The fallacy of composition and the law of profitability

In mainstream economics, the concept of the ‘fallacy of composition’ is often used.  In a general sense, the fallacy of composition arises when it assumed that the sum of all individual parts will equal the whole.  Sometimes, it does not.  There are many examples: if you stand up at a concert, you can usually see better. But if everyone stands up, everyone cannot see better as it will lead to obscured views for the majority of attendees. Therefore, what might be true for one individual in the crowd is not true for the whole crowd.  This phenomenon happens because the interaction of individual moves can affect the overall result.

The fallacy of composition is often cited in economics.  Paul Samuelson in his ubiquitous Economics textbook for university students reckoned “the fallacy of composition is one of the most basic and distinctive principles to be aware of in the study of economics”. And it is invariably used by Keynesian economists in their advocacy of government spending to boost the economy.  This is the paradox of thrift.  This is the belief that if one individual can save more money by spending less, then society or an economy can also save more money by spending less. But if every household reduces spending, then the overall demand for products and services would decline. This decline would lead to lower sales revenue and profits for businesses. As a result, businesses would have to lower wages or lay off individuals. People would have less income and would save even less. What is true for an individual in the economy is not necessarily true for the whole economy.

The fallacy of composition in this context has been used by Keynesians to attack the view of the neoclassical and Austrian schools that economies are like individual households. Good housekeeping is good economic policy. But it may be good for a household to tighten its belt but not for whole economies.  So the Keynesians say that there is no crime in running budget deficits and avoiding ‘austerity’, even if it means rising public debt levels.

Now I have discussed the issue of whether rising debt (public and private) matters for a capitalist economy in many places.  So I’m not going over that ground again in this post.

What interests me is that the fallacy of composition applies in another area too – in the refutation of one major critique of Marx’s law of the tendency of the rate of profit to fall.  The most famous modern argument against the law is that by Nobuo Okishio, a Japanese Marxist economist.  Okishio argued way back in 1961 that under competitive capitalism, a profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit not a tendency to fall – otherwise why would any capitalist invest in new technology?  And Marx is used to back up this argument: no capitalist ‘ever voluntarily introduces a new method of production … so long as it reduces the rate of profit’. Marx 1978a, p. 264

Yes, no individual capitalist would introduce a new technology unless it contributed to raising profits and market share, the individual rate of profit.  But this is where the fallacy of composition comes in.  The innovating capitalist steals a march on others through lowering the costs of production against the prevailing market price.  Its profits go up.  But that is being achieved by the profits of the other capitalists beginning to fall as they lose competitive advantage.  They must react by introducing the new technology (or even better technology) that lowers their costs too.  But then the productivity of the existing or probably reduced labour force for all the capitalists rises and thus lowers the value per unit of product.  Once all the capitalists have adopted the new technology, the organic composition of capital (the ratio of money spent on equipment versus wages) will have risen and, ceteris paribus, the general rate of profit will have fallen.

Professor Simon Mohun provided an excellent example from game theory to show why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.

There are two capitalists: A and B.  Each starts with 3 in profit.  If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3.

But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets less profit (1).  Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4.  If both innovate, then A gets 2 and B gets 2.

There is a drive to innovate because A or B could raise profit from 3 to 4.  So there cannot be an agreement not to innovate, leaving A on 3 and B on 3.  But if one innovates first to get 4, then the other must do so or its profit will fall to 1.  But with both innovating, they both end up on 2 instead of 3 (if they had done nothing).  So innovation boosts the individual profit of the leader but eventually when both innovate, the profit is lower.

Again, this is over time.  If A and B could simultaneously introduce the innovation (as Okishio assumes), then they may not do so, and stay at 3, rather than fall to 2.  But that would not be reality.  Reality is temporal.

The Okishio theorem is an example of the fallacy of composition.  It simply sums the gain of one individual capitalist to the whole capitalist economy.  But what is good for each individual capitalist is not good for the profitability of the whole capitalist economy.  When everybody does it, overall profitability falls.

Moreover, each individual capitalist is not doing this ‘voluntarily’ after all, but of necessity to compete and not lose market share.  As Marx says, the law of value and profitability operates ‘behind the backs’ of the capitalists – it is not in their conscious control.  For Adam Smith, it is the ‘invisible hand’ of the market, for Marx, it is an ‘invisible Leviathan’, to use Murray Smith’s metaphor (Murray Smith, Invisible Leviathan, Historical Materialism, forthcoming 2018).

29 Responses to “The fallacy of composition and the law of profitability”

  1. Virgens VK Says:

    Okishio’s logical failure is solved by Capital book II’s first chapter.

    Surplus labour is literally work beyond a certain point. This point is determined by the individual capital’s organic composition.

    But even surplus values is not wealth created out of nothing: it is still another value transformed. So, e.g. a total produce of 500 coats, where 100 coats are fruit of the coats producer’s surplus value, can still be translated to, say, 50km of cotton line (equivalent value). Lavoisier Law still holds in Marx’s value theory: wealth is subjective, in the sense that labour only creates wealth because the already existing natural resources (i.e. the biosphere of planet Earth) don’t transform in humanly useful thing by themselves (save for very exceptional case, such as the air we breath etc.). Human labor only transforms matter and energy, not create it.

    Coming back to the social, we have that those 100 coats of surplus value is, from the point of view of the cotton line producer, mere commodity-capital; one’s commodity-capital can be another’s constant or fixed capital, which translates or not in surplus value. Put it simply, one individual capital’s profit is another one fixed etc. capital (i.e. not profit). Profit is subjective by definition, albeit subjective in the Marxian sense of the word (i.e. still concrete, but only socially concrete), not in the Kantian sense of the word (imaginary).

    • Virgens VK Says:

      By what I very informally refered to as “Lavoisier Law” is the law of conservation of energy.

