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Marx and the Falling Rate of Profit


Some people who are concerned with what Marx wrote about the average rate of profit believe that he confidently predicted that it would go on falling indefinitely. This is not correct.

The tendency for the average rate of profit to fall was noticed by economists long before Marx. Both Adam Smith in his WEALTH OF NATIONS (1776) and David Ricardo in his PRINCIPLES OF POLITICAL ECONOMY some forty years later both held their own respective but untenable theory to explain it.

Adam Smith saw the accumulation of capital being governed by the extent of the competition and the growing division of labour. Smith believed that competition exhausts capital accumulation thereby slowing down the economy and reducing the rate of profit to a minimum.

David Ricardo, on the other hand, attributed the falling rate of profit to the cost of corn and Malthus's law of population.

He believed that as the value of corn increases so does the wage at the expense of profit and, consequently, the rate of profit is forced down to a minimum.

It was in his criticism of the general economic theories held by Smith and Ricardo that Marx came to address the question of the falling rate of profit. Marx showed that the fall in the rate of profit derived from the main laws of the movement of capital itself.

By the 1860's when Marx came to consider the question of the falling rate of profit it was no longer the comparatively simple one it had once appeared to be. (It was in this decade that Marx prepared the unfinished draft which Engels would subsequently edit as volume III of CAPITAL after Marx's death).

Far from feeling confident about the question of the falling rate of profit, Marx was clearly uncertain and puzzled. At the beginning of Chapter XIV of the third volume of CAPITAL he wrote:

"If we consider the enormous development in the productive powers of social labour over the past thirty years (1835-65) alone, compared to all earlier periods, and particularly if we consider the enormous mass of fixed capital involved in the overall process of social production quite apart from machinery proper, then instead of the problem that occupied previous economists, the problem of explaining the fall of the rate of profit, we have the opposite problem of explaining why this fall is not greater or faster. Counteracting influences must be at work, checking and cancelling the effect of the general law and giving it simply the character of a tendency, which is why we have described the fall in the general rate of profit as a tendential fall" (CAPITAL III p.339, Penguin edition p. 1981).

Marx then commented briefly on half a dozen counteracting influences which tend to raise the average rate of profit, but he did not even attempt to evaluate the final outcome of one tendency lowering the average rate of profit and others raising it. The counteracting influences Marx highlighted were:

(i). More intense exploitation of labour. The process of capital accumulation brings in machinery and division of labour. These factors increase the rate of surplus value by increasing the intensity of exploitation of labour power. Similarly, a lengthening of the working day increases the rate of exploitation.

(ii). Reduction of wages below their value. This is a cyclical factor caused during periods of high unemployment where the effects of competition between workers looking for work influence the profit rate. Marx believed this "one of the most important factors checking the tendency of the rate of profit to fall".

(iii). Cheapening of the elements of constant capital. The means of production are cheapened by increases in the productivity of labour, and this tends to offset the increase in the mass of means of production used.

(iv). The relative surplus population. Increase in productivity makes workers redundant and forces down wages, checking the tendency to substitute means of production for labour, and also encouraging the creation of new labour intensive industries that reduce the average composition of capital.

(v). Foreign Trade. Foreign trade increases the rate of surplus value by lowering the rate of labour power because it is possible to buy cheaper foreign food consumed by workers. It also allows cheaper foreign means of production to be brought. Marx also mentions in passing that exporting capital may also prevent the fall in the rate of profit.

(vi). The increase in share capital. Marx, in passing, adds one further counter-tendency. As capitalism develops into joint-stock companies made up of numerous shareholders a portion of the capital invested can be treated as interest-bearing capital yielding lower rates on unearned income than the general rate of profit. Such capital does not affect the general rate of profit and hence does not contribute to the fall in the profit rate. It must be noted that Marx also considered the theoretical possibility of where interest-bearing capital did not affect the profit rate.

These six counteracting influences were just stated by Marx with very little rigorous presentation and analytical investigation. There could even be other factors besides those mentioned above which also acted against the profit rate falling.

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Is there a contradiction in Marx's Analysis of the falling rate of profit?

