhibition of wealth and consequently a source of credit, becomes a business necessity ... Luxury enters into the expenses of representation. [69]
Thus Marx suggests in passing in Capital that capitalism, which initially flourished through the destruction of preceding societies with their vast superstructure of unproductive classes, becomes sluggish as it becomes old and thereby creates its own non-productive superstructure.
In his discussion of commercial capital and commercial profit, he argues that with the expansion of the system, industrial capital has to surrender an increasing amount of surplus value to finance the unproductive buying and selling of its output.
It is clear that as the scale of production is extended, commercial operations required constantly for the recirculation of industrial capital ... multiply accordingly ... the more developed the scale of production, the greater ... the commercial operations of industrial capital. [70]
Successful capitalist competition is no longer (if it ever was) just a matter of accumulating more rapidly than one’s rivals. It increasingly involves spending surplus value on ways of manipulating the market, advertising goods, creating a ‘product image’, bribing buyers in firms and state agencies. ‘Non-productive’ expenditures become increasingly significant for each individual capital. They are the price to be paid for adding a whole new dimension to the competitive struggle.
These expenditures are ‘non-productive’ because, although they nearly always involve the hiring of labour power, this does not produce surplus value. It merely enables the hirer to gain control of surplus value that would otherwise have gone to another capital. That is why Marx refers to them as part of neither variable capital nor constant capital, but as something else, ‘the expenses of production’. Yet he also hints that the individual capitalist may regard them as ‘productive’ in certain circumstances – he has to invest in them if he is to get his appropriate share of the total surplus value already created.
To industrial capital the costs of circulation appear as unproductive expenses, and so they are. To the merchant they appear as a source of profit, proportional given the general rate of profit, to their size. The outlay to be made on these circulation costs is therefore productive investment for mercantile capital ... And the commercial labour which it buys is likewise immediately productive for it. [71]
Such areas of ‘unproductive’ expenditure have grown massively since Marx’s time, with the spread of advertising and such like. The development of finance capital has meant the growth of a vast range of activities not concerned with the production of wealth, but rather with the sharing out of surplus value among members of the capitalist class, all at great expense. The stock exchange is the prime example.
Other sorts of expenditures which are unproductive for the individual capital, but essential for its continuance, have grown as well. The elimination of pre-capitalist forms of exploitation more or less everywhere means that the expenses of the state have to be borne by the surplus created in capitalist production. Some of these state expenses are not only unproductive in the sense that they do not add to the creation of surplus value; they do not aid the ability of some capitals to get more surplus value out of the common stock held by the capitalist class as a whole in the course of competition either. They are necessary simply in order to maintain the structures of exploitation – such as spending on the police, on the education system where it acts to maintain the current ideology, on priests in state-financed churches, on social security payments aimed at preventing the permanently unemployed from rioting.
But others do aid the individual capitals to engage productive labour themselves – such as expenditure on the health and education of workers, on keeping unemployed workers on the labour market, on reassuring employed workers that they will be able to survive when they are too old to work. These are what some modern Marxist writers refer to as ‘reproductive’ expenditures, others as ‘indirectly productive’ and still others as ‘necessary non-productive’. The best way to see them is as ‘non-productive’ for the individual capital competing within the closed national market, since although it has to pay for them, they give it no advantage over its rivals who likewise benefit from them. To it they are more or less the same as having to pay more for labour power. But for the aggregate of capitalists (or the ‘state capitalist trust’) operating within one state in their competition with capitalists from other states they are in a sense ‘productive’: for they ensure that the workers are capable of producing as much as the workers employed by their ‘foreign’ rivals. [72]
Finally, there are the military expenditures of the state. We have referred already to the contentions of the classic theorists of imperialism that the monopolisation of capital leads to its growing together with the state, and to war and the preparation for war becoming one – if not the main – means by which nationally-based capitals try to drive each other to the wall. As the twentieth century has proceeded, military expenditures have come to consume massive amounts of surplus value, until some estimates suggest that they consume as much as the productive investments of individual capitals. [73]
Like expenditures on the police, military expenditures do not increase either the output of the individual capitalist or the ‘aggregate’ capitalist. But like expenditures on advertising they enable one bloc of capital – the ‘aggregate’ national capital, the ‘state capitalist trust’ – to encroach on the surplus value in the hands of other capitalists.
