Capital acting as a barrier to itself

Many economists and Marxists too have struggled with the reasons for crises in the capitalist system. Well the whole system is based on contradictions which become greater and greater as the system develops into a more advanced economic system. As a Marxist I follow the writings of Karl Marx not dogmatically but by applying his theories to the current situation today. I am a big supporter of Marx’s theory of the tendency of the rate of profit to fall and believe firmly that this is where Marxists and economists alike should be focusing their studying time. I’ve just finished the section the 3 chapters which I think are crucial in Marx’s capital Vol 3 are chapters 13, 14 and 15. In the first chapter 13 Marx sets out his theory of the tendency of the rate of profit to fall in a superb fashion going on in the other two chapters to explain what counter actions could be put in place to slow or decrease the fall of the rate of profit to fall whilst upholding that this can only ever be temporary and eventually the economic crash is not far away and counter measures o stem the crisis like we are seeing right now will only delay the eventual slump and depression. Capitalists area always having to update and improve their modes of production speed up the process buy more effective and efficient machinery and this as a result takes away the role of a labourer or two this as we know diminishes the rate of surplus value due to the need to improve production forces yet the source of a capitalist profit from the embodiment of human wage labour is reduced to the addition of new machines causing the rate of profit to fall s a result. This is a natural process as to remain competitive the capitalist must cut his production costs in terms of his constant capital and his means of production. The e rules of competition require the capitalist to constantly try and out do his competitors to steal a march in the market and to eventually drive out his competitors he does this in several ways. Karl Marx writes in his supplementary remarks in chapter 15 of volume 3 “While the circulating part of constant capital, such as raw materials, etc., continually increases its mass in proportion to the productivity of labour, this is not the case with fixed capital, such as buildings, machinery, and lighting and heating facilities, etc. Although in absolute terms a machine becomes dearer with the growth of its bodily mass, it becomes relatively cheaper. If five labourers produce ten times as much of a commodity as before, this does not increase the outlay for fixed capital ten-fold; although the value of this part of constant capital increases with the development of the productiveness, it does not by any means increase in the same proportion. We have frequently pointed out the difference in the ratio of constant to variable capital as expressed in the fall of the rate of profit, and the difference in the same ratio as expressed in relation to the individual commodity and its price with the development of the productivity of labour. [The value of a commodity is determined by the total labour-time of past and living labour incorporated in it. The increase in labour productivity consists precisely in that the share of living labour is reduced while that of past labour is increased, but in such a way that the total quantity of labour incorporated in that commodity declines; in such a way, therefore, that living labour decreases more than past labour increases. The past labour contained in the value of a commodity — the constant part of capital — consists partly of the wear and tear of fixed, partly of circulating, constant capital entirely consumed by that commodity, such as raw and auxiliary materials. The portion of value deriving from raw and auxiliary materials must decrease with the increased productivity of labour, because with regard to these materials the productivity expresses itself precisely by reducing their value. On the other hand, it is most characteristic of rising labour productivity that the fixed part of constant capital is strongly augmented, and with it that portion of its value which is transferred by wear and tear to the commodities. For a new method of production to represent a real increase in productivity, it must transfer a smaller additional portion of the value of fixed capital to each unit of the commodity in wear and tear than the portion of value deducted from it through the saving in living labour; in short, it must reduce the value of the commodity. It must obviously do so even if, as it occurs in some cases, an additional value goes into the value of the commodity for more or dearer raw or auxiliary materials over and above the additional portion for wear and tear of the fixed capital. All additions to the value must be more than offset by the reduction in value resulting from the decrease in living labour. This reduction of the total quantity of labour going into a commodity seems, accordingly, to be the essential criterion of increased productivity of labour, no matter under what social conditions production is carried on. Productivity of labour, indeed, would always be measured by this standard in a society, in which producers regulate their production according to a preconceived plan, or even under simple commodity-production. But how does the matter stand under capitalist production? Suppose, a certain line of capitalist industry produces a normal unit of its commodity under the following conditions: The wear and tear of fixed capital amounts to ½ shilling per piece; raw and auxiliary materials go into it to the amount of 17½ shillings per piece; wages, 2 shillings; and surplus-value, 2 shillings at a rate of surplus-value of 100%. Total value = 22 shillings. We assume for the sake of simplicity that