  2. Anti-Capital Says:

    I used to think I was pretty good at simple math, but this has me befuddled:

    “There are two capitalists: A and B. Each starts with 3 in profit. If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3.

    But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets less profit (1). Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4. If both innovate, then A gets 2 and B gets 2.”

    One innovates and the other doesn’t, and the total declines from 6 to 5; if both innovate the profit declines from 5 to 4?

    That’s not how Marx explains the allocation of shares of surplus value, the establishment of the average rate of profit, or the tendency of the rate of profit to decline.

    Enlighten me, someone, please.

    • Ron Rice Says:

      As I understand it: The possible results of the game: 3-3, 4-1, 2-2, indicate that total profits decline due to the reduction in the need for labor brought about by “innovation” — upgrading constant capital (machines) and thereby reducing the need for variable capital (labor power). Since surplus value is created using labor power, less of it is created as productivity increases.

      When either A or B (but not both) innovates, total profit is reduced from 6 to 5. Once both A and B have innovated, total profit is reduced from 6 to 4. The first to innovate will gain additional profits until the other has innovated as well. At that point the total surplus value will less than it had previously been, resulting in less total profit being shared equally by the two now equally productive players.

      • Anti-Capital Says:

        If the total profit were reduced, then no capitalist would ever invest. Capital accumulation would cease. Permanently.

      • Anti-Capital Says:

        One more time on this– if the total available profit declined everytime more capital was invested in expansion/innovation, there would be no way for capital to accumulate. Marx doesn’t explain the FROP that way. On the contrary, the decline in the rate of profit is accompanied by an increase in the mass of surplus value/profit, allowing for greater capitalization…to a point.

      • Ron Rice Says:

        I spoke too loosely: “Since surplus value is created using labor power, less of it is created as productivity increases” should have read “less of it is created relative to total capital as productivity increases.” And: “the total surplus value will less than it had previously been, resulting in less total profit” should read “less than it had previously been relative to total capital, resulting in less total profit relative to total capital.”

        Anti-Capital, you are of course correct when you say “the decline in the rate of profit is accompanied by an increase in the mass of surplus value/profit.” What declines in the long run for capitalist production as a whole is the ratio between a mass of surplus value and the mass of capital used to produce it.

        That mass of capital consists of constant capital and variable capital. Since variable capital is what generates surplus value, as the ratio of variable to constant capital is reduced, the ratio of surplus value to total capital is reduced as well. Total capital can continue to grow larger as the rate of profit declines, and the mass of surplus value can continue to grow larger as well. But as the ratio of variable to constant capital is reduced in capitalist production, the growth in the mass of surplus value will be less than the growth in total capital required to produce it. For the economy as a whole.

      • Anti-Capital Says:

        What the game theorist provides is not a demonstration where the rate of profit declines, but rather where the MASS of profit declines.

      • Ron Rice Says:

        The game as described does not state a unit for “profit” . But Roberts says: “Professor Simon Mohun provided an excellent example from game theory to show why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.” [emphasis mine] It seems clear to me that term “profit” is being used in the sense of “profit rate” in the description of the game.

  3. Anti-Capital Says:

    To follow up, if the game theory numbers are correct then the fall in the rate of profit is not a TENDENCY but is the immediate and eternal result of all investment and a capitalist economy could never expand.

    The game theorist has created a condition where all investment leads to a net decline, not in the ratio of profitability, but to the mass of profit in all cases at all time.

    There can be no offsetting conditions in this scenario; and no capitalism after 6 cycles.

  4. ucanbpolitical Says:

    The point you make Michael cannot be overstated. Because of unequal exchange which is made possible by the intermediation of money, the innovating capitalist is able to make an extra profit at the expense of his or her competitors. They end up exploiting not only their own workers but the workers of their competitors through the transfer of surplus value. Without this the profit motive would collapse. Why? Because in reducing the labour time expended by their workers (assuming the organic composition is increased by this innovation) their share of the labour time of society both paid and unpaid is reduced. If market price equalled individual value the mass of their profits would thus fall not rise. They would not invest, but because the transfer of surplus value exceeds the loss of surplus value produced by their own workers they end up with more surplus value.

    The real importance of this observation relates to the USSR. I believe, and am willing to be corrected, that I was the first to understand why the application of profit in the USSR helped collapse the economy there. In the USSR the labour of the individual was directly social labour. This meant that an innovating enterprise which reduced the labour time needed to produce their quota immediately reduced their share of the labour time of society. If we simplify the “pricing” system in the USSR as being the wage/benefit fund plus margin, this is easy to understand. If we assume that to begin with the wage/benefit element was 100 and the margin was 25 or 25% then that enterprise produced 125 roubles. Now let us assume that 20% fewer workers are employed. This means that the wage/benefit fund now reduces to 80. If the same margin of 25% applies, as it should do, then the margin falls to 20 and output drops from 125 Roubles to 100.

    Hence in the USSR, because there was no intermediation of money nor market price to redistribute labour, any reduction in labour time by an enterprise was experienced as a loss. Theorists like Harman got hold of the wrong end of the stick. It was not the falling rate of profit that dismembered the USSR it was profit per se. Profit can only function as the driver in a market economy where the labour of the individual only becomes social indirectly, through first having to be exchanged. It cannot function in an economy which is socialised.

    When the profit margin came to the fore, enterprise managers did the obvious thing, they increased their cost base in order to reap more profit from the profit margin.
    The only other way the Stalinists could have acted otherwise was to use the tax system to redistribute labour. They would have needed to increase the tax on the least efficient plants, and, reduce it for the more efficient plants. However, that would have reduced the centre from commanding the economy to taking from one to give to the other. This would have bankrupted the less efficient plants disrupting the taut plan while giving increased economic power to the most efficient plants. It would have provoked a civil war within the ranks of the bureaucracy.