Addressing the Fourth Congress of the Communist International in 1922, Nicolai Bukharin suggested that
Competition between various industrialists whose methods consisted in lowering the price of commodities ... is almost the only form of competition mentioned by Marx. But in the epoch of imperialist competition we find many other forms of competition wherein the method of reducing prices is of no significance. The main groups of the bourgeoisie are now of the nature of trustified groups within the framework of the state ... It is quite conceivable that such a form of enterprise should resort chiefly to violent forms of competition ... Thus arise the new forms of competition which lead to military attack by the state. [74]
The argument can be rephrased. In Marx’s model of capitalism there is only one dimension of competition, that based upon competition for markets through the accumulation of productive investments aimed at reducing costs and so also selling prices. But as capitalism gets older new dimensions of competition supplement and even on occasions replace this. [75]
Any assessment of capitalism in the twentieth century has to look at how these new dimensions of competition, and the various expenditures of surplus value which accompany them, affect the basic dynamic of the system and the ‘law of the falling rate of profit’.
With some of the new forms of competition there is not a great deal to discuss. Marx himself, for instance, dealt very well with the effects of expenditure on the selling of goods (what he referred to as ‘merchants’ capital). Such expenditure does not increase the total amount of surplus value. But the productive capitalists are forced by competitive pressures either to engage in such expenditure themselves or to pay part of their surplus value over to other capitalists to do the job for them, in proportion to the amount of investment undertaken by those capitalists. Such spending therefore serves to reduce the average rate of profit. [76]
At the same time, in so far as these expenditures divert funds from productive investment, they will serve to reduce the general pressure for the capitalist class as a whole to increase the organic composition of capital, and will reduce long-term pressures on the rate of profit.
The real problem arises when we come to the question of the effect of arms expenditure. This cannot simply reduce the rate of profit – if only because the period in which peace-time expenditures on arms reached an all-time high (1949 onwards) was a period in which capitalism no longer seemed condemned by the ‘falling rate of profit’ to stagnation and crises. [77] Hence attempts to treat arms as a form of ‘luxury’ expenditure by the ruling class. [78]
If arms are ‘luxury’ expenditure, then expenditure on them both offsets the pressures for the organic composition of capital to rise progressively and, through the process outlined above, may not in the long term cause the average rate of profit to fall. Of course, capitalists have to use some of their surplus value to pay for them. But since the state represents the sum of the capitalists operating from its territory, this is merely a question of how capitalists expend the surplus value they already possess, and cannot alter the fact that they possess it, or the ratio of the total surplus value to the total investment – the rate of profit.
Such an account has the advantage of providing some sort of explanation of why capitalism was able to expand after 1945 for nearly 30 years without running into the crises that seemed endemic until then.
What exactly happened in this period will be looked at in detail in chapter three. But before we can understand changes in the rate of profit and dynamic of the system under aging capitalism, we must look at ways in which different dimensions of competition, with different implications for the organic composition and the rate of profit, reinforce or contradict one another.
Each form of competition has the same goal: the preservation and expansion of the individual capital (or aggregate national capital) through gaining control of surplus value which would otherwise accrue to rival capitals. But this does not mean that all are equally effective at each stage in the development of the global system. At any particular point, from the point of view of the particular capital (or national capital), one form of competition is likely to be seen as most effective and therefore as most important, and other forms as a diversion from success in this.
The case Marx considered was one in which relatively small-scale capitalist enterprises were expanding within what was still a predominantly pre-capitalist world and were doing so very successfully on the basis of ‘pure’ economic competition through the price mechanism. Under such circumstances, expenditures on the state were necessarily seen as a diversion of the individual capital’s surplus value from areas of investment which would produce its self-expansion.
It is easy to suggest cases in which things would operate quite differently: situations in which military expenditure would seem to provide the individual capitals of a particular country with better opportunities for expansion than expenditure oriented to price competition, or even situations in which investment oriented to price competition would seem like a diversion from the major means of preserving and augmenting individual capitals’ military expenditures.
There is the situation where the rate of profit is so low that individual enterprises are unwilling to embark of new investments. Without new investments there is massive excess capacity in whole sectors of industry, goods are being dumped at below their value, there is massive ‘overproduction’. Even attempts by the state to mobilise the mass of surplus value for investment seems unlikely to be able to produce goods at a low enough cost to break into new markets.
Under such circumstances, military expenditures can seem like a way of directing otherwise idle surplus value into channels that can be used to expand the share of the home market available to ‘national capitalists’, by forcibly closing it to outsiders through protectionist methods, and can then go on to forcibly prise open foreign markets at present protected by foreign states.