the capital in this line of production has the average composition of social capital, so that the price of production of the commodity is identical with its value, and the profit of the capitalist with the created surplus-value. Then the cost-price of the commodity = ½ + 17½ + 2 = 20s. the average rate of profit 2/20 = 10%, and the price of production per piece of the commodity, like its value = 22s. Suppose a machine is invented which reduces by half the living labour required per piece of the commodity, but trebles that portion of its value accounted for by the wear and tear of the fixed capital. In that case, the calculation is: Wear and tear = 1½ s., raw and auxiliary materials, as before, 17½s. wages, 1s., surplus-value 1s., total 21s. The commodity then falls 1s. In value; the new machine has certainly increased the productivity of labour. But the capitalist sees the matter as follows: his cost-price is now 1½s. For wear, 17½s. For raw and auxiliary materials, 1s. For wages, total 20s., as before. Since the rate of profit is not immediately altered by the new machine, he will receive 10% over his cost-price, that is, 2s. The price of production, then, remains unaltered = 22s., but is 1s. Above the value. For a society producing under capitalist conditions the commodity has not cheapened. The new machine is no improvement for it. The capitalist is, therefore, not interested in introducing it. And since its introduction would make his present, not as yet worn-out, machinery simply worthless, would turn it into scrap-iron, hence would cause a positive loss, he takes good care not to commit this, what is for him a utopian, mistake. The law of increased productivity of labour is not, therefore, absolutely valid for capital. So far as capital is concerned, productiveness does not increase through a saving in living labour in general, but only through a saving in the paid portion of living labour, as compared to labour expended in the past, as we have already indicated in passing in Book I (Kap. XI II, 2, 5. 409/398). [English edition: Ch. XV, 2. — Ed.] Here the capitalist mode of production is beset with another contradiction. Its historical mission is unconstrained development in geometrical progression of the productivity of human labour. It goes back on its mission whenever, as here, it checks the development of productivity. It thus demonstrates again that it is becoming senile and that it is more and more outlived.] [1] Under competition, the increasing minimum of capital required with the increase in productivity for the successful operation of an independent industrial establishment, assumes the following aspect: As soon as the new, more expensive equipment has become universally established, smaller capitals are henceforth excluded from this industry. Smaller capitals can carry on independently in the various spheres of industry only in the infancy of mechanical inventions. Very large undertakings, such as railways, on the other hand, which have an unusually high proportion of constant capital, do not yield the average rate of profit, but only a portion of it, only an interest. Otherwise the general rate of profit would have fallen still lower. But this offers direct employment to large concentrations of capital in the form of stocks. Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows. The increase in the absolute number of labourers does not occur in all branches of production, and not uniformly in all, in spite of the relative decrease of variable capital laid out in wages. In agriculture, the decrease of the element of living labour may be absolute. At any rate, it is but a requirement of the capitalist mode of production that the number of wage-workers should increase absolutely, in spite of its relative decrease. Labour-power becomes redundant for it as soon as it is no longer necessary to employ it for 12 to 15 hours daily. A development of productive forces which would diminish the absolute number of labourers, i.e., enable the entire nation to accomplish its total production in a shorter time span, would cause a revolution, because it would put the bulk of the population out of the running. This is another manifestation of the specific barrier of capitalist production, showing also that capitalist production is by no means an absolute form for the development of the productive forces and for the creation of wealth, but rather that at a certain point it comes into collision with this development. This collision appears partly in periodical crises, which arise from the circumstance that now this and now that portion of the labouring population becomes redundant under its old mode of employment. The limit of capitalist production is the excess time of the labourers. The absolute spare time gained by society does not concern it. The development of productivity concerns it only in so far as it increases the surplus labour-time of the working-class, not because it decreases the labour-time for material production in general. It moves thus in a contradiction. We have seen that the growing accumulation of capital implies its growing concentration. Thus grows the power of capital, the alienation of the conditions of social production personified in the capitalist from the real producers. Capital comes more and more to the fore as a social power, whose agent is the capitalist. This social power no longer stands in any possible relation to that which the labour of a single individual can create. It becomes an alienated, independent, social power, which stands opposed to society as an object, and as an object that is the capitalist's source of power. The contradiction between the general social power into which capital develops, on the one hand, and the private power of the individual capitalists over these social conditions of