    More can be read on my website.

  5. ucanbpolitical Says:

    Can I abuse the comments section to say that corporate profits for the USA have just been released and they are down. Given the appreciation of the D

  6. Anibal gabriel Says:

    Yes, i know i’m going way off-topic, but i couldn’t find any post where what i ‘m going to ask would fit better.
    I consider myself a socialist; nevertheless, i’m aware that socialism hasn’t been really tried, except maybe for the first few years of russian revolution.
    With that in mind, i wonder why should we aim at socialism instead of some form of capitalism like that of nordic countries or new zeland, where most people who live there can do it reasonably well?

    • Sherwin Mendoza Says:

      Here’s how I understand it: Workers globally produce a certain quantity of value. Because of a number of mechanisms (prominently the organization of finance capital) this value is distributed very unevenly to capitalists and workers in different countries. Capitalists in Nordic countries and New Zealand receive a disproportionately large amount of surplus value, while workers in/from some countries (such as Bangladesh, China, the Philippines, and many others) receive much less than they produce. I do not believe that reforming capitalism in the rich (imperialist) countries will necessarily help the workers in other countries. Even if workers in the rich countries do well, what about the workers in/from countries that create the wealth of the rich countries?

      With regard to this blog, the debates about imperialism might be one thing to look into (I have been lurking for a while, but I am inspired by the discussion on this blog and thankful for it). With regard to actually-existing reformist parties, the posts about Keynsianism might be helpful.

  7. Boffy Says:

    The argument as framed is correct. However, Marx also says that capital does not introduce a machine unless its value is less than the paid labour it replaces. Marx in Capital I, and elsewhere, makes clear that what he means by “replaces” here does not just mean existing workers, but also the potential workers that would have been required for some kind of production if the machine itself were not used. So, the introduction of a power loom might actually have thrown ten hand-loom workers on the street, but the fact that 1 million workers spinning by hand would have been required to spin the amount of yarn that the installed spinning machines achieved, did not at all eman that 1 million workers had been thrown on the street, because, they had never been employed in spinning to begin with.

    So, Marx also demonstrates that in absolute terms more labour is employed. Less labour is employed only relative to the material processed, and relative to output. In Capital III, Chapter 6, and in TOSV he also illustrates the above point about fixed capital, that because it is the means for raising labour productivity, not only is relatively less value of labour (paid and unpaid) contained in the value of output, but also less value of fixed capital (wear and tear) is also included in the value of output, whilst the value of material in output – because far more of it is processed – rises as a proportion of output value. This is the whole basis of his theory of the tendency for the rate of profit to fall.

    In fact, as he says, not only does the value of fixed capital fall relative to the value of output, because the rise in productivity massively increases the quantity of material processed, and so use values produced, (which thereby causes a corresponding moral depreciation of all the existing fixed capital stock), but the rise in productivity also reduces the value of machines themselves, which are produced in less labour-time, which causes a further reduction int eh share of their value in output, and causes a further moral depreciation of the fixed capital stock, and this process, thereby has a significant effect on the annual rate of profit, which is the basis of the annual average rate of profit.

    But, Marx’s argument here also depends on a number of other points. Firstly, it depends upon the quantity of circulating constant capital, i.e. raw materials increasing in by a larger proportion, as a result of this rise in productivity than the fall in the unit value of those materials caused by that same rise in productivity. Marx asserts that is the case, and gives several arguments to justify it, which were relevant at the time he was writing, possibly. But, there is no theoretical or practical reason why that has to be the case.

    Marx himself discusses the way waste of materials was reduced in production, for example. Whole industries develop on the basis of using waste materials, and the production of bi-products. All of that becomes more possible as the scale of production in general rises. But, take something from marx’s time. The improvement in steam engine technology not only meant that each steam engine could raise productivity in general, it meant that each steam engine produced the same, and more energy with less coal required to fuel it!. Not only did improved steam engine technology reduce the value of the coal it consumed, but it required less of that coal for its operation too.

    To put that in a modern context, the growth of global GDP since the 1980’s, has been 7 times the growth in the consumption of oil, to fuel that production! That is because not only has technological development reduced in real terms the value of oil, but it has also meant that less oil as raw and auxiliary material is required for each unit of output. So, the fundamental argument behind Marx’s Law of Falling Profits, that whilst the share of fixed capital and labour in final output falls, the share of materials rises, due to the huge rise in the quantity of it processed falls.

    There is no reason why a), the unit value of processed materials should not fall by a greater proportion than the quantity of those materials consumed in production, and b) the same rise in technology means that a relatively smaller quantity of such materials may be consumed in production, for any given amount of output.

    That can also be seen by looking at the other types of commodity produced. An LED light requires less materials than an old style light bulb, the same with an LED screen as opposed to a CRT screen, a microprocessor far less material than the thousands of glass valves it replaces. A smart phone uses much less material than an old style telephone, let alone the camera, music player etc. etc. it replaces.

    More significantly, given that 80% of value added, and of surplus value production in modern economies comes from service industry, which processes very little raw and auxiliary materials relative to its output, its clear that things are very different today than they were at the time Marx developed his theory which was mostly set out to show the fallacy of the Ricardian/Malthusian/Smithian theories of falling profits, and to show at the same time the basis
    of prices of production as the pivot around which market prices rotate – as against Ricardo and Smith’s belief that it was exchange value, and also thereby to illustrate that it is this law which explains the allocation of capital within the capitalist economy, away from low annual profit areas to higher annual profit areas.