The fact that such arms spending does not actually create any fresh value at all need not worry them: it provides them with access to surplus value created via the use of means of production belonging to foreign capitalists. It expands national capital more than civilian investment would, even if it does not expand capital in general. Under this set of circumstances, although arms expenditure is motivated by other considerations than the luxury consumption of the capitalist class and its hangers on, it has the same effect on the rate of profit. It neither cuts it in the short term, since it is simply a matter of how capitalists freely decide to use their already existing surplus value. Nor does it necessarily cut it in the long term, since even if it involves a high organic composition of capital, the ‘von Bortkiewicz effect’ may prevent this reducing the average rate of profit. And in addition it reduces the long-term pressure for the organic composition to rise.
Then there is the situation in which arms expenditure seems the only effective dimension of competition, as in the all-out wars of 1914–18 and 1939–45. In such circumstances capitalists no longer have a choice. They have to spend money on arms if they are to survive. They hope that this will, through victory, enable them to gain access to new sources of surplus value and thus to expand their capitals. But they have to undertake it even if these hopes are meagre, since the alternative is the loss of their existing sources of surplus value to foreign capitalists. Arms spending is now as much a cost of continuing in production as is expenditure on the police.
At such a point, the rate of profit for the individual capitalist must fall, unless the rate of exploitation of the workforce can be forced up enormously. Arms as a cost of maintaining production have cut right into surplus value in the hands of the capitalist class here. But it is no longer the rate of profit of the individual capitalist which matters. Total war, by definition, means that considerations of price competition become completely subordinate to considerations of military survival. If capitalist relations still prevail, it is because the efforts or the rival capitals to outshoot each other mean that each has to reduce the price of labour to the minimum in order to invest the surplus in producing more arms. Investment decisions become military, state, decisions, over-riding the decisions of particular owners of capital. [79]
The effects of the tendency of the rate of profit to decline now express themselves at the level of state decision-making, in terms of reducing the ability of the state both to engage in military activity it needs in order to survive, let alone win, and to expand (or even simply reproduce) the existing level of non-military production.
Finally, there is the situation under aging capitalism where the trend is towards an interaction of military and economic competition. At such a stage, the dimensions of price competition and military competition must come into contradiction. Success in both depends upon past levels of accumulation. But one involves further raising those levels through reproductive expenditures. The other involves, instead, non-reproductive expenditure, which it is hoped, will lead to the grabbing of surplus value produced elsewhere in the system. A certain level of military expenditure therefore cuts one’s ability to engage in price competition. Yet today war itself has become so expensive and dangerous that it is not easy to use military power in order to protect a national capitalism from the effects of such price competition – especially in export markets.
Over time, the heavy arms spenders can be expected to grow economically more slowly than the non-so-heavy arms spenders. This is, of course, what has happened over the past two decades, with the US growing more slowly than Japan and West Germany (and now, with the USSR tending to grow more slowly than the US). This can be put another way: those with most ‘leaks’ offsetting the tendency of organic competition to rise, grow more slowly than those with fewer leaks. The world-wide organic composition of capital will rise under such circumstances, until increases in the rate of exploitation can no longer prevent a fall in the rate of profit.
So far we have attempted to deal, at an abstract level, with the dynamics of the system as depicted by Marx, and the factors (including those pointed out by Marx himself) which could offset the basic dynamic at various points in the development of the system.
It has been argued that as the system gets older, the individual units of capital become a bigger and bigger proportion of the total system, making it more difficult for these offsetting factors to work – whether you are referring to crises, colonial expansion, or unproductive expenditure on war preparations. If this is true, we should expect Marx’s prediction of a hundred years ago concerning the long-term trends in the system to begin to be realised.
We now need to go beyond such abstract, general considerations to look at the actual trends of capitalism in the twentieth century and its development today. That will be the aim of the next two chapters.
1. Karl Marx, Grundrisse (London 1973), pp. 623 and 637.
2. Karl Marx, Capital: One, p. 645. All quotations from Capital are from the Moscow edition.
3. Although it did not necessarily follow that the employed section of the working classes would grow poorer. See Rosdolsky’s account of Marx’s views on this question, in The Making of Marx’s Capital (London 1977) pp. 300–303.
4. Grundrisse, p. 749. There is a certain difference of tone between the Grundrisse and Capital. Grundrisse was an unpublished work, written at a feverish pace in the middle of a crisis which Marx thought might lead to the overthrow of the system, whereas the three volumes of Capital were an (unfinished) rewriting, reorder ing and more careful presentation of material and arguments. See Rosdolsky, The Making of Marx’s Capital.
5. Capital: One, p. 6.
6. See for example the article by Thomas Weiss, Cambridge Journal of Economics, December 1979.
7. For instance those who accept the theories of monopoly associated with Baran and Sweezy; the Sraffian, neo-Ricardian current of Harrison, Steedman, Hodgson, Glyn and others; also critics of the Sraffians such as Bob Rowthorn.