Some readers of volume III of CAPITAL think that Marx contradicted himself. On page 318, for example, he wrote:

"this gradual growth in the constant capital, in relation to the variable, must necessarily result in a gradual fall in the general rate of profit…"

while on page 343 he wrote:

"the same factors that produce the tendency for the rate of profit to fall also moderate the realization of this tendency".

They have failed to notice Marx's presentation, which was to treat each factor separately. All that Marx was saying on page 318 was that if the tendency for the rate of profit to fall because of the increase of constant capital to relative variable capital was the only factor then the rate of profit must fall continuously. And the statement on page 343 was not a generalisation but referred only to the matter dealt with in the sub-section, namely: "cheapening of the elements of constant capital".

Anthony Brewer of the Department of Economics, University of Bristol, in his A GUIDE TO MARX'S CAPITAL (1984 p. 145), says of this that Marx:

"gives no good reason to expect the "tendency" to prevail over the "counteracting influences".

On the other hand Joseph Gillman in his THE FALLING RATE OF PROFIT (New York 1958, p. vi) treats it as if Marx was saying that a downward tendency would prevail and that the rate of profit was therefore bound to fall (see the critical review of Gillman's book in THE SOCIALIST STANDARD, June 1960).

Brewer and Gillman both comment on the unreality of wondering about the falling rate of profit a century or more after Marx wrote about the subject. Adam Smith and David Ricardo could think of capitalism lasting indefinitely but not Marx. In his expectation it would have been abolished before now but the working class, for example, have persistently voted for capitalist politicians at general elections and have not taken conscious political action in line with their own interests. Gillman quotes in this connection the passage in Volume 1 of CAPITAL (page 837) which concludes:

"Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument (skin). This integument is burst asunder. The expropriators are expropriated".

Nevertheless Marx gave no time limit for the establishment of Socialism. What he did say was that Capitalism would not collapse and that Socialism was contingent on being established, consciously and politically, by a Socialist working class through its own efforts; an important point Gilman missed altogether.

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Has the average rate of profit fallen?

It might appear to be a simple matter to compare the present average rate of profit with what it was in the 1860's and note whether it has fallen and if so by how much. It isn't at all a simple matter.

In the 1860's little statistical information was available. There is much more information available now but, then as now, it is rarely in a form which fits in with Marx's definitions.

Much of the information in Company Profit and Loss accounts and Balance Sheets is unreliable and misleading. The Government Statistical Office publishes figures for the total of the gross trading profits of companies but apparently the Office does not publish a corresponding estimate for the total of Capital invested, without which it is not possible to calculate the average rate of profit.

From the information that is available it is possible to draw certain fairly reliable conclusions:

(a). In Britain and the US the average rate of profit has not been falling continuously since the 1860's. If they had we would surely expect that by now the rate would be approaching zero.

(b). It is possible for the average rate of profit to rise in certain periods of the trade cycle and fall in others.

(c). The fall, or rise, of he average rate of profit or the average rate in certain industries, may be due to causes other than those Marx dealt with.

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The average rate of profit in the 1890's

On 12th March 1895 Engels wrote to Conrad Schmidt about the average rate of profit (see correspondence of Marx and Engels, Martin Lawrence 1934, page 527).

Engels warned Schmidt against expecting the average rate of profit to be a precise figure ("say 14.876 or 934 %") and went on to say this:

"In reality the rates of profit vary from business to business and from year to year according to different circumstances, and the general rate of profit only exists as an average of many businesses and a series of years".

Engels also raised the question with Schmidt, in connection with an article Schmidt had written about Capital Volume III (see Engels "ON MARX'S CAPITAL" Progress Publishers, Moscow, 1956, page 104).

"especially to be emphasised here is the proof of how the Marxian derivation of average profit from surplus value for the first time gives an answer to the question not even posed by the economists up to now: how the magnitude of this rate of profit is determined, and how it comes about that it is, say 10 or 15 percent and not 50 or 100 per cent".

Are we, on the strength of these statements by Engels, entitled to believe that in 1895 it was Engels' view that the average rate of profit was somewhere between 10% and 15%? He was in as good position as anyone to form a useful opinion.

If so we can say with some confidence that the average rate of profit has not constantly fallen in the past 100 years or so. In his book "A GUIDE TO MARX'S CAPITAL", Brewer shares this view:

"In theoretical terms, the problem is that Marx described a "tendency" together with a number of "counteracting influences" that have the opposite effect. He gives no good reason to expect the "tendency" to prevail over the "counteracting influences". There has been, in practice, been no consistent falling trend in profit rates" (p.145).

