This section of the chapter explores the tendency for the rate of profit to fall across successive periods of production. It contains more detail than other sections, because of the significance of the LTFRP for the key propositions and conclusions of the thesis. In Chapter Eleven, it is argued that the LTFRP is valid explanation of finance sector transformation, and the erosion of state sovereignty. If rates of profit in the non-financial sector are lower, and the expectancy of future profits is low, this will increase the attractiveness of investments in the finance sector despite its risks.
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In general, profitability in the non-financial sector can be expected to tendentially equalise between sectors, as capital migrates towards higher returns, although within sectors it does not tend to equalise. This is because new labour-saving technologies is profitable for leading firms in a particular sector, as it creates a transfer of profit from other firms in that branch of industry.121 Non-leading firms (laggards) will adopt labour-saving techniques in time but by this later stage will not be able to realise any surplus profit. If they do not try to catch up, alternatively, they are unlikely to make a profit at all. Since the leading firms realise surplus profits they are better placed to invest in research and development and are thus likely to remain as the leading firms (Potts 2007). So, according to Marx, as the capitalist mode of production evolves, competitive firms introduce labour-saving technologies in order to increase productivity. When such an increase in the organic composition of capital actually occurs, Marx states:
Then this gradual growth in the constant capital, in relation to the variable, must necessarily result in a gradual fall in the general rate of profit, given that the rate of surplus value, or the level of the exploitation of labor by capital, remains the same. (Marx [1894] 1981: 318)
It is an hour of abstract social labour that always yields the same labour value. Technical innovation produces less new value per pound (£) of advanced capital, since constant capital e.g. machinery has been expanded as a ratio to labour.122 This seemingly counter-intuitive aspect of Marx’s political economy illustrates that in a boom time of increasing productivity, the profit rate has a tendency to fall. Increases in productivity will lower the labour-value of individual commodities and, given healthy competition, should lead to a reduction in prices. Kliman explains, with use of an example that assumes a constant rate of exploitation (surplus value), and a physical output that is expanded at the same rate as the physical capital, that if prices remain the same so does the profit rate. But if prices fall, the profit rate falls (Kliman 2012: 16). In this scenario, the physical proft rate can be increasing i.e. the physical quantity of outputs as a proportion of the physical quantity of inputs, whilst the value profit rate falls (assuming labour value equals price). Kliman illustrates that simultaneous valuation, that values inputs and outputs as the same (as a method), inevitably leads to explaining profit by using physical values and, as a consequence, is unable to explain the falling labour value profit rate as Marx intended i.e. as the exploitation of labour (Kliman 2007: 77). This is the
121 For Marx, as Kliman notes, unit-value does not depend on the individual firm but the average. If a firm
produces twice the output, with the same labour, they produce almost twice the labour-value (Kliman 2007: 22).
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key proposition that Kliman makes in his critique of Marx. The TSSI (that values inputs and outputs sequentially, so they usually differ) of Marx reclaims his LTFRP from the claim of simultaneous Marxists, who have sought to show that either Marx used their method, or that Marx needs to be corrected by their method (Freeman 1996, Kliman 2007: 36, Potts 2009a). Kliman explains that if simultaneous models are used it is rational to reject the LTFRP on theory grounds, as Okishio did in 1961. But since the TSSI has re-legitimised the consistency of Marx’s original method, it then becomes possible to utilise the LTFRP for explanation. This prediction of the tendential behaviour of the productive economy, based on Marx’s law of value, is used here for the purposes of analysing financial power. The following Table 5.3, adapted from Potts (2009a), illustrates how in an accumulating economy (that assumes everything is reinvested), the profit rate in physical terms (simultaneous approach) can rise whilst the profit rate in terms of value falls as Marx predicts in his method.123 It can be seen in the table that the LTFRP can be measured in either labour time or money, and it is only the physical output profit rate that increases.124 The Okishio theorem stated above is disproved. Table 5.3. Physical and Value Profit Rate with Constant MELT (Compiled by author).
Period C Cp V Vp S Sp E 0 200 20 50 5 50 5 100% 1 200 20 50 5 50 5 100% 2 250 25 50 5 50 8 100% 3 303.95 33 46.05 5 53.95 12 117% 4 363.55 45 40.40 5 59.60 16 148%
Period Output Outputp P Rate Pp Rate U Value Price MELTa
0 300 30 20.00% 20.00% 10 10 1.000
1 300 30 20.00% 20.00% 10 10 1.000
2 350 38 16.67% 26.67% 9.21 9.21 1.000
3 403.95 50 15.41% 31.58% 8.08 8.08 1.000
4 463.55 66 14.75% 32.00% 7.02 7.02 1.000
a The MELT (labour hours/$) is measured at the end of production.
