Marx’s law of profitability after Capital

The Global Marxism series organized by SSK in Korea has delivered a number of important presentations and papers on aspects of Marxist economics. I participated in the second round with a paper on the Economics of Modern Imperialism. Recently Hideto Akashi of Komazawa University, Tokyo returned to the fray with a presentation on Marx’s law of the tendency of the rate of profit to fall. 

As is well known in the small circles of Marxian economics, leading Marxist scholar, Michael Heinrich, the author of a detailed account of Marx’s Capital, has argued in the past that Marx’s law of profitability is logically faulty: in particular, it is ‘indeterminate’ in that its key categories do not show that profitability of capital must fall.  According to Heinrich, “an increasing organic composition as such is not enough to prove a falling rate of profit”.

Moreover, Heinrich argues that, in the last decade of his life, Marx ‘probably’ recognized this and so dropped the law as part of his theoretical arsenal and as providing any basis for a theory of crises under capitalism, instead searching for a theory based on the excess of credit.  Marx doubted his own law and instead in the 1870s switched to studying the credit system as a possible cause of crises.  Heinrich: “These doubts were probably amplified in the course of the 1870s. In 1875, a comprehensive manuscript emerges which was first published under the title Mathematical Treatment of the Rate of Surplus-Value and Profit Rate. […] it quickly becomes apparent that in principle all sorts of movement are possible. Several times, Marx makes note of possibilities for the rate of profit to increase, although the value-composition of capital was increasing. In the case of a renewed composition of book III, all of these considerations would have had to find their way into a revision of the chapter on the “Law of the Tendency of the Rate of Profit to Fall”. A consistent regard for them should have led to the abandonment of the “law”. (Heinrich).

When Heinrich first proposed this critique, several authors including myself responded with firm rebuttals, which, in my view, were compelling in refuting Heinrich on both his points: the indeterminacy and Marx’s dispensing with the law.  Indeed, I offer a detailed rebuttal of Heinrich’s claim that Marx dropped the law in my recent short book, Engels 200 (see pages 106-111).

But Heinrich’s claims were raised again in questions in the Global Marxism series and Akashi took them up again in his latest presentation. Akashi points out that the most important factor of the law of tendential fall of the general rate of profit is that the rate of profit falls and the quantity of profit increases while, at the same time, the organic composition of capital (ie more investment in means of production relative to employment) is rising.  There are some counteracting factors, but these cannot diminish the former sufficiently to cause a secular rise in profitability. 

Akashi also argues against Heinrich that after the publication of Capital, Marx did not abandon the law.  Akashi cites Marxist scholar Kohei Saito who rejects Heinrich’s interpretation and points out that as late as 1878, Marx was still considering mathematically how the law of profitability would operate.  Indeed, Marx tried to integrate the effect of turnover of capital into his argument for the rate of profit: Marx wrote a short manuscript in 1878 entitled “On the rate of profit, Turnover of Capital, Interest and Discount” by editors of MEGA. (MEGA II/14, Apparat p. 697). 

Actually, in writing Capital, Marx had considered earlier the role of the turnover of capital. He discussed this with Engels in 1873 (after the publication of Capital), to ascertain the length of the turnover of fixed capital (see my book, Marx 200, pp56-8).

However, in Akashi’s view, Marx’s attempts in 1878 to show the impact of the turnover of capital on the rate of profit did not work. (MEGA II/4.2, p. 252, S. 216), which is why Marx abandoned the attempt.  In Akashi’s view, Marx should have adopted a method of consideration based on first equalizing rates of profit to a general one and then applying turnover rates to that. “I supposed Marx should have dealt with capital transfer from industries with a higher organic composition and a slower speed of turnover to those with a lower organic composition and a higher speed of turnover, and then he should have taken the general rate of profit as given.”  Once he had a general rate of profit, if he had simulated the equalization of turnover’s effect on the general rate of profit, he would have seen the capital transfer from the industry with lower speed turnover to the industry with higher speed turnover. 

