Explaining the tendency for the rate of profit to fall

Marx presents this tendency as a law. Different people use the word ‘law' in different senses. Some scientific writers quite legitimately use the term to mean a statistical regularity. In this case there would be a law for the rate of profit to fall if we could observe the rate of profit falling continuously.

We can't. And Marx is quite clear that is not how the tendency for the rate of profit to fall operates in practice. For him a tendency is a force operating in a certain direction. We shall present the law in Marx's own words.

"Once wages and the working day are given, a variable capital which we can take as 100, represents a definite number of workers set in motion: it is an index of this number. Say that £100 provides the wages of 100 workers for one week. It these 100 workers perform as much surplus labour as necessary labour, they work as much time for the capitalist each day, for the production of surplus value, as they do for themselves, for the reproduction of their wages, and their total value product would then be £200, the surplus value they produce amounting to £100. The rate of surplus value s/v would be 100%. Yet, as we have seen, this rate of surplus value will be expressed in very different rates of profit, according to the differing scale of the constant capital c and hence the total capital C, since the rate of profit is s/C. If the rate of surplus value is 100%, we have:

if c = 50 and v = 100, then p' = 100/150 = 66 2/3 %;

if c = 100 and v = 100, then p' = 100/200 = 50%;

if c = 200 and v = 100, then p' = 100/300 = 33 1/3 %;

if c = 300 and v = 100, then p' = 100/400 = 25%;

if c = 400 and v = 100, then p' = 100/500 = 20%.

"The same rate of surplus value, therefore, and an unchanged level of exploitation of labour, is expressed in a falling rate of profit, as the value of the constant capital and hence the total capital grows with the constant capital's material volume.

"If we further assume now that this gradual change in the composition of capital does not just characterise certain individual spheres of production, but occurs in more or less all spheres, or at least the decisive ones, and that it therefore involves changes in the average organic composition of the total capital belonging, 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 exploitation of labour by capital, remains the same" (Capital Volume III pp. 317-8, The law itself).

Countervailing factors 

Marx deals with the counteracting forces on the tendency for the rate of profit to fall in Part Three of Capital Vol. III. Chapter 13 is ‘The law itself.' Chapter 14 is entitled ‘Counteracting factors'. Chapter 15 is ‘Development of the law's internal contradictions.' We can see at once that the ‘law' does not mean that the rate of profit will always fall. It is not a prediction. The tendency for the rate of profit to fall is a force operating on the capitalist system, as we have seen. This force, in a dialectical way, actually unleashes contradictory forces that may tend to drag the rate of profit up.

Marx mentions six counteracting factors to the underlying tendency for the rate of profit to fall:

• More intense exploitation of labour
• Reduction of wages below their value
• Cheapening of the elements of constant capital
• The relative surplus population
• Foreign trade
• The increase in share capital

Increasing the intensity of exploitation

How can the bosses exploit the workers more? Apart from making workers more productive so as to increase the extraction of relative surplus, Marx realised that they could get exactly the same result without investing in more machinery. Through an offensive on the shop floor they could increase what he called the intensity of labour. In effect workers would be made to do ten hours' work in eight hours. The main two ways of increasing the intensity of labour is by speeding up the assembly line and by making workers mind more machines.

Generally raising the intensity of labour and increasing its productivity have the same effect. They both raise the rate of exploitation by increased the production of relative surplus value. They both tend to make goods cheaper. We shall therefore consider them together.

Let us begin by assuming that the goods made cheaper are the ones workers buy with their wages, for instance KitKats. Obviously if the price of KitKats fall you don't feel materially much better off, but this raising of productivity is assumed to be going on all over in the economy. As we discussed earlier (Absolute and relative surplus value), we can assume to start with that the worker works four hours to earn enough wages to buy the elements of her subsistence and four hours making surplus value for the boss class. If productivity for all the items going to make up the wage bundle doubles, then the worker need only work two hours for herself and six hours for the capitalists. Marx is assuming that workers' real wages (in terms of purchasing power) will remain unchanged. The end result of raising the productivity of labour is thus to increase the rate of surplus value (rate of exploitation) by increasing relative surplus value

Reduction of wages below their value

Second Marx assumes that on average commodities are sold at their value (or rather price of production) for the purposes of his analysis. He was well aware that this is not always the case. In fact, he was by far the finest and most systematic chronicler of his time of the abuses of the capitalist system. He knew that the value of labour power was established by class struggle and had ‘a historical and moral element'. Therefore in practice depression of wages below the value of labour-power is important in practice in raising the rate of profit, not this time by making workers produce more but by paying them less.

