Is the Theory of a Falling Profit Rate Valid

Abstract

Abstract: Marx's theory of the falling rate of profit makes two main appearances in his work. first is in Chapter 25 of Capital Volume 1, entitled The General Law of Capitalist Accumulation. It is further developed in Part III of Volume 3 of Capital, entitled The Law of the Tendency of the Rate of Profit to Fall. In this article I will outline the structure of the theory presented in these two volumes of Capital. Following that I will look at some criticisms that have been leveled at it. I will go on to argue that the criticisms are based on a misunderstanding of some of the dynamic causal mechanisms that Marx assumed. Following on from this I shall present a dynamic solution to the equations of accumulation and show under what circumstances these lead to a falling rate of profit. dynamic model will then be used to analyze the trajectories of some contemporary capitalist economies and to help understand the current structure of the world economy.Key words: Marx; falling rate of profit; capital; capital accumulation; world economyThe Theory in Volume 1Marx presents both of his discussions in the context of capital accumulation. In Volume 1 he is concerned primarily about the interaction of accumulation with the working population. Although this is not so evident in Volume 3 I believe that the same concerns are present there too. According to Marx a key factor in understanding the impact of accumulation is the composition of capital.The composition of capital is to be understood in a two-fold sense. On the side of value, it is determined by the proportion in which it is divided into constant capital or value of the means of production, and variable capital or value of labour-power, the sum total of wages. On the side of material, as it functions in the process of production, all capital is divided into means of production and living labour-power. This latter composition is determined by the relation between the mass of the means of production employed, on the one hand, and the mass of labour necessary for their employment on the other. I call the former the value-composition, the latter the technical composition of capital. (Marx 1887: 387)If the value composition of capital remains the same, an increase in the stock of capital necessarily implies an increase in employment.Accumulation of capital is, therefore, increase of the proletariat (Marx 1887: 388). However, if the growth of the labor supply is slow, the demand for labor may exceed the supply allowing wages to rise. This in turn can tend to reduce the rate of profit. Whilst this condition was the one most favorable to the laboring classes, Marx believed it to be temporary and self-limiting.A rise in the price of labor resulting from accumulation of capital implies the following alternative:Either the price of labour keeps on rising, because its rise does not interfere with the progress of accumulation. In this there is nothing wonderful, for, says Adam Smith, after these (profits) are diminished, stock may not only continue to increase, but to increase much faster than before.... A great stock, though with small profits, generally increases faster than a small stock with great profits. (l. c., ii, p. 189.) In this case it is evident that a diminution in the unpaid labour in no way interferes with the extension of the domain of capital.-Or, on the other hand, accumulation slackens in consequence of the rise in the price of labour, because the stimulus of gain is blunted. rate of accumulation lessens; but with its lessening, the primary cause of that lessening vanishes, i.e., the disproportion between capital and exploitable labour-power. mechanism of the process of capitalist production removes the very obstacles that it temporarily creates. (Marx 1887: 390)The system goes through a cycle. Rapid accumulation uses up the supply of labor. This allows wages to rise. This in turn reduces profits and reduces accumulation. …