The Marxist theory of economic crises in capitalism – part two

In the first part of this double post, I dealt with whether Marx had a coherent theory of crises or not. I reckoned that Marx’s theory was based on his law of the tendency of the rate of profit to fall and that this law was realistic and coherent.  I also argued that Marx did not dispense with this law in his later works that some have claimed and it remains the best and most compelling theory of regular and recurrent economic crises in capitalism.  In this second part, I shall provide some empirical evidence from modern capitalist economies to support this view.  This completes what is really just a short essay on Marxist economic crisis theory – as I see it – with much left out.

Does Marx’s law fit the facts?

Some Marxist critics of Marx’s law of profitability reckon that the law cannot be empirically proven or refuted because official statistics cannot be used to show Marx’s law in operation.  But there are plenty of studies by Marxist economists that show otherwise.  The key tests of the validity of the law in modern capitalist economies would be to show whether 1) the rate of profit falls over time as the organic composition of capital rises; 2) the rate of profit rises when the organic composition falls or when the rate of surplus value rises faster than the organic composition of capital; 3) the rate of profit rises, if there is sharp fall in the organic composition of capital as in a slump.  These would be the empirical tests and there is plenty of empirical evidence for the US and world economy to show that the answer is yes to all these questions.

For example, Basu and Manolakos applied econometric analysis to the US economy between 1948 and 2007 and found that there was a secular tendency for the rate of profit to fall with a measurable decline of about 0.3 percent a year “after controlling for counter-tendencies.”  In my work on the US rate of profit, I also found an average decline of 0.4 percent a year through 2009. And here is a figure by G Carchedi for the rise in the organic composition of capital (OCC) in the industrial sector of the US since 1947 versus the average rate of profit (ARP).  It tells the same story.

US ARP and OCC (i.e. C/V)


There is a clear inverse correlation between a rising organic composition of capital and a falling rate of profit.

Can Marx’s law explain crises?

How does Marx’s law of profitability work as an explanation and forecast of slumps in capitalist economies?  The law leads to a clear causal connection to regular and recurrent crises (slumps).  It runs from falling profitability to falling profits to falling investment to falling employment and incomes.  A bottom is reached when there is sufficient destruction of capital values (the writing off technology, the bankruptcy of companies, a reduction in wage costs) to raise profits and then profitability.  Then rising profitability leads to rising investment again.  The cycle of boom recommences and the whole ‘crap’ starts again, to use Marx’s colourful phrase.  There is a cycle of profit alongside the long-term tendency for the rate of profit to fall.

Profit cycle

The evidence of this causality between profit and investment is available.  Jose Tapia Granados, using regression analysis, finds that, over 251 quarters of US economic activity from 1947, profits started declining long before investment did and that pre-tax profits can explain 44% of all movement in investment, while there is no evidence that investment can explain any movement in profits.  I find a higher ‘Granger causality’ of 60% from annual changes in profit and investment (unpublished) and a correlation of 0.67 for the period since 2000.  And see this by G Carchedi (Carchedi Presentation).

In the period leading up to the Great Recession 2008-9, we can see the causality visually for US profits, investment and real GDP in the graphic below.  The mass of US corporate profit peaks in mid-2006, investment and GDP follows two years later.  Profits turn back up in late 2008 and investment follows one year later.

profits lead

There are two basic regularities shown by the data: that a change in profits tends to be followed next year by a change in investment in the same direction; and that a change in investment is usually followed in a few years by changes in profits in the opposite direction.  Thus we have a cycle.  From these results, the “regularity” of the business cycle, and the fact that profitability stagnated in 2013 and declined in 2014 (and now the mass of profits in 2015) after growing between 2008 and 2012, it can be concluded with some confidence that a recession of the US economy, which will be also part of a world economic crisis like the Great Recession, will occur again in the next few years.

And Marx’s law of the tendency of the rate of profit to fall makes an even more fundamental prediction: that the capitalist mode of production will not be eternal, that it is transitory in the history of human social organisation. The law of the tendency predicts that, over time, there will be a fall in the rate of profit globally, delivering more crises of a devastating character. Work has been done by modern Marxist analysis that confirms that the world rate of profit has fallen over the last 150 years.  See the graph below (data from Esteban Maito and ‘doctored’ by me).

world rate of profit Maito

Maito’s data for the 19th century have recently been questioned (DUMENIL-LEVY on MAITO), but in a recent work using different sources and countries, I find a similar trend for the post-1945 period globally (Revisiting a world rate of profit June 2015).  And earlier groundbreaking work by Minqi Li and colleagues, as well as by Dave Zachariah, show a similar trend.