Cheapening of elements of constant capital.

Just as the elements of variable capital can be made cheaper through raising the productivity of labour, so can the elements of constant capital. So, though there may be a much greater mass of machinery behind the elbow of each worker, each unit of capital may cost less and the organic composition of capital could be lower. "Also related to what has been said is the devaluation of existing capital (i.e. of its material elements) that goes hand in hand with the development of industry. This too is a factor that steadily operates to check the fall in the rate of profit, even though in some circumstances it may reduce the mass of profit by detracting from the mass of capital that produces profit. We see here once again that the same factors that produce the tendency for the rate of profit fall, also moderate the realisation of this tendency." (ibid. p. 236)

Though the labourer is working up more and more raw materials over a given period of time, each piece costs less because it takes less time to produce those raw materials. "For example, the quantity of cotton that a single European spinning operative works up in a modern factory had grown to a most colossal extent in comparison with that a European spinner used to process with the spinning wheel. But the value of the cotton processed has not grown in the same proportion as its mass. It is the same with machines and other fixed capital. In other words the same development that raises the mass of constant capital in comparison with variable reduces the value of its elements as a result of the higher productivity of labour, and hence prevents the value of the constant capital, even though this grows steadily, from growing in the same degree as its material volume. i.e. the material volume of the means of production that are set in motion by the same amount of labour power." (ibid. p. 343)

The unemployed can be used as a whip against the demands of employed workers. Then as now the discovery of pockets of workers who will work for wages below the average can be a Klondike for individual sectors of capitalists, and serve to raise the overall rate of profit for the system as a whole.

Foreign trade enables capitalists to buy commodities from the cheapest sources in the world and so lowers their costs. It produces a global division of labour and enables national economies to reap the advantages of scale economies within world trade, further cutting costs all round.

Marx also introduces some important concepts that can serve as the base for a theory of imperialism. We cannot pursue these here. Note that Marx is dealing with the formation of national rates of profit, and how they are influenced by cheap imports. Realistic as this was for his time, we might consider whether the twenty-first century, with its vast capital flows, has produced a tendency for a global rate of profit to emerge. In any case we cannot treat foreign trade as a rabbit out of a hat, negating the basic tendencies of capitalist accumulation.

Finally Marx points to a tendency then in its infancy. It is now fully realised - a stratum of the capitalist class has become purely parasitic, and lives off the income of shares that their brokers, not they themselves, select. In this case surplus value undergoes a further division, with share dividends approximating to interest-bearing capital.

We have to say that some of Marx's countervailing tendencies are mentioned very briefly, sometimes in a single paragraph. Fascinating though they are, they are not fully explored in the text. They almost come across as a sort of checklist for further research.

We regard the two most important counter-tendencies as raising the rate of exploitation and cheapening the elements of constant capital. They are the most important because they both explore how the central tendency to raise the productivity of labour that causes the tendency for the rate of profit to fall actually produces its own counter-tendencies.

In the case of raising the rate of exploitation, wage goods are produced faster and therefore cheaper, thus enabling the worker to spend more of her time producing surplus value and less in producing the elements of her own subsistence.

In the second case capital goods are produced faster and therefore cheaper. In this case while the mass of constant capital (what Marx called the technical composition of capital) may rise, the price of those material elements of constant capital (for the organic composition of capital is expressed in money prices) could fall.

Could these counter-tendencies indefinitely offset the tendency for the rate of profit to fall?

Increasing the rate of exploitation. In the example we used earlier, the worker works four hours to produce the elements of her own subsistence and four hours producing surplus value. As a result of new techniques, productivity doubles and the worker is now only working two hours for herself and six hours for the bosses. Her standard of living is unaffected - she can still buy the same bundle of wage goods as before. But there are limits to this process in increasing the rate of exploitation. In mathematical terms the rate of exploitation is bounded by the new value added by the worker (v + s). In mathematical terms, as productivity continues to rise in the wage goods sector, s tends to increase towards (v + s), while v tends to zero. As long as constant capital continues to increase (c tends to infinity), the rate of profit must eventually fall.

Cheapening the elements of constant capital. The cheapening of elements of constant capital through rising productivity tends to reduce the organic composition of capital expressed in market prices. The question is: can this indefinitely offset the tendency for the rate of profit to fall? Marx believed it could not. We agree.

Since this issue has been in contention for more than a century, we cannot treat it fully here. We would refer the reader to the historic debate Tendency for the rate of profit to fall and post-war capitalism - AG and MB. We have included further material on this question in the Appendix.

