The law of the tendency of the rate of profits to fall
Like his predecessors, Marx tried to provide an explanation for the supposed empirical phenomenon of the tendency of a falling rate of profits. His approach must be seen in connection with the alternative one suggested by David Ricardo, who had argued that in the course of the accumulation process the wage share must rise, because the production of foodstuff is subject to increasing costs as a consequence of the need to have recourse to less and less productive soils or methods of land cultivation.
Accordingly, nominal wages must rise to keep real wages constant and the rate of profit and the profit share are bound to fall. Ricardo had also suggested that the rise in money wages could lead to the substitution of machinery for labour, that is, to the introduction of machines which have been available already before, but which could not be profitably introduced at the lower money wages. This can temporarily retard the fall of the rate of profits, but not ultimately prevent it. In his argument Ricardo explicitly set aside technical progress proper.Marx had detected an important error in Ricardo’s reasoning. Ricardo had maintained that the rate of profits depends only on “proportional wages”, that is, the share of wages in the total product measured in labour terms. With a rise in the latter the former is bound to fall. In his argument, Ricardo had assumed for simplicity that the advanced capital consists only of wages, or could be reduced to direct and indirect wages in a finite number of steps; but such a reduction is possible only with “unidirectional” production processes, that is, when the reduction series comprises a production stage at which only “original” factors of production like labour and land are needed in the production of the means of production. If Ricardo’s error is corrected and the existence of circular production relations is taken into account, Marx insisted, the true cause of the falling rate of profits is revealed.
If we designate the rate of profits with r, the value of the social product with Y, wages with W, profits with ∏, and the wage share with ω, then Ricardo determined the rate of profits as:
In the special case contemplated by Ricardo, the rate of profits corresponds to the rate of surplus value: Ricardo thus derived the falling rate of profits from a falling rate of surplus value (see Marx 1861-63c [1989b]: 73).
Denoting the total quantity of living labour by L, and the maximum rate of profits by R, the following relationship can be derived (reckoning in terms of labour values, where Y 5 L, W 5 V and ∏ 5 5):
This shows that the rate of profits depends on two magnitudes, not one (as Ricardo thought): on the wage share ω - or the rate of surplus value, (1 - ω)∕ω - and on the maximum rate of profits, R. If the latter falls, the rate of profits must also fall, given the rate of surplus value. Even a moderately rising rate of surplus value cannot prevent this tendency of a fall in the general rate of profits.
For Marx the law of the tendency of the rate of profits to fall had two fascinating aspects. First, he regarded it as a striking refutation of Ricardo’s view, according to which the falling rate of profits is caused by the “niggardliness of nature”, which gives rise to increasing production costs of subsistence goods. For Ricardo, the introduction of agricultural improvements or new machinery in manufacturing was a counteracting factor, which could temporarily retard, but not ultimately prevent, the fall in the rate of profits. Marx believed he could demonstrate that the rate of profits falls not in spite of, but precisely because of technical progress, since the latter is bound up with a rising organic composition. Secondly, the law also revealed, in Marx’s view, one of the major contradictions inherent in the capitalistic mode of production: the progressive element in this mode of production is its capacity to develop the social forces of production and to raise labour productivity.
However, since technical progress under capitalistic production must inevitably take the form of replacing living labour by machinery - or, in Marx’s terminology, of a rising organic composition of capital - it paradoxically deprives the capitalistic system also of one of its constituting elements, since surplus value cannot be generated by “dead”, but only by living, labour.However, as the original manuscripts published in the new MEGA edition show, Marx entertained doubts about the general validity of the “law” (see, in particular, Marx 1863-67 [2012]). On the one hand, he was clear about the fact that not all forms of technical progress are necessarily associated with a rising organic composition of capital. Moreover, even if the organic composition were rising and the maximum rate of profits were exhibiting a tendency to fall, this need not necessarily imply a fall in the actual rate of profit, since the former could be accompanied by a rise in the rate of surplus value. (For a more detailed account, see Kurz 2010, 2012-13.)
From the point of view of the development of the surplus approach to value and distribution it was perhaps one of Marx’s most important analytical achievements to have carried the analysis of prices and income distribution which he had inherited from his precursors a step forward: by resurrecting the aspect of circular production relations he could demonstrate the existence of a maximum rate of profits and show its importance for the analysis of distribution, accumulation, and technical change.