production, on the other, becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions. This transformation stems from the development of the productive forces under capitalist production, and from the ways and means by which this development takes place. No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it may increase the rate of surplus-value, so long as it reduces the rate of profit. Yet every such new method of production cheapens the commodities. Hence, the capitalist sells them originally above their prices of production, or, perhaps, above their value. He pockets the difference between their costs of production and the market-prices of the same commodities produced at higher costs of production. He can do this, because the average labour-time required socially for the production of these latter commodities is higher than the labour-time required for the new methods of production. His method of production stands above the social average. But competition makes it general and subject to the general law. There follows a fall in the rate of profit — perhaps first in this sphere of production, and eventually it achieves a balance with the rest — which is, therefore, wholly independent of the will of the capitalist. Three cardinal facts of capitalist production: 1) Concentration of means of production in few hands, whereby they cease to appear as the property of the immediate labourers and turn into social production capacities. Even if initially they are the private property of capitalists. These are the trustees of bourgeois society, but they pocket all the proceeds of this trusteeship. 2) Organisation of labour itself into social labour: through co-operation, division of labour, and the uniting of labour with the natural sciences. In these two senses, the capitalist mode of production abolishes private property and private labour, even though in contradictory forms. 3) Creation of the world-market. The stupendous productivity developing under the capitalist mode of production relative to population, and the increase, if not in the same proportion, of capital-values (not just of their material substance), which grow much more rapidly than the population, contradict the basis, which constantly narrows in relation to the expanding wealth, and for which all this immense productiveness works. They also contradict the conditions under which this swelling capital augments its value. Hence the crises. References Karl Marx capital volume 3 Penguin edition http://www.marxists.org/archive/marx/works/1894-c3/ch15.htm

Marx’s theory of the tendency of the rate of profit to fall

This is Karl Marx’s basic ideas of financial crisis. It’s not something which is easily understood and many on the left today fail to grasp Marx’s teachings sadly. But here I will point readers in the right direction. Marx described his idea of how crisis’s come about and how they can be counters acted and how they will eventually be overcome. This is basic Marxism which all comrades must try and grasp if we are to understand the current economic crisis and produce a well rounded Marxist analysis and a alternative to the crisis which as Marxist’s must be nothing less than the over throw of the current order the removal of the capitalist system in place of a socialist planned democratic economy based on the needs of the many. The tendancy for the rate of profit is basically summed up in the notion thatcapitalits as technology advances naturally uses’s more machinery to help produce comodites and as Labour is the source of profit the capitalist use’s less of labour power variable capital if you like the tendancy for the rate of profit to fall is thus. One blog I would point you in the direction of is my comrade from Scotland Bruce Wallace http://69.195.124.91/~brucieba/ Bruce is a highly developed comrade in terms of political economy and Marxist economics that the CWI should treasure and look to. Bruce’s blog is excellent in expressing and educating other socialists on the ideas of Marx and Marx’s ideas of crisis. Bruce like others remains true to the ideas of Marx and Marx’s ides in volume 3 which I’d advice all comrades to read closely the ideas of crisis and how Marx understands crisis’s to develop. To quote from Bruce’s excellent blog below. “We must clarify exactly what is meant by the rate of profit in capitalism because the term profits can be quite misleading. The rate of profit is determined by the rate of return on the amount of capital invested (advanced in Marx’s terminology). If a capitalist advances a capital of £100 and the rate of profit is 20% they will get their original investment back plus £20 in profit. The rate of profit is therefore a percentage rate of return on investment. The £20 the capitalist reaps as profit at the end of the production process is what is regarded as the mass of profit. From this it is easy to see that if the rate of profit falls to say 10% but the capitalist advances £1000 that the mass of profit will be £100. So even with a lower rate of profit the capitalist can recoup a greater mass of profit. This is an important point to remember as we proceed with Marx’s theory. What is clear is that the rate of profit is what the capitalist expects to make on the investment of their capital based on the existing rate of profit. So caution is required when reading economic literature that refers to the abstract term ‘profits’ as the rate and mass of profit are two distinctly different things. The rate is the expectation and the mass is the result. Capital is attracted to the areas of industry which are making the highest rate of profit. This is not based on the independent decision making of individual capitalists. In modern capitalism there is a free flow of capital to the most profitable sectors and this process is automatically governed