More recently, Kliman's Reclaiming Marx's ‘Capital': A refutation of the myth of inconsistency has, we believe, definitively rebutted those who argue that ‘Marx got it wrong' and that by implication there is no long term tendency for the tendency for the rate of profit to fall.

How the tendency manifests itself in practice

Marx's analysis is actually subtler than many give it credit for.  "There is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time...We have seen how it is that the same reasons that produce a tendential fall in the profit rate also bring about an accelerated accumulation of capital and, hence, a growth in the absolute magnitude or total mass of the surplus labour (surplus value, profit) appropriated by it." (ibid. p. 331)  In Capital Volume III, Marx even referred to the law as a "double-edged law of a decline in profit rate coupled with a simultaneous increase in the absolute mass of profit, arising from the same reasons." (ibid. p. 326)

So the rate of profit can fall, and usually does fall, while the mass of profit available to the capitalist class rises. In addition the mass of profit is expressed in a greater and greater quantity of use-values (‘wealth'), each of which involves less and less labour time to produce, and so each has less value congealed within itself.

Secondly, the reader should bear in mind that, "we are deliberately putting forward this law before depicting the decomposition of profit into various categories, which have become mutually autonomous." (ibid. p. 320) Rent, interest and profit, conventionally presented as the components of surplus value, all vary against one another and all follow their own economic laws. This is very important when we consider the actual onset of crisis.

Development of the law's internal contradictions

The three chapters on the Law of the tendential fall in the rate of profit, and particularly Chapter 15 (The development of the law's internal contradictions), provide the only complete explanation provided by Marx of boom and slump as part of a cycle and not, as over-production theorists would have it, as a crash coming out of a clear blue sky. Bearing in mind Rosdolsky's outline of Marx's 1865-66 economic ‘project' referred to earlier, we find it exactly where we would expect it to be in his writings. After dealing with the production and circulation of capital he turns in Capital Volume III to The process of capitalist production as a whole. Crisis theory deals with all the contradictions of capitalist society.

Marx appears to raise the realisation problem in Chapter 15. "The conditions for the immediate exploitation and for the realisation of that exploitation are not identical. Not only are they separate in time and space, they are also separate in theory. The former is restricted only by society's productive forces, the latter by the proportionality between the different branches of production and by society's power of consumption." (Capital Volume III, p. 352)

It is precisely at this stage in his analysis that Marx introduces the concept of over-accumulation. "Over-production of capital and not of individual commodities - though this over-production of capital always involves over-production of commodities - is nothing more than over-accumulation of capital." (ibid. p. 359)

He goes on, "There would be an absolute over-production of capital as soon as no further additional capital could be employed for the purpose of capitalist production. But the purpose of capitalist production is the valorisation of capital, i.e. appropriation of surplus labour, production of surplus value, of profit." (ibid. p. 360)

So over-accumulation is over-production of capital, which manifests itself as over-production of commodities. But too much capital is produced only in relation to profit-making potential. And this tendency produces an unseemly scramble among the capitalists for their chance to grab what profit there is.

"Concentration grows...since beyond certain limits a large capital with a lower rate of profit accumulates more quickly than a small capital with a higher rate of profit. This growing concentration leads in turn, at a certain point, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises. The so-called plethora of capital is always basically reducible to a plethora of that capital for which the fall in the rate of profit is not outweighed by its mass." (ibid. p. 359)

So Marx sees no contradiction in raising the so-called realisation problem in the middle of a chapter dealing with the falling rate of profit as the fundamental cause of capitalist crisis. It is precisely the fall in the profit rate that produces the crisis, and over-production (over-accumulation) is its form of appearance. To put it another way, the fact of over-producing firms may be regarded as the trigger, while the fall in the rate of profit is the cause of the crisis.

Moreover viewing the crisis as a crisis of profitability enables us to understand how the downturn prepares the basis for a later upswing. The essential mechanism is through the destruction of capital in a recession.

"The periodic devaluation of existing capital, which is a means immanent to the capitalist mode of production for delaying the fall in the profit rate and accelerating the accumulation of capital value by the formation of new capital, disturbs the given conditions in which the circulation and reproduction process of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process" (ibid. p. 262).

This destruction of capital is not mainly physical destruction and obsolescence. The destruction of capital values in a crisis actually prepares the way for a reduction in the organic composition of capital, and a revival in the rate of profit. In this way we can explain the entire boom-slump cycle.

In a slump unwanted stocks and unused machinery are sold in fire sales of the assets of bankrupt firms. "Secondly, however, the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use values...A large part of the nominal capital of the society i.e. of the exchange value of the existing capital is once for all destroyed, although this destruction, since it does not affect the use value, may very much expedite the new reproduction." (Theories of surplus value Volume II p. 496)

The crisis therefore prepares the way for a new upturn in the same way as naturalists explain that forest fires can actually prepare the woodland for a new period of growth.

