Tendency of The Rate of Profit To Fall - Marx's Argument

Marx's Argument

Marx argued that increased investment in constant capital (fixed capital (factories, machines, buildings), raw materials) relative to variable capital (labor) reduced the margin of surplus labor time relative to the total capital invested (constant capital plus variable capital). According to Marx, surplus labor time is the source of surplus value. Now the rate of profit equals surplus value divided by total capital, so the fall in surplus labor time relative to capital results in a fall in the rate of profit for newly produced commodities.

Even as investment in constant capital increases productivity (i.e. the margin of surplus labor relative to regular labor, and thus of surplus value relative to variable capital), it reduces the rate of profit (i.e. the ratio of surplus value relative to total capital). The capitalist then responds by investing more in raising productivity or expanding the scale of production, which in turn reduces profits per unit further after a while, and so on and so forth, in a vicious cycle of diminishing returns.

This is, then, the general tendency in capitalism, but it is only a tendency, because there are also "counteracting factors" operating which had to be studied also. In his draft manuscript (he did not publish it himself), Marx cited six of them:

• more intense exploitation of labour (raising the rate of exploitation);
• reduction of wages below the value of labour power (commonly referred to as the "immiseration thesis");
• cheapening the elements of constant capital by various means;
• the growth and utilization of a relative surplus population (the reserve army of labour);
• foreign trade reducing the cost of industrial inputs and consumer goods; and
• the increase in share capital, which devolves part of the costs of using capital on others.

But there could obviously also be several other factors involved which Marx did not discuss in detail, including:

• reductions in the turnover time of industrial capital generally (e.g., an increase, driven by technology or management, in the productivity of fixed capital investment);
• accelerated depreciation and faster throughput;
• the level of price inflation for different types of goods and services;
• capital investment into previously non-capitalist production, where a lower organic composition of capital prevailed;
• military wars or military spending causing capital assets to be inoperative or destroyed, or spurring war production (see permanent arms economy);
• demographic factors
• consolidation of mature industries into an oligarchy of survivors. Mature industries do not attract new capital because of low returns. Also, mature companies with large amounts of capital invested and brand recognition create barriers to entry against new competitors. See also secular stagnation theory.

Some of these "countervailing factors" can only temporarily postpone the fall of the rate of profit. Wages, for instance, cannot fall below zero, the turnover period of capital also cannot fall below zero, and so on.

The controversy about the TRPF nowadays concentrates on whether the cheapening of elements of constant capital could indefinitely counteract the TRPF, and what effect increased productivity has on the rate of profit on production capital.