What is the tendency of the rate of profit to fall? (Jim) by der Augenblick

There's been some mention on this blog and on the list of the "tendency of the rate of profit to fall" over the past few months. For those who lack of the benefit of a comprehensive grasp of Marx's critique of political economy, I thought I would provide a brief, easy-to-understand explanation of this phenomenon and the argument Marx gives for it.

The law of the tendency of the rate of profit to fall concerns the rate of profit, so that's the first thing we need to define. Marx defines the rate of profit as:

s /(c + v)

"s" is defined as the value of surplus-labor, "c" is defined as the value of constant capital, and "v" is defined as the value of variable capital. Your work day is divided into labor you're compensated for in the form of a wage and labor you're not compensated for but which you perform gratis for the capitalist. Marx calls the value of the labor you're compensated for "variable capital" (represented by "v" in the equation). Marx calls the value of the labor you perform for free "surplus-value" or "s". The value of constant capital - "c" - is the value laid out for the means of production: things like heavy machinery and the building the labor takes place in, but also computers and whatever other labor-saving techniques the capitalist can use.

Imagine the capitalist starts with a lump sum of money, say, $100, and he spends $20 of that on labor and $80 on means of production. The $20 represents the value of labor, or "v", and the $80 represents the value of the means of production, or "c". Whatever the capitalist gets out of the production process over and above what he lays out is his profit, represented here by "s". So you can see the rate of profit is nothing other than the ratio of the value of his profit to the value of what he starts with.

An increase in productivity lowers v toward 0. This is because an increase in productivity (via scientific labor management techniques, introduction of machinery, etc.) makes the worker generate more value in less time, so a fortiori he produces his means of subsistence in less time. This means necessary labor is finished in less time. Variable capital is what is paid out as the equivalent of necessary labor. Therefore, increased productivity lowers v toward 0.

Consider the ratio of surplus-value ("profit") to variable capital ("wages"), or s/v. If v goes toward zero, the value represented by s/v goes toward infinity. (You divide a given quantity, s, by an infinitely shrinking quantity, v.) But even if this is the case, there is still a limit on how high s can rise, since s is still determined by things like the number of workers you have, the length of the working day (which can't approach 24 hours), and the upper limit on the intensity of physical and mental endurance. So in fact, even if you increase the number of workers, the length of the working day, and the intensity of work, the rate of profit
(s/(c+v)) tends not toward infinity but rather to s*/(c+v), where s* is the upper limit determined by the number of workers you can have, the length of the work day (limited to less than 24 hrs), and the intensity a human can possibly stand even with the aid of machines or computers. This is the case even as v approaches zero.

What raises the productivity of the worker, thus reducing v, is the "relative surplus strategy": introduction of machinery, increasing the intensity of work, utilizing scientific management of labor, etc. This raises what Marx calls the "organic composition of capital", which is nothing but the ratio of the means of production utilized and the labor power utilized in any operation. Increasing the organic composition of a particular capital means you use more machinery, more computers, more technology, more "dead labor" for each living, present worker you employ. But there is no theoretical limit to the rise in the organic composition of capital the way there is a limit to the other things. Therefore, in s*/c, the c (the value of the means of production you can employ) can rise continually. s* is in fact limited, but c is not, so the value s*/c will fall, i.e., its value
will diminish.

The tendency of the organic composition of capital to rise means that it becomes harder and harder to extract surplus-value. As you use more machinery and make the worker more productive, you need to invest larger and larger sums of money to get the same profit back.

Does that make sense?

Marx believes the tendency of the rate of profit to fall is a cause of crisis. It is inherent in the process of capitalist accumulation, and it leads one part of that process—namely, the production process—to "seize up".

However, you should note that the accumulation process is more than the production process. It also includes the process of purchasing labor-power and the means of production on the market. It also includes selling the product of labor. According to Marx, each step of the accumulation process is fraught with the potential for crisis, because capitalism is an unplanned system of production and circulation of the product of labor. While the tendency of the rate of profit to fall explains crisis arising from the labor process, it does not explain crises in other portions of the accumulation process. In order to explain those potentials for crises, Marx utilizes theories of overproduction and underconsumption.

You can read a short, accessible account of these theories in Robert Tucker's (ed) The Marx-Engels Reader. The essay is called "Crisis Theory (from Theories of Surplus-Value)".