Once Marx has explained how the movement in the rate of profit is the mainspring of economic crisis, he can introduce the ancillary factors that play their role in preparing for the individuality and complexity of any particular capitalist crisis.

Ancillary factors

Now we introduce those economic factors that give each specific historic period its own colour and character. They interact with the general movement of the capitalist economy, based as it is on movements in the rate of profit, accelerating its upswings and deepening its downward drops. The items below are just an indicative list of these epiphenomena.

Wages: One important economic effect of the crisis, of course, is that, by creating mass unemployment, the boss class has the whip hand in trying to drive down the wages of the employed workers. "Stagnation in production makes part of the working class idle and hence places the employed workers in conditions where they have to accept a fall in wages, even beneath the average; an operation that has exactly the same effect for capital as if relative or absolute surplus value had been increased while wages remained at the average." (Capital Volume III p. 363) The point is that movements in wage levels are based on the bargaining power of the contending classes, which is determined by the level of unemployment - itself dependent on the stage reached in the economic cycle.

Competition: Marx is also aware of the competitive struggle between individual capitalists, and its deleterious effect on their system as a whole, in the teeth of a crisis. Unlike Adam Smith, he does not see competition as the driving force of the falling rate of profit. "Competition, generally this essential locomotive force of the bourgeois economy, does not establish its laws, but is rather their executor. Unlimited competition is therefore not the presupposition for the truth of the economic laws but rather the consequence - the form of appearance in which their necessity reveals itself." (Grundrisse p. 552)

For Marx the fall in the rate of profit intensifies the pressure on individual capitalists to compete with one another. "(T)he fall in the profit rate that is bound up with accumulation necessarily gives rise to a competitive struggle. Compensation for the fall in the profit rate by an increase in the mass of profit is possible only for the total social capital and for big capitalists who are already established. New and independently operating additional capital finds no compensatory conditions of this kind ready made; it must first acquire them, and so it is the fall in the profit rate that provokes the competitive struggle between capitals and not the reverse"(Capital Volume III p. 365)

Raw material prices: Typically a prolonged upswing will produce a boom in the price of raw materials. We suppose in theory that an increase in the demand for an industrial product is likely to call forth an instant increase in its supply as its price goes up and capitalists, mindful of the profit motive, respond by boosting production. But there are biological and geological limits in the responsiveness of organic and mineral materials' production to demand conditions. As a result commodity prices are likely to respond spasmodically to changes in demand, with soaring peaks and dizzying drops.

This was most noticeable in the case of oil, which was actually the major basic cheap resource that fuelled capitalism in the ‘golden years' after the Second World War. Our ‘rigorous' neoclassical economists descend to the most casual empiricism when they characterise the 1974 crisis as an ‘oil crisis.' They are incapable of noticing that oil prices generally are determined by the demand for oil, given the supply constraints, and that the demand is provided by capital accumulation in the industrial countries.

Of course, since oil is an important resource for capitalism, if the price of oil rises towards the end of an upswing, that is going to cut into manufacturing costs and therefore profits. And because the rate of profit is likely to be falling by this stage, it is theoretically possible that the oil price hike could help push them over the edge. The important point is to see how commodity prices are located in the cycle of accumulation.

Stocks (Inventories): In a boom the capitalists exude confidence. They develop the belief that ‘this time it's different' - this time the boom will last forever. As a result they build up stocks of raw materials, confident in the good times to come. In doing so, of course, they act as excellent customers to the capitalists responsible for producing raw materials. They may also allow stocks of finished goods to accumulate in the warehouses, sure that they will be sold in the fullness of time.

It's a different story in a slump. Unsold stocks of finished goods are a millstone around their necks. They may well reduce output below what is actually required so as to realise the values of their unsold stocks first. They may be forced to do this because their profits have disappeared and that is the only way to escape bankruptcy. The niggardly approach they develop in the slump to husbanding raw materials hits the capitalists producing these raw materials, for whom this market is the only way they have of making a living.

Expectations: Capitalists have no way of knowing what the future will hold for them. Yet they have to develop a view as to how markets are likely to evolve. Under these conditions capitalists' expectations can acquire the power of a material force in the economy. Marx gleefully chronicles the swindles carried out by capitalists upon one another. Yet these swindles were indicative of a certain mentality - the belief that anyone with money could make more money. This outlook becomes dominant after a long period of boom because it reflects a certain reality.