by the stock market. Through the coercive force of competition the rate of profit tends to equalize and to fall across the economy as a whole. This applies to the world economy and not just within national economies. The less productive, and hence less profitable, industries go out of business or are absorbed by rivals. So it is the rate of profit which is the motive force of competition and for a greater and greater concentration and centralisation of capital. There is a growth of larger corporations and monopolies with their integration into banking and finance. This is what Marx means by an increase in the mass of accumulated capital although a fall in the rate of profit means a decline in the rate of accumulation. In other words economic growth slows but the concentration of capital (its mass) increases. This is very much like the evolution of a black hole in physics. How the LTRPF, in tandem with accumulation, works out in practice to produce crisis is explained by Marx in a chapter in Capital Volume III titled “Development of the Law’s Internal Contradictions”. Let’s look at how it works? How it Works in Practice The continuous downward pressure on the rate of profit brings forth what Marx called counteracting influences or tendencies and these are the main ones. • More intense exploitation of labour (increasing productivity) • Reduction of wages below their value (wage cuts) • Cheapening of the elements of constant capital (reducing the cost of machinery) • The relative surplus population (using unemployment to force down wages and conditions)) • Foreign trade (the expansion of global capitalism) • The increase in share capital (the growth of banking and finance/debt” All these points above are crucial to understanding how the tendency for the rate of profit LTRPF, can be delayed and held up. But as we know this can only delay the v LTRPF to fall. The general tendency is for this to eventually fall. The addition of credit in the capitalist system in the last 10- 20 years extending this process was a method adapted to the capitalist system only to stem the crisis and put it off for another day. Bruce in his superb blog goes on to explain what this means in practice “The LTRPF is primarily a historical law whose influence is felt over a protracted period of time resulting in major periodic crisis but it also is the underlying reason for ‘normal’ periodic recessions. In this sense the law has two aspects. Marx analysed the impact of the counter tendencies on the long term operation of the law. As he explains in relation to increasing the exploitation of the working class either through improving productivity or lengthening the working day: ‘This factor does not abolish the general law. But it causes that law to act rather as a tendency, i.e., as a law whose absolute action is checked, retarded, and weakened, by counteracting circumstances’. (Capital Vol III ) Earlier, in relation to the reduction of surplus value embodied in commodities due to accumulation offsetting a fall in the rate of profit by cheapening the cost of both productive and consumer goods he wrote: ‘But in reality, as we have seen, the rate of profit will fall in the long run. In no case does the fall in the price of any individual commodity by itself give a clue to the rate of profit. Everything depends on the magnitude of the total capital expended in its production’. (Capital Vol III ) And: Thus the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced’ Recourse to credit and finance was a particular feature of the neo-liberal boom. There was a huge growth in both consumer and government debt which extended the period of the boom but it did not negate the general law. Thus recourse to what Marx called fictitious capital laid the basis for a sovereign debt and fiscal crisis. This is fictitious i.e. imaginary value, because it is based purely on paper assets, promissory notes on future profits, yet the root of the crisis lay in production and the long term decline in the rate of profit. The law appears to operate cyclically and governs the onset of recessions. This has been proven in excellent research by José Granados (2012): ‘‘Data on 251 quarters of the U.S. economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn to a fall in demand, seems to be a basic mechanism in the causation of recessions.’ Thus we have periodic booms and slumps. Normally there are recessions approximately every eight years or so that are quickly overcome but the process is also cumulative. As accumulation proceeds the historical operation of the law builds up pressure for major generalised crises over a longer timescale. We have seen this in the history of capitalism where there have been four major generalised crises; the Long Depression of the 1870’s, the Great Depression of the 1930’s, the crisis of the 1970’s and todays Long Depression. The falling rate of profit is the underlying and indirect force driving these crises all of which have specific and unique features. In some ways this is akin to the movement of the earth’s tectonic plates that build up pressure at fault lines in the earth’s crust eventually causing earthquakes. The LTRPF is exactly like this; an indirect force acting on the dynamics of capitalist development that causes economic earthquakes! “ Bruce finnish’s with this section “The crisis is far from over as more sober economic commentators have pointed out in a world loaded with geopolitical and economic risk. It is just as Karl Marx predicted for capitalism: ‘Its historical mission is unconstrained development in geometrical progression of the productivity of human labour. It goes back on its mission whenever, as here, it checks the development of productivity. It thus demonstrates again that it is becoming senile and that it is more and more outlived’. (Capital Vol