In an article in the Times (14 July) David Smith, Economics Editor of the Sunday Times, mentions that he is revising a book of his which has a chapter on Marx:
‘Marx, you may recall, thought he had pinned down what drives capitalists. As he put it: “Accumulate, accumulate! That is Moses and the prophets . . . Accumulate for accumulation’s sake, production for production’s sake.” By accumulation, Marx meant investment and that the tendency of capitalists to over-invest condemned them to a future of declining profits and, ultimately, the fundamental crisis of capitalism.’
This is accurate enough until the word ‘investment’. After that it’s wrong.
Marx certainly thought that investment to make profits (most re-invested in expanding productive capacity, hence ‘the accumulation of capital’) was the driving force of capitalism. In a boom, capitalists in some key industry tend to ‘over-invest’, resulting in overproduction in relation to its market; this has a knock-on effect on other industries, causing a general slump in production. But this is not the end of the road for capitalism. It is a phase of the boom/slump cycle that is part of the way the capitalist system works. Slump conditions, by eventually restoring profitability (as by the clearance of stock, depreciation of capital, low interest rates, lower real wages), pave the way for a recovery leading to a boom, and the cycle repeats itself.
What is ironic about Smith’s criticism is that Marx would have agreed with the article’s heading ‘Without investment the recovery we’re seeing is built on sand’ precisely because he saw investment (for profit) as the driving force of capitalism.
In writing ‘the tendency of capitalists to over-invest condemned them to a future of declining profits’, Smith is presumably referring to what Marx called, in chapter 13 of Volume 3 of Capital, ‘the law of the tendency of the rate of profit to fall’ (often miscalled, by opponents and some supporters of Marx, ‘the law of the falling rate of profit’).
Marx’s point here was that as capital accumulation proceeded there was a tendency for a greater and greater proportion of new capital to be invested in plant and machinery relative to labour power, whose application in production was the only source of surplus value and so of profits.
Marx called the ratio of surplus value to labour power purchased (the amount of profit produced per worker) ‘the rate of exploitation’. The rate of profit was the ratio of profit to total capital. If the rate of exploitation remains constant, it follows mathematically that, when production becomes more and more ‘capital intensive’, then the rate of profit will fall – because the amount of profit comes to be related to a larger and larger amount of capital.
In practice, however, the rate of exploitation does not remain constant but increases; in which case the rate of profit does not necessarily fall. It depends on how the rate of exploitation moves. It was because there was no way of predicting this that Marx spoke of the fall in the rate of profit being a tendency rather than an iron law.
Smith is confusing the rate of profit with the amount of profit. Marx pointed out that it was possible for the amount of profits to increase even if the rate fell. In fact this is what he expected to happen as capital accumulation meant that more workers were employed and so more profits were produced. He even called this a ’law’, writing ‘this double-edged law of a decrease in the rate of profit and a simultaneous increase in the absolute mass of profit arising from the same causes’ (his emphasis).
Smith is mistaken, then, in saying Marx expected capitalism to end in a ‘fundamental crisis’ due to fewer and fewer profits being made.