C = constant capital advanced, Cp = Physical units advanced as constant capital V = the value of variable capital, Vp = number of physical units paid as wages S = surplus value extracted in production measured in money or labour
123 In Period 0 the surplus value is not reinvested and can be considered as capitalist consumption.
124 In Table 5.3 please note that the measures for constant capital, variable capital, surplus value, total output
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Sp = surplus value extracted in physical terms, U Value = unit value E = rate of exploitation i.e. S/V, P Rate = Profit rate
For Marx, the falling profit rate law in capitalism was a tendency that, by implication, was subject to counter-tendencies. If the rate of exploitation is increased, for instance, then the profit rate will be raised (assuming nothing else changes). Marx describes that this can occur as a result of a prolonging of the working day, a so-called increase of absolute surplus value, or if the worker is remunerated less (as wage-good prices are cheapened by productivity increases) an increase of relative surplus value takes place (Marx [1867] 1976: 432). Any technical innovation normally increases productivity through the replacement of labour and results in a greater proportion of constant capital. This means that the profit rate will fall since profit is derived from labour power. The significance of this point is illustrated in the above Table 5.3, in Period 3, where the value of variable capital falls from 50 to 46.05 and the mass of surplus value has increased to 53.95, which means that the rate of exploitation has risen to 117%. Since the productivity increase was achieved at the expense of the rising organic composition of capital, of greater proportion than the reduced wage-goods prices (i.e. 22%), the value profit-rate falls from 16.67% to 15.41%. Meanwhile, the physical profit rate rises from 26.67% to 31.58% due to the increased productivity. In summary, the mass of surplus value increases as the wage-goods are reduced in value/price and workers are paid less (not in use-value) and this is offset as capital employed becomes more productive with accumulation because whilst the physical profit rate is rising the price/value profit rate is falling simultaneously.125 Marx explains that these circumstances will create the impression that the capitalist gains from greater sales, in full knowledge of the simultaneous fall in individual commodity values and the receipt of less profit per commodity. In reality the capitalist only gains from the increase in the mass of surplus value in this period, resulting from the productivity increase (see Table 5.3), if wage goods prices fall proportionately more than increases in the organic composition of capital. Marx writes:
…The phenomenon arising from the nature of the capitalist mode of production, that the price of an individual commodity or a given portion of commodities falls with the growing productivity of labor, while the number of commodities rises; that the amount of profit on the individual commodity and the rate of profit on the sum of commodities falls, but the
125Marx notes, ‘if the variable capital diminishes, and at the same time the rate of surplus-value increases in the same ratio, the mass of surplus-value remains unaltered’ (Marx [1867] 1976: 418). In this circumstance, despite the total labour input falling, relative surplus value allows surplus value to stay constant as variable capital falls.
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mass of profit on the total sum of commodities rises – this phenomena simply appears on the surface as a fall in the amount of profit on the individual commodity, a fall in its price, and a growth in the mass of profit on the increased total number of commodities produced…. (Marx [1894] 1981: 337)
A caveat is that the individual firm experiencing productivity growth can gain at the expense of laggard firm in the sector before profit equalisation occurs. It should be pointed out that the rising rate of surplus value i.e. lower wages as a proportion of new value is problematic, even though it can offset any fall in the profit rate, because there are natural limits to this. Kliman uses the example of a firm employing five workers from whom the capitalist extracts five hours surplus value each i.e. 25 hours in all. In time, if productivity improvements lead to a reduction of the workforce to one worker, the maximum surplus value that could be extracted is still only twenty-four hours (Kliman 2007). In addition to this, that act of reducing the wages of workers is a difficult process for capitalists to achieve in reality.
Marx argued that the profit rate is restored through a crisis, reducing the prices of the means of production, and through capitalists finding it easier to increase exploitation of workers. In crisis, with capital assets lying idle, there is a physical deterioration of capital value when capital ‘falls prey to the destructive power of natural processes’ (Marx [1867] 1976: 289). There is the process of what Marx called the moral depreciation of fixed assets that occurs when the price of the means of production fall as a consequence of obsolescence. This is explored more fully in 5.10. During crises, both these asset write-downs have the effect of cheapening the means of production and, increasing the profit rate after the initial losses. In a bankruptcy crisis when assets are liquidated, a new capitalist buys the firm at a reduced price and profit can be restored.
Any combination of these mitigating factors outlined above will reduce the prices paid for means of production and restore the profit rate. These processes lead to the destruction of capital that, in turn, is a central element of what Schumpeter dubbed the creative destruction of capital, which induces technological revolution and cycles (Kliman 2012: 210, Schumpeter 1954).126 The dynamics of capitalism driven by Marx’s law of value lead to the increasing
126 The shorter technological lifespan of fixed assets has led, according to Mandel, to shorter business cycles
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expropriation of capital by other capitalists as part of the general law of capitalist accumulation. Marx writes:
It will be further remembered that, with the development of the capitalist mode of production, there is the increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, crowd into spheres of production which large-scale production has taken control of only sporadically or incompletely. Here competition rages in direct proportion to the number, and in inverse proportion to the magnitude, of the rival capitals. It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, and partly vanish completely. (Marx [1867] 1976: 777)
In this competitive capitalist environment, firms seek to protect their survival, and profitability strengthens their position by providing resources for research and development. Leading producers are able to realise more surplus value than they produce, in contrast to average or laggard producers, as a consequence of their superior productivity. Laggard firms become squeezed out of the market altogether. Market prices are established in sectors, and the leading firms are more profitable due a larger output per portion of advanced capital. Capital will migrate between sectors in search of higher profit. This has the effect of increasing (or decreasing) supply in varying sectors and contributes towards the tendential formation of prices of production, that equalise profit rates across sectors, in the transformation process. The thesis argues that, the process of profit equalisation is less likely to occur within a particular sector, due to the existence of lead firms, notwithstanding its theoretical feasibility. Firms that respond by attempting to gain more market power, such as Monopolies, are continually able to realise more value than they produce, thus reducing the amount of surplus value for distribution amongst the competitive parts of the general economy. Monopolies and cartels are, as Marx noted, not subject to the same transformation process between sectors (Marx [1894] 1981: 1001).
