Ricardo and Marx Theories of the Falling Tendency of the Rate of Profit - Essay Example

Ricrdo nd Mrx theories of the flling tendency of the rte of profit in the development of cpitlism The tendency of the rte of profit to fll ws n observble phenomenon of cpitlism by Mrx, Ricrdo nd mny other economists. well before Mrx. ccording to Dvid Ricrdo, s cpitl expnded nd the workforce incresed, griculture lso expnded. This implied tht less fertile lnd ws used to grow the food necessry for the incresed workforce. Lower fertility of lnd ment n increse in the cost of food, resulting in higher wges nd therefore lower profits. Mrx did not gree with ny of these explntions. The tendency of the rte of profit to fll rose neither from incresed competition (Smith) nor lower productivity in griculture (Ricrdo). It ws, rther, the expression under cpitlism of the incresed productivity of lbour. In the following pper I will review the theory of the tendency of the rte of profit to fll s postulted by Mrx nd Ricrdo. ccording to Mrx, lw of the tendency of the rte of profit to fll (LTRPF) is theory developed by Mrx in the third volume of Cpitl to explin the occurrence of economic crises within cpitlist economies. ccording to the LTRPF, s cpitlists invest in ever more cpitl-intensive production, the rte of profit flls, since profit cn only be generted from the surplus vlue extrcted from living lbor, which is declining proportion of the cpitlist's outly. However, securing lrger shre of the mrket offsets the lower rte of profit for the individul cpitlist. Eventully the flling rte of profit wekens the incentive to ccumulte on the prt of the cpitlists until eventully the mss of profit begins to stgnte. t tht point n economic crisis begins s cpitlists decline to invest. The LTRPF explins long-term fluctutions in cpitlist economies. There my be long periods of expnsion before the LTRPF ffects the mss of profit, during which the effects of the LTRPF cn be offset by vrious countercting tendencies, such s lower wges nd incresed intensity of exploittion in the lbor process. Eventully, however, there will be period of stgntion nd crisis in which lrge proportion of existing cpitl is destroyed before reinvestment nd renewl cn strt over gin (see Shikh 1991). The importnce of the LTRPF for Mrxist politicl economy is tht it demonstrtes how the rte of profit flls, nd crisis sets in, independently of ny impetus on the prt of lbor. The LTRPF ws of prticulr significnce in this regrd in the 1970s nd 1980s, when it ws widely rgued, nd sometimes ccepted on the Left, tht the economic crisis nd unemployment of the time resulted from excessive wge demnds tht hd generted infltion. Proponents of the LTRPF could mintin tht economic crises would occur even if workers ccepted the cpitlists' clls for wge cuts. If it is ccepted tht the LTRPF is inherent in cpitlist economies, nd tht crises re unvoidble, then the only wy to prevent further crises is to remove the constrints of cpitlism (see Hrmn 1984; Mndel 1981). Citing Mrx in the Cpitl, "the progressive tendency of the generl rte of profit to fll is, therefore, just n expression peculir to the cpitlist mode of production of the progressive development of the socil productivity of lbour. This does not men to sy tht the rte of profit my not fll temporrily for other resons. But proceeding from the nture of the cpitlist mode of production, it is thereby proved logicl necessity tht in its development the generl verge rte of surplus-vlue must express itself in flling generl rte of profit. Since the mss of the employed living lbour is continully on the decline s compred to the mss of mterilised lbour set in motion by it, i.e., to the productively consumed mens of production, it follows tht the portion of living lbour, unpid nd congeled in surplus-vlue, must lso be continully on the decrese compred to the mount of vlue represented by the invested totl cpitl. Since the rtio of the mss of surplus-vlue to the vlue of the invested totl cpitl forms the rte of profit, this rte must constntly fll." (Krl Mrx, Cpitl Volume 3, chpter 13) In nutshell, this lw sttes tht the tendency of the socil cpitl to increse its orgnic composition (i.e. to replce 'living lbour' by the 'ded lbour' embodied in n incresingly sophisticted productive pprtus) must exert downwrd pressure on the rte of profit, the decisive regultor of cpitlist ccumultion. To be sure, Mrx's lw of vlue is merely 'necessry presupposition' of the lw of the flling tendency of the rte of profit, not sufficient one. Yet, there is sense in which the ltter stnds s corollry to the former, even if not theoreticlly ineluctble one. For cpitlism is the one mode of production in which the object of production is only incidentlly the production of prticulr things to stisfy prticulr humn wnts; but in which it is directly nd overwhelmingly the production of vlue, tht 'socil substnce' which is the flesh nd blood of dm Smith's 'invisible hnd'. Mrx's theory of vlue is concerned with the