Karl Marx: A Rising Organic Composition of Capital

Marx had access to a much larger illustrative material than Ricardo as regards the technological dynamism of capitalism. There could no longer be any doubt that it revolutionized continually the system of production from within.

Marx’s system of accounting, like Ricardo’s, is in terms of (labour) values. In Capital he started from the premise that commodities are produced by means of commodities, that is, he started from an input-output scheme. This is reflected by a “constant capital” (produced means of production) needed in each line and at each stage of production. The important implication of this is that the maximum rate of profits of the system, R, is finite. R informs about the capacity of the economic system to generate a surplus product over and above what is being used up in production. The organic composition, κ, is equal to the ratio of “dead” (C) and “living labour” (L): κ = C/L, and thus equals the inverse of the maximum rate of profits: κ = R '^l. The actual rate of profits, r, is given by:

where S designates surplus labour (profits), V “variable capital” and κ the share of wages. The long run trend of the rate of profits thus depends on two magnitudes, one referring to distribution, the other to the socio-technical conditions of production: ω and k = R^-1.

Marx characterized the stages of economic history in terms of a sequence of phases, each of which had its own dominant pattern of technical and structural change; namely, (1) cooperation; (2) division of labour and manufacture; and (3) machinery and modern industry (see Marx 1954: pt IV). He also distinguished between different forms of techni­cal change.

While Marx admitted that these latter forms cannot be excluded on a priori grounds, he was convinced that κ was bound to rise and thus R to fall as capitalism develops. The features of this case are precisely those Ricardo had investigated in his chapter on machinery. The endogenous mechanism that according to Marx favours this bias of technical change reflects the inherent logic of capitalism. Labour saving and capital using technical progress, he insisted, was “just another expression peculiar to the capitalist mode of production” (Marx 1959: 213, Engels’s (ed.) 1894 edition emphasis). It is the antagonism between capital and wage labour that directs technical change towards a rising organic composition. In the conflict over the distribution of the product, capitalists seek to replace the element that cannot be fully controlled and dis­ciplined, the worker, by the element that can, the machine. Marx apparently counted upon a ruse of history. By replacing labour power by machine power, capitalists in the short run are able to ward off threats to their profit position. However, in the long run they thereby unconsciously undermine that very position because profits come out of (surplus) labour, which is progressively made redundant. “Behind capitalists’ backs” the system’s nemesis is taking shape: the general rate of profits, the key to the whole system, tends to fall. Hence in Marx, as opposed to Ricardo, the rate of profits is assumed to fall, not because there is insufficient technical change to counteract the “niggardliness of nature”, but because there is a particular bias to technical change.

For a rigorous elaboration of the tool of the wage curve, see Sraffa (1960); see also, for example, Kurz and Salvadori (1995). For a discussion of the classical approach to tech­nical progress, see Schefold (1976) and Kurz (2010). See also Piketty (2014), who sees a long-term rise in the capital-output ratio and thus a falling maximum rate of profits. The labour displacing effects of new technologies and their possible compensation by capital accumulation gave rise to a big debate to which contributed, among others, Ricardo, Marx, Wicksell, Hicks and Leontief. Dynamic input-output analysis was used to study the diffusion of new technologies; see Leontief and Duchin (1986) and Kalmbach and Kurz (1990).

With the rise of Marginalism, the classical economists’ concern with the problem of technical change and economic dynamics gave way to a concern with static alloca­tion problems. If technical change was discussed at all, it was in terms of an exogenous change of production techniques. This type of approach one encounters, for example, in Gustav Cassel at the beginning of the twentieth century and then several decades later in Solow (1956). A noteworthy exception is Alfred Marshall who in some of his analysis entertained an evolutionary perspective. Another and perhaps even more important exception is Joseph A. Schumpeter, who considered innovations and technical change as a dynamic process of “creative destruction” generated from within the economic system.