8. Ben Fine and Lawrence Harris, Rereading Capital (London 1979), p. 64.
9. Capital: Three, pp. 236–7.
10. Capital: Three, p. 237.
11. Capital: Three, p. 245.
12. Capital: Three, p. 248.
13. Capital: Three, p. 208.
14. Capital: One, p. 622.
15. The organic composition was depicted algebraically by Marx by the formula c/v, where c = constant capital and v = variable capital. Fine and Harris argue that there is a further, distinct but related concept in Marx – that of the ‘value composition of capital’: the ratio of the current value of the means and material of production consumed to the current value of labour power consumed. The point is that the current value of the capital consumed is not necessarily the same as the value of the original investment – indeed, a point we will deal with later, the value of consumed capital will tend to be less than the value of invested capital, as increased capital reduces the socially necessary labour needed to produce each unit of capital. See Fine and Harris, pp. 58–60.
16. Capital: One, p. 622.
17. This is a consequence of the labour theory of value. I do not intend here to go into the debate over the validity of this theory. Readers are referred to the replies to the marginalists by Hilferding (reprinted in the English edition of Böhm-Bawerk, Karl Marx and the Close of his System) and Bukharin, The Economic Theory of the Leisure Classes, and to the replies to the Sraffians by Fine and Harris, and Pete Green, [The Necessity of Value – and a Return to Marx (Part 1) and (Part 1),] International Socialism, series 2, issues 3 and 4.
18. Assuming, that is, that the rate of exploitation does not change. We will look later at what happens if it does.
19. Alternative perspectives in Marxist theories of accumulation and crisis in Jesse Schwartz (ed.), The Subtle Anatomy of Capitalism (San Diego 1977) pp. 207–8. Compare also Phillippe van Parijs, The Falling Rate of Profit Theory of the Crisis, a rational reconstruction by way of an obituary in Review of Radical Political Economy 12:1 (spring 1980) pp. 3–4. I regard Parijs as being an accessory to a case of flagrant premature burial.
20. Capital: Three, p. 222.
21. As for example Ernest Mandel does in his Late Capitalism (London 1975), where on p. 11 he asserts that the renewal of fixed capital after crises is ‘at a higher level of technology’ and therefore ‘with an increasing organic composition’.
22. Capital: One, p. 624.
23. Grundrisse, pp. 750–1.
24. Michael Kidron, Western Capitalism since the War (London 1968), p. 46.
25. Capital: Three, p. 231.
26. The argument is usually expressed in terms of the need to ‘go beyond Marx’ and to take account (as he did not) of the need to transform the value of the inputs of the production process into prices as well as the output. This solution to the ‘transformation problem’ is said to be due to the Polish economist of the turn of the century, von Bortkiewicz. So Glyn, for example, claims that von Bortkiewicz’s ‘simultaneous solution for the prices of production and the rate of profit demonstrates that any technique introduced by capitalists in order to cut costs will in fact increase the rate of profit if real wages are unchanged.’ (Bulletin of CSE, Autumn 1973)
27. This point was made by Robin Murray in a reply to an attempt by Glyn to use a ‘corn model’ to disprove the falling rate of profit. (CSE Bulletin, 1973)
28. Fine and Harris, p. 59. I say ‘they claim’, because it is not self-evident that Marx makes the distinction as clearly as they do (see Capital: One, p. 612). However, this is not to detract from the utility of the distinction that they make. Unfortunately, they themselves do not seem to draw all the advantages they could from the distinction; they later seem to backtrack by saying that ‘the debate between Glyn and Murray over whether the organic composition should be evaluated at current or historic value is essentially irrelevant.’ (p. 61)
29. The rate of profit using the original investment cost as the base for calculation would be r = s/(c + v).
The effect of the devaluation of constant capital on this rate is two-fold. Firstly it cuts into the mass of profits by a sum, k, equal to this devaluation. Secondly it reduces the quantity of capital between which these profits must be shared.
To get the ‘corrected’ rate of profit we would therefore have to reduce both the numerator and the denominator in the above formula by the same sum, k.
If c + v is greater than s, the effect will be to reduce the rate of profit. If it is the other way about it will increase the rate of profit. The latter can therefore only occur when s is greater than c + v, i.e. where the rate of profit exceeds 100%! This, of course, could not generally be the case.
30. Of course, there is also the limiting case in which constant capital depreciation is just covered, with no surplus value being produced. There is also the more concrete case – which we will look at later – where a little surplus is produced, and used to cover the consumption of the capitalist class and its hangers on, but is not available for investment.