    • Anti-Capital Says:

      Let’s take a look at what Marx actually says in Chapter 23 of Theories of Surplus Value, “Cherbuliez, [2. On the Progressive Decline in the Number of Workers in Relation to the Amount of Constant Capital]:

      “It is an incontrovertible fact that, as capitalist production develops, the portion of capital invested in machinery and raw materials grows, and the portion laid out in wages declines. This is the only question with which both Ramsay and Cherbuliez are concerned. For us, however, the main thing is: does this fact explain the decline in the rate of profit? (A decline, incidentally, which is far smaller than it is said to be.) Here it is not simply a question of the quantitative ratio but of the value ratio…

      …As far as the machinery is concerned, its cost is not as great as that of the labour it displaces, although the spinning-machine is much more expensive than the spindle. The individual capitalist who owns a spinning-machine must possess a greater amount of capital than the individual spinner who buys a spinning-wheel. But the spinning-machine is cheaper than the spinning-wheel in relation to the number of workers it employs. Otherwise it would not have displaced the spinning-wheel. The place of the spinner is taken by a capitalist. But the capital which the former laid out on the spinning-wheel was larger relative to the size of the product, than that which the capitalist lays out on the spinning-machine.>

      The increasing productivity of labour (insofar as it is connected with machinery) is identical with the decreasing number of workers relatively to the number and extent of the machinery employed. Instead of a simple and cheap instrument a collection of such instruments (even though they are modified) is used, and to that collection has to be added the whole part of the machinery which consists of the moving and transmitting parts; and also the materials used (like coal, etc.) to produce the motive power (such as steam). Finally, the buildings. If one worker is in charge of 1,800 spindles instead of driving a spinning-wheel, it would be quite ridiculous to ask why these 1,800 spindles are not as cheap as the single spinning-wheel. The productivity in this case is brought about precisely by the amount of capital employed as machinery. The ratio of the wear and tear of the machinery affects only the commodity; the worker confronts the total amount of machinery and similarly the value of the capital laid out in labour confronts the value of the capital laid out in machinery.

      There can be no doubt that machinery becomes cheaper, and this for two reasons: [1] The application of machinery to the production of raw materials from which the machinery is made. [2] The application of machinery in the transformation of these materials into machinery. In saying this, we already say two things. Firstly, that in both these branches, compared with the instruments required in the manufacturing industry, the value of the capital laid out in machinery also grows as compared with that laid out in wages. Secondly, what becomes cheaper is the individual machine and its component parts, but a system of machinery develops; the tool is not simply replaced by a single machine, but by a whole system, and the tools which perhaps played the major part previously, the needle for example (in the case of a stocking-loom or a similar machine), are now assembled in thousands. Each individual machine confronting the worker is in itself a colossal assembly of instruments which he formerly used singly, e.g. 1,800 spindles instead of one. But in addition, the machine contains elements which the old instrument did not have. Despite the cheapening of individual elements, the price of the whole aggregate increases enormously and the [increase in] productivity consists in the continuous expansion of the machinery.”

      1.So the cost of the machinery is not as great as the labor it displaces, not in some abstract sense of displacing 1 million potential workers, but in the concrete sense of the real workers, the real mass of variable capital, required to animate the mass of constant capital. This is the basis for the decline in the rate of profit, and the growth of surplus population.

      2. Yes the individual “packets” of constant capital, the units become cheaper, but the accumulation of capital as a whole is the accumulation of greater amounts of value, of capital, in the instruments of production RELATIVE to the living labor. Boffy essentially performs his own fallacy of composition, arguing that because the the units of constant capital decline in unit value, the accumulation of the units in total must also be cheaper, forgetting, conveniently or not, that what counts is the PROPORTION of the accumulated capital values to the variable capital, the living labor.

      • Boffy Says:

        “So the cost of the machinery is not as great as the labour it displaces, not in some abstract sense of displacing 1 million potential workers, but in the concrete sense of the real workers,”

        My comment did not deny the displacement of actual existing workers. It began by saying a power loom might throw ten existing handloom weavers on to the street. The point is that Marx’s argument goes beyond that. It was a paraphrase of what Marx says. Here is what Marx actually says.

        “If it be said that 100 millions of people would be required in England to spin with the old spinning-wheel the cotton that is now spun with mules by 500,000 people, this does not mean that the mules took the place of those millions who never existed. It means only this, that many millions of workpeople would be required to replace the spinning machinery. If, on the other hand, we say, that in England the power-loom threw 800,000 weavers on the streets, we do not refer to existing machinery, that would have to be replaced by a definite number of workpeople, but to a number of weavers in existence who were actually replaced or displaced by the looms.”

        (Capital I, Chapter 15, p 404)

        So you are picking a fight with Marx not me on that point.

        Marx’s argument could also be extended as, when a new capital is established, the capitalist in deciding whether to employ a machine and 1 worker to do a given amount of work, or whether to employ 10 workers who would be required without the machine, examines the cost of each option. Its why in the rest of Chapter 15, he also talks about the fact that when female labour was so cheap, women were used to pull barges rather than pack horses. Its also why he goes on to describe the way, machines and other fixed capital that cheapened the price of commodities and thereby enabled an expansion of the market, was able to then employ actual labour than would otherwise have been the case.

        For example, as I have pointed out previously, a mainframe computer that cost £2 million back in the 1970’s, employed say 4 operators, 4 data processing clerks, and 2 programmers. That is ten people altogether. (Actually, it processes no raw material as part of its output either). But, by 20 years later, £2 million would have bought 4,000 PC’s (again processing no raw material), each employing an operator, so that the amount of employed labour rises 400 fold, with each of these 4000 workers producing new value, and surplus value.

        “but in the concrete sense of the real workers, the real mass of variable capital, required to animate the mass of constant capital. This is the basis for the decline in the rate of profit, and the growth of surplus population.”