historicl promise nd fteful implictions of lbour process which hs ssumed the socil form of 'vloriztion' process. Mrx's theory serves to remind us tht the impertive to 'produce vlue' is socil impertive, n impertive of cpitlist socil reltions, not technicl or nturl necessity inherent in the metbolic reltion between humnity nd nture. Only society burdened by the need to 'produce vlue' could give birth to so bsurd phenomenon s 'crisis of overproduction'. nd only such society cn trnsform the benefits flowing from lbour-sving technologicl innovtion into declining living stndrds, unemployment, bitter trde rivlries, de pression nd wr. Mrx's theory of vlue, in sum, provides compelling bsis for the conclusion tht cpitlism is, t bottom, n 'irrtionl' nd historiclly-limited system, one which digs its own grve by seeking to ssert its 'independence' from living lbour while remining decisively dependent upon this lbour for the production of its own life-blood: the surplus-vlue which is the socil substnce of privte profit. ccording to Dvid Ricrdo, the theory discussed in the pper should be expressed differently. Supposing grin nd mnufctured goods lwys to sell t the sme price, profits would be high or low in proportion s wges were low or high. But suppose grin to rise in price becuse more lbor is necessry to produce it; tht cuse will not rise the price of mnufctured goods in the production of which no dditionl quntity of lbor is required. If, then, wges continued the sme, the profits of mnufcturers would remin the sme; but if, s is bsolutely certin, wges should rise with the rise of grin, then their profits would necessrily fll. Thus in every cse, griculturl, s well s mnufcturing profits, re lowered by rise in the price of rw produce, if it be ccompnied by rise of wges. If the frmer gets no dditionl vlue for the grin which remins to him fter pying rent, if the mnufcturer gets no dditionl vlue for the goods which he mnufctures, nd if both re obliged to py greter vlue in wges, cn ny point be more clerly estblished thn tht profits must fll, with rise of wges The frmer then, lthough he pys no prt of his lndlord's rent, tht being lwys regulted by the price of produce, nd invribly flling on the consumers, hs however very decided interest in keeping rent low, or rther in keeping the nturl price of produce low. The nturl tendency of profits then is to fll; for in the progress of society nd welth, the dditionl quntity of food required is obtined by the scrifice of more nd more lbor. This tendency, this grvittion s it were of profits, is hppily checked t repeted intervls by the improvements in mchinery, connected with the production of necessries, s well s by discoveries in the science of griculture which enble us to relinquish portion of lbor before required, nd therefore to lower the price of the prime necessry of the lborer. The rise in the price of necessries nd in the wges of lbor is however limited; for s soon s wges should be equl to the whole receipts of the frmer, there must be n end of ccumultion; for no cpitl cn then yield ny profit whtever, nd no dditionl lbor cn be demnded, nd consequently popultion will hve reched its highest point. Long indeed before this period, the very low rte of profits will hve rrested ll ccumultion, nd lmost the whole produce of the country, fter pying the lborers, will be the property of the owners of lnd nd the receivers of tithes nd txes. There would be no motive for ccumultion; for no one ccumultes but with view to mke his ccumultion productive, nd it is only when so employed tht it opertes on profits. The frmer nd mnufcturer cn no more live without profit, thn the lborer without wges. Their motive for ccumultion will diminish with every diminution of profit, nd will cese ltogether when their profits re so low s not to fford them n dequte compenstion for their trouble, nd the risk which they must necessrily encounter in employing their cpitl productively....In this cse rection will tke plce, wges will be below their nturl level, nd will continue so, till the usul proportion between the supply nd demnd hs been restored. Thus, only the lndlord stnds to gin. The lborer is forever condemned to the mrgin, for with every rise in wges he hs more nd more children, nd thus competes his wges down to bre subsistence. The cpitlist, who works nd sves nd invests, nd drives forwrd the economic engine of society, finds tht ll his trouble is for nught, s his wge costs re higher nd higher, his profits smller nd smller, nd his rent higher nd higher. Thus the lndlords lone, who do nught but collect rent, who contribute nothing to the progress of society, get welthier nd welthier, while the rest of society---both cpitlists nd lborers---get poorer nd poorer. LTRPF of both Ricrdo nd Mrx is very economistic technologicl interprettion of the ide tht the brrier to cpitl is cpitl itself. fter ll, s economists explined frequently, cpitl is not merely bundle of physicl objects (mens of production like mchinery nd fctories), but