As Maito concludes: “The tendency of the rate of profit to fall and its empirical confirmation highlights the historically limited nature of capitalist production. If the rate of profit measures the vitality of the capitalist system, the logical conclusion is that it is getting closer to its endpoint.  There are many ways that capital can attempt to overcome crises and regenerate constantly. Periodic crises are specific to the capitalist mode of production and allow, ultimately, a partial recovery of profitability. This is a characteristic aspect of capital and the cyclical nature of the capitalist economy. But the periodic nature of these crises has not stopped the downward trend of the rate of profit over the long term.  So the arguments claiming that there is an inexhaustible capacity of capital to restore the rate of profit and its own vitality and which therefore considers the capitalist mode of production as a natural and a-historical phenomenon, are refuted by the empirical evidence.”

So the law predicts that, as the organic composition of capital rises globally, the rate of profit will fall despite counteracting factors and despite successive crises (which temporarily help to restore profitability).  This shows that capital as a mode of production and social relations is transient.  Capitalism has not always been here and it has ultimate limits, namely capital itself.  It has a ‘use-by-date’.  That is the essence of the law of profitability for Marx.

Alternative theories

This is not to deny other factors in capitalist crises.  The role of credit is an important part of Marxist crisis theory and indeed, as the tendency of the rate of profit to fall engenders countertendencies, one of increasing importance is the expansion of credit and the switching of surplus value into investment in fictitious capital rather than productive capital to raise profitability temporarily, but with eventually disastrous consequences, as The Great Recession shows (The Great RecessionDebt matters).

Alternative theories of crisis like underconsumption, or the lack of effective demand, are taken from theories from the reactionary Thomas Malthus and the radical Sismondi in the early 19th century and then taken up by Keynes in the 1930s and by modern inequality theorists like Stiglitz  and post-Keynesian economists.  But lack of demand and rising inequality cannot explain the regularity of crises or predict the next one.  These theories do not have strong empirical backing either (Does inequality causes crises).

Professor Heinrich, after concluding that Marx did not have a theory of crisis and dropped the law of profitability, does offer a vague one of his own: namely capital accumulates and produces more means of production blindly.  This gets out of line with consumption demand from workers.  So a ‘gap’ develops that has to be filled by credit, but somehow this cannot hold up things indefinitely and production then collapses.  Well, it is a sort of a theory, but pretty much the same as the underconsumption (overproduction) theory that Heinrich himself dismisses and Marx dismissed 150 years ago.  It seems way less convincing or empirically supported that Marx’s own theory of crisis based on the law of profitability.

No other theory, whether from mainstream economics or from heterodox economics, can explain recurrent and regular crises and offer a clear objective foundation for the transience of the capitalist system.

Why not Marx’s law of profitability?

Finally, why do Professor Heinrich and others like Professors David Harvey, Dumenil and Levy and many other Marxist economists, want to dish Marx’s law of profitability as a theory of crises?

Obviously, they think it is wrong.  But all these alternative theories have one thing in common.  They suggest a way out of crises within the capitalist system. If it’s due to underconsumption, then spend more by government; if it’s due to rising inequality; then correct that with taxation; if it’s too much credit or instability in the financial sector, then regulate it.  None of these leads to policies or actions to replace the capitalist mode of production at all but merely to correct or improve it.  They lead to reformist strategies i.e. there no need to replace the capitalist mode of production with common ownership of the means of production and democratically controlled planning for need (socialism).

Then socialism becomes a moral issue to end poverty and inequality not an objective necessity if human society is to achieve freedom from toil.  That’s a reformist view, but not Marx’s.  Actually even these small changes that preserve capitalism might still require revolutionary action in the face of fierce opposition by capital – so why stop at reform?

27 thoughts on “The Marxist theory of economic crises in capitalism – part two

  1. What sounds strange to me Mr. Roberts is that investments should derive from things happened in the past (as returns by investments already made) and at the moment estimated (current profits).
    Why don’t we consider the future as the right horizon to look at for investments? This is what Keynes did mainly.
    If I went wrong in investing in my plant in China in the past why should I be prevented from investing in that plant if I see for the future better profits there?