This may be so, but we cannot share with Brewer the view that Marx expected "the eventually collapse" of capitalism. This view was the standard theology of the Social Democrats and, later, the Bolsheviks. A. Bogdanoff, in his revised 1223 edition, A SHORT COURSE OF ECONOMIC SCIENCE", wrote that:

"Capitalism in its latest stages reveals symptoms of the deepest degeneracy which must lead to its inevitable collapse" (p.370).

Ironically it was Russian State Capitalism that collapsed and with it the anti-working class doctrines which supported it.

Marx held no such view that capitalism would collapse.

Marx in fact wrote:

"…capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation" (WAGES, PRICE AND PROFIT in Selected Works, p. 440).

He emphasised this point again in THEORIES OF SURPLUS VALUE, VOLUME II:

"Permanent crises do not exist" (p. 497).

Those who believe that Socialist consciousness rises when there is economic crises and economic depressions are not supported by history. The Great Depression of the late 19th century, the trade slump of the 1930's and the trade crises in the three decades; 1970-1990 did not see a corresponding rise in socialist consciousness and political action. The Socialist case against capitalism exists whether it is in a boom or in a crisis.

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Gillman on the average rate of profit in the US

In the book by Joseph Gillman referred to above he examined all the evidence to find out whether in fact the average rate of profit had continuously fallen (On Gillman's erroneous reading of Marx he believed Marx expected it to do so).

Gillman emphasised the great difficulty experienced in obtaining information and being certain of interpreting it correctly. He reached the following tentative conclusion:

"The results show that whereas for the years before about World War I the historical statistics seem fully to support these theories of Marx, after that war the series studied appear generally to behave in contradiction to the Marxist expectations. The explanation could be that our statistics or our procedure, or both, are wrong (Preface p. vii).

At page 84, Gillman published his table showing the average rate of profit in US manufacturing industries from 1880 to 1952. Between 1880 and 1921 the rate was falling, from 69% to 18% in 1921.

After 1921 the rate more or less continuously rose and in 1950, 1951 and 1952 was 40%, 38% and 37% respectively.

The academic debate has continued unabated and now takes the form of a medieval dispute on how many angels can be found on a pin's head. Much of the writing on the falling rate of profit is found in Capital and Class published by the mis-named Conference of Socialist Economics (CRE) whose members either support policies associated with State capitalism (nationalisation) or a mixed capitalist economy. No where in there writings do they apply Marx's theories to the political struggle and the abolition of the wages system.

Another example of this academic parasitism in living off Marx's Capital could be found in Quantitative Marxism (ed. P. Dunne, Polity Press 1991). A particularly poor paper in the book was written by Lord Desai. Entitled Methodological problems in Quantitative Marxism, Dessai not only rejected Marx's analysis of the question of the fall in the rate of profit but pompously substituted his own "model" to explain the question, a model which is indistinguishable in its content from the vulgar economics Marx attacked in the 19th century for its apologetic shallowness. Ironically, Lord Dessai was once an economic adviser to the Chancellor of the Exchequer, Gordon Brown.

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Financial Times summaries of Company Reports (1984-5)

For many years the FINANCIAL TIMES published monthly summaries of company accounts, including a figure described as "Net Return on Capital".

In 1884-5 the average net return in respect of over 700 "industrial" companies showed that for the latest year the average was about 16% and for the previous year in respect to the same companies, 15%.

It may be assumed that these figures give a rough indication of "average profitability" as the FINANCIAL TIMES describes them. The "profit" figures used in the calculation were "Profits before interest and tax". The "capital" were "net fixed assets -excluding tangibles such as goodwill - plus current assets, less current liabilities, except bank overdrafts".

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Profits of British Manufacturing Companies 1948-1977

For the 30 years 1948-1977 the Government Statistical Office published each year the number of workers employed by the manufacturing companies, the total wages and salaries bill, and total gross trading profits of the companies. They did not publish information which would have shown directly the course taken by the average rate of profit but indirectly the figures suggest the rate of profit must have been falling.