        Except, Marx makes clear that BOTH the fixed capital and variable capital decline relative to the circulating constant capital, i.e the raw material processed, and it is THAT, which is the basis of his law of falling profits. So, he says,

        “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.”

        (Capital III, Chapter 6)

        So, again, I’m afraid that again you are picking a fight with Marx not me.

        “Yes the individual “packets” of constant capital, the units become cheaper, but the accumulation of capital as a whole is the accumulation of greater amounts of value, of capital, in the instruments of production RELATIVE to the living labour.”

        Except, that is again not right for several reasons. Firstly, it is a bourgeois conception of capital as a thing, rather than as a social relation. For Marx capital is the social relation between capital and wage labour, and it is that social relation that enables capital to be capital as self-expanding value, because it is wage labour that produces surplus value that can be accumulated as capital. For Marx as he again sets out in Capital 1, the expansion of capital is the expansion of this social relation, the employment of additional amounts of labour, so as to produce ever increasing amounts of surplus value, so as to accumulate that surplus value as capital.

        A jeweller who works with expensive materials say amounting to £10,000 in a day, produces no more new value, and surplus value than a potter who works with cheap materials that amount to say only £1,000 in a day. Marx points out it is not the VALUE of the constant capital that sets to work labour that is important, but its use value, the quantity of that constant capital as determined by the technical composition of capital. As he sets out in Theories of Surplus Value Chapters 15 et al, the cheaper that constant capital, so that the more of it that can be employed, and thereby employ more labour, the more new surplus value can thereby be produced, and the greater the potential for expanding the actual capital at a faster pace, i.e. the higher the rate of profit, which is why he calculates the latter on the basis of that current reproduction cost, not on the basis of irrelevant historic prices.

        So, when you say,

        “Boffy essentially performs his own fallacy of composition, arguing that because the units of constant capital decline in unit value, the accumulation of the units in total must also be cheaper, forgetting, conveniently or not, that what counts is the PROPORTION of the accumulated capital values to the variable capital, the living labour.”,

        I’m afraid that once again you are actually picking a fight with Marx not with me. Moreover, I did not say “the units in total MUST also be cheaper” (emphasis added). What I said was there is no theoretical or practical reason why they MUST be dearer. There were good reason for believing the latter was the case in Marx’s time, though he also gives plenty of reasons why they need not be. Given that Marx’s theory of the tendency for the rate of profit to fall is based upon the increasing proportion of raw material processed, in the value of total output, as against either fixed capital or labour, as a result of the rising productivity, in conditions where the vast majority of value added is industries that do not process raw materials, it is clear that the basis of that law, which Marx himself points out, even in his time, was only perceptible over very long times, and as even stated in the quote you give above, was “far smaller than it is said to be”, then the basis for the operation of that law disappear.

        Certainly, it ought to be clear to anyone that a law, which only acts as a tendency, which is only discernible over very long periods of time, which results in a fall in the rate of profit that is “far smaller than it is said to be”, cannot be seen as the basis of regularly occurring crises of overproduction. And nor did Marx see it that way. Marx saw crises of overproduction arising for a variety of reasons, and the way he relates the rate of profit to crises, is that at periods of increasing capital accumulation, labour supplies start to get used up. As he set out in Theories of Surplus Value Chapter 21 in relation to his analysis of Hodgskin, that means that although capital seeks to address that by lengthening the individual working day, that has limits, it seeks to address that by expanding the social working day by employing additional workers, including women and children etc., but there are limits to that too, so there is a limit to the expansion of absolute surplus value, beyond which surplus value cannot be increased, and so any further capital accumulation results in no additional surplus value, and consequently a falling rate of profit.

        It may also cause wages to rise, so that the rate of surplus value falls, and the mass of surplus value would then itself actually fall too causing the rate of profit to fall.

        “As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

        (Capital III, Chapter 15)

        These are the opposite conditions, however, to Marx’s analysis of the long term tendency of the rate of profit to fall, based upon rising productivity, a rising rate and mass of surplus value. The latter arises not as the basis of crises, but as the cure to them! In order to address the shortage of labour, capital introduces labour-saving technologies, which create a relative surplus population. It means that wages can be reduced, and the rate of surplus value, and consequently mass of surplus value increased. The same technological revolution reduces the value of the fixed capital via moral depreciation, and it usually results in a lower unit value of materials too, as well as efficiencies in the use of materials, so that the surplus value rises relative to the capital advanced. That is also facilitated by a rise in the rate of turnover of capital, caused by the higher productivity, which raises the annual rate of profit, and thereby average rate of profit. It only results in a lower rate of profit where the volume of material processed increases proportionately more than the fall in its unit value.

        In modern economies where the processing of material comprises a small component of value added production, that is unlikely to be the case.

      • Anti-Capital Says:

        My “fight,” such that it is, is not with Marx. I do find it significant that Boffy can reduce the law that Marx called “the most important law of political economy” to complete irrelevancy in advanced capitalism because of the growth of services, itself a result of the growing productivity of labor. Marx writes in the Grundrisse:

