Spring 1999

Capital, Volume 3

Part 3

 

The Law of the Tendential Fall

The primary strength of the law of the rate of profit, it seems to me, is that Marx links it directly to the rise in productivity: the rise in productivity leads necessarily to a fall in the rate of profit. I see three steps in this logical progression.

First Marx is asking us to take for granted here that capital must always strive to increase productivity. That is something that he spent a lot of time on in volume 1 and it doesn't seem a very controversial claim. In short, the primary reason for this is that the increase of relative surplus value involves increased productivity, and, since the drive for s-v (profit) is the sole motor driving the individual capitalist, it is not difficult to accept this as necessary. Also worker conflict often forces capitalist's to mechanize further and thus increase productivity in order to divert or defer the worker threat.

The second step in the logic is that increased productivity implies a higher composition of capital: that is, an increase of constant capital with respect to variable capital. Just to clarify, let's consider this in terms of circulating and fixed capital separately. The fact that circulating capital rises with respect to variable when productivity rises is inherent to the definition of productivity itself. An increase in productivity simply means that more material is worked up (say cotton is spun into thread) by the amount of labor-power. For example, a rise in productivity means that one worker who used to be able to spin 5 lb of cotton in a day can now spin 10 lb. Fixed capital rises too to the extent that the increased productivity is made possible by the introduction of machinery. Therefore, the "progressive decline in the variable capital in relation to the constant capital, and hence in relation to the total capital as well" that is referred to by "the progressively rising organic composition ... of the social capital as a whole ... is just another expression for the progressive development of the social productivity of labour" (318).

The third and final step is that a higher composition of capital means a lower rate of profit (if we assume a constant rate of exploitation or even a higher one within limits). "Since the mass of living labour applied continuously declines in relation to the mass of objectified labour that is sets in motion ... the part of this living labour that is unpaid and objectified in s-v must also stand in an ever-decreasing ratio to the value of the total capital applied" -- and this last ratio is precisely the rate of profit.

So here in the law of the tendential fall we have a precise way in which capital by pursuing its own interest necessarily undermines its own interest, while furthering its own life prepares its own death.

Now, is the law true? No one contests that higher productivity, high composition of capital taken on its own leads to lower rate of profit. But there are also many factors that lead in th eopposite direction, raising the rate or mass of profit. The debate, then, has to be over the relative strength of these various factors.

Marx himself points to mitigating circumstances or counteracting factors. The two central ones, it seems to me, are the rising rate of exploitation and accelerated accumulation. The first of these, the rising rate of exploitation, acts within the rate of profit and the second, accelerated accumulation, acts outside it.

Now, the rate of exploitation rises along with the increase in relative surplus value and the increased productivity through technological innovation. This rising rate of exploitation counteracts the rising composition of capital within the determination of the rate of profit. Remember that Marx established in Part 2 that the rate of profit, since it is the surplus value with respect to the total capital applied, depends on both the rate of s-v (exploitation) and the composition of capital. So here we have it that the two determining factors of the rate of profit are moving in opposite directions. Marx's assumption or claim is that as productivity rises the composition of capital will increase more than the rate of exploitation. To the extent that this is the case, the rate of profit will still go down despite the effect of the rise of the rate of exploitation. "The rate of profit does not fall because the worker is less exploited, but rather because less labour is generally applied in relation to the capital invested" (354).

Accumulation is accelerated insofar as increasing productivity and increasing the composition of capital requires an ever larger scale of production. "The reasons that concentrate massive armies of workers under the command of individual capitalists are precisely the same reasons as also swell the amount of fixed capital employed, as well as the raw and ancillary materials, in a growing proportion as compared with the mass of living labour applied" (326). The reasons specifically are relative surplus value and increasing productivity. This leads to both higher composition and a higher concentration of capital. This greater scale of production, with more workers even if in smaller proportion to constant capital, can allow the capitalist a greater mass of profit. "The mass of profit certainly does grow, even at a smaller rate of profit, as the capital laid out increases. But this brings about a simultaneous concentration of capital, since the conditions of production now require the use of capital on a massive scale. It also leads to the centralization of this capital, i.e. the swallowing-up of small capitalists by big, and their decapitalization" (354). In fact, accumulation and the falling rate of profit accelerate each other -- the falling rate of profit requires a larger mass to make the same profit and the larger scale drives the rate of profit down in turn. It might be seen as countervailing, though, with respect to the mass of profit.

This is how we can understand that this is a "double-edged law" (326) in that it is decline in the rate of profit that is coupled with an increase in the absolute mass of profit. We should keep in mind that this can only be the case if the growth of the total capital is more rapid than the fall in the rate of profit.

