Karl Marx’s alternative to capitalism part 24 – forces and relations of production 7

Not only do increases in production often require machines to replace living labour but the increase in productivity necessarily increases the share of materials purchased and incorporated into the increased number of products produced.  Materials which pass only their own value into the final product and no new surplus.

Marx is explicit on this general point – “Moreover, it has been shown to be a law of the capitalist mode of production that its development does in fact involve a relative decline in the relation of variable capital to constant, and hence also to the total capital set in motion.” (Capital Volume III p 318)

Of course, there are often efficiencies created in the use of materials and also in the value and cost of machinery, which again is also a result of increased productivity in the industries that produce them. As Marx says “We see here once again how the same factors that produce the tendency for the rate of profit to fall also moderate the realisation of this tendency.” (Capital Volume III p 343)  And, of course, while the number of workers may reduce, the time they spend creating value purely for the capitalist will increase.

These all offset any fall in the share of surplus value in the total value of production but irrespective of this, the compulsion to increase productivity and reduce the employment of labour and its cost, impels individual capitals to seek these improvements because individually they will be able to undercut costs in relation to rivals, while perhaps selling at the same or slightly lower price than competitors while making a more significant profit.

Should their new methods of production become generalised among the majority of capitalists in their sector of production, or the less productive ones fail and exit production, then the overall share of labour in that sector of production will fall and so will the share of surplus value and of profit.  What makes sense for an individual capitalist reduces the share of profits for everyone in the sector – the development of the forces of production conflict with the relations of production which are based on seeking the greatest possible expansion of surplus value.

Such a fall in the amount of living labour in production can be offset by increased levels of exploitation but a rise in level of exploitation can check but may not cancel the fall in the rate of profit, and this is particularly so at high levels of organic composition of capital; although the latter assumes technological development that can do this across more and more industrial sectors, and increasingly so to new sectors and any new independent capitals thrown up.

A falling rate of profit may also be compensated by growth in the absolute size of surplus value although augmentation of this would decline if the absolute amount of living labour (variable capital) declines, or much more likely, its augmentation declines relatively if the quantity of living labour fails to grow at the relatively high rate commensurate with the growth of constant capital – machinery and materials etc.

While the rate of profit may fall, it may thus be the case that the mass of profit still rises, indeed given that capitalism involves the accumulation of more and more capital this mass must increase.  Marx allows that the absolute size of variable capital and surplus value may rise – in fact it “must be the case . . . on the basis of capitalist production.” (Volume III pp 322 – 324) This is certainly the reality of capitalism since Marx developed his analysis.

“Capitalist production is accumulation involving concentration of capital is simply a material means for increasing productivity.  Growth of the means of production entails growth in the working population and creation of a surplus population. (p324 – 325)

“As the process of production and accumulation advances, therefore, the mass of surplus labour that can be and is appropriated must grow, and with it too the absolute mass of profit. . . The same laws , therefore, produce both a growing absolute mass of profit for the social capital, and a falling rate of profit.”  (p 325) “A fall in the profit rate, and accelerated accumulation, are simply different expressions of the same process, in so far as both express the development of productivity. . .” (p349)

“Thus, the same development of the social productiveness of labour expresses itself with the progress of capitalist production on the one hand in a tendency of the rate of profit to fall progressively and, on the other, in a progressive growth of the absolute mass of the appropriated surplus-value, or profit; so that on the whole a relative decrease of variable capital and profit is accompanied by an absolute increase of both. This two-fold effect, as we have seen, can express itself only in a growth of the total capital at a pace more rapid than that at which the rate of profit falls.” (p329 – 330)

It will also be the case, to a greater or lesser extent, that new industries develop that require large amounts of living labour for their production, labour that can only be displaced by technology and machinery over a future, longer or shorter period of time.

New industries widen the range of commodities that capital can produce, and that can be used to produce them, which can create profit, i.e. that can become capital.  The mass of material labour that capital can command depends not only on the value of capital but on the mass of use values that can act as consumption for workers or as means of production and materials of production.  If the latter grows so can the quantity of labour employed, and therefore the accumulation of capital that can proceed, allowing capitalism to continue to develop the forces and relations of production.