        “The general laws developed previously here briefly summarized thus: The real surplus value is determined by the relation of surplus labour to necessary labour, or by the portion of the capital, the portion of objectified labour, which exchanges for living labour, relative to the portion of objectified labour by which it is replaced. But surplus value in the form of profit is measured by the total value of the capital presupposed to the production process. Presupposing the same surplus value, the same surplus labour in proportion to necessary labour, then, the rate of profit depends on the relation between the part of capital exchanged for living labour and the part existing in the form of raw material and means of production. Hence, the smaller the portion exchanged for living labour becomes, the smaller becomes the rate of profit. Thus, in the same proportion as capital takes up a larger place as capital in the production process relative to immediate labour, i.e. the more the relative surplus value grows – the value-creating power of capital – the more does the rate of profit fall. We have seen that the magnitude of the capital already presupposed, presupposed to reproduction, is specifically expressed in the growth of fixed capital, as the produced productive force, objectified labour endowed with apparent life. The total value of the producing capital will express itself in each of its portions as a diminished proportion of the capital exchanged for living labour relative to the part of capital existing as constant value. Take e.g. manufacturing industry. In the same proportion as fixed capital grows here, machinery etc., the part of capital existing in raw materials must grow, while the part exchanged for living labour decreases. Hence, the rate of profit falls relative to the total value of the capital presupposed to production – and of the part of capital acting as capital in production. The wider the existence already achieved by capital, the narrower the relation of newly created value to presupposed value (reproduced value). Presupposing equal surplus value, i.e. equal relation of surplus labour and necessary labour, there can therefore be an unequal profit, and it must be unequal relative to the size of the capitals. The rate of profit can rise although real surplus value falls. Indeed, the capital can grow and the rate of profit can grow in the same relation if the relation of the part of capital presupposed as value and existing in the form of raw materials and fixed capital rises at an equal rate relative to the part of the capital exchanged for living labour. But this equality of rates presupposes growth of the capital without growth and development of the productive power of labour. One presupposition suspends the other. This contradicts the law of the development of capital, and especially of the development of fixed capital. Such a progression can take place only at stages where the mode of production of capital is not yet adequate to it, or in spheres of production where it has assumed predominance only formally, e.g. in agriculture. Here, natural fertility of the soil can act like an increase of fixed capital – i.e. relative surplus labour can grow – without the amount of necessary labour diminishing. (E.g. in the United States.) The gross profit, i.e. the surplus value, regarded apart from its formal relation, not as a proportion but rather as a simple magnitude of value without connection with any other, will grow on the average not as does the rate of profit, but as does the size of the capital. Thus, while the rate of profit will be inversely related to the value of the capital, the sum of profit will be directly related to it. However, even this statement is true only for a restricted stage of the development of the productive power of capital or of labour. A capital of 100 with a profit of 10% yields a smaller sum of profit than a capital of 1,000 with a profit of 2%. In the first case the sum is 10, in the second 20, i.e. the gross profit of the larger capital is twice as large as that of the 10 times smaller capital, although the rate of the smaller capital’s profit is 5 times greater than that of the larger. But if the larger capital’s profit were only 1%, then the sum of its profit would be 10, like that for the 10 times smaller capital, because the rate of profit would have declined in the same relation as its size. If the rate of profit of the capital of 1,000 were only 1/2%, then the sum of its profit would be only half as large as that of the smaller capital, only 5, because the rate of profit would be 20 times smaller. Thus, expressed in general terms: if the rate of profit declines for the larger capital, but not in relation with its size, then the gross profit rises although the rate of profit declines. If the profit rate declines relative to its size, then the gross profit remains the same as that of the smaller capital; remains stationary. If the profit rate declines more than its size increases, then the gross profit of the larger capital decreases relative to the smaller one in proportion as its rate of profit declines. This is in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated. Since this decline in the rate of profit is identical in meaning (1) with the productive power already produced, and the foundation formed by it for new production; this simultaneously presupposing an enormous development of scientific powers; (2) with the decline of the part of the capital already produced which must be exchanged for immediate labour, i.e. with the decline in the immediate labour required for the reproduction of an immense value, expressing itself in a great mass of products, great mass of products with low prices, because the total sum of prices is = to the reproduced capital + profit; (3) [with] the dimension of capital generally, including the portion of it which is not fixed capital; hence intercourse on a magnificent scale, immense sum of exchange operations, large size of the market and all-sidedness of simultaneous labour; means of communication etc., presence of the necessary consumption fund to undertake this gigantic process (workers’ food, housing etc.); hence it is evident that the material productive power already present, already worked out, existing in the form of fixed capital, together with the population etc., in short all conditions of wealth, that the greatest conditions for the reproduction of wealth, i.e. the abundant development of the social individual – that the development of the productive forces brought about by the historical development of capital itself, when it reaches a certain point, suspends the self-realization of capital, instead of positing it. Beyond a certain point, the development of the powers of production becomes a barrier for capital; hence the capital relation a barrier for the development of the productive powers of labour. When it has reached this point, capital, i.e. wage labour, enters into the same relation towards the development of social wealth and of the forces of production as the guild system, serfdom, slavery, and is necessarily stripped off as a fetter. The last form of servitude assumed by human activity, that of wage labour on one side, capital on the other, is thereby cast off like a skin, and this casting-off itself is the result of the mode of production corresponding to capital; the material and mental conditions of the negation of wage labour and of capital, themselves already the negation of earlier forms of unfree social production, are themselves results of its production process. The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms. The violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation, is the most striking form in which advice is given it to be gone and to give room to a higher state of social production. It is not only the growth of scientific power, but the measure in which it is already posited as fixed capital, the scope and width in which it is realized and has conquered the totality of production. It is, likewise, the development of the population etc., in short, of all moments of production; in that the productive power of labour, like the application of machinery, is related to the population; whose growth in and for itself already the presupposition as well as the result of the growth of the use values to be reproduced and hence also to be consumed. Since this decline of profit signifies the same as the decrease of immediate labour relative to the size of the objectified labour which it reproduces and newly posits, capital will attempt every means of checking the smallness of the relation of living labour to the size of the capital generally, hence also of the surplus value, if expressed as profit, relative to the presupposed capital, by reducing the allotment made to necessary labour and by still more expanding the quantity of surplus labour with regard to the whole labour employed. Hence the highest development of productive power together with the greatest expansion of existing wealth will coincide with depreciation of capital, degradation of the labourer, and a most straitened exhaustion of his vital powers. These contradictions lead to explosions, cataclysms, crises, in which by momentaneous suspension of labour and annihilation of a great portion of capital the latter is violently reduced to the point where it can go on. These contradictions, of course, lead to explosions, crises, in which momentary suspension of all labour and annihilation of a great part of the capital violently lead it back to the point where it is enabled [to go on] fully employing its productive powers without committing suicide. Yet, these regularly recurring catastrophes lead to their repetition on a higher scale, and finally to its violent overthrow. There are moments in the developed movement of capital which delay this movement other than by crises; such as e.g. the constant devaluation of a part of the existing capital: the transformation of a great part of capital into fixed capital which does not serve as agency of direct production; unproductive waste of a great portion of capital etc. (Productively employed capital is always replaced doubly, as we have seen, in that the positing of value by a productive capital presupposes a counter-value. The unproductive consumption of capital replaces it on one side, annihilates it on the other. ”