 

Now, you might say, why should this law of the tendential fall really be a problem? Why should it be a tragedy for the capitalist if the rate of profit falls as long as the mass of profit can be maintained or increase? Marx claims that the falling rate of profit is indeed a problem or a barrier for capital, and perhaps a fatal one: "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" (350). I take this to mean it reduces the incentive to invest in production. Marx develops this 20 pages later. "The rate of profit, i.e. the relative growth in capital, is particularly important for all new off-shoots of capital that organize themselves independently. And if capital formation were to fall exclusively into the hands of a few existing big capitals, for whom the mass of profit outweighs the rate, the animating fire of production would be totally extinguished. It would die out. It is the rate of profit that is the driving force in capitalist production, and nothing is produced save what can be produced at a profit" (368). So part of the danger is the danger of a monopoly of large capitals who would extinguish the animating fire (I assume by eliminating competition and hence innovation). That may itself be a significant problem, but to reinforce the catastrophy of the falling rate of profit for capital Marx goes on with several other reasons that result from the falling rate: "it promotes overproduction, speculation and crises, and leads to the existence of excess capital alongside a surplus population" (350). This law thus demonstrates for Marx "the restrictiveness and the solely historical and transitory character of the capitalist mode of production" (350). Let me work through some of these catastrophes because they are not immediately clear to me. The two I want to elaborate correspond to what Marx sees as two contradictions that follow from or form part of the barrier: 1) the contradiction between the needs of capital and social needs; and 2) the contradiction between the development of productive forces and the relations of production.

1) Let's start with the paradoxical notion of surplus capital alongside surplus worker population. This is paradoxical because one would initially assume that the excess capital would engage the excess worker population in an additional production process. Marx explain that surplus capital means only surplus means of production "that can function as capital, i.e. can be applied to exploiting labour at a given level of exploitation." It should be no contradiction, then, that this surplus of capital can co-exist with a surplus worker population. The surplus population of workers "are not employed by this excess capital on account of the low level of exploitation of labour at which they would have to be employed, or at least on account of the low rate of profit they would yield at the given rate of exploitation" (364). The barrier that blocks this excess capital from coming together with and employing this excess population, in other words, is the low level of exploitation that they would be able to impose. Hence the contradiction between the needs of capital and social needs: "it is [the rate of profit] that determines the expansion or contraction of production, instead of the proportion between production and social needs, the needs of socially developed human beings" (367).

This first notion of the barrier posed by the rate of exploitation is fine as far as it goes, but we had said before that just in terms of increases in productivity capital tends to raise rather than lower the rate of exploitation. In order to understand this we have to look at the barrier to the rate of exploitation posed by overproduction, or really by the problem of realization. Now, the overproduction of commodities, like the overproduction of capital, is also paradoxical because alongside these excess commodities is a population that needs them. Overproduction of commodities, however, does not mean that there are too many commodities but rather that there is not a power of consumption equal to them. In other words, it's not really overproduction but underconsumption. The worker may be exploited in production but until the commodities can be sold that exploitation cannot be realized. Now, with the increase of productivity and the consequent rise in the composition of capital, variable capital constitutes an increasing small part of the total value of the commodities. That means that the workers's power of consumption is increasingly small with respect to the commodities produced. The workers simply don't have the money to buy the commodities produced -- this was always a problem but it is exacerbated here. And Marx reminds us if you think that the capitalists only have to exchange their commodities with each other and consume them, they you are forgetting the whole character of capitalist production and that what is primary is the valorization of capital not its consumption (366). This is I think the fundamental barrier here: "the more productivity develops, the more it comes in to conflict with the narrow basis on which the relations of consumption rest" (353). This is what Marx means by the conflict between the development of production forces and capitalist relations of production: "the contradiction in this capitalist mode of production consists precisely in its tendency towards the absolute development of productive forces [i.e., the increase of productivity] that come into continuous conflict with the specific conditions of production in which capital moves, and can along move" (366). For conditions here read relations of production.

I want to point out here how close these formations are to the language of the Manifesto written some 20 years before. As you remember, when M&E explain this movement of the history of modes of production in the Manifesto, they do so in terms of the development of productive forces, which at a certain point come into conflict with the relations of production that contain them, experience those relations as fetters, and burst them asunder. In the Manifesto for the passage from feudalism to capitalism they wrote: "the feudal relations of property ... became no longer compatible with the already developed productive forces; they became so many fetters. They had to be burst asunder; they were burst asunder" (214). The same process, they said, will mark the passage from capitalism to communism: capitalism has become "a society that has conjured up such gigantic means of production and of exchange" that it is like "the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells" (214). More specifically, "the conditions of bourgeois society are too narrow to comprise the wealth created by them" (215). In other words, the relations of production are too narrow to contain or fulfilled the needs of the expanding productive forces.

Here in Volume 3 of Capital "the narrow basis on which the relations of consumption rest" is precisely the way in which capitalist relations of production pose a barrier or fetter to the continued development of productive forces, the continued development of the productivity of labor. Or as Marx writes, "the contradiction in this capitalist mode of production consists precisely in its tendency towards the absolute development of productive forces that come into continuous conflict with the specific conditions of production in which capital moves, and can alone move" (366). And further, like in the Manifesto, here too precisely this movement is what is preparing the terrain for communism. "The development of the productive forces of social labour is capital's historic mission and justification. For that very reason, it unwittingly creates the material conditions for a higher form of production" (368). This is one of the few passages in Capital in which the passage to communism is invoked.

[p. 373: capital is an impersonal social power]