On the other hand a crash caused by failed capitalist projects can drag quite reputable and viable capitalist firms and individuals down with it. That is the price capitalists pay for their system. Really the market division of labour makes them all interdependent upon each other and dependent upon the operation of the law of value. But they do not realise this. "(I)n the midst of accidental and ever-fluctuating exchange relations between the products, the labour time socially necessary to produce them asserts itself as a regulative law of nature. In the same way the law of gravity asserts itself when a person's house collapses on top of him." (Capital Volume I  p.168) After the crash, caution becomes the dominant mood. And of course that caution makes recovery slower.

Finance: When we discussed the tendency for the rate of profit to fall, we made it clear that by ‘profit' we meant surplus value as a whole and that the rate of profit is calculated as total surplus value divided by total capital invested. Yet surplus value is usually divided into rent, interest and profit (actually there are others who share in this surplus). All three factors can vary against one another.

Traditionally, the share of surplus value going to finance capital is called interest. Interest rates are connected to the boom-slump cycle in a complex way, analysed by Marx in Capital Volume III. We cannot treat the subject fully here.

"If we consider the turnover cycles in which modern industry moves - inactivity, growing animation, prosperity, over-production, crash, stagnation, inactivity, etc.,.. - we find that a low level of interest generally corresponds to periods of prosperity or especially high profit, a rise in interest comes between prosperity and its collapse, while maximum interest up to extreme usury corresponds to a period of crisis." (Capital Volume III p. 482)

After a recession, interest rates are generally low. Manufacturing capitalists are not making much profit, so they cannot afford to pay the banks much interest. They are not investing in new plant. They are certainly not investing with borrowed money, but gradually trying to cover their losses and restart production on a modest scale with the resources available to them. As production picks up, the demand for loan-capital from manufacturing capitalists rises.

When a crash is looming, "In times of pressure, the demand for loan capital is a demand for means of payment and nothing more than this; in no way is it a demand for money as means of purchase. The interest rate can then rise very high"...just when the industrial capitalists can least afford it. (Capital Volume III p. 647) In a crash everybody needs hard cash. The whole crazy process is about to begin again.

Trade: We would expect that, as profit-making opportunities re-emerge, capitalists would exploit the division of labour to introduce more economies of scale and divide the world ‘rationally' into areas that can produce goods at the lowest possible cost. This division of labour between capitalist firms is not organised but governed by market forces. We would therefore expect to see trade, including international trade, advance during the upswing and contribute to the strength of that upswing. We would also expect to see trade shrink in the downturn as each capitalist, and each capitalist nation-state, turns on the others, determined to load the burdens of the crisis on anyone but themselves.

As Armstrong (Capitalism since 1945) shows, trade liberalisation did not kick-start

the revival of the European and Japanese economies in the years right after the Second World War. The reason for this was the enormous imbalances in the world economy - in particular the complete dominance of the USA over the capitalist world. All the other advanced countries had massive deficits with America.

"Nor was continued European expansion based on massive import growth from the United States or elsewhere...Indeed, imports fell in 1948 and only regained 1947 levels in 1951. Meanwhile exports steamed ahead and by 1950 had regained prewar levels, with imports still some 10% below." (pp. 82-3) In other words the increased exports were not a sign of reviving economic health, but served just to repay accumulated debts.

When the road was clear, trade interacted dialectically with profit-making potential in production to push the upswing higher. "The years of the boom saw a phenomenal explosion of trade. Between 1951-3 and 1969-71 the volume of world trade in manufactures grew by 349% whereas the volume of output grew by 194%" (ibid. p. 153).

The slowdown hit trade as well as production. The slowdown in trade made the slowdown in production worse. "The growth of world trade slowed down sharply after 1973, growing at an average 3.8% a year over the period 1973-88, compared to 8.7% per year during the previous decade" (ibid. p. 296). As we shall see later, world trade actually fell in volume terms in the wake of the 1974 crash.

The crash of 1974

The 1974 recession was the first generalised recession of global capitalism since the Second World War. It marked the end of the ‘golden years'. We look briefly at this event as an example of the processes we have been analysing.

In the first instance bourgeois economists, desperate to show that crisis is not inherent in their system, assert that the 1974 crash was ‘all about inflation.' Certainly inflation was very high in 1974. In the US it was 11%, in Japan 21%, in Britain, 16%, in Germany 7%, and in Italy 19%.

World capitalism had actually thrived on the more moderate inflation, which had become a feature of the whole post-War era, gradually and insidiously increasing over the years. The causes of inflation are complex and cannot be dealt with here. But in Britain, for instance, the government budget deficit was 10% of GDP in 1975. Such deficits have to be paid for, and can contribute to the inflationary spiral.