31. Here it is worth commenting on one disproof of the mathematical arguments of Okishio and Himmelweit – Anwar Shaikh, Political Economy and Capitalism: Notes on Dobbs’ Theory of Crisis, Cambridge Journal of Economics, Vol. 2, No. 2, June 1978. Shaikh argues that the disproofs ignore the existence of fixed capital. In this he is quite right. But his own mathematical disproof of Okishio and Himmelweit contains an assumption that makes it of very limited value. He takes the example of where the introduction of a new technique involves moving from a capital with a turnover of one cycle of production to that involving several cycles (i.e. from 1 to n). The rate of profit on fixed capital must fall under these circumstances but this does not mean that the rate of profit must fall when there is a larger fixed capital with the same turnover time.
In such circumstances, if you continue – as Shaikh does – to accept the assumption of Okishio and Himmelweit that devaluation of fixed capital reduces the capital on which the rate of profit is calculated, then the rate of profit will rise. Shaikh’s mistake is in not going far enough in challenging their assumptions.
32. Capital: Three, pp. 227 and following.
33. Capital: Three, p. 234. For an account of all of Marx’s arguments on this score, see Rosdolsky, pp. 398 and following.
34. Theory of Capitalist Development (London 1946) pp. 101–2.
35. See for instance, Okishio, A Formal Proof of Marx’s Two Theorems, Kobe University Review, No. 18, 1972. Compare also Ian Steedman, Marx After Sraffa (London 1977).
36. I. Steedman, Marx After Sraffa, p. 64; compare also pp. 128–9.
37. Bulletin of the Conference of Socialist Economists (Autumn 1973) p. 103.
38. Marxist Economics for Socialists (London 1978) p. 103.
39. Technical change and the rate of profit, in Kobe University Economic Review (1961) pp. 85 and following.
40. Bulletin of CSE (Autumn 1974).
41. ‘If one hour’s labour is embodied in sixpence, a value of six shillings will be produced in a working day of 12 hours. Suppose with the prevailing productiveness of labour, 12 articles are produced in those 12 hours, let the value of the means of production used up in each article be sixpence. Under these circumstances each article costs one shilling: sixpence for the value of the means of production and sixpence for the value newly added in working with these means. Now let some capitalist contrive to double the productiveness of labour ... The value of the means of production remain ing the same the value of each article will fall to ninepence ... Despite the doubled productiveness of labour, the day’s labour creates as before a new value of six shillings and no more, which, however, is now spread over twice as many articles ... The individual value of these articles is now below their social value: in other words, they have cost less labour time than the great bulk of the same article produced under the average social conditions ... The real value of the commodity is not its individual value, but its social value, that is to say, the real value is measured not by the labour time the article in each individual case costs the producer, but labour time socially required for production. If, therefore, the capitalist who applies the new method sells his commodity at its social value of one shilling, he sells it above its individual value, and thus realises an extra surplus value of threepence each ...’ (Capital: One, pp. 316–17).
42. Stage Three of this example enables us to see the apparent plausibility of the argument of Glyn, Harrison, Okishio and Himmelweit. If the whole worldwide production of a certain sort of goods came from a single firm, with no substitutes available, then it would certainly not introduce new techniques if the result of doing so was to raise the organic composition of capital and reduce the rate of profit. The only thing giving it an incentive to raise the organic composition of capital would be a rise in labour costs which itself would cut the rate of profit anyway.
The whole argument of Steedman, Glyn, Harrison, Himmelweit, Okishio rests on this, unstated assumption. For their argument is about what happens in ‘industries’, not firms. So Steedman writes of the ‘selection of production techniques, industry by industry’. In their mathematical arguments, using matrix algebra, Okishio and Himmelweit refer to the effects of technical change in the ‘nth industry’.
Under capitalism, the units of production are not ‘industries’, but firms compet ing with each other in the same industries and straddling industries. And, as Marx shows, the individual capitalist firm can do things which lead to deleterious effects for the cost structure and rate of profit of the industry as a whole. The ‘disproof’ of Marx by these writers consists in arguing that the rate of profit cannot fall ... in a society which is not organised along capitalist lines. For there is no room in their matrices for the most basic unit of capitalism, the individual firm.
It is this too which enables some people who hold this view of the rate of profit also to hold the view that the labour theory of value is redundant. Their view of an economy organised into industries, not firms, can be fitted into a neo-Ricardian, Sraffian model of the economy, which sees as superfluous Marx’s insistence that interrelations between firms are based upon the law of value – the continual reduction of different, concrete labours to abstract labour. For elaboration of this point, see Pete Green, The Necessity of Value, in International Socialism 2:3 and 2:4.