In addition to the counter-tendencies to falling profit rates mentioned above, mitigation could occur through increasing commodification as capitalism develops. Some freely available products of nature, such as water that contains a use-value but is without an exchange-value, have been privatised and commodified by firms, creating an exchange-value that did not previously exist. This, in turn, leads to a corresponding expansion of output value and, providing the market contains at least above-average profit, an increased profit rate (Petrella
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2001).127 The development of new commodities, and their markets, can occur ex niliho, particularly in the service sectors in an under-employed economy, as new needs are discovered or formed by consumers/firms or state spending requirements.
The fall in profit rates, as the economy accumulates in booms, is even more noticable when it is considered in conjunction with any of the (above mentioned) mitigating factors that may be counteracting the tendency for the fall. The thesis posits that this law of the tendency for the rate of profit to fall has led to increased systemic need (and practice) to compensate through mitigating factors and this, in turn, has led (albeit indirectly) to the changes experienced in the financial system. Marx had remarked, for instance, on the increasing role that banks played in the accumulation process generally. Marx writes of the activities of the agents providing financial resources in his day (similar to leveraged private equity firms of today):
In its first stages, this system furtively creeps in as the humble assistant of accumulation, drawing into the hands of individual or associated capitalists by invisible threads the money resources, which lie scattered in larger or smaller amounts over the surface of society; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into an enormous social mechanism for the centralisation of capitals. (Marx [1867] 1976: 777)
In this passage, Marx indicates that credit monies and related banking activities are important elements of the capital accumulation and centralisation of capitalism, since they determine real outcomes in the competitive process. Marx had argued that they would facilitate the centralisation of the means of production in the hands of a decreasing class of capitalists, and concentrate capital in larger joint-stock units. This process has indeed continued unabated in the history of capitalist economies. Marx thus maintained that the key driving forces and mechanics of the capitalist mode emanate from production itself and, in particular, general accumulation and the tendency for the profit rate to fall as objective laws of its operation. Marx had claimed, as Kliman illustrates with reference to several key passages from Marx, that this tendency for the profit rate to fall was his single most important contribution to political economy (Kliman 2010: 3). The LTFRP is considered as the central explanatory tool for the thesis theory, since falling profitability (directly or indirectly) affects and transforms the financial sector, which erodes state financial sovereignty as defined, and then leads in the absence of counter-tendencies to crisis. It is important to outline these processes
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in more detail since they are significant for the later empirical analysis. The first consideration is the Potts depiction, derived from Grossman, then the Kliman approach (Potts 2010, Kliman, 2012). These key theoretical arguments, regarding the behaviour of the circuit of capital and falling profit, form the basis for the claims made in later empirical chapters. Potts argues that migration of surplus capital towards the financial markets, and subsequent financial sector development, is driven by the fall in profit as capital seeks higher returns (Potts 2010). He defines surplus capital as simply the monies remaining when capitalists cut back on productive investment, after a fall in the profit rate (Potts 2011c: 75). Marx writes:
The rate of profit, is the spur to capitalist production (in the same way as the valorisation of capital is its sole purpose), a fall in this rate slows down the formation of new, independent capitals and thus appears as a threat to the development of the capitalist production process; it promotes overproduction, speculation and crises, and leads to the existence of excess capital [my emphasis] alongside a surplus population. (Marx [1894] 1981: 349)
Potts demonstrates that Grossmann employed Marx’s concept of surplus capital to predict the imminence of looming crisis, in the 1930s, as a consequence of superfluous capital, poor investment prospects and rising unemployment (Potts 2011c: 77). Grossmann writes:
Superfluous capital looks for spheres of profitable investment. With no chance in production, capital is either exported or switched to speculation. ... Despite the optimism of many bourgeois writers who think that the Americans have succeeded in solving the problem of crises and creating economic stability, there are enough signs to suggest that America is fast approaching a state of over accumulation. ... The depressed state of industry is reflected by an expansion of speculative loans and speculative driving up of share prices. Today’s America is doing its best to avert the coming crash – already foreshadowed in the panic selling on the stock exchange of December 1928 – by forcing up the volume of exports. ... When the Germans and the British match these efforts, the crisis will only be intensified. (Grossmann 1929: 191)