{"id":518,"date":"2019-01-22T00:14:52","date_gmt":"2019-01-22T00:14:52","guid":{"rendered":"https:\/\/wsm.prolerat.org\/?page_id=518"},"modified":"2019-10-17T23:40:24","modified_gmt":"2019-10-17T22:40:24","slug":"an-introduction-to-marxian-economics-2-the-rate-of-profit","status":"publish","type":"page","link":"https:\/\/www.worldsocialism.org\/wsm\/an-introduction-to-marxian-economics-2-the-rate-of-profit\/","title":{"rendered":"An introduction to Marxian Economics 2: the rate of profit"},"content":{"rendered":"\n<p>This article, written in April 1971, features in the S.P.G.B. pamphlet <em><a href=\"https:\/\/www.worldsocialism.org\/spgb\/publications\/an-introduction-to-marxian-economics-2-the-rate-of-profit\/\">Marxian Economics<\/a><\/em><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">What is the rate of profit?<\/h3>\n\n\n\n<p>The rate of profit measures the return on invested capital over a given period and is\nusually expressed as a percentage. So, if a capital investment of \u00a3 100,000 turns over\nin a year and the profit is \u00a320,000 then the rate of profit is 20,000\/100,000 or 20 per\ncent per annum.<\/p>\n\n\n\n<p>If a capitalist was starting from scratch he would have to use some of his original\n\u00a3100,000 to buy a factory building and to equip it with machines. He would then have to\nbuy raw materials and pay for electricity to power the machines. Finally he would have\nto use some of his capital to hire workers and pay their wages. Let us assume that the\nfactory, the machines, the raw materials and the electricity cost him \u00a380,000 and that\nhis wages bill comes to \u00a320,000.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The organic composition of capital<\/h3>\n\n\n\n<p>Marx isolated the capital invested in hiring the workers because, the only source of new\nvalue being the exercise of labour power, this was the part of the capital which\nincreased to provide free for the capitalist a profit, or surplus value, of in this case\n\u00a320,000. Marx called this part the variable capital (v). The other part invested in the\nfactory, machines, etc. was just as essential to production but its value was only\ntransferred to the final product without any change in its size. Which was why Marx\ncalled it constant capital (cc). There are various relations between total capital (C) and\nits components:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>s\/C or s(cc + v) is the rate of profit<\/li><li>s\/v is the rate of surplus value<\/li><li>cc\/v is the organic composition of capital<\/li><\/ul>\n\n\n\n<p>The organic composition of capital expresses in value terms the technical relationship\nbetween the productive apparatus and the number of workers needed to operate it,\nwhat academic economists would call the degree of capital intensity.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The falling rate of profit<\/h3>\n\n\n\n<p>We will assume that in the second year our capitalist re-invests all of his \u00a320,000 profit.\nIf there has been no technical progress he would divide it as previously, using \u00a316,000\nas new constant capital and \u00a34,000 as new variable capital. Assuming that the rate of\nsurplus value is unchanged at 100 per cent, his profit will be \u00a324,000 in that year and\nthe rate of profit 24,000\/120,000, still 20 per cent.<\/p>\n\n\n\n<p>But assume that there had been technical progress and that he only needed to use\n\u00a31,000 as new variable capital and so could use \u00a319,000 as new constant capital (this\nis only an example; we are assuming here an unrealistically fast rate of technical\nprogress). The organic composition of the total capital would rise but, with the rate of\nsurplus value remaining the same, the rate of profit would fall to 21,000\/120,000 or 17\u00bd\nper cent.<\/p>\n\n\n\n<p>So, insofar as technical progress raises the organic composition of capital it reduces the\nrate of profit. As labour power is the only source of surplus value and as the amount of\nsurplus value depends on the amount of variable capital, if the share of v in total capital\nfalls (and if s\/v remains constant) then the rate of profit must fall. This spectre of the rate\nof profit falling as the stock of constant capital grew worried the classical economists\nAdam Smith and Ricardo and their successors like John Stuart Mill. They foresaw that,\nif this went on, the profit-motivated capitalist system would soon reach a state of chronic\nstagnation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Why so slow?<\/h3>\n\n\n\n<p>Marx approached the problem from a different angle. He wanted to know why the fall in\nthe rate of profit had in practice been so slow. There must be, he deduced, some\ncounteracting influences and, using the <a href=\"https:\/\/www.worldsocialism.org\/wsm\/economics\/wsm\/an-introduction-to-marxian-economics-1-the-labour-theory-of-value\/\">labour theory of value<\/a>, was able in Chapter XIV\nof Volume III of Capital to work out what these influences must be.