CHAPTER V. A CRITICISM OF THE MARXIAN LAW OF THE FALL IN THE RATE OF PROFITS[ToC]
Interpretation here given assumes acceptance of Marx's main principles: Necessary decline in rate of profit on hypothesis of technical improvement: Two successive stages confused by Marx: More accurately a decline in amount of profit: Marx assumes that would be an increase of capital: Would be same capital and increase in rate of profits: Decline in rate of profits due to other reasons.
This law is set forth in the third section of the third book (posthumous) of Das Kapital. A few criticisms have been made of it, which vary from that of Sombart, who says that it is developed in the most striking manner (in glänzendster Weise), to that of Loria, who defines it as 'a metaphysical pistol shot (sic) from beyond the Rhine,' and thinks that he refutes it by an objection which is in fact quite inappropriate. Others have thought the law certainly true, but that it explained only partially the fact of the decline in the rate of profits and required to be combined with other laws already known to classical economics. But most of those who have studied Marx's economic theories have not examined it at all; his opponents (like Böhm Bawerk) reject it by implication, when they reject Marx's fundamental principles; the Marxians welcome it, German fashion, humbly and submissively, without discussion, with that lack of freedom and intellectual originality which is noticeable in all their writings.
The examination of it attempted here, rests on the same basis as Marx's theories, i.e. it is made from the standpoint of those who accept the essentials of these theories, and hence the premiss of labour-value, the distinction between fixed and floating capital, the view of profits as arising from surplus-value, and of the average rate of profits as arising from the equalisation, owing to competition, of the various rates of surplus-value. It is true that I accept all these things in a certain sense, which is not the sense of the ordinary Marxian, inasmuch as they are not looked upon as laws actually working in the economic world, but as the results of comparative investigations into different possible forms of economic society. But such a reservation, which relates to a question discussed by me at length elsewhere,[89] has practically no effect on the present study, whose results would be almost the same, even if these theories of Marx were interpreted in the sense which I consider erroneous. The object here is no longer to determine and define accurately Marx's fundamental concepts, but to see whether, from these concepts, even when interpreted in the current manner, it is ever possible in any way to deduce the law of the fall in the rate of profits. This task I think impossible.
The law was derived by Marx from the study of the effects of technical improvement. Marx states that technical improvement increases the amount and changes the form of the total capital, increasing the proportion of fixed as compared with floating capital, so that by this means the rate of profit is decreased; the latter arises, as is well-known, out of the surplus-value, the product of the floating capital divided by the total capital. He illustrates the matter thus. Some technical improvement occurs; new machines are made, which formerly did not exist. The capital employed in production has been hitherto, we will suppose, a total of 1,000, divided into 500 fixed and 500 floating, and employing 100 labourers: the surplus-value = 500, i.e. the rate of it is 100 per cent.; and hence the rate of profit is 500/1000 = 50 per cent. In consequence of the technical improvement, and of the construction of new machines, the 100 labourers who are maintained by the variable capital of 500, continue still to be employed in production; but, in order that this may be possible, it is necessary to use a larger fixed capital, which we may suppose 200 larger than before. Hence, as the result of the technical improvement, there will now be a total capital of 1,200, i.e. 700 fixed and 500 floating; and the rate of surplus-value remaining unchanged at 100 per cent., the rate of profit will be 500/1200 = about 41 per cent., i.e. will have decreased from 50 per cent. to 41 per cent. Hence the necessary decline in the rate of profit on the hypothesis of technical improvement. But this hypothesis is an actual everyday fact in modern capitalist society. Hence, the actual decline of the average rate of profits in modern capitalist society. But this law is more or less counteracted by other facts, which act in a contrary sense more or less transitorily. Thus the fall is only a tendency.
In order that our study may be clear, it is above all necessary to distinguish the two groups of facts, or the two stages in the same capitalist society which Marx confused and embraced in a single somewhat obscure view.
The first stage is marked by the fact, pure and simple, of a technical improvement. Now technical improvement, among its logical, or what is the same thing, its necessary effects, in no way includes that of an increase in the amount of total capital employed, nor that of leaving the quantity of total capital unchanged. It has rather exactly the opposite as its necessary and immediate effect: i.e. that of limiting the capital employed. It is unnecessary to warn the reader that we are here treating of economic science and that increase and decrease refer always to economic values. In its simplest form, supposing the quantity of objects produced to be constant (200 shoes are required, and there is no reason to increase the production), technical progress will consist, purely and simply, in a saving of social expense: the same production at less expense. And since all cost, in Marx's hypothesis resolves itself into social labour, there will be the same production with less social labour. If it were not so, it would not be worth while to introduce this technical innovation; there would be, economically, no improvement but either the status quo ante or a regression. We must not take into account the other effects which would arise to increase production, greater consumption, increase of population, etc: additional and extraneous facts which are not considered here, since we are concerned with the single fact of technical improvement, all other conditions remaining unchanged. And, in such a case, we cannot represent technical improvement with the increasing series of total capital which Marx employs, viz. 150, 200, 300, 400, 500, etc., but with this decreasing one, 150, 140, 130, 120, 110, etc. And to keep to the illustration used above, if we suppose that the given technical improvement has caused a decrease of 1/10 in the total social labour required, we shall have in place of the original capital of 1,000 a capital of 900, no longer made up of 500 fixed and 500 floating, but of 450 fixed and 450 floating. The decrease must affect proportionally every part of the capital since all of it is, in the final analysis, a product of labour. Of the 100 original labourers, 1/10, i.e. 10 of them will remain unemployed: a fraction of the original capital will remain unemployed; the quantity (or utility) of the goods produced will remain the same.[90]
When the description of the facts is thus corrected, there is no doubt that the smaller total capital employed, supposing on the one hand, the rate of surplus-value to remain unchanged, and, on the other, 10 of the original labourers to be working no longer, would absorb an amount of surplus-value of 450. But the rate of profit would not on this account be changed; or rather, just for this reason the rate of profit could not be altered and would be expressed by 450/900 (as at first 500/1000), i.e. it would be as at first, 50 per cent.