Crisis theory : The law of a tendency of the rate of profit to fall
3CR Solidarity Breakfast presentation October 20th 2018
The law of the tendency of the rate of profit to fall is an important, but sometimes misunderstood, component of Marxist political economy. Here, in the text of one of his 3CR radio talks, noted Marxist historian Humphrey McQueen explains that a tendency is not an inevitability, that a tendency to decline can sometimes become its opposite and see the profit rate rise, and that even if the profit rate falls, absolute profit can still rise. Capitalism will not collapse of itself because of the tendency of the rate of profit to fall; rather, it must be confronted in its existence as a repressive state and overthrown by the organised working class. (Ed)
We’re back for another session on why crises recur. By definition, a crisis can’t be permanent. The eruption of 2008 is over but its consequences are still being felt. The cover story in the current issue of The Economist is headlined ‘The Next Recession’. The coming recession, they agree, will be worse than the last one. In part, that will be because some of the problems that led to 2008 have not been removed.
Wall street blues
Another reason why the stock market is down it that the earnings of the tech giants are at risk from Trump’s tariffs on components from China. Tech stocks now dominate almost every measure of the US economy. G-M and EXXON have been knocked off the perch. Threats to Google and Amazon etc therefore rock the whole system.
It is possible that this stock-market ‘correction’ is an early warning that the causes behind 2008 are on the way back. No one will ever be able to predict exactly when or precisely where the next crisis will erupt. Will it be triggered by the Italian banks? What about the 10 percent devaluation of the Chinese Yuan so far this year?
Of one thing we can be sure. The next crisis won’t be a carbon-copy of the last one – or of 1987 and still less of 1929. Most likely, the next eruption will begin somewhere that no one is watching. It’ll start ‘behind our backs’, to use another of Marx’s regular expressions about the il-logic of capitalism.
Over the years, I’ve heard life-long Marxists misrepresent Marx’s position by trimming the title down to ‘the falling rate of profit’. ‘The Law of the Tendency …’ had gone AWOL.
Even worse, some cut the title back to ‘falling profits’ as the explanation for crises. Marx argues the opposite. Absolute profits usually increase. It’s the rate of profit that has a tendency to fall.
For Marx, all laws are tendential. They are patterns of high probability. A limited number of outcomes are possible but no single outcome is inevitable.
Marx never tires of reminding us that Laws apply only if all other things are equal. In human affairs, nothing is the same from one day to the next.
A writer might catalogue all those complexities but be unable to unscramble them into an explanation. To announce that a situation is ‘dialectical’ doesn’t get you over a failure to integrate evidence with concepts.
Marx’s tendential laws are an excellent example of dialectical reasoning. In brief, we dialecticians hold that nothing is wholly one thing or another. The reason for this dualism is that everything is undergoing change. In addition, those changes combine an unfolding of inner forces with the impress from external influences.
Marx includes inner drives and outside pressures for his ‘Law of a tendential fall in the rate of profit’. That is why the chapter headed ‘The Law Itself’ has to be read along with the following pair. The reason is clear from their titles: one is headed ‘Counteracting Factors’, and the other is ‘Development of the Law’s Internal Contradictions’.
Since Marx wrote 150 years ago, new counteracting factors and new contradictions have appeared. Examples include:
Put counter-tendencies and contradictions together, and we see why a law about falling rates of profit is never going to be more than tendential.
Here is the one and only universal law: everything is subject to change. Change is the one constant – though its rate is unstable.
(see Michael A. Lebowitz, ‘Marx’s Falling Rate of Profit, A Dialectical view’, Canadian Journal of Economics, IX (2), May 1976, on https://www.surplusvalue.org.au/Marxism/marx%20ltlrpf%20lebowitz.pdf )
What is the rate of profit?
I. stroppy proles
Now the numbers are 20 – not 10 for wear-and-tear; 380 instead of 290 for raw materials etc; but only 80 for wages. The new total is 480 units. Absolute profit has gone up from 100 units to 110. Put 110 over 480 and we get a rate of close to 23 percent. The rate has dropped from 25 percent while the absolute profit has increased by 10 percent.
What matters to the agents of capital is the rate of return on investment. A profit of one billion dollars sounds like a lot. But if the corporation has spent $50 billion, its rate of profit is only 2 percent. It’s losing money.
Meanwhile, all the rival firms are investing in more efficient equipment. Their combined efforts mean more products to sell. Only after doing so will any of them realise a profit of any magnitude or rate.
NB The tendential law about the rate of profit can work out in the opposite direction. One of Marx’s counter-tendencies is where capital becomes strong enough to reduce real wages. The rate of profit then has a tendency to rise – not to fall. That’s been happening for nearly forty years in the US. In the aftermath of 2008, profits soared while wages stagnated, at best. That is why we need to break bad laws to reclaim our power to strike.
Marx provides an explanation built on over-production. But over-production of what? His explanation is at one stage removed from the workers’ demand for consumer goods. For him, the system seizes up from an excess capacity of production goods. A crisis does not flow directly from the over-production of the commodities turned out on those machines.
To give one example of the difference. A crisis is compounded by the failure of airlines to order more 757s. The failure of passengers to buy enough tickets to fill all the seats is a second-order event. Competition drove the excess capacity of seats. Each airline seeks to capture a bigger slice of the flying public. Each buys more aircraft than they can fill. Airlines then pull back on new orders. Aeronautical corporations in turn order less raw material. The squeeze goes down the production chain.
That’s probably enough on crisis theory for this hour in the morning. As ever, the notes are on the Solidarity Breakfast site.
Decades later, capital still rules. How so?
Behind the power of the corporates stands the power of their state. Capital will rule for as long as its state apparatuses can shift the burden onto working people; onto small businesses; and onto competing corporates, especially those in rival nation-market-states. The outcome of every crisis is decided by the relative strengths of the contending classes.
Applying Marx’s critical analysis of how capital’s drive to expand brings on crises is part of how we strengthen our class for that fight.