\nNow, what does technical progress mean besides a growing capital intensity? Surely an\nincrease in productivity as machines replace human muscle power. Applied to the\nmachine-making industry this would mean that more machines could be produced in a\ngiven time so that the value of each of them would fall. This effect Marx called\n&#8220;cheapening the elements of constant capital&#8221;. Academic economics calls it &#8220;capital\nsaving&#8221;.<\/p>\n\n\n\n<p>Increasing productivity in the industries making goods consumed by \nthe workers has a\nsimilar effect on variable capital. It will in fact increase the amount \nof surplus value by\nshortening the time during which the worker reproduces the value of his \nown labour\npower, which is the only part of the working day the capitalist has to \npay for (this does\nnot necessarily mean a decline in the workers standards of living, as \nexplained in the article &#8220;Relative Wages&#8221;). The rate of surplus value \ncan also be\nraised by increasing the intensity of work, by lengthening the working \nday and even by\ndepressing wages below their value. Competition for jobs will also keep \nwages down\nand so limit how much the capitalist has to invest as variable capital.<\/p>\n\n\n\n<p>This-the cheapening of the elements of constant capital and the rise in the rate of\nsurplus value-was Marx&#8217;s explanation as to why the rate of profit only tended to\nfall slowly. He\naccepted the classical economists&#8217; view that the rate was falling but expected this to be\na slow, long-run tendency. He did not believe that the rate of profit was always falling\nsince at times the counter-tendencies could be the stronger.<\/p>\n\n\n\n<p>The rate of profit can also be raised by reducing the period in which the capital (or part\nof it) is turned over. In our example the \u00a3 100,000 turned over in a year; if this was\nreduced to six months the amount of profit would become \u00a340,000 and the rate of profit\n40 per cent per year. The development of commercial and financial institutions\nindependent of industrial enterprises-and the introduction of shift-working and other\nforms of &#8220;rationalisation&#8221;-tends to shorten the turnover period and so to raise the annual\nrate of profit.<\/p>\n\n\n\n<p>How the rate of profit moves even in the long run cannot be predicted from pure theory.\nThis movement depends on which of the influences at work proves to be the stronger at\nany particular time or over any particular period, a fact that can only be discovered by\nempirical research. Some attempts have been made to estimate what has happened in\nthe past hundred years but the results are conflicting. It has been suggested that the\norganic composition of capital stopped rising about 1920 due to &#8220;capital-saving&#8221;\ninventions.<\/p>\n\n\n\n<p>Because Marx&#8217;s theory of the tendency of the rate of profit to fall is meant to describe a\nslow process which would only become evident in the long run it cannot be used to\nexplain periodic crises. The onset of a crisis is, however, often linked with a fall in the\nrate of profit as wages rise in a boom &#8211; but a fall caused by a short term fall in the rate of\nsurplus value rather than by long term changes in the organic compositions of capital.<\/p>\n\n\n\n<p>It is true that Marx does (Chapter XV) discuss crises in connection with the falling rate of\nprofit, but with a view to explaining their significance as a counteracting tendency. For,\nduring a depression, the value of the constant capital depreciates considerably while\nsome of its elements (machinery, stocks) are often physically destroyed. To say that\ncrises help offset the long-term tendency of the rate of profit to fall is quite different from\nsaying (as John Strachey does in his <em> The Nature of Capitalist Crisis<\/em>) that crises are\ncaused by it.<\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p>Back to the <a href=\"https:\/\/www.worldsocialism.org\/wsm\/economics\">Economics index<\/a><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p>Back to the <a href=\"https:\/\/worldsocialism.org\/wsm\">World Socialist Movement home page<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>This article, written in April 1971, features in the S.P.G.B. pamphlet Marxian Economics What is the rate of profit? The rate of profit measures the return on invested capital over a given period and is usually expressed as a percentage. So, if a capital investment of \u00a3 100,000 turns over in a year and the&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"magazine_newspaper_sidebar_layout":"","footnotes":""},"class_list":["post-518","page","type-page","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/pages\/518","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/comments?post=518"}],"version-history":[{"count":1,"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/pages\/518\/revisions"}],"predecessor-version":[{"id":2504,"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/pages\/518\/revisions\/2504"}],"wp:attachment":[{"href":"https:\/\/www.worldsocialism.org\/wsm\/wp-json\/wp\/v2\/media?parent=518"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}