The main point is that in 1974 inflation ceased to be a stimulant and started to become a major obstacle to economic growth, reflecting imbalances that were making the recession worse. Before 1974 Keynesian economists had perceived inflation as a sign that the economy was growing too fast, while unemployment was evidence that it was going too slow. Now the economy was simultaneously sending out messages that it was running too fast and too slow! The alternative, of course, was that Keynesianism had failed as an explanatory tool and as a remedy for economic problems. Economists started to mutter about ‘stagflation' and ‘slumpflation' and to develop alternative theories.

The second illusion spread about 1974 was that it was an ‘oil crisis'. It is true that the price of oil, the basic feedstock of post-War capitalism, quadrupled in less than a year. The oil price hike was not a result of sober economic calculation. After the 1973 Arab-Israeli War, oil producing Arab nations boycotted western countries because of their perceived pro-Israeli bias. Both they and their customers were then astonished at the economic power they had accumulated.

Itoh and Lapavitsas (Political economy of money and finance) put the oil shock in context. "The world market prices of primary products such as corn, wood, cotton, wool and minerals also began to rise rapidly in the later 1960s, reflecting the relative shortage of these products. The quadrupling of the price of crude oil within a few months in 1973-4 owed much to the fourth Arab-Israeli War, but was also integral to the general shortage of primary products due to the over-accumulation of capital in the advanced countries. The terms of trade relative to manufactures were raised by more than 10 per cent in 1970-3 and by nearly 70 per cent in 1970-4. The price of raw materials for manufacturing nearly doubled within the year prior to the first oil shock." (p. 193)

All the other epiphenomena mentioned in the abstract in the section above (Ancillary factors) came into play in a concrete and painful manner. At the end of the boom speculation and swindling were rife. More and more resources were devoted to the acquisition of raw materials and of land, the price of which was soaring. This feverish speculation was a product of the mentality that the good times would never end.

Banks had been lending more and more to speculators to buy land, thus creating the perfect bubble. The bubble duly burst at the end of 1974, threatening to take the banks with it.

In Britain a dodgy bunch called secondary banks (really property speculators) had to be saved by a rescue operation launched by the Bank of England. The alternative was that, as they sank beneath the waves, they would take large chunks of the financial establishment with them.

The overheated stock exchanges all over the world had the opportunity to chill out. In London share prices went from a high of 339 to a low of 150 in 1974.

Commodity prices, with the exception of oil, also collapsed. By December 1974 copper had lost 60% of its value, posted in April of the same year. Other commodities recorded similar losses. These dry statistics are actually a trail of tears for the poor people totally dependent on their sale on the world market.

World trade, which had actually grown faster than the national economies throughout the post-War period and was regarded as an ‘engine of growth' took a hit and fell in absolute terms in 1975. It fell because of a recession located in production and the profit-making engine of the capitalist economy.

The crash actually started in the car industry, and spread and spread.  Production fell sharply. From peak to trough over two years industrial production fell 14.4% in the USA, 19.8% in Japan, 11.8% in Germany, 10.1% in Britain, and 15.5% in Italy.

Naturally unemployment soared. By the trough it was 7.9 million in the US, 1.1 million in Japan, 1.1 million in Germany, 1.3 million in Britain and 1.1 million in Italy. The ‘full employment' era was over.

Capacity utilisation fell in the US from 83% in 1973 to 65% (less than two thirds) in 1975. 1973 was a peak year. But in the 1966 peak 92% of manufacturing capacity was in use. In 1969 it was 86.5%. Measured from peak to peak or from trough to trough capacity utilisation had been falling over the whole post-War period.

Why? Capacity utilisation, investment, output and employment were all falling in line with the rate of profit. Capitalists use manufacturing capacity to the maximum if they think they can make profits. They invest if they think they can make profits. They produce if they think they can make profits. They employ workers if they think they can make profits.

In the USA industrial (pre-tax) profits were 16.2% in the years 1948-50, 12.9% in 1966-70, and 10.5% in 1973. Then they crashed, and so did the economy.

In Britain our figures are taken from Glyn and Sutcliffe - British capitalism, workers and the profits squeeze. In 1950-54 the rate of pre-tax profit was 16.5%, in 1955-59 14.7%, in 1960-64 13%, in 1965-69 11.7% in 1968 11.6%, in 1969 11.1%, and in 1970 9.7%. As we have seen from Capitalism since 1945 quoted earlier, profits then recovered after the 1974-75 recession, but never regained the levels they achieved in the ‘golden years'.