What is possible to calculate, is the relationship between total profit and the total wage and salary bill. Breaking the 30 years into three 10 year periods, the percentage relationship between profits and wages was as follows:





Profits 57% of wages


Profits 43% of wages


Profits 33% of wages

This, however, was not an example of an industry modernising itself by increasing investment in constant capital relative to variable capital, but an industry which from the 1950's onwards was progressively less and less able to stand up to the competition of cheaper goods from Japan, Germany and elsewhere. The volume of sales declined, at home and abroad. Many forms went out of business or curtailed their operations and between 1956 and 1977 the total number of jobs declined from 8,559,000 to 7,382,000.

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Production, wages and profits 1981 -1993

Experience shows that whatever long-term changes may take place the average rate of profit falls in depressions and rises again as production expands.

There is good indirect indication that this may have been taking place since 1981, as evidenced by the relationship between total gross company trading profits and total wages and salaries.

A useful method of illustrating the variations of profits from year to year is to express them as a percentage of total wages and salaries. The table in Appendix 2 below shows, for each year, the official estimate of total "Gross Trading Profits" as a percentage of "Income from Employment". The Decades covered are from the 1930's to the 1990's.

Income from employment covers all employees in work which, of course, falls when unemployment rises, particularly in a trade depression. Unemployment was generally very low from 1946 to 1976 and was high in 1981-83 and 1989-1993. Income from employment also takes into account changes in average weekly pay. Company profits largely reflect the state of trade in home and foreign markets.

It will be noticed that the figures do not show any long-term trend either for profits to rise, or to fall. The periods in which the percentages were high are in the beginning, 1946-1951, and towards the end, 1982-1988, with generally lower percentages in the middle years, 1966-1976.

The figures show that the variations up and down are not at all related to whether the government is Labour or Tory despite the fact that the Tories have been in power longer during this period than Labour. There is only a minute difference between the average for the 16 years of Labour Government, 22.9%, and that of the 33 years of Tory Government, 22.18%. Of the 6 years in which the percentage is highest (above 27%), 3 are years of Labour Government and 3 are years of Tory Government. Of the 6 years when the percentage were lowest (under 20%), 3 are labour and 6 are Tory. The high rates of profit in the period 1946-1951 will have been helped by the receipt of Marshall Aid from the US, and by the fact that Japan and Germany, due to war damage, were more or less out of the world market. The low rates in 1974-1976 were probably due to the formation of OPEC and the enormous rise in the price of oil in 1973.

What has been happening from the 1980's onwards is that capital invested has increased and the employers have been able to get a big increase of total production -some 21% between 1981 and 1987 - with almost no increase in the number of workers in employment. The decline between 1989 and 1992 is explained by the trade depression of the period where the average rate of profit fell.

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Is there a political point to the tendency for the rate of profit to fall? In the context of the three volumes of CAPITAL it plays its role in explaining economic crises and exploitation which is part of a larger argument against capitalism in that it can never be run in the interests of the working class.

The capitalist left have often tried to draw their own political views of the falling rate of profit from claiming that it will lead to the collapse of capitalism and chaos from which a new society will emerge. As we have shown this was not Marx's view.

A recent writer believes there is another political point to be drawn. In his book "THE FALLING RATE OF PROFIT: RECASTING THE MARXIAN DEBATE" (Pluto Press 1994), Stephen Cullenberg, Associate Professor and Chair of the Department of Economics at the University of California-Riverside stated:

"…not far below the surface of the debate, are different views on the political significance of the falling rate of profit, which gives this debate a particular urgency and vitality. Roughly, these political positions are of two types: (a) if the rate of profit must necessarily fall that provides the basis for a revolutionary transformation to socialism, or, alternatively, (but if it doesn't fall, then political action will necessarily be reformist and capitalism can only be slowly transcended, if ever" (abstract p. 2).

Is this correct? Are revolution and the establishment of Socialism dependent upon the rate of profit to fall? This was again not Marx's view. As early as the COMMUNIST MANIFESTO Marx rejected economic determinism and fatalism. He wrote:

"The essential condition for the existence, and for the sway of the bourgeois class, is the formation and augmentation of capital; the condition of capital is wage-labour. Wage-labour rests exclusively on competition between the labourers. The advance of industry, whose involuntary promoter is the bourgeoisie, replaces this isolation of the labourers, due to competition, by their revolutionary combination, due to association. The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie therefore produces, above all, are its own gravediggers. Its fall and the victory of the proletariat are equally inevitable" (taken from THE COMMUNIST MANIFESTO AND THE LAST HUNDRED YEARS, Socialist Studies, 1948 p. 73).