III ) Capitalism is senile and outlived because its motive force, the rate of profit, is weak. In order to restore it and usher in a renewed period of dynamic growth there must be the mass destruction of capital value and intensified exploitation of the working class, a renewed major global economic slump is therefore inevitable at some point. Even a major recovery will sow the seeds for a renewed downturn and these are becoming ever more violent and catastrophic in their effect. Only One Alternative Marxists are in favour of revolution not because capitalism is an unjust or unequal form of society. Of course capitalism is just that but there is another more pressing reason. Marx showed that capitalism leads to ever more destructive economic crises. Capitalism’s lust to expand endlessly inevitably hits ever more insurmountable barriers due to the crisis tendency that is inbuilt into the very logic of the system itself. As Marx stipulated the barrier to capital in these terms is capital itself. Unless capitalism is overthrown the prospects for humanity are grim including the exhaustion of the earth’s natural resources or destructive war but there is an alternative: ‘The contradiction between the general social power into which capital develops, on the one hand, and the private power of the individual capitalists over these social conditions of production, on the other, becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions. This transformation stems from the development of the productive forces under capitalist production, and from the ways and means by which this development takes place’. (Marx Capital Vol III) The only alternative to the deepening crisis of capitalism’s ‘creative destruction’ is its abolition as a social system and its replacement with a socialist plan of production on a global scale. Other solutions, such as limited nationalisation, state control of the banks and policies aimed at redistributing wealth for example are completely utopian. Provided capitalist production continues i.e. a system which aims at the production of value, of abstract wealth, in favour of a small minority of society and not to meet general human need more destructive crises are inevitable. Marxists do of course struggle for immediate reforms such as halting the austerity cuts, an increase in wages and a program of public works but only as part of a general strategy towards the overthrow of the capitalist system itself. To argue otherwise, as some on the left have done, that capitalism has somehow solved its problems in the advanced countries negating the need for revolution is flying in the face of reality. The epicentre of the current capitalist crisis is precisely in the advanced capitalist countries where there is such a historic accumulation of the mass of capital. In the advance countries the prospect for the working class is increasing misery and exploitation and the historic decline of the economy. The Greek and Spanish crises show the more advanced European countries an image of their own future as the crisis begins to grip France who’s unemployment has hit 10%. Across Europe more that 20 million workers are jobless and the depression is deepening. Neither will the rise of capitalism in the emerging markets offer a way out as this will lead to exactly the same working out of Marx’s law. China, the world’s second biggest economy, is preparing a massive slump with its huge growth of constant capital. The interconnectedness of the global capitalist economy heralds further conflagrations of more intensity and depth on a world scale than ever before. The long term choice for the working class is stark, socialism or barbarism, and only in the works of Karl Marx can a thought out scientific answer to the way forward be found.” So we can see that the tendancy for the rate of profit to fall is a long term affect with several counter acting measues which can be taken but ultimately can only put off the crisis for another day. The ultimate choice is of a widespread destruction of capital resulting in huge redundancies, mass unemployment and therefore a driving down of labour power to a point where capital can feel confident enough to start to reinvest. Not when the ground is clear for reinvestment will this happen. It is clear that left Keynesian demands will only go so far that we have to take a much bigger look at the overall picture of production and the capitalist system as a whole to understand the long term trends within the system itself. For Marxist’s this should be Marxism 101 but not for an all sadly. A fear of theory and economics leads others to blindly follow others yet a examination of Marx’s works will show many experienced Marxists that the tendency of the rate of profit to fall is spot on and however had they try to disprove it Marx always comes back stronger and even more correct. Lastly I don’t fully understand this myself but am developing my understanding all the time I therefore encourage other comrades and beyond to educate themselves too in the teachings of Marx and Engel’s in economics as it’s crucial to understanding the period we are living through. With huge thanks to comrade Bruce Wallace and his excellent blog for extracts and help. Do check him out if you can. References Marx, K. (2013) Capital Volume I Marxist internet archive http://www.marxists.org/ Marx, K. (2013) Capital Volume II Marxist internet archive http://www.marxists.org/ Marx, K. (2013) Capital Volume III Marxist internet archive http://www.marxists.org/ Marx, K. (2013) Theories of surplus value Marxist internet archive http://www.marxists.org/ Marx , K. (2013) Grundrisse Marxist internet archive http://www.marxists.org/ And lastly comrade Bruce Wallace’s blog http://69.195.124.91/~brucieba/2013/06/11/the-basic-mechanism-of-capitalist-crisis-part-ii/