Brenner's works confirm that, since the 1974 crash, the good times have gone for good. The rate of profit has been consistently lower in the 1970-1990 (or 1993) period than it was from 1950 to 1970. Within the later period, the rate of profit rose in times of boom and fell as the economy entered a recession, as it did in the 1950 - 1970 period.

 More recently Andrew Glyn's most recent book Capitalism unleashed is mainly concerned with other matters. On page 136 he does briefly suggest that the American capitalist class has achieved a clawback of the rate of profit up to the level of the early 1970s. But for Europe (pp. 145-6) and Japan (p. 141) the picture we have painted remains the same. Likewise Brenner's 2006 book The economics of global turbulence (an update of his previous work) is subtitled The advanced capitalist economies from long boom to long downturn. It does not challenge the link between movements in the rate of profit and the health of the capitalist economy. The fit is almost perfect.

We conclude that the tendency for the rate of profit to fall as explained by Marx is the key to understanding the cycle of boom and slump in the capitalist economy.

Appendix

Countervailing tendencies to the tendency for the rate of profit to fall. Cheapening the elements of constant capital.

The same process of rising productivity that cheapens wage goods can also cheapen capital goods and so reduce the organic composition of capital. Certainly this can happen in practice. But those who have argued that this process can indefinitely offset the tendency for the rate of profit to fall have all too often adopted a false method. The following quotes are taken from a historic debate (The tendency for the rate of profit to fall and post-war capitalism - AG and MB)

"The typical figures used to back up the LTRPF (law for the tendency of the rate of profit to fall) are the huge increase of fixed capital per worker, such as these shown in columns 1-3 below." (AG)

The author's Table 1 covers industry for the years 1953-72 and deals in percentage growth rates per year. Column 3 details Capital/Worker and shows the ratio rising by 8.8% (per year over the twenty year period) in the case of Japan, 4.8% for France, 6.0% for Germany, 4.8% for Italy, 4.2% for the UK and 2.2% for the USA.

This would appear fairly clear evidence to most people that the organic composition of capital did indeed rise over that period. But AG goes on to argue that, "These statistics for the capital stock at constant prices are attempts to measure the volume of the capital stock (i.e. number of machines before taking account of their cheapening due to productivity growth). They do not simply get rid of the effect of inflation, but they also ignore productivity growth - the devaluation of capital, which cheapens machines. We want to get at the value composition, i.e. what is relevant for the rate of profit which is calculated on the value of capital - not its physical volume - we have to account for this devaluation of capital. This I have done in a simple way by subtracting the growth of productivity (Column 4) from the growth of the volume of capital per worker to give the growth in the value of capital per worker." He is introducing the method pioneered by neoclassical equilibrium theorists in treating Marx's economic system as a set of simultaneous equations.
So AG introduces a Column 4, which measures Productivity (Devaluation of Capital), again measured as an annual rate. The figures for Japan are 8.9%, 5.4% for France, 5.0% for Germany, 5.0% for Italy, 3.0% for the UK and 2.7% for the USA.

He then proceeds to subtract the results of the percentage figures of Column 4 from the results in Column 3. A quick glance at the figures for Capital Growth per Worker in Column 3 will show that they show very similar national trends to the Productivity increase in Column 4. 

In fact, using this technique, Column 5 (which AG asserts shows the Ratio of Dead to Living Labour) records, in what AG regards as the ‘proper' measure of the organic composition of capital, that it actually falls over the period in Japan, France, Italy and the USA. Rises in Germany and the UK are insignificant and it seems from Column 5 that overall movements in the organic composition of capital are indeterminate. AG is treating the increase in productivity as causing an instant and equivalent fall in the price of capital goods.

To many readers who have followed this discussion so far, it is probably not surprising to find that productivity rises as capital per worker increases - as the reason for increasing the organic composition of capital is usually to raise the productivity of labour. But do input prices fall instantly and at the same rate?

AG's method in ‘depreciating' the rise in capital per worker by using productivity increases was criticised at the time in the course of the debate. AG is a scrupulous economic statistician. But this method is one that generations of conventional economists have used to try to assimilate Marx into neoclassical economic theory.

They in effect regard the economy as a set of simultaneous equations and Marx as an equilibrium theorist like them.

Marx on the other hand regarded accumulation as a process that takes place in real time. Marx was well aware that rises in productivity in the industries producing the elements of constant capital could lead to a fall in their unit price. But he regarded this adjustment of relative prices to be a messy and protracted result of competition between individual capitalists, not as an instantaneous outcome.