    1. Yes, future investment is partly driven by past profitability but also by the expectation of future profitability. But expectations are strongly determined by past results. Of course, as you say, some will invest more even if they start to return lower profitability in the hope of winning out in the end. But reality will eventually triumph. Thus investment lags profits, but profits can be driven by investment for a while too.

  2. Let me put a series of comments on your previous posts and this one.


    First, I am working on the site: It will be called “Marxistats”
    1) I made a script that gets the required data from and transforms them into a useful csv format.
    2) I made a small javascript library that makes it easy to use the data in formulas and then show the results in a chart.
    (How do you make your charts by the way?)
    3) The text can be written in markdown.
    4) Formulas can be written in latex.

    I made a google (email list ) group for discussion.

    The idea is that Marxist researchers will be able to get the data more easily. They would use the data to make charts based on their formulas. The site would also host their text/analysis.


    The way you measure the rate of profit seems to be the correct way. The profits of the financial sector should be accounted.


    The rate of profit is a variable that when it changes, it almost immediately affects investment.
    One needs to investigate what happens in case of the cheapening of capital. It might give a temporary increase in the rate of profit but it destabilizes the financial system. The cheapening of capital leads to a reduction of produced value and thus makes previous debts unrepayable.


    My work to build a network of socialist production processes inside capitalism that will eventually overtake it has put me in contact with the so called reformist Marxists because technically my work doesn’t exclude reformism.

    I agree with you that their Marxist theory is influenced by their ideology and their motives.

    Our theory is influenced by our ideology too. But who is closer to the truth? The one chained to the system or the free person? In all revolutions, the revolutionary people were closer to the truth because they were free from systemic constrains.

    As I have written before, the ryaki network is a network that doesn’t have profits inside it. Thus, it isn’t a different type of Capitalism but a new type of Socialism. At the same time, it can be a vehicle for political systemic change since it will be an economic system that provides prosperity to the people.

    That is why I believe that the ryaki network is compatible with the revolutionary ideas.

    Apart from that, the requirements that ryaki has in terms of economic theory are quite different from the needs of a revolutionary. For a revolutionary, all she needs to show is that the system doesn’t work. Ryaki also needs to create a new system, Socialism. Thus macroeconomic analyses are insufficient.

    1. Do you have access to USSR and other socialist states, such that we could calculate the “rate of profit” for these countries? The law of value may not quite apply directly, but the great advances in technologies demoralized commodities of the west as well as import and export, might guarantee it. It would be great to have a reconstruction of the TRPF for all XX century, globaly.

      1. See the references cited in my latest post for attempts to develop a global rate of profit including in some cases, Russia and China. Maito, Minqi Li and Michael Roberts. But not many go back to the beginning of the 20 th century.

      2. The data were provided by Michael. Check the appendix of his paper.

        Click to access us-rate-of-profit-revisited1.pdf

        Maito has data for many countries. If someone is willing to transform the xmlx files to correct csv files so that I put them in the site, please contact me at x e k o u k o u _ g m a i l . c o m.

        The most time consuming part till now has been to transform the bad csv files that BEA gives to correct ones.

        If you want to look at the site as it is build, you can check:

        The data link has the data table.

      3. It would be very important to know the profit rates from the subsaharan countries. But I look at the references, I cannot find anything about USSR back to the 50’s.

  3. Michael,
    excellent essay (pt1 & 2). Two points for explanation:
    1) since the tendency of the rate of profit to fall comes along with the rising organic composition of capital, shouldn’t we just say that the accumulation of capital itself leads to slumps and crises? Isn’t the world economy today plagued by an over-production of capitals commodities?
    2) Debt and financial speculation are important from the marxist perspective and class struggle, because historically they signify the attempts of capital(ists) to overcome the law of value.

    1. 1) it’s that the accumulation of capital becomes a barrier to accumulation and thus to the production of things and services people need. The law of profitability reveals this.

      2) agreed. Credit is necessary to capital accumulation but also becomes a threat to it.

