‘Others apart sat on a hill retired,
In thoughts more elevate, and reasoned high
Of providence, foreknowledge, will, and fate,
Fixed fate, free will, foreknowledge absolute,
And found no end, in wandering mazes lost’.
Milton, Paradise Lost.
Marx uncovered many causes of capitalist economic crisis.
footnote1 It has been traditional, however, to place his theory of the tendency of the rate of profit to fall in the centre of the Marxian analysis and critique of capitalism. Marx’s main exposition appears in the first and third volumes of Capital.
footnote2 The theory attempts to show that there is an inbuilt tendency for the capitalist system to stagnate or fall into crisis, as a result of the falling rate of profit. But Marx did not expect the rate of profit to decline in a persistent and uninterrupted manner; certain ‘counteracting influences’ would periodically halt the downward slide. Despite this qualification, the theory has been regarded, by most Marxists, as the backbone of revolutionary Marxism. According to this view its refutation or removal would lead to reformism in theory and practice. In this regrettable context we shall attempt to refute the theory of the falling rate of profit. In addition we shall
The existence of separate capitalist firms creates a tendency for the rate of profit to be equalized between firms. The more competitive the situation the more pronounced is this tendency. Capitalist competition, therefore, leads to the formation of a general rate of profit in the economy. This tendency is even present under monopoly capitalism, as capitalism is inconceivable without some degree of competition and separation between firms. footnote3 With increasing competition and inter-dependence we have no reason to suppose that this tendency is dead today.
Marx’s analysis of the falling rate of profit proceeds from this essential feature of capitalist production. At a given level of abstraction it is justified to ignore the various frictions and barriers that prevent the rapid formation of an equilibrium general rate of profit. Marx starts from the rate of profit in value terms in each firm, i.e. surplus value divided by the value of the total capital invested. He then treats the whole economy as a ‘single capital’ footnote4 and equates the general with the average rate of profit. Hence, in Marx’s view, the general rate of profit is the total surplus value in the economy divided by the total value of capital invested.
Two points are evident here. Firstly, no reason is given to identify the general with the average rate of profit. Secondly, Marx’s general rate of profit is a ratio between value amounts, i.e. amounts of socially necessary labour time. It is not a ratio between prices. Some Marxists and non-Marxists, such as the Ricardian economist L. v. Bortkiewicz, have criticized this formulation of the general rate of profit on the grounds that there is no reason to assume that the rate of profit in value terms will tend to be equalized. The rate of return on capital advanced is calculated in terms of prices, as capitalists are not aware of, or disposed towards, any embodied labour calculation. The general rate of profit is the ratio between profit and the price of capital invested, as this is the actual rate of profit that is equalized between firms in the real world. This point of contention relates to the well-known transformation
Despite this connection between the transformation problem and the question of the falling rate of profit it is possible to deal with the latter without invoking a rejection of Marx’s solution to the transformation problem. Our critique of the falling rate of profit theory in Section II is directed at Marx’s formula for the general rate of profit, as in certain circumstances this coincides with the correct formula adduced by Bortkiewicz and others—when prices are proportional to values, for instance. Hence we can avoid the intricacies of the transformation problem, at the cost of a lack of completeness in our argument.