43. The point is well argued in Fine and Harris, p. 84 and pp. 60–61.
44. Capital: Three, p. 244.
45. Capital: Three, p. 244.
46. This is the implication of the argument put forward by ‘Long Wave’, ‘structural crises’ and ‘crises of hegemony’ theorists dealt with in the appendices to this book. It also seems to me to be the implication of the position developed by Fine and Harris, despite their general closeness to many of my arguments so far.
47. This is a very sketchy summary of a complex process. To fill out some of the details see Nigel Harris, World Crisis and the System, IS (old series) 100, and The Asian Boom Economies, IS 2:3; see also Chris Harman, Poland and the Crisis of State Capitalism, IS (old series) 93–94. Also Nigel Harris, Of Bread and Guns (Penguin 1983).
48. This insight into the aging of the system is due to Mike Kidron; see for example The Wall Street Seizure, IS (old series) 44.
49. Section on Foreign Trade in Capital: Three, ch. 14, pp. 232–3.
50. See Lenin, Imperialism, the Highest Stage of Capitalism. Barratt Brown (Essays in Imperialism, p. 35) and Kiernan (Marxism and Imperialism, p. 29) object that this overseas investment led to interest returning to Britain greater than the outflow of funds, and that therefore this outflow could not have provided a way to siphon off investment-seeking surplus value. The objection does not hold. Had the overseas investment not initially taken place, there would have been a much higher pool of funds seeking investment in Britain and therefore a higher level of investment with a higher organic composition. This extra investment would have generated its income in Britain just as the investment that went abroad did. This would have sought further investment in Britain in conditions of a higher organic composition than actually prevailed after the outflow of much previous investment-seeking surplus value. Over seas investment eased the problem of accumulation in Britain, despite the fact that it eventually led to an inflow of funds greater than the outflow.
51. It was the great merit of Rosa Luxemburg’s The Accumulation of Capital to grasp this and the historically transitory role that imperialism could play in stabilising the capitalist system. However, she did not see this role in terms of its effect on the rate of profit. For a critique of her position, see N. Bukharin in R. Luxemburg and N. Bukharin, Imperialism and the Accumulation of Capital (London 1972), and Tony Cliff, Rosa Luxemburg (London 1980).
52. Lenin, Imperialism, the highest state of capitalism, and Nicolai Bukharin, Imperialism (London 1972).
53. Lenin and Bukharin do not seem to have noticed the effect of war expenditures on Marx’s law.
54. Shane Mage, The ‘Law of the Falling Rate of Profit’, its place in the Marxian theoretical system and its relevance for the US Economy (PhD thesis, Columbia University 1963), p. 228.
55. Grundrisse, pp. 750–51.
56. See Rejoinder to Left Reformism, IS (old series) 7 (winter 1961–62).
57. [A Permanent Arms Economy,] IS (old series) 27 [actually 28], p. 10.
58. Kidron, Capitalism and Theory (London 1974) p. 16.
59. Capitalism and Theory, pp. 16–17. At first Kidron argued that the ‘leakage’ had to be of capital-intensive goods, and suggested that a leakage of labour-intensive goods would have the opposite effect. But, as he later recognised, either form of leakage would reduce the vol. of surplus value available for further investment, and so offset the rising organic composition of capital and the falling rate of profit.
60. Ernest Mandel, The Inconsistencies of State Capitalism (London 1969), pp. 4 and 6.
61. Late Capitalism (London 1975) p. 288.
62. Late Capitalism, p. 289. The article he refers to is The Inconsistencies of Ernest Mandel, in IS (old series) 41.
63. Kidron himself confuses the issue a little. He defines labour which creates goods which are then unproductively consumed as itself ‘unproductive’. I do not think this definition is helpful. (See my review of Capital and Theory in IS (old series) 76.)
He has not been alone in recognising the peculiar effect of a large ‘third depart ment’ on the trends in the organic composition of capital. M. Cogoy (Teoria del Valore e Capitalismo Contemporaneo, in Alberto Martinelli (ed.), Stato e accumulazione de capitale) notes that where you have a two-sector economy, what is productive for each capital is, via reproduction, reproductive for capital-as-a-whole. But when you have a three-sector economy, this no longer applies. Part of the surplus value becomes revenue for department three, which gives nothing back in return.
‘The accumulation of total capital is no longer equal to the sum of the surplus value produced by each of the individual capitals, but is the sum of the total surplus value minus the total value of production of the third sector. The capital in the third sector is capitalistically unproductive, insofar as it does not contribute to the accumula tion of capital’ (p. 112).
