13 October 2011

Tendency of the Rate of Profit to Fall

Tendency of the Rate of Profit to Fall

Capital Volume 3, Part 3, The Law of the Tendency of the Rate of Profit to Fall

The most well-known insight of Capital Volume 3 is the Law of the Tendency of the Rate of Profit to Fall, often abbreviated to “TPRF”.

Chapter 13 (linked below) describes the Law very directly and simply.

The TPRF is not a mystical law. The TPRF is in the first place a consequence of the simple fact that surplus value extracted from wage-workers is the only source of increase, and profit is surplus value less the capitalists’ other costs, or what Marx calls “constant capital”, where wages are “variable capital”.

The tendency for these other costs to increase over time in relation to the amount of labour-power used, is what causes the TPRF, the tendency of the rate of profit to fall.

The constant capital includes technology and the cost of technological inputs rises as more scientific methods are used, in relation to the amount of labour applied.

This produces an apparent paradox: When productivity rises, profits fall. The more “capital-intensive” is a business, the less profit is made in proportion to the amount of money invested.

Does this mean that capitalism is going to fade away? Does it mean that there is an entropy in play for capitalism, like the winding-down of the solar system? So that profits will eventually reduce almost to zero, and the capitalist relationship therefore become unsustainable and cease to exist?

Perhaps Kautsky might have thought so, but there are “counteracting influences”, some of which Marx describes in the following Chapter 14 of Capital Volume 3. Wikipedia (here) lists Marx’s ones as follows (and then follows with some additional ones of its own):

  • more intense exploitation of labour (raising the rate of exploitation)
  • reduction of wages below the value of labour power
  • cheapening the elements of constant capital by various means
  • the growth and utilization of a relative surplus population (the reserve army of labour)
  • foreign trade reducing the cost of industrial inputs and consumer goods
  • the increase in share capital which devolves part of the costs of using capital on others.

Do the “counteracting influences” balance out the TRPF and produce a capitalist equilibrium?

No, not exactly. Instead, what we actually have is a very dynamic, unstable, and finally political, living world. We have constant crises, contradictions, and conflict.

“Marxism” is for many purposes a hidden science in capitalist society. For example, the business pages of newspapers seldom relate what is happening in businesses from day to day to theories of surplus value. Marx gets a nod now and again but mostly he is ignored.

But it is not the case that in the world of economic theory, Marx is never consulted by bourgeois economists. The terrain on which the parlay happens is here, in Capital Volume 3. The TRPF and its countervailing tendencies are familiar to bourgeois economists. They have their own variations on the problematisation of the TPRF, or its equivalent as they see it, such as “the law of diminishing returns”.

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