  4. While, like Michael, I’m convinced that Marx’s falling-profit law is a real thing, I don’t think it’s quite right to say that Marxists who aren’t convinced are “reformists.” Certainly they don’t think that the current ecological crisis can be solved within capitalism, from what I’ve read.

    Even socialists with an incorrect theory of why capitalist crises happen can be genuine revolutionaries. Rosa Luxemburg is the most obvious example. And whatever Michael Heinrich’s flaws, it’s quite clear from his introduction to Das Kapital that he thinks welfare-state reforms are mostly functional for capitalism and that revolution is an absolute necessity.

    1. yes, I agree. Perhaps I should have said that alternative theories of crises under capitalism allow for reform rather than replacement of capitalism, not that the Marxist proponents of such theories like Heinrich, Dumenil or Harvey are reformists.

  5. But the question initially raised has not been answered: Does Marx lay this– the LTFROP– as “his” theory of crisis? If so, where? If not, does Marx lay out anywhere a theory of crisis that integrates his notions of the conflict between means and relations of production, his assessment of overproduction, his exploration of the internal contradictions of the LTFROP, into a single “universal” theory of crisis.

    Does Marx accomplish what Einstein couldn’t– that is to say a unified field theory that identifies the conjuncture between “short term” or small forces, and the long-term or structural tendency?

    1. Interesting questions. I think that even if he did not spell it out in chapter and verse, Marx leaves behind enough stuff to suggest that we can develop a theory of crises that explains regular and recurrent booms and slumps AND offers a long-term structural perspective on capitalism as a mode of production. Anyway, this is what we should be trying to develop or get close to.

    1. Apostolis – this is a very good initiative. The first entry is good stuff. Couple of points: perhaps make it clear that this is a measure of the US rate of profit in particular. Also ‘separate’ not ‘seperate’, small English correction.

      1. I made the changes. The front page chart is just to show off.

        The site will not work unless prominent Marxist intellectuals do make analyses that are hosted there.

        Thus, here is the question: Are you interested in costewardship of the site? Maybe inform Kliman and the others to join too.

        What this means for you is that you will own the content of the site. As a responsibility, you will have to put your data there in a good csv format.

        I will provide technical help. (as much as my time allows).

  6. Michael,

    You say,

    “There is a clear inverse correlation between a rising organic composition of capital and a falling rate of profit.”

    But, the Carchedi’s graph, which precedes this statement appears to show the exact opposite! That is hidden by using a trend line covering the whole time period, but a look at the graph shows two distinct phases within that period.

    The OCC appears relatively flat between 1947 to 1980. After 1980 it begins to rise more steeply, and particularly steeply after 2001, according to the chart. Yet, the clearest period of a falling rate of profit is shown as being between 1947 to 1980, when the rise in the OCC was only slight.

    By contrast, if we were to insert a trend line from 1986 to 2010, it would show not a falling rate of profit, but a rising rate of profit, during precisely that period when the organic composition of capital was rising. In fact, according to your (Carchedi’s) chart the sharpest rise in the rate of profit appears to occur after 2001, and up to 2007, which is also one of the sharpest periods of rise in the OCC, according to the chart! That is the opposite of what your statement claims.

    That is not to mention all of the caveats I have previously set out in comments to part 1, that the national output/expenditure/income data does not include the value of consumed constant capital – circulating constant capital, because by definition these accounts only deal with new value created during the year, i.e. v + s, which forms revenues (wages, profits, interest, rent) rather than c + v + s.

    In other words, it repeats the same mistake of confusing the value of society’s consumption fund, with the value of total output, which Adam Smith made, and which Marx elaborates. The consequence is that it provides only a measure of the rate of surplus value, not the rate of profit.

    Moreover, making the measurement against the fixed capital stock, whilst omitting the circulating capital, only compounds the error, because the rate of profit is calculated as s/c + v, where s is the surplus value produced in the year, and c is the laid out circulating constant capital plus wear and tear of fixed capital, and v is the laid out variable capital. In other words, it is the same as the profit margin p/k, and excludes the total value of fixed capital.

    Where Marx calculates the rate of profit including the total value of the fixed capital, rather than the wear and tear, he makes clear that this is a calculation of the Annual Rate of Profit, , i.e. the surplus value measured not against the laid out capital for the year, but for the advanced capital for just one turnover period.