Cogoy does not make the mistake Kidron makes, in seeing only the constant capital in the third sector as a leak. ‘Total accumulation is not only diminished by the accumulation of sector III, but by all of sector III.’ (p. 112.)
However, there is a weakness in his position compared to Kidron’s (or at least the earlier Kidron) – he does not complete his analysis over the effect of these ‘revenues’ on the rate of profit and tends to see them rather as diminishing the rate of profit. This is a point we will return to in a few pages.
64. This was the argument against any resort to von Bortkiewicz used by David Yaffe’s followers when they were in the International Socialists. See for example Dan Siquerra, Marx, Bortkiewicz and IS, in IS Internal Bulletin, April 1972.
65. Von Bortkiewicz’s formulae ended up suggesting that the total profit in the system was not equal to total surplus value or that total prices did not equal total value. Von Bortkiewicz and those who have followed him have gone on to claim that this proves the general uselessness of the labour theory of value and the conclusions drawn from it in relation to the trend in the rate of profit.
66. Above all, the use of simultaneous equations can make people forget that production does not take place ‘simultaneously’, but over time.
67. Anwar Shaikh, in Jesse Schwartz (ed.), The Subtle Anatomy of Capitalism, pp. 106 and following; Miguel Angel Garcia in Karl Marx and the formation of the average rate of profit, International Socialism 2:5. In both cases the divergences of total price from total value and total surplus value from total profit exist.
The reason for these divergences is no deep mystery. The formation of average prices takes place when profit rates are equalised between different capitals having different organic compositions. The prices of products produced by high organic composition rises above their value, and of those produced by low organic composition below their values. If workers’ consumption goods are produced by high organic compositions, their price will rise above their values, while goods going to the capitalists (as luxury goods or means of production) will fall.
When this happens, the distribution of the social product between the classes is changed a little, altering the total profit. If account is not taken of this in equations total price seems to vary from total value and Marx to be ‘refuted’.
But the variation of total profit from total surplus value is not random. One depends on the other, and, in theory one could be calculated from the other. As Anwar Shaikh has put the argument (in Marx’s theory of value and the transformation problem, in J. Schwartz, The Subtle Anatomy of Capitalism, p. 125):
‘Beginning with prices proportional to values, a sector’s total price must fall (or rise) relative to its money cost price according to whether its organic composition is lower (or higher) than the social average if its particular money rate of profit is to conform to the general rate ...
‘It does not follow that the general money rate of profit will continue to equal the general value rate of profit, once prices deviate from a strict proportionality with values ... The aggregate price of commodities is the total price of the commodities which form the social product. On the other hand, the aggregate cost price is the total price of the commodities – the means of production and the labour power – which form the inputs into the aggregate process of production ... The aggregate cost price is, in effect, the total price of the means of production and the means of subsistence.’
In that case any change in relative prices will change the total money profit, since it depends on the total costs of products in money terms which have deviated from the total costs of production in value terms. Shaikh insists however, that the deviation does not affect the general validity of Marx’s argument about the labour theory of value and the dynamics of capitalism.
It is only necessary ‘to carefully distinguish between value which stems from production, and money price which is the form taken by value in circulation. With this distinction in hand, it is possible to see that money magnitudes are always different, both qualitatively and quantitatively from value magnitudes’. (p. 125)
For, ‘Like the deviations of prices of production from direct prices, the money and value profit rate deviation is systematic and determinate ... It can be shown that the money rate of profit will vary with the value rate ...’ (p. 134) From Marx’s analysis of capitalism one can grasp the trend of the value rate of profit, which in turn will directly influence the trend of the money rate of profit.
This was why Marx himself insisted that:
‘The fact that prices diverge from values cannot, however, exert any influence on the movement of social capital. On the whole there is the same exchange of products, although the individual capitalists are involved in value relations no longer proportionate to their respective advances and to the quantities of surplus value produced singly by each one of them.’ (Capital: Two, p. 393)
However, Shaikh adds, that
‘From the point of view of individual capitals the situation is quite different ... Different forms of value have different effects on individual capitals, and these in turn have different implications for the dynamic process of accumulation and reproduction. It is through the actual movement of money prices that the system is regulated; as such the analysis of prices of production and their relation to values is of the utmost importance to concrete analysis. The first step (which in most discussions of the “transformation problem” is the only step) along this path is the derivation of prices of production from direct prices.’ (Shaikh, p. 127)
The same argument as Shaikh’s is put forward by a 1974 article of Okishio – (Value and production price, Kobe University Review, 1974, p. 1 and following). He shows, using an extension of Marx’s schema, ‘It is immediately clear that the second proposition of Marx, that the total surplus value of all sectors is equal to the total profit, does not generally hold, when we take into consideration the transformation of cost price into production price’. He gives a numerical example where the total surplus value is 120, but the total profit is 114. This, he says, is because with the equalisation of the rate of profit, the cost price in terms of production prices rises above the cost price in terms of values.