Actually, there has been further work by Marxist economists to bring the turnover of capital into the coordinates of the law of profitability.  Engels himself began that work with his addition in Volume 3 of Capital – see my Engels 200, pp99-101).  Modern accounts can be found from Brian Green, Peter Jones and others.  Maito, for example, concludes that “while it (turnover rate) does not affect the sense of the trend (the fall in the rate of profit), it softens the slope” in referring to his calculation of the rate of profit in Japan.

But the main point here is that, as late as 1878, Marx was tinkering with the law of tendency of the rate of profit to fall and trying to integrate turnover rates into the equalization of profit rates in different sectors to produce a general ‘social’ average rate of profit.  This confirms the view of many of us that Heinrich is wrong, namely that a) that Marx’s law is ‘indeterminate’ and b) that Marx had dropped the law in the period after Capital Volume One was published and Engels should never have included the law in Volume Three of Capital when he edited it.

11 thoughts on “Marx’s law of profitability after Capital

  1. Hi Michael,

    I read your blogs with interest specially those about the tendency of the rat of profit to fall. Marxists have been defensive on the fundamental aspect of Marxist economics which is unnecessary and unfortunate. I myself have dealt with this topic in my book /”Capitalism versus Planet earth; an irreconcilable conflict”/ in//a new and original way that meets the objections raised by many as to the validity of the law in theory and practice. The book is concerned with the unique intersection of ecological and economic crisis. Part of the latter is of course the fall in the rate of profit which is covered in Chapter 4.

    The book is available in Kindle format on Amazon. If you wish, I can send you a hard copy.

    Best regards,

    Fawzi Ibrahim

  2. This whole debate would benefit by getting to grips with a rigorous realist philosophical account of what laws understood as tendencies are. See Roy Bhaskar, A Realist Theory of Science (1975)

  3. Once he had a general rate of profit, if he had simulated the equalization of turnover’s effect on the general rate of profit, he would have seen the capital transfer from the industry with lower speed turnover to the industry with higher speed turnover.

    There are numerous ambiguities in Marx’s treatment in the average rate of profit in volume 3, not the least of which is that he asserts that the mediation for establishing an average rate of profit, which he calls the prices of production, can only occur in a capitalism more highly developed than a capitalism where commodities are exchanged at their values:

    “The exchange of commodities at their values….thus corresponds to a much lower stage of development than the exchange at prices of production, for which a definite degree of capitalist development is needed…” He then goes on to propose a historical account of the exchange of commodities at their values which is in fact pre capitalist, which occurs before the point where the socially necessary tabor time regulates production. Marx presents us with a law of value that only functions when the conditions for transforming surplus time FROM surplus product and INTO surplus value have not been established. He describes the law of value as being operative under modes of production where the condition of labor is NOT that of wage labor; where labor is NOT organized as “free”– dispossessed and accessible, or available, to the division between necessary labor time and surplus labor time.

    The capital transfer from the industry with a lower rate of turnover to that with the higher rate occurs only simultaneously with the expansion of the means of production and means of transportation (circulation). Thus, the reduced realization time for any particular cycle of capital is inseparable from the extended realization time from the aggregated mass of capital, and rate of profit are always calculated against that total mass.

    The general lengthening of realization time IS the tendency of the rate of profit to decline. It is a TENDENCY. It manifest itself as the TENDENCY to overproduction of commodities.

    1. The TRPF is not simply the lengthening of realization/turnover time. Constant capital could increase fivefold, lowering the ROP, and yet doing nothing to the turnover time – the product being sold after the sane interval. The long term rate of profit falling does not necessarily have anything to do with overproduction. Overproduction as a direct result of competitive profit making is a much more simple explanation. The falling rate of profit would have to be noticeable, and there would have to be a falling rate of profit in specific sectors (banking, tech, housing) which have been particularly prone to overproduction, which doesn’t hold.

      1. I try not to quote Marx too often since smacks of “the appeal to authority” and I have a noble history of having problems with authority, but sometimes, one just has to compromise. So, Marx says in vol 3 Chapter 15:

        “On the other hand, the rate of self-expansion of the total capital, or the rate of profit, being the goad of capitalist production (just as self-expansion of capital is its only purpose), its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population.”