    If you are going to calculate a rate of profit based upon the total value of the fixed capital stock then first its important to understand that this is NOT the rate of profit that Marx is referring to in dealing with the LTRPF, but is the annual rate of profit. In order to calculate this annual rate of profit, it is first necessary to know what the rate of turnover of capital is, and so what the advanced circulating capital is, rather than the laid out circulating capital for the year. The government accounts only provide the latter, and even out of these you have not included the circulating constant capital.

    For Marx, the LTPRF is based upon a rate of profit that is the profit margin, calculated on the laid out capital.

    As he states in Theories of Surplus Value.

    “{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay.”

    Chapter 16.

    So, to be honest whilst all of the data provided is very useful and interesting, it does not fit Marx’s definitions for either the rate of profit or the annual rate of profit. If you don’t include the figure for circulating constant capital, and you can’t because that data is not available in the national accounts, because they only account for value added (i.e. new value created by labour during the year) you cannot get a figure for the change in its value.

    As Marx’s Law of the Tendency For The rate of Profit To Fall is based upon the notion of rising social productivity, which causes a rise in the technical composition of capital, and consequent rise in the organic composition of capital, as more material, circulating constant capital is processed by the same amount of labour, leaving out this changing value of the circulating constant capital is a fundamental flaw.

    Moreover, the reason for this rise in social productivity is the use of more and better fixed capital. Including the value of the fixed capital stock in this calculation, whilst not including the change in the value of the circulating constant capital, resulting from it, gives a fundamentally wrong and distorted picture, because as Marx sets out, the consequence of rising social productivity is that whilst the technical composition of capital rises, the organic composition of capital rises by a smaller amount, or might even fall, because the higher productivity reduces the value of the machines and materials.

    If you calculate the rate of profit on the basis of the value of the fixed capital stock, this is the annual rate of profit, not the rate of profit, and requires the figure for the advanced circulating capital, not the laid out capital.

    1. Incidentally,

      I would suggest that the reason that the OCC rises only slightly between 1947 and 1980 is that it is a period of extensive rather than intensive accumulation, i.e. existing forms of technology are rolled out on a larger scale, thereby employing more labour-power, as opposed to a period of intensive accumulation, where capital seeks to introduce labour-saving machines to create a relative surplus population, and thereby relieve labour shortages, which in the preceding period have pushed up wages, reduced the rate of surplus value, and so caused a squeeze on profit margins, leading to crises of overproduction.

      In other words, its important to recognise that not all falls in the rate of profit/profit margin can be attributed to the LTRPF. As Marx sets out in Chapter 6 and 15 of Capital III, profits can be squeezed as a result of sharp rises in demand for inputs, and rises in wages that reduce the rate of surplus value.

      Similarly, the rise in the OCC after 1980, reflects precisely this reality, as firms began to introduce new labour-saving technologies from the mid 1970’s onwards, to replace expensive labour-power, whose supply had become restricted. This is the process that Marx describes in Chapter 15, whereby the LTRPF is one of those means used by capital to resolve crises of overproduction.

      It raises social productivity, creates a surplus population, thereby reducing wages, and raising the rate of surplus value, and it causes a moral depreciation of fixed capital, and a devaluation of circulating constant capital. Because this new technology is labour-saving, the initial effect is to reduce relatively the quantity of labour employed, and consequently the surplus value produced. Growth is slowed, because a more slowly growing workforce, with falling wages, results in lower aggregate demand.

      But, all of the effects listed above, and set out by Marx in Chapter 15, create the basis for the rate of profit to rise, and for accumulation to increase.

      “But it affects the relations of the labourer to capital in the same way as an increase of the number of actually working labourers would have affected them. On the other hand, the fall in prices and the competitive struggle would have driven every capitalist to lower the individual value of his total product below its general value by means of new machines, new and improved working methods, new combinations, i.e., to increase the productivity of a given quantity of labour, to lower the proportion of variable to constant capital, and thereby to release some labourers; in short, to create an artificial over-population. Ultimately, the depreciation of the elements of constant capital would itself tend to raise the rate of profit. The mass of employed constant capital would have increased in relation to variable, but its value could have fallen. The ensuing stagnation of production would have prepared — within capitalistic limits — a subsequent expansion of production.”

