Is Karl Marx's theory of "tendency of the rate of profit to fall" correct or not?
By Omar Elsayed
The falling of the Rate of Profit is the certainty that Capitalism will doom itself.
What is the Rate of Profit?
“Rate of profit” is a term introduced by Marx in Volume III of Capital for the ratio of profit to total capital invested in a given cycle of reproduction, or the proportion of value in any given commodity which constitutes profit for the capitalist.”
~Marxists Internet Archive.
To put it simply, the Rate of Profit is the ratio of profit a Capitalist gains compared to the amount of Capital they spent into production.
Marx put the formula of the Rate of Profit as follow:
s/(c+v) in which:
s = Surplus Value, the extra value extracted from the workers’ labor, unpaid to the workers themselves.
c = Constant Capital, the Capital paid for materials.
v = Variable Capital, the wages of the workers which quantitatively varies, as for the name “variable.”
c+v = the production cost of the commodity.
The Rate of Profit is not a set value, but it constantly changes. Changes in the Rate of Profit happens in a process called the Cycle of Reproduction. The Cycle of Reproduction is the process in which the Capital invested in production transforms into money. This process repeats itself.
The General Rate of Profit, or the historical change in the Rate of Profit, which is the average Rate of Profit in a historical period, is calculated, using this formula:
(s/v)/(c/v+1):
s/v = Rate of Surplus Value, also called the Rate of Exploitation, the ratio of Surplus Value produced compared to the labor spent in production.
c/v: the Organic Composition of Capital, the constant capital put into production divided by the variable capital necessary for labor.
+1: error margin.
+The falling of the Rate of Profit.
To quote Marx:
If it is further assumed that this gradual change in the composition of capital is not confined only to individual spheres of production, but that it occurs more or less in all, or at least in the key spheres of production, so that it involves changes in the average organic composition of the total capital of a certain society, then the gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall of the general rate of profit, so long as the rate of surplus-value, or the intensity of exploitation of labour by capital, remain the same. [Source]
To quote Adam Smith:
It generally requires a greater stock to carry on any sort of trade in a great town than in a country village. The great stocks employed in every branch of trade, and the number of rich competitors, generally reduce the rate of profit in the former below what it is in the latter. But the wages of labour are generally higher in a great town than in a country village. In a thriving town, the people who have great stocks to employ, frequently cannot get the number of workmen they want, and therefore bid against one another,in order to get as many as they can, which raises the wages of labour, and lowers the profits of stock. In the remote parts of the country, there is frequently not stock sufficient to employ all the people, who therefore bid against one another, in order to get employment, which lowers the wages of labour, and raises the profits of stock. [Source]
In a simpler language, when the Capitalists replace the workers with more productive forces such as machines, whose higher labor power attracts the Capitalists more, nobody is left to buy the Capitalists’ products, since the workers themselves no longer receive wages, which are the only source of income they have, profit will decrease, and the exchange will result in disadvantages towards the Capitalists themselves.
The tendency in which the Capitalists replace the workers with more productive forces, is real. It is called the Tendency of Organic Composition to Rise. The higher the Rate of Exploitation is, the more profit there is. As a result, the Capitalists themselves usually will try to find ways to increase their production power to produce more profit. The formula is the following: c/v in which when c rises, v will fall.
For example, the Capitalists spend 3 dollars for materials, and pay their workers 2 dollars in wages. 3/2=1.5 dollars. So, 1.5 is the ratio of exploitation, it is the Surplus Value the workers give to the Capitalist, basically for free.
However, after the machines are introduced to the Capitalists, the condition in the factory changes. Hence, the Capitalists spend 4 dollars for materials, while pay their workers only 1 dollar, since they need not the workers anymore. We have the following equation: 4/1=4 dollars. Assuming that is somehow enough for the workers to survive, the law clearly shows that the more constant capital increases, the less the workers are able to buy the products themselves produced. The workers, at this point, can only buy 1 of the products each month, and the other 3 products are wasted.
Due to the fact that the Organic Composition of Capital has a tendency to rise, and the workers’ wages necessarily go in the opposite direction, the Cycle of Reproduction is twisted. Now, the amount of Capital spent into production is higher than the profit generated. The Capitalists themselves inevitably lose profit, since the more they spend on their dying production, the less wealth they have.
To quote Marx:
“This does not mean to say that the rate of profit may not fall temporarily for other reasons. But proceeding from the nature of the capitalist mode of production, it is thereby proved logical necessity that in its development the general average rate of surplus-value must express itself in a falling general rate of profit.” [Source]
Marx was saying that not only the Rate of Profit, which could be seen as a temporary stage, but also the General Rate of Profit, which is an average stage, will fall.
Here, Marx introduces a new term for us to analyze: the General (Average) Rate of Surplus Value. The General Rate of Surplus Value can be calculated, using the same formula as the Rate of Exploitation: s/v. The relation between the General Rate of Surplus Value with the Organic Composition of Capital, hence, is contradictory to each other.
(s/v)/(c/v+1):
When v increases, s/v will decrease, thus lowering the Rate of Profit. However, when s increases, s/v will increase, thus increasing the Rate of Profit. Assuming c/v does not change, the Capitalists only need to keep s/v at a specific point to maintain the Rate of Profit. However, naturally, c/v has to increase.
There can be various reasons why c/v increases. The Capitalists may replace the workers with machines, causing wages to stagnate, or simply lower v out of random motives, c/v naturally increases. However, generally, the rise in c/v and the falling of v lower s/v. The Rate of Profit, thus, falls.
Therefore, generally, the Rate of Profit is cursed to fall by Capitalism itself. Hence, we can see in the chart above that the Rate of Profit, despite sometimes increases, especially during wars, which are artificially made to temporarily increase the Rate of Profit, has a tendency to go down, and no hope to go up.
The falling of the Rate of Profit renders Capitalism’s doom.
Crises have become much harder to resolve than a hundred years ago. This poses a huge threat to many families and individuals. When the Rate of Profit falls closer to zero, crises will happen much more constantly, and deals much deeper impacts on the economy. Life will be full of miseries, and even the most wealthy Bourgeoisie, one day, will begin to starve. At this point, the abolition of Capitalism seems inevitable.
Helpful sources:
The US rate of profit 1948-2015
The rate and the mass of profit
The Scientific Status of the Labour Theory of Value