Marx also knew that what are outputs for one capitalist are inputs for another. He raised precisely that issue in his reproduction tables in Capital Volume II. The fall in the prices of these inputs through rising productivity will eventually be reflected throughout the economic system. But these commodity prices are devalorised (depreciated) in real time. This is not the same as the way a mathematician ‘solves' a set of simultaneous equations, a method applied by neoclassical economists to their ‘model' of the economy.

More recently, Andrew Kliman has trenchantly denounced this tendency to turn Marx into an equilibrium theorist (Reclaiming Marx's Capital). Neoclassical economists have for a century accused Marx of ‘inconsistency', beginning with von Bohm Bawerk's Karl Marx and the close of his system in 1896. In Capital Volume I, they say, Marx deals in values. In Volume III he introduces prices of production as modified values. Von Bohm Bawerk regarded this as a ‘contradiction.'

As we have indicated earlier Marx uses this procedure because after dealing with the production of capital in Volume I and its circulation in Volume II, he comes to The process of capitalist production as a whole in Volume III. This is where the formation of a general rate of profit is properly dealt with. Until he has derived the general rate of profit, Marx cannot move on to the formation of prices of production from values, so this too belongs in Volume III.

Following von Bortkiewicz's 1906-07 papers, neoclassical economists have dealt with what they call the contradiction in Marx by using simultaneous equations to transform an economic ‘system' made up of values into a system of prices. Not surprisingly, they arrive at different results from Marx in the process.

Kliman is an advocate of what is called the temporal single system interpretation (TSSI) of Marx's economics. By ‘temporal,' TSSI theorists mean that economic processes take place in real time, unlike the simultaneous equations that instantly devalue output prices as input prices for other capitalists.

The ‘single system' is contrasted to a dual system, where values have to be transformed into prices in the manner suggested by von Bortkiewicz. In fact prices and values are interdependent. As Kliman explains (p. 33), "First, prices of production and average depend on the general (value) rate of profit s/C, so there is no distinct price system. Second, prices influence value magnitudes, so there is no distinct value system either. The constant capital advanced and the value transferred depend upon the prices, not the values, of means of production."

When capitalists consider the costs of inputs in calculating their profits, there are three possibilities. (Kliman Chapter 6):

• They can use historical cost - costs they incurred at the time of purchasing the elements of production in the marketplace.
• They can use pre-production reproduction cost - costs of the commodities at the time of production
• They can use post-production replacement costs - costs of the constant capital at the time of sale and after production.

The example Kliman uses is that of apples used to make apple sauce - costing $0.60 when the apple is picked, falling to $0.50 when the apple sauce is made and $0.45 when the apple sauce is cooked and available for sale. It is unfortunate for the capitalist that the price of his input is continually falling in this way, but he can't buy apples as the cost of an input at 2pm ($0.45) when he actually starts making the sauce at 1pm - when apples cost $0.50. Yet that is the miracle that simultaneous equations perform when they turn output prices instantaneously into input prices!

Is it not obvious that the relevant cost of inputs is this pre-production reproduction cost? This remains the case even if the value of that constant capital later depreciates, and replacement costs therefore fall, as a result of technical progress in the production of means of production.

AG is therefore entirely wrong when he uses increases in productivity to instantaneously depreciate capital values, and thus produce a corresponding fall in the organic composition of capital and increase in the rate of profit, in his Column 5. Yet this procedure is at the heart of his ‘rebuttal' of Marx's tendency for the rate of profit to fall, as it has been for generations of neoclassically trained economists.

Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Baran and Sweezy-Monopoly capitalism, Penguin Books 1966

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, Verso Books 2006

Engels-Anti-Duhring, Foreign Languages Publishing House, Moscow 1959

Glyn and Sutcliffe-British capitalism, workers and the profits squeeze, Penguin Books 1972

Glyn-Capitalism unleashed, Oxford University Press 2006

Hegel-Hegel's Logic, Oxford University Press 1975

Itoh and Lapavitsas-Political economy of money and finance, Macmillan 1999

Kliman-Reclaiming Marx's ‘Capital,' Lexington Books 2007

Lenin-A characterisation of economic romanticism, Progress Publishers, Moscow 1967

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Marx-Capital Volume I, Penguin Books 1976

Marx-Capital Volume II, Penguin Books 1978

Marx-Capital Volume III, Penguin Books 1981

Marx-Theories of surplus value Volume II, Lawrence and Wishart 1969

Nove-The economics of feasible socialism, Allen and Unwin 1983

Rosdolsky-The making of Marx's ‘Capital,' Pluto Press 1977

Sweezy-The theory of capitalist development, Monthly Review Press 1956

See:

The Marxist theory of Crisis - part 1