    2. Thanks Boffy. This seems to me to be an incredibly important distinction on the rate of profit – and which one constitutes Marx’s rate of profit in the context of the TROPF. Leaving aside circulating constant capital, what exactly is the fixed capital component of c in: s / (c + v)? Is it the total stock of fixed capital ‘advanced’ at the beginning of the year, or the ‘consumed’ fixed capital over the year? If I’ve got this right, as it’s never been clear to me.

      There are similar problems with the OCC – ROP chart for the UK in Part I.

      1. Graham,

        When Marx deals with the rate of profit s/c+v, this is effectively the profit margin. As he sets out in analysing prices of production, the price of production is the cost price c + v, which Marx then designates k, plus the average profit. The cost price here is the value of the materials, plus the wear and tear of fixed capital, plus wages.

        But, this seems to be circular because what then is the average rate of profit. In fact, Marx sets this out. It is the total surplus value divided by the capital advanced for one turnover period. The capital advanced for a single turnover period comprises the whole of the fixed capital, not the wear and tear. As Marx sets out, the reason for that is that the whole of this fixed capital has to be present, even though say only 10% of its value is transferred to production.

        But, the advanced circulating capital then only comprises the value of the materials, and the wages for that single turnover period, which may be a year, or may be a day! If the OCC rises, this is an indication that more circulating capital is processed in a given period of time, which means that the turnover period becomes shortened.

        I’ve set this out in my post The Rate Of Turnover, Profit and The Transformation Problem.

        As the table I have provided there indicates, if the average rate of profit is calculated on this basis, i.e. of the annual rate of profit, as Marx indicates in Chapter 9, an amount of profit can then be calculated for any capital of a particular size, but this then results in very different rates of profit/profit margins for these different capitals, dependent upon the individual rates of turnover.

        A capital that has a high organic composition of capital, because it employs more, better fixed capital, will have a higher level of productivity, by definition, and a higher rate of turnover. Its total mass of output will be higher as a result of the higher level of productivity, so that any given mass of profit, will be distributed over this greater mass of output, so the profit margin will be lower.

        So, in the table shown the rate of profit in sphere 1 is 60%, but the profit margin is only 37%, whereas the rate of profit in sphere 4 is only 25%, but the profit margin is 122%. The reason is that with an advanced capital, in each case is equal to 100. With an average rate of profit for the economy of 46.25, this is the amount of profit added to the laid out capital in each case, i.e. the cost of production including the wear and tear during the year.

        But, the circulating capital of sphere 1 turns over 3 times during the year, whereas in sphere 4 only half of it turns over during the year. The laid out capital in sphere 1 is, thereby much greater than in Sphere 4, and so 46.25 represents a much smaller proportion of this greater quantity of laid out capital in sphere 1 than it does to the laid out capital of sphere 4.

        If you calculate the rate of profit on the basis that Michael does here, and that Carchedi does in his chart, you almost inevitably arrive at a continuously falling rate of profit, because you are including the higher value of this fixed capital stock, whilst not taking into consideration its effect on the rate of turnover, or on the value of the advanced circulating capital – which is missing from this data.

        If you are going to calculate the rate of profit/profit margin that Marx discusses in the LTRPF then you should exclude the fixed capital stock, and only include the wear and tear of fixed capital. But, that would lead to an opposite conclusion to that which Michael and carchedi arrive at.

        In Capital III, Chapter 6, Marx describes why that is. It is that the consequence of the higher productivity which this increased capital stock brings, is to increase output by an even larger amount, so that the value of wear and tear of fixed capital, falls as a proportion of the value of output, and so of the individual value of each unit of output.

        “Further, the quantity and value of the employed machinery grows with the development of labour productivity but not in the same proportion as this productivity, i. e., not in the proportion in which this machinery increases its output. In those branches of industry, therefore, which do consume raw materials, i. e., in which the subject of labour is itself a product of previous labour, the growing productivity of labour is expressed precisely in the proportion in which a larger quantity of raw material absorbs a definite quantity of labour, hence in the increasing amount of raw material converted in, say, one hour into products, or processed into commodities. The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease. Owing to this falling tendency, the other portion of the value representing raw material increases proportionally, unless this increase is counterbalanced by a proportionate decrease in the value of the raw material arising from the growing productivity of the labour employed in its own production.”

