Cooking the Books: The Falling Rate of Profit (2) (2014)

The Cooking the Books column from the August 2014 issue of the Socialist Standard

The May/June issue of Philosophy Now also mentions the ‘law of the tendency of the rate of profit to fall’ (as it’s called in the first English translation of Part Three of Volume 3 of Capital). In a generally fair article on Marx in their Brief Lives series, poet Roger Caldwell ventures into the field of economics:

‘Marx takes over from economist predecessors such as Adam Smith the notion of the falling rate of profit, although he is nowhere able to show that such a tendency exists, not least because, in the buoyant economy of the middle to late Victorian period, rates of profit were manifestly rising.’

It was indeed the opinion of Classical Political Economy that in the long run capital accumulation would theoretically eventually come to a halt because the rate of profit would have fallen to nearly zero. Adam Smith thought this would happen because capital would become too abundant (a view shared by some moderns, Keynes for example). Marx regarded this as merely a passing phase of the business cycle which would not be permanent.

David Ricardo thought that it would happen because of diminishing returns from agriculture which would eventually lead to all surplus value (to use Marx’s term) being absorbed by ground-rent at the expense of profits. Marx wanted to explain the phenomenon from the internal working of the capitalist economy, not from some external ‘natural’ phenomenon such as Ricardo was suggesting.

Starting from the basis that surplus value arose only from that part of capital invested in the purchase of labour-power, and noting that as capital accumulation proceeded the proportion of capital invested in this would fall as more was invested in plant and machinery, Marx deduced a theoretical tendency for the rate of profit, as newly created surplus value as a percentage of total capital invested, to fall because total capital would increase at a faster rate than total surplus value.

This was Marx’s contribution to the debate amongst the Classical Political Economists. But no more than Smith or Ricardo would he have thought that the rate of profit would actually fall to zero, simply that there would be a ‘tendency’ for it to move in this direction. The very fact that he chose the word ‘tendency’ shows that he did not think that there would be a steady downward movement. This is confirmed by his listing of a number of ‘counteracting’ tendencies that would work to increase the rate of profit, the implication being that at one time the tendency might win out and that at another the counter-tendencies might.

Any such fall for the reason Marx gave would be a long-run tendency, discernible only in generations rather than decades (not that Marx expected that the workers would wait generations to overthrow capitalism) and is to be distinguished from the short-term falls that occur for different reasons just before and during the economic downturns that capitalism regularly goes through from time to time.

Marx was well aware that profits were rising in ‘the middle to late Victorian period’ and notes this not only in Volume I of Capital but also earlier, in 1864 in his Inaugural Address of the IWMA. But an increase in the amount of profit is not the same as an increase in the rate of profit. Not that Marx was particularly concerned to show that the rate of profit had been falling during this period, nor did he need to be. A ‘tendency’ is only ever a tendency and does not have to manifest itself all the time. That’s why it’s called a tendency and not an iron law.