        What we get from Boffy is not Marx. Rather it is as if capital produced nothing but offsetting tendencies to the tendency of the rate of profit to fall, without anybody realizing that the offsetting tendencies are triggered by the very tendency itself and reproduce that tendency.

        Now Boffy can argue that Marx is wrong, but he can’t argue that Marx didn’t call the law of the fall in the rate of profit the most important law. He can’t argue that Marx didn’t point out that the devaluation of capital, the creation of the surplus population were all results of the amplification of the productivity of labor which threatens capital accumulation AND that threat is expressed both most immediately and over the long term by the fall in profitability.

      • Boffy Says:

        I suppose that something in the huge slab of text cut and paste from the Grundrisse there may be something relevant to the discussion, but good luck to anyone trying to find it.

        What Marx meant by the law of falling profits being the most important law for capital relates to two things. Firstly, he talks about it in terms of the law as presented by his predecessors such as Smith, Malthus and Ricardo. For them it was important because they saw it in catastrophist terms that they thought would cause the actual mass of profit to fall and cause the collapse of the system. As Marx says, Smith actually viewed that process positively. But, marx demonstrates that these previous catastrophist theories were WRONG!

        Secondly, what Marx means is that his law of falling profits is the basis of the allocation of capital, and the formation of prices of production, which are peculiar to capitalist production as opposed to all previous forms of commodity production and exchange, and as he sets out in The Critique of the Gotha Programme, and in Chapter 49 of Capital III, any post capitalist economy.

        Its why he sets out out before describing the process by which capital necessarily moves to those spheres where the annual rate of profit is highest, and away from those where it is lowest. In other words, it is highest where the organic composition of capital is lowest, and/or where the rate of turnover of capital is highest. As capital moves to those spheres where the rate of profit is highest, it causes the supply of those commodities to rise relative to demand so that the prices of those commodities fall below their exchange value, and continue to do so until they reach the price of production. Similarly, as capital leaves or accumulates more slowly in the areas where the annual rate of profit is lowest, the prices of those commodities rise above their exchange value, and continue to do so until they reach their price of production, so that a process for the establishment of the average annual rate of profit is established.

        That is what distinguishes capitalism from all other forms of commodity production and exchange, and it is why Marx’s law of falling profits is the most important law for capital. I’m surprised that anti-capitalist thinks that this role of Marx’s Law is “irrelevant”, but as I said his argument is with Marx not with me. I haven’t argued that Marx is wrong, I’ve applied his law as he set it out. Unfortunately, the conclusions of that don’t suit the catastrophist dogma of anti-capitalists, who unlike Marx start out from such “anti-capitalism” rather than pro-Socialism.

        Marx’s law continues to be the basis for the allocation of capital within the economy, and for the determination of prices of production. But, whereas in Marx’s time the law as far as the average annual rate of profit was concerned only operated over very long periods of time, and was even then hardly perceptible, or as Marx puts it, the fall was “far smaller than it is said to be”, now does not lead to a fall in the annual average rate at all. It certainly is not the cause of crises, but the basis of the law, of rising social productivity, or a rising rate of surplus value, continues to be the response of capital to crises of overproduction resulting from the over accumulation of capital, the using of of labour supplies, rises in wages and falls in the rate of surplus value leading to profits squeezes.

      • Anti-Capital Says:

        You got to love it when Boffy complains about others posting “huge slabs” of text.

        So here’s a short version, with no slab of text: Marx says what he says in the Grundrisse, in Theories of Surplus Value, and in Capital. He does not say what Boffy says he says.

  8. Libertaer Says:

    Very good point, but here is one thing I never understood. If the profit rate can fall, why is zero the limit?

    Take an economy where extraction of surplus value is done also in form of rent. Lets say capitalist A and B have 0 profits, but some constant rental income of 2. Now, A invest in new technology and makes a profit of 1 while B loses market share and makes -2. (Negative profit just means that even after returns the value of your capital stock is less than before.) Then B catches up and both make -1. This can go on until both have capital stocks with no value at all. Think of a Mars colony with capitalists competing to produce oxygen, one day someone invents a self replicating oxygen machine powered by solar energy. These machines will have use value but no exchange value. Competition will have reduced capital values to zero.
    My question is: why can‘t profits fall below zero? And why should this lead to a crisis in investment? It‘s alwasy better to have -1 profits then -2.

    All this makes no sense if capitalists could act as a class, but under competition, why not negative profits?

    • Boffy Says:

      Capital exists to produce profits, so if a capital knows in advance it would make a loss – apart from the situation where they believe that these are short term losses required to establish longer term market share, and long term profitability – it would not invest the capital. It would either use the capital in some other sphere where profits were possible, or would convert the capital back to revenue, to consume it, in some other form.