        On this basis, if the rate of profit were calculated as s/c+v, this constant diminishing proportion of the value of wear and tear of fixed capital in the total value of output, alongside continually rising masses of surplus value, would produce a constantly rising rate of profit, especially as the rising productivity would mean that the value of v also constantly fell, whilst s’ would rise.

        But, this would be equally wrong, and deceptive, precisely because it would not include the actual basis of the rise in the OCC discussed by Marx, which leads to the LTRPF, which is the rising mass of material consumed in production. But, it is precisely that data which is missing from the national accounts, and so from these calculations. To put that in the simple terms that Marx sets out in Capital II, in looking at the two Departments it is this.

        Department 1

        c 6000 + v 1500 + s 1500 = 9000

        Department II

        c 3000 + v 500 + s 500 = 4000.

        If we look at the total amount of revenues here, it is equal to 4000. £2000 as wages and £2,000 in profits. This is equal to the society’s consumption fund, i.e. the output of Department II. This final production, appears also to include the value of the circulating constant capital (Department II (c)), but as Marx points out this is false, because this value is only equal to the new value created by labour, in Department I.

        The total value of Department 1 output is 9000, but only 3000 of this is exchanged with Department II. As Marx sets out, this value of £3000 does not, in reality represent constant capital, but only represents the new value created by labour during the year, and whose equivalent, is £3000 of consumption goods produced by Department II.

        But, the total value of output of this economy is not then equal to the total value of factor incomes – I (v+s) plus II (v+s) – equals £4000, but is £10,000. £6,000 is never exchanged with revenue, but is only an exchange of capital with capital, and never forms an income for anyone.

        Because the national accounts are formulated on the Smithian basis that all value can be resolved into factor incomes – wages, profits, rents and income (the same thing that is taught to all students of bourgeois economics, and which stands behind the marginal productivity theory of value) – they inevitably fail to include this increasing value of constant capital that is not traded, and forms no revenue for anyone.

        Consequently, all attempts to produce a Marxist rate of profit based on those figures are doomed to failure, and to be misleading in the extreme.

    3. Marx does not say what Boffy wishes he would say.

      First in Chapter 13, he does not distinguish between the fixed portion of constant capital and the circulating portion. Marx does say:

      “Moreover it has been shown to be a law of the capitalist mode of production that its development does in fact involve a relative decline in the relation of variable capital to constant and hence also to the total capital set in motion. This simply means that the same number of workers or the same quantity of labor-power…sets in motion, works up, and productively consumes, within the same period, an ever growing mass of means of labour, machinery and fixed capital of all kinds, and raw and ancillary materials– …. This progressive decline lin the variable capital in relation to the constant capital, and hence in relation to the total capital as well, is identical with the progressively rising organic composition on average, of the the social capital as a whole…..With the progressive decline in the variable capital in relation to the constant capital, this tendency leads to a arising organic composition of the total capital, and the direct result of this is that the rate of surplus-value, with the labour remaining the same OR EVEN RISING [my emphasis}, is expressed in a steadily falling general rate of profit. (We shall show later on why this fall does not represent itself in such an absolute form, but rather more in the tendency to a progressive fall). The progressive tendency for the general rate of profit to fall is thus simply THE EXPRESSION, PECULIAR TO THE CAPITALIST MODE OF PRODUCTION (emphasis in the original), of the progressive development of the social productivity of labour…. it does prove that it [the tendency] is a self-evident necessity, deriving from the nature of the capitalist mode of production itself, that as it advances the general average rate of surplus-value must be expressed in a falling general rate of profit. Since the mass of living labour applied continuously declines in relation to the mass of objectified labour that it sets in motion…the part of this living labour that is unpaid and objectified in surplus-value must also stand in an ever decreasing ratio to the to value of the total capital applied. But this ratio between the mass of surplus value and the total capital applied in fact constitute the rate of profit, which must therefore steadily fall.”

      Marx makes precisely NO distinction between the the circulating and fixed portions of constant capital in explaining the law, and the inexorable tendency of the law to exert itself over time. The law is the result of the expansion of the “total capital applied.”