        Specifically linking overproduction to the fall in the rate of profit.

        And later in the same Chapter 15:

        “The creation of this surplus-value makes up the direct process of production, which, as we have said, has no other limits but those mentioned above. As soon as all the surplus-labour it was possible to squeeze out has been embodied in commodities, surplus-value has been produced. But this production of surplus-value completes but the first act of the capitalist process of production — the direct production process. Capital has absorbed so and so much unpaid labour. With the development of the process, which expresses itself in a drop in the rate of profit, the mass of surplus-value thus produced swells to immense dimensions. Now comes the second act of the process. The entire mass of commodities, i.e. , the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value, must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited, but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital.”

        Reads to me like Marx is linking the falling rate of profit to overproduction to the failure, or disruption, or interruption, or the deceleration in the rate of realization, in turnover, but of course, I’m prejudiced. Now there’s so much more in this chapter that is relevant, but let me conclude with this:

        “On the other hand, too many means of labour and necessities of life are produced at times to permit of their serving as means for the exploitation of labourers at a certain rate of profit. Too many commodities are produced to permit of a realisation and conversion into new capital of the value and surplus-value contained in them under the conditions of distribution and consumption peculiar to capitalist production, i.e., too many to permit of the consummation of this process without constantly recurring explosions.

        Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.

        The limitations of the capitalist mode of production come to the surface:

        1) In that the development of the productivity of labour creates out of the falling rate of profit a law which at a certain point comes into antagonistic conflict with this development and must be overcome constantly through crises.

        2) In that the expansion or contraction of production are determined by the appropriation of unpaid labour and the proportion of this unpaid labour to materialised labour in general, or, to speak the language of the capitalists, by profit and the proportion of this profit to the employed capital, thus by a definite rate of profit, rather than the relation of production to social requirements, i.e., to the requirements of’ socially developed human beings. It is for this reason that the capitalist mode of production meets with barriers at a certain expanded stage of production which, if viewed from the other premise, would reversely have been altogether inadequate. It comes to a standstill at a point fixed by the production and realisation of profit, and not the satisfaction of requirements.”– Marx, Vol 3, Chapter 15

        Love, positively, love that last sentence: “It comes to a standstill at a point fixed by the production and realisation of profit….

        Thanks for listening.

  4. Thanks for the citation Michael, I was wondering why there were all these downloads of the turnover formula. Now I know.

    It really is a pity that all these debates continues to take place at a theoretical level. The turnover formula actually puts to an end all this mystification allowing us to use the data to answer these issues practically and decisively. For example the formula shows that lower organic composition capitals do have a higher turnover, than do higher organic composition sectors, viz durable manufacturers versus non durable manufacturers. (Table 1 in the article of mine you cite) Via the turnover formula one can view the organic composition of capital in a new light and with accuracy plot the effect of the inter-relation between the rate of surplus value and the composition of capital on the rate of profit. It puts to an end that uninterrupted and endless argument, does it or does it not allow, for a rise in the rate of profit. Again Graph 4 shows that the movement of profit is a product not of the rate of exploitation but the rate of surplus value which includes turnover.

    In sum, by really understanding turnover, what was out of focus now becomes clear. It is why called the formula the Rosetta Stone of Marxian economics. In conclusion Marx’s hypothesis and predictions all became true, but unfortunately without the National Accounts which he inspired, he did not have the data to prove his assumptions. and he was always right about the importance of turnover. I may have uncovered the formula after 70 years, but I could not have done it without Marx’s preparatory work in Volume 2. I have always and will always be awed by Marx’s intellectual abilities. Brian Green.

  5. “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.” Marx to Kugelmann July 11, 1868. Amazing how in 24 words Marx sums up (almost) the whole of chapter one of Capital. Joan Robinson would have loved that summary!

  6. Rate of profit is just interest rates https://www.jstor.org/stable/42779593

    Marxism is mentally retarded, you take a arbitrary value set by monetary policy and worship it. Interest rates have been falling for hundreds of years as liquidity increased, it’s just a accounting thing and doesn’t matter.

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