lso socil reltion (tht is, cpitl is mens of production operted by wge lbour nd owned by cpitlists in competition with ech other). The ide of cpitl s brrier to itself does not depend on some technologiclly bsed impossibility to continue ccumulting (technologicl in the sense tht Mrx sys the LTRPF is the reflection under cpitlism of the higher lbour productivity resulting from technicl progress). It my include such technologicl component, but the brrier itself cn just s much derive from the fct tht the development of the reltions between cpitl nd lbour, nd between the different groups of cpitl (within country or between countries), constitutes brrier to continued development. The brrier then is the clss-ridden nd unplnned nture of the cpitlist system. The theories of Mrx nd Ricrdo hve been criticized by other uthors. The most importnt criticism of the theory is tht it mkes unjustifible deductions bout the vlue composition of cpitl from perfectly plusible ssumptions bout the technicl composition of cpitl. The technicl composition of cpitl is physicl reltion between the mss of mchinery, rw mterils, etc. used nd the number of workers. The substitution of mchinery for lbour, which Mrx perfectly correctly sw s persistent tendency of cpitlist production, leds to rising technicl composition of cpitl. But prt nd prcel of the process of rising technicl composition is rise in the productivity of lbour. This mens tht the vlue of ech commodity-the socilly necessry lbour time required to produce them-is flling. Thus the vlue of constnt cpitl which ech worker uses is subject to two contrdictory processes. The movement of the vlue of cpitl depends on which of the two contrdictory processes t work-the rising mss of constnt cpitl nd its devlution-is the dominnt one. If the technicl composition of cpitl rises fster thn the devlution of cpitl then the vlue of constnt cpitl rises per worker, nd vice-vers. Contrry to Mrx's ssertion, it is impossible to rgue for persistent tendency for the technicl composition to rise fster thn cpitl is devlued-the outcome is indeterminte. Thus, while it is possible tht over prticulr periods the vlue composition of cpitl will rise, it cnnot be held to be fundmentl tendency of cpitlist production. If the rtio of ded to living lbour does rise over prticulr period this my or my not be ssocited with fll in the rte of profit. s is well known, it depends whether the rte of exploittion is incresed sufficiently. Wht is true is tht if the rtio of ded to living lbour rises indefinitely then the rte of profit must fll. But such persistent continul rise in the rte of ded to living lbour is only one out of mny possibilities. It is possible tht the cpitlists, forced by competition to chepen their commodities nd seeking to increse s fr s possible the mrgin of profit they ern on ech commodity, might persistently introduce new techniques of production of higher nd higher rtio of ded to living lbour which must eventully depress the profit rte. But it is eqully possible, when ccount is tken of the chepening of mchinery due to technicl progress in the cpitl goods industries, tht the rtio of ded to living lbour will not increse, so the cpitlists serch for cheper commodities, nd the mximum profit mrgin nd mss of profit would not led to fll in the profit rte. There is no logicl bsis for giving one of these possibilities (flling rte of profit, reflecting rising rtio of ded to living lbour) ny theoreticl priority t this level of bstrction nd divorced from the other spects of the ccumultion process. In the end, Mrx prised Ricrdo in his efforts to understnd the movement of the rte of profit. However his theory ws different from the theory of Ricrdo. Not only did he probe this question much more deeply thn Smith (who sw profit flling s result of competition, which ws no explntion t ll) but Ricrdo did grsp the significnce of the rte of profit s the motor of cpitl ccumultion: 'Wht worries Ricrdo is the fct tht the rte of profit, the stimulting principle of cpitlist production, the fundmentl premise nd driving force of ccumultion, should be endngered by the development of production itself'. But, dds Mrx, Ricrdo ws concerned here, s in so mny other mtters, only with the quntittive spect of the problem nd ws t best only vguely wre of the rel forces lying behind this tendency. He sw the problem, sys Mrx, 'in purely economic wy - tht is from the bourgeois point of view, within the limittions of cpitlist understnding, from the stndpoint of cpitlist production itself'. Bibliogrphy: 1. Shikh, . 1991. "Flling rte of profit." In Dictionry of Mrxist Thought, 2d ed., ed. Bottomore, 185--86. 2. Mrx, Krl, Cpitl, vol. 3, edited by Frederick Engels. New York: Interntionl Publishers, 1967 (orig. ed. 1894). Chpter 2, "The Rte of Profit" nd Chpter 13, "The Lw s Such." Hrmn, C. 1984. Explining the Crisis: Mrxist Repprisl. London: Bookmrks. 3. Mndel, E. 1981. Introduction to K. Mrx, Cpitl, vol. 3,9--90. Hrmondsworth, UK: Penguin. Read More