      Boffy states:

      “If you are going to calculate a rate of profit based upon the total value of the fixed capital stock then first its important to understand that this is NOT the rate of profit that Marx is referring to in dealing with the LTRPF, but is the annual rate of profit. In order to calculate this annual rate of profit, it is first necessary to know what the rate of turnover of capital is, and so what the advanced circulating capital is, rather than the laid out circulating capital for the year. ”

      First– Boffy is mistaken. Marx points out that to calculate the annual rate of profit you do not in fact need to know the rate of turnover. According to Marx “The rate of profit is calculated on the total capital applied, but for a specific period of time, in practice a year. The proportion between the surplus-value or profit made and realized and the total capital, calculated as a percentage is the rate of profit. And so this is not necessarily identical with the rate of profit in which it is not the year but rather the turnover period of the capital in question that is taken as the basis of calculation.”.

      Get it? Calculating the ANNUAL RATE does not require knowing the specific turnover rates,,,

      Then after providing examples of divergences between the two rates, Marx writes:

      “Even though the RATE [original] of profit cannot just just be calculated by measuring the mass of surplus-value produced and realized against the portion of capital consumed which reappears in the commodity, but one must rather measure it against this portion PLUS THE PORTION OF CAPITAL WHICH IS ADMITTEDLY NOT CONSUMED {my emphasis}, but is still applied in production and continues to serve there, the MASS [original] of profit can nevertheless only be equal to the mass of profit or surplus value actually contained in the commodities and destined to be realized by their sale.

      That’s the nub, which Marx presents in various forms in various other works, particularly is analyses of fixed capital in vol 3, and in the other Economic Manuscripts 1857-1864– IIRC he sums it up very nicely by stating that fixed capital,[ which only transfers its value incrementally over time] participates completely in the production process, but only partially in the valorization process. He also points out that the increased portion of surplus-value objectified in fixed assets determines that the turnover time of the total capital in fact slows down, as the fixed assets transfer less portions of their total value over time to the increasing mass of commodities.

      As for what constitutes the “C”– the total accumulated value of the fixed assets, the portion advanced in a year, or that portion consumed in a year– well, I think we should work that out practically– run the calculations using numbers for annual capital expenditures; run the numbers for capital consumed, see what we come up with.

      BTW, it is possible to measure, at least with the data supplied by the US Dept of Commerce Bureau of Census, changes in the rate of profit WITHOUT using the total accumulated fixed asset values– by using total costs of materials in production, production worker hours, production worker wages, applying a coefficient derived from the same sources to determine production worker benefits and fringe, total amounts spent on repair and maintenance of equipment, buildings, software, etc. You will find that if you wade through all the figures for the US, the rate of profit tends to decline over time. Just sayin’.

  7. Marx developed his theory after a period of staggering technological change, more profound than we have witnessed. From the introduction of the power loom the next 100 years, give or take, saw the OCC go from 50:50 to 85:15. During that period the rate of profit declined, thus resulting the academic debate in the first place.

    The issue has been that in subsequent years there has been no technological revolution that matches the move to the power loom. The computer has not resulted in the same shift in the OCC. So the affects are now very marginal.

    The Marxist theory of the TROPF is pretty linear, and ultimately I guess this is the truth of the matter. But for scientific purposes Marxism really needs a good dose of punctuated equilibrium!

  8. These figures are incomplete. Without the turnover of capital it is impossible to deflate annual compensation into variable capital. Without variable capital it is impossible to extract the value composition of capital which is the ratio of constant capital to variable capital, without variable capital it is impossible to extract the rate of surplus value which is the ratio of the annual surplus over variable capital, and finally without variable capital it is impossible to obtain an accurate of profit which includes both constant and variable capital in the denominator. Hence the fall in the rate or profit expressed above is overstated because total capital has fallen more slowly due to the slower fall in variable capital (and hence the rise in the composition of capital). The formula for obtaining turnovers is G.O./G.V+(G.O – G.V.)/G.V. where G.O. is gross output and G.V. is gross value added obtainable for example from BEA interactive tables KLEMS Composition of Industry. Secondly the fall in the rate of profit is accentuated by the conversion of Intellectual Property from a cost into capital. Taking all this into account, while it is true that the rate of profit peaked in 2014 at least in the USA it reached heights achieved only in 2006 and 1966. For more on these issues and graphs, visit my site, the Otherwise some interesting observations. I suspect the rate of profit has fallen world wide since 1914 though I have only worked on the US economy. Brian Green.

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