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The Falling Rate of Profit

In the early part of the 19th century the economist Ricardo had his own simple idea about the falling rate of industrial profit. Essentially his idea was that there is a natural tendency of profits to fall because, or so he believed, more and more labour was required to produce foodstuffs and this meant higher prices and higher wages. In the 3rd Edition 1821 of his Principles of Political Economy, where he dealt with this, he went on to say:

“This tendency ... is happily checked at repeated intervals by the improvements in machinery connected with the production of necessaries, as well as by discoveries in the science of agriculture, which enables us to relinquish a portion of labour before required, and therefore to lower the price of the prime necessaries of the labourer.” (Everyman Library, page 71.)

Half a century later Marx went into this much more thoroughly and dealt with it in Chapter XIV of the 3rd Volume of Capital. He held that there is a general tendency for the rate of profit to fall because of the greater quantity of constant capital in production (plant, machinery, raw material, etc.) and the relatively smaller quantity of variable capital, i.e., that part spent on wages. He explained in the opening paragraph of the chapter that whereas other economists were looking for an explanation of the falling rate of profit the problem for him was the opposite one, namely of finding out why the fall is not greater and more rapid. He wrote:— “There must be some counteracting influences at work, which thwart and annul the effects of this general law, leaving to it merely the character of a tendency.” In Chapter XIV he dealt briefly with these counteracting factors which included raising the intensity of exploitation, and the cheapening of the elements of constant capital. He therefore expected the fall to be slow.

He recognised that the rate of profit could rise as well as fall, and in an example he gives (page 91) he showed that in a cotton spinning factory where the average rate was about 33 per cent, this was abnormally high because at that time cotton was very cheap and the price of yarn was very high.

It would, of course, not be easy to find out what the average rate of profit is over the whole field of production and, in order to get a true average rate, it would be necessary to look at a period of several years, not merely at what is happening at the moment.

While the average rate of profit rises and falls with the variations of good and bad trade it is quite evident that there cannot have been a continuing fall of the rate of profit for 150 years. If there had been, the rate of profit now would be very low, which of course it is not. An American writer, Joseph M. Gillman in his book The Falling Rate of Profit (Cameron Associates—New York, 1958) in an analysis of the course of events in America reaches the tentative conclusion that while the rate of profit was falling it is now rising. He writes: “Whereas for the years, before about World War I the historical statistics seem fully to support these theories of Marx, after that war the series studied appear generally to behave in contradiction to the Marxist expectations.” We can get an approximate idea of the amount and movement of the British rate of profit from the Financial Times index of profits which covers several thousand companies with total capital running into over £5,000 million. Financial Times figures for the profits of 2,600 industrial companies in 1959 show that total profit less depreciation represents 21 per cent of the total of the issued ordinary capital plus capital and revenue reserves. Figures from the same source show an apparent slow fall in the percentage in the years 1951 to 1959, but there is reason to believe that this apparent fall is a reflection of the fact that, in a time of inflation, with steadily rising prices, balance sheet figures of capital values and depreciation are an underestimate. At the end of the war capital assets and depreciation would usually appear at a figure not much above the pre-war levels. In the years since the war this has been gradually corrected. If it had been corrected at the outset the rate of profit would probably have been stable or may even have shown a steady increase. It is certainly likely that between 1958 and the present time, when total profit has been rising fast, the rate of profit has also been rising.

This is not an academic question because round it have been built theories of the onset of crises. John Strachey in his pre-war book The Nature of Capitalist Crisis took it for granted that the rate of profit was falling and that it was falling rapidly. He then argued that because of this fall in the rate the capitalist has to keep on enlarging his capital in order to get the same mass of profit out of a falling rate if profit.

“This is the formula of the minimum rate of accumulation necessary to capitalism. If ever, and whenever, the rate of accumulation falls below this level, the system must, and does jam. For it becomes more profitable for the capitalists to restrict than to expand production.” (p.247)

It is not particularly important that Strachey no longer holds this view for there are certainly others who still hold it. But in practice it by no means follows that boards of directors behave in this way. Some of them and certainly the very large companies take a longer view and do not curtail investment because of a current fall in the rate of profit. As a case in point the Unilever group reported a quite drastic fall in their rate of profit in 1957 but because they take a longer view, their capital investment did not decline but was increased. The evidence would seem to show that the rate of capital investment is less influenced by the current rate of profit than by the long term expectations of over-production likely to arise in the near or more distant future.

One of the factors that at the present time may be helping to raise the rate of profit is the merger of many large groups of companies and the economies of capital expenditure that can be achieved that way, while another is the growth of shift working which enables them to keep their plant running more or less round the clock.