It is argued that the growth of these new industries, increasingly ‘service industries’ involve higher relative amounts of living labour than the more mature manufacturing or other industry.  Increased productivity in service industries does not generally involve increased consumption of raw materials even as productivity is increased, or at least not nearly to the same extent.  Increased consumption of circulating constant capital (materials), which simply has its value transferred into the final product and does not add any surplus value but must be advanced as capital, does not occur to the same extent and so does not lead to a reduction in the rate of profit on that account.

Of course, it must be understood that many industries are described as service industries that actually produce physical commodities and these are subject to the same tendencies of development as classical manufacturing industry.

Infrastructure industries are sometimes considered as service industries but the water and sewerage industry for example produces a physical product and then transforms it.  I recall visiting a new sewerage works that had a large bank of electronic equipment.  When I asked the manger how many staff worked at the plant he said there was five, but these were all going to be transferred elsewhere because the plant could work remotely and required only a regular visit by one member of staff to check everything was ok.

Even health services, which in the UK has traditionally had a budget in which over 60 per cent is spent on staff salary and wages, relies more and more on expensive drug treatments and the use of high-tech equipment.

No contradictions are therefore escaped by the development of new industries, even some ‘service’ industries, they are simply reproduced, but then any expansion of capitalism must by definition reproduce its essential nature, which is riven by contradiction.  However, it is not that nothing has thereby changed. The effect of these industries that develop upon a lower average organic composition of capital and higher rate of surplus value is to raise the average of both across the wider economy.

Marx at one point quotes six reasons why decline in the profit rate does not reduce accumulation. “Jones emphasises correctly that in spite of the falling rate of profit the inducements and faculties to accumulate are augmented; first, on account of the growing relative overpopulation; second, because the growing productivity of labour is accompanied by an increase in the mass of use-values represented by the same exchange-value, hence in the material elements of capital; third, because the branches of production become more varied; fourth, due to the development of the credit system, the stock companies, etc., and the resultant case of converting money into capital without becoming an industrial capitalist; fifth, because the wants and the greed for wealth increase; and, sixth, because the mass of investments in fixed capital grows, etc.”

At a recent meeting on Marx’s Capital, one speaker supported the view that the rate of profit did exhibit a tendency to fall and cited, among other reasons for this view, that such a situation confirmed the temporary character of the capitalist system in an objective way.  This, even if it were true, would not thereby equally confirm the inevitability of socialism or even that the seeds of socialism had grown equally as strongly as capitalism was gripped by its objective contradictions.

There are no absolute, predetermined limits which set the boundaries on the development of capitalism such that the contradiction between the development of the forces of production and relations of production just described can be said to lead to a terminal crisis or ending of the capitalist system.  The release of the forces of production from the fetters to their growth, arising from the requirement that such growth requires sufficient profitability that capitalism can no longer deliver, is not something that Marx foresaw as the resolution to the contradictions of capitalism.

The point rather is that the tendency for the rate of profit to fall is a fundamental one within capitalism that is inevitably associated with its equally fundamental drive to increase productivity through increasing relative surplus value.  Both stem from the combined development of the forces of production and relations of production and from the need for capital to accumulate by increasing the appropriation of surplus value. This includes new production with new sources of human labour as well as both increases in absolute and relative surplus value.

It is not necessary for a fall in the rate of profit to be evident at all times, the process by which it falls proceeds regardless and is important in this respect.  If the tendencies that counter this fall outweigh its effects this does not entail its unimportance, since the law exhibits the fact that new value is created only through labour power and the tendency for the fall in the rate of profit reflects this.  The expansion of capitalism, both in terms of the forces and relations of production, requires masses of additional labour, in other words expansion of the numbers and social power of the working class, the gravediggers of the system as Marx saw it.

Back to part 23

Forward to part 25

9 thoughts on “Karl Marx’s alternative to capitalism part 24 – forces and relations of production 7

  1. Incidentally, a large part of the fixed capital of NI Water is likely to comprise the value of reservoirs, as well as water pipes. In either instance ask yourself whether the value those things is likely to be significantly higher or lower today than it was a century ago, given the facility today to construct reservoirs, pipelines and so on using modern technology and equipment.