      An oxygen producing machine would always have some value, because it is the product of labour. In a capitalist economy rent (and interest and taxes) are subordinate to profit. Rent is surplus profit, so if there are negative profits there are by definition no surplus profits, and so no rent apart from that which arises from monopoly pricing. Similarly, if there are no profits, there is no demand for money-capital to finance the purchase of productive-capital. With no demand for money-capital there is no market price for it, and so no interest.

      • Libertaer Says:

        „Capital exists to produce profits…“ Yes, but that‘s precisely the point of Roberts post, each individual capitalist tries to make a profit, but capitalists as a class get a falling rate of profit. My question was: why can‘t the rate of profit turn negative?

        „An oxygen producing machine would always have some value…“ I agree, but I was talking about a self replicating oxygen machine.

        „Rent is surplus profit“ Rent presupposes surplus value, there could be a post-capitalist society where all surplus value is exploited through rents.

      • Boffy Says:

        I don’t know whether this reply will appear, as I’m still waiting for a comment from 4th June to get clear from the moderation queue, but here goes.

        A low rate of profit is not the same as a loss. Moreover, as Marx sets out in TOSV and Capital III, the basis of his falling rate of profit is a rapidly growing mass of profit, and for larger capitals the mass of capital becomes far more important than the rate of profit. A capital of €1 billion that produces only 10% annual rate of profit, makes €100 million of profit, whereas a capital of €10 million, even with a 50% annual rate of profit, still only produces €5 million of profit.

        But, with this same huge volume of output, any loss itself becomes all the larger as the output expands. If the €1 billion capital produces 10 million units of production, each losing just €0.10, it makes a loss of €1 million, whereas if the capital of €10 million produces just 100,000 units each making a €0.10 loss, its loss amounts to only €10,000.

        If capitals believe they are going to consistently make losses they will convert their capital to revenue, in the same way that Marx discusses in TOSV Chapter 22 when discussing the illusion of profit that Ramsey fell into, and which has confused proponents of historic pricing. That is a farmer who ceases production is able to also liquidate their capital as well as simply realising the value of the revenue component of their output.

        A self replicating oxygen machine will also continue to have some value, as with any other machine. That value will continuously decline, because the value of constant capital that goes into its production, will diminish with each additional replication, as Marx discusses in the Fragment on Machines, but it will never be actually zero.

        There could be a postcapitalist society where all surplus value takes the form of rent, just as precapitalist societies extracted surplus value primarily in the form of rent. But then its not a capitalist economy, and its not capitalist rent.

      • Alex Says:

        “but it will never be actually zero.” I agree, it just approaches zero, but for all practical purposes it’s zero.

        “A low rate of profit is not the same as a loss.”
        I talking about a negative rate. My question is why can’t the profit rate not fall into negative territory? If the fallacy of composition explains why the rate of profit can fall from 10 to 5 to 0, why can’t the same explanation be used to predict a fall from 0 to -5 to -10…. ??? To me this sounds as if capitalists compete with each other ruthlessly only until they reach the zero bound, then suddenly they coordinate their investments (by not investing at all) to keep the profit rate above zero. If competition can lower the rate of profit although each individual capitalists would prefer this not to happen, why can’t the same mechanism force the rate of profit below zero?

  9. ucanbpolitical Says:

    To answer your question. The first capitalist makes an extra profit at the expense of other sets of capitalists in the industry. The market price is largely unaffected because the weight of change is small. The other capitalists follow suit introducing the new technology. The market price falls because the weight of change is large. Assuming this market price, say shoes, enters into the value of labour power, its fall reduces the price of labour power. The price of labour power reduces wages and increases profits. So we have two circuits. The first which transfers surplus value within the industry. The second is the transfer of value from the working class to the capitalist class as the price of the goods making up workers’ standards of living fall. It is the second circuit that enlarges the mass of profits and hence props up the rate of profit.

    • Alex Says:

      “It is the second circuit that enlarges the mass of profits and hence props up the rate of profit.”
      But this explains too much, right? Michael Roberts gave an explanation why the rate of profit falls, although each individual capitalist would prefer this not to happen. My question is: why stop at zero? Your are saying: because of lower wages (shoes get cheaper so less must be paid for the reproduction of labour power) the rate of profit doesn’t fall at all.

      • ucanbpolitical Says:

        Alex I was only giving one side of the equation. In order to reduce the price of shoes more constant capital needs to be invested. The rate of profit measures the rate at which profits grows compared to the growth of the capital invested in its production. It is a complex interaction Think of the rate of profit as a glider. During the day when the sun heats the earth creating updrafts the glider can soar escaping temporarily the force of gravity (the technical composition of capital) but as the sun sets and the air cools the glider loses lift. Now it is true that in normal market conditions, which avoids the question of realisation, capitalists will ALWAYS sell commodities at a profit, simply because they do not pay workers for all their labour. There will thus be a mass of profits which will always mean a positive rate of profit regardless of whether it is declining or not. However, at the end of the industrial cycle, when investment falls absolutely and turnover elongates, commodities can no longer be sold at a price which not only realises their value, but their cost price. In that event losses replace profits. In short, capitalists are no longer being paid for the unpaid labour of their workers. Under these circumstances the rate of profit can and does become negative. That is why destruction of capital follows the production of capital in order to reduce the mass of capital over which profits are measured.

      • Anti-Capital Says:

        “However, at the end of the industrial cycle, when investment falls absolutely and turnover elongates, commodities can no longer be sold at a price which not only realises their value, but their cost price. ”

        Of course, that’s the heart of the issue — “the end of the industrial cycle”– is that a cause of the fall in the rate of profit, or caused by a fall in the rate of profit.

        In most of his writings, Marx considers the FROP as the long term tendency, separate and apart from the industrial cycle– except in certain critical passages in the Grundrisse, and in vol 3, he clearly identifies that fall as the driver of “short-term” impairments in the process of accumulation.

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