The central thrust of Marx's argument is that the working class make revolutions and do so because they come to realise that capitalism cannot be made to work in their interests, that reforms and political leaders from across the political spectrum cannot abolish class exploitation, social alienation, poverty and unemployment. Of course Socialism is only possible when a socialist majority exists to take conscious and political action. Until then capitalism will pass from one crisis to the next, one war to the next and one life of class privilege and power to the next.

We have looked at the question of the falling rate of profit, not as an academic exercise, but to see its relevance to the anarchic movement of capitalism from one trade depression to the next and the exploited position of the working class in this movement. Testing the fall in the rate of profit meets difficulty by the unavailability of statistics within the framework in which Marx posed the question and carried out his research. No information exists for the organic composition of capital or the rate of surplus value since all statistics are collected in terms of market prices.

Marxian Economics is important. It forms a large field in the battle of ideas. If Feudalism defended itself ideologically with theology then capitalism, by and large, defends itself with economic theory. Although it is useful to remember, with Engels, that "Economics deals not with things but with relations between persons and in the last resort, between classes", the arguments put forward by academic economists, journalists and politicians have to be largely refuted in economic terms as much of Capital sets out to do because relations between classes under capitalism are "always attached to things and appear as things" (Blaming workers for inflation and giving banks the power to mystically create credit at the stroke of the pen are just two examples). Propagating socialist ideas will not succeed by unsupported rhetoric. Clarity, argument, rigorous debate supported by the facts separates scientific socialism from utopian speculation. It might be hard work but the class struggle is just that.

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Appendix 1

Part III, of CAPITAL VOLUME III, "The Law of the Tendency of the Rate of Profit to Fall" is not easy reading since Marx introduces a number of unfamiliar concepts. The chapters in question are The Law as Such, Counteracting Influences and Internal Contradictions of the Law which are set out from pages 211 to266 of the translation edited by Frederick Engels.

The fundamental contradiction of accumulation, in the Marxian sense of the word, is that the process of capital accumulation has a tendency to attack the very motive which drives it forward, the rate of profit.

Marx expresses the rate of profit for capital in general by the ratio of total surplus value to total capital invested. Marx gives the equation as r = S/(C+V).

The rate of profit then depends on two pivotal relationships. First is the rate of exploitation. Second is the ratio of constant capital to variable capital. This latter ratio Marx called "the organic composition of capital".

The organic composition of capital is either measured as the ratio of constant capital to variable capital (C/V) or as the ratio of constant capital to total capital (C/ (C+V).

Accumulation of constant capital can occur without a subsequent increase in the organic composition of capital if it can be met with an increase in variable capital; that is an increase in the working class employed and exploited in the process of production.

However, if this occurs, the supply of labour to be exploited will fall and wages and salaries begin to rise as workers in employment struggle to use their favourable position to gain better pay and working conditions at the expense of profit.

Historically, what has happened is that capitalists introduce labour saving machinery with displaced workers either finding themselves unemployed or absorbed elsewhere in employment.

The use of machinery increase productivity. What took an architect a week to draw on a drawing board now takes a day's work using computer aided design. Mechanisation may allow a fall in necessary labour time or an increase in relative surplus value.

Nevertheless this raises a problem for the capitalists. The organic composition of capital under these new conditions of mechanisation has a tendency to rise. The amount of dead labour represented by equipment, machinery, computers and buildings rises relative to the employment of living labour. However, as Marx showed in CAPITAL VOLUME I, dead labour or constant capital cannot create additional surplus value. The rate of profit will therefore fall, unless the rate of exploitation increases and the mass of surplus value grows.

This is how Marx posed the problem and, after setting out a number of "counteracting tendencies" and commenting on the "internal contradictions of the law" is how he left it.

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Appendix 2


Total Gross Trading
Profits of Companies
as % of total wages
and salaries












































Source: Office of National Statistics

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