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Previous: Marx's economic theory continued

9. "Capital", v. 3, ch.13-15, Decline in the rate of profit.

1) Progress of technology means that composition of capital, or c/v changes, to be more specific, this proportion increases. Since the rate of profit = s / (c+v), an increase in c/v means that the rate of profit is going to fall. In other words, since in the fraction s / (c+v) the denominator (the lower part of fraction) increases faster than the numerator (the upper part of the fraction), then the fraction decreases, or the rate of profit is falling.

2) Relative decrease of "v" in the fraction "c/v" doesn't mean that the absolute number of workers decreases. The variable capital can increase absolutely, but the constant will increase faster.

3) The mass of profit can increase while the rate of profit can fall. The mass of profit, defined in vol. 1, ch.11, = s/v * V, where V is the entire variable capital used up in the given production; it is proportionate to the number of workers.

4) Causes which counteract the decline in the rate of profit: A) an increase in productivity and cheapening of commodities. That also leads to cheapening of labor power.

B) an increase in exploitation, and hence a growth in surplus value;

C) use of female and children's labor; this leads to cheapening of labor power.

D) an improvement in the methods of production, leading to economy on constant and variable capital.

E) anti-union struggle, use of strikebreakers, immigrant workers, etc.

F) "free trade", i.e. duty free movement of capital. Today, this is one of the meanings of the term "globalization".

G) Monopolism.

H) Imperialism, i.e. cheap labor, etc.

I) Limited cooperation of capitalists, e.g. OPEC.

J) Patents which temporarily increase the profit of capitalists.

K) A decrease in the value of constant capital.

L) Devaluation and destruction of existing capital. Illustrations of the above are numerous. Here is one purely economic example. "The New York Times" started to publish its "Weekly review" in the former USSR. In the issue from 18-31 August 1992 we can find an article called "The last resting place for airplanes":

"Mojave, California - If airplanes die, then their cemetery is here, in Mojave. In the airport of this small town, some 110 km to the north of Los Angeles, there are over 200 useless planes. An industry which used to blossom has led to a market glut for airplanes, and many of them have found their way here.

In this sunny landscape their look ridiculous. Small workhorses with propellers and heavy Boeings 747, among which you can find completely new machines. The names of air companies read like a list of names which have lost their grandeur - Eastern Airlines, Braniff International Airlines, Pan Am & Midway. There are jets of Continental and America West - companies which are in the bankruptcy but still functioning. But not only bankrupt companies place their machines here, but also companies which are doing well, such as Air Canada, British Airway, KLM, etc...

At first most of the parked airplanes were 10-20 years old. But with streamlining of the industry, even new airplanes, bought in large quantities, are no longer needed. There were cases when jets ordered 3 years ago straight from the conveyor have found their way to a hangar in the Mohave desert."

So, in this case we see that capitalists struggle for keeping up the rate of profit through destruction of constant capital in the form of airplanes.

5) Is the rate of profit really falling? Data on this question is usually not advertised. So, at first I decided to measure this indirectly. My attention was attracted by the interest rates, which the capitalist press publishes widely. The rate of profit is directly related to the interest rate. The lower is the interest rate, the lower is the rate of profit. Reason for that is that bankers' profits are part of the surplus value pie distributed among all capitalist in the given society. The smaller is the pie, the smaller is the interest rate. Hence we can make a hypothesis that in the more developed countries the interest rate must be lower than in less developed countries.

To see that the interest rate is lower in more developed capitalist countries you need to look at the issues of "The Economist". On the last pages there are financial indicators. In the table called "Money and interest rate" you can find column called "Prime lending". Choose several countries. For the more advanced, we can take Japan and the USA. For the less advanced, we can take England and Sweden. One criteria which points to an "advanced" capitalist economy is the use of robots, and hence higher productivity of labor. We know that Japan and the USA use more robots than England and Sweden.

The column "Prime lending" doesn't point to real interest rate, and that's because of inflation in each country. Hence, we should make a correction for inflation, by finding what that is in the column "Consumer prices". Obviously, consumer prices rise proportionately to inflation. The real interest rate (R) = the apparent interest rate (A) - the rate of inflation (I).

R = A - I

Let's make calculations for the countries named above for November 1992:

Country

Apparent interest rate

Inflation

Real interest rate

Japan

4.25

1.7

2.55

USA

6

3.2

2.8

England

10

3.6

6.4

Sweden

21

2.0

19

The most developed country is Japan; its interest rate is the lowest - 2.55%. The USA is a close second - 2.8%. England has the third place, with 6.4%. And on the last place is Sweden, with 19%.

It is interesting to observe that in countries where capitalism is in its infancy, the rate of profit is very high. For example, "The New York Times: Weekly review", published in the former USSR, from 13-26 October 1992, says that Mr. Mu who lives in China sells Soviet Tu-154 airplanes. He says: "In China there are many possibilities, much more than in the West. There the economy is saturated with business and the rate of profit is mediocre. Here the economy is still developing". Let's note: while in the USA new, or almost new Boeing 747's are parked in the Mohave desert, in China a hot-baked capitalist sells Soviet Tu-154 airplanes with a profit.

Occasionally, "The Economist" publishes direct data about the rate of profit. Thus, in an issue from 8-14 December 2001, the magazine has written that profit of corporations is now at their lowest level since 1930's. It continues to say that while the average rate of profit in 1950's was over 20%, around 2000 it has fallen to somewhere between 6 and 7%.

6) Hence, the perspective for a socialist revolution is based upon objective development of productive forces under capitalism. The increasing proportion of c/v, and hence decline in the rate of profit, means that both objective and subjective conditions of socialist revolution mature. The falling rate of profit is an objective condition for the destruction of the capitalist mode of production, for the capital we'vedefined as "self-increasing value". If this value can not increase, then we're dealing with self destruction of capital. The subjective condition is an increase in unemployment and exploitation of the workers, an increase in their hatred of capitalism and, hence, development of revolutionary energy.

An addendum, 2009

Profit-rates

Chris Harman article, rate of profit

Rate-of-profit-1950-2000

"The Economist" on the rate of profit, as percent of GDP

1. The rate of profit, according to Chris Harman article (on the left)

2. The rate of profit, according to "The Economist", December 8, 2001 (on the right).

Additional evidence: According to Adam Smith, 1776, the interest rises and falls together with the rate of profit:

"Profit is so very fluctuating that the person who carries on a particular trade cannot always tell you himself what is the average of his annual profit. It is affected not only by every variation of price in the commodities which he deals in, but by the good or bad fortune both of his rivals and of his customers, and by a thousand other accidents to which goods when carried either by sea or by land, or even when stored in a warehouse, are liable. It varies, therefore, not only from year to year, but from day to day, and almost from hour to hour. To ascertain what is the average profit of all the different trades carried on in a great kingdom must be much more difficult; and to judge of what it may have been formerly, or in remote periods of time, with any degree of precision, must be altogether impossible.

But though it may be impossible to determine, with any degree of precision, what are or were the average profits of stock, either in the present or in ancient times, some notion may be formed of them from the interest of money. It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that wherever little can be made by it, less will commonly be given for it. According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of stock must vary with it, must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit." (The Wealth of Nations, chapter IX)

Now, look at the interest rates at the end of 2008 - beginning of 2009. For example, an article from "Daily Telegraph" tells us about a possibility of a 0 interest rate (24 February 2009).

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