This in turn is because ‘In the example, sector II is the wage good sector, and sector I is the production good sector. As we assume the organic composition of capital in sector II is lower, and that in sector I higher than the average organic composition of capital, the production price in sector II is lower than its value and the production price in sector I is higher than its value. Thus in each sector the evalution of the part c in terms of production price is higher and that of the part v is lower than its value.
‘As in our example, c is greater than v as a whole, the total of the cost price as a whole increases when the cost price is evaluated in terms of production price.’
But:
‘If the amount of the surplus product measured in terms of value is reestimated in terms of production price ... This is equal to the total profit already calculated in terms of production price ... The amounts 120 and 114 only differ because the same surplus product is differently estimated, the former in terms of value and the latter in terms of production price. Therefore it remains completely unchanged that the surplus labour of workers is the unique source of profit.’ (p. 6)
Miguel Garcia’s account of the transformation of values into prices which is very similar to Shaikh’s (although arrived at independently) manages to evade the problem of ‘deviations’ of total profit from total surplus value in two ways.
First, he assumes that in the process of the transformation, the rate of exploitation (or rather the measure of it, the rate of surplus value) changes. This is a realistic assumption, in that the transformation of values into prices does not affect the use values which workers consume as their real wages. It does however affect the price of these goods, and therefore the proportion of the total social wealth’ that has to be expended on labour power.
The difference between Garcia’s calculations and that of Shaikh and Okishio is in reality only one of presentation. Garcia’s method does bring out more clearly, however, the fact that it is the basic value relations that determine the rate of profit.
Garcia’s second point is that in practice there is unlikely to be any great difference in the organic composition of capital between the sector producing means of production and that producing wage goods. The means of production do include some items produced with a very high organic composition of capital – steel works, for instance – but they also include raw materials and semi-manufactured goods – produced by labour intensive processes. And all sorts of products can serve indiscriminately as means of production or wage goods (electricity, petrol, foodstuffs – which are means of production when fed to animals, or processed in factories, wage goods when bought directly by workers – buildings, vehicles, etc.).
However in one important respect Garcia overstates his case. He fails to draw the conclusion from his own method for the rate of profit in circumstances where the organic composition of the luxury goods sector is higher than average. This is a point which we will return to later.
68. This peculiar effect of a high organic composition of capital in department III was one thing von Bortkiewicz did grasp. However, his method of simultaneous equations made him see the fall and rise in the average rate of profit as taking place at the same time, cancelling each other out, rather than seeing the fall as preceding the rise in time. But this does not excuse a succession of Marxist economists who have simply dismissed out of hand his discovery about the impact of department III.
69. Capital: One, p. 544.
70. Capital: Three, p. 293.
71. Capital: Three, p. 296.
72. Which is why those who advise capitalism at the national level have been able to work out ‘rates of return’ on certain state expenditures. See for example the Robbins Report on Higher Education.
73. Mike Kidron, Western Capitalism since the War (London 1968), p. 40.
74. N. Bukharin, Address to the Fourth Congress of the Comintern, in Bulletin of the Fourth Congress, Vol. 1, Moscow, 24 November 1922, p. 7.
75. When I speak of ‘new’ dimensions of competition, I do not mean to imply that they did not exist before. In its early ‘mercantile’ period capitalism was closely dependent upon the activities of the state. But Marx, following the classical political economists, saw this as a declining phenomenon as capitalism became a self sustaining system. The point is that once capitalism entered the ‘imperialist’ stage, resort to the state became once again an increasing phenomenon in a way unforeseen by Marx.
76. Capital: Three, pp. 292–4.
77. As is argued, for instance, by Mandel, Late Capitalism (London 1978), pp. 292–93.
78. By Mike Kidron, in Western Capitalism since the War (London 1968) and Capitalism and Theory (London 1974), and by myself in a rejoinder to Mike Kidron, Better a Valid Insight than a Wrong Theory, IS (old series) 100.
79. This was certainly true in both Germany and Britain in 1943–4. It was also true in Russia during the Stalin period. For an elaboration of the argument as applied to Russia, see Tony Cliff, State Capitalism in Russia (London 1974).
Last updated on 28 June 2019