  2. On the question of water supply, here is a response I gave, elsewhere, in relation to telecommunications, but the same applies to water supplies. You can consider the figures in millions if you like.

    Suppose a telephone system starts with £1,000 of fixed capital, in the form of exchanges, and telephone wires. The fixed capital suffers £100 of wear and tear each year. It employs 10 workers, as operators in the exchanges, and a small number of engineers (10 workers in total operators and engineers, each creating equal amounts of value, and paid the same wages, though this might not be the case, as engineers would probably constitute more complex labour). The system provides for 100 connected telephones. The 10 workers are paid wages of £100, and there is a 100% rate of surplus value. The annual rate of profit is £1,000 (fixed capital), + £100 wages, gives advanced capital of £1,100 (assuming variable-capital turns over once), and profit is £100, thereby 100/1100 = 9.09%. We’ll assume that this equals the average annual rate of profit, so that exchange value = price of production.

    The cost of production is £100 (wear and tear) + £100 wages, and £100 profit, giving a price of production of £300, or £3 per connected phone, and a rate of profit/profit margin of 50%.

    Now assume that technological development means that new fixed capital is capable of providing not for 100 connected phones, but 1,000 phones. We can even assume that this new technology is twice as expensive absolutely as the previous fixed capital. In other words, it now costs £2,000, and loses £200 per year in wear and tear. But, as Marx points out the nature of such development is that even as the absolute price of such fixed capital rises, its relative price declines, because whereas previously the £1,000 of fixed capital represented £10 per connected phone, this new technology constitutes only £2 per connected phone. (the same applies to throughput of hospitals, or the number of people who can be scanned by an MRI scanner etc.)

    Marx and Engels point out that such fixed capital is only introduced if its cost is less than the paid labour it replaces. If we consider this situation, it clearly fits the bill. On the basis of the previous technology, to be able to service 1,000 phones, would have required £10,000 of fixed capital, and 100 workers, paid wages of £1,000. Assume that this new technology is able to replace all the operators in the exchanges, by automation, but now requires 30 engineers. I will ignore any variations in wages between engineers and operators. In other words, for an additional £100 per year of fixed capital wear and tear, this new fixed capital replaces the additional 70 workers that would have been required on the basis of the old technology, equal to £700 of wages (variable-capital). This is similar to the situation you described in relation to the water treatment works. It is also why, despite all of the improvements in technology in the last 100 years, we have much more labour employed in water treatment and supply than was the case in 1918!

    Productivity has been raised considerably, both for the fixed capital and for the employed labour. In such conditions in manufacturing, this would have created the conditions Marx sets out as the basis for the operation of the Law of Falling Profits, because this rise in productivity, reducing the proportion of both fixed capital and labour in output, would have caused a corresponding huge increase in the proportion of raw material in final output. However, what is the effect here.

    We now have £2,000 of fixed (constant) capital and £300 of variable capital advanced = £2,300. The 30 workers (assuming no change in the rate of surplus value, as a corresponding rise in social productivity brought about a reduction in the value of labour-power) now produce £300 of surplus value. The annual rate of profit is then 300/2300 = 13.04%. In other words, the annual rate of profit has risen by more or less 50% from its previous level of 9.09%. Yet, as seen above the introduction of the new fixed capital brought about a massive relative reduction in the amount of labour employed, for a comparatively small additional expenditure on the new fixed capital. In fact, as I have set out elsewhere, such developments in technology, undoubtedly have wider impacts, which would result in a reduction in the value of labour-power, rise in the rate of surplus value, and annual rate of profit, over and above what is indicated here.

    If we look at the further consequences, the cost of production is now £200 (wear and tear) plus £300 wages = £500. Assuming this industry still represents the average, and so its annual rate of profit represents the average annual rate of profit, its £300 of profit then gives a price of production of £800, or now just £0.80 per phone. The rate of profit/profit margin is now 300/500 = 60%, compared to the original 50%.

    But, in fact, using Marx and Engels argument that such fixed capital is introduced so long as its cost is less than the paid labour it replaces, it could have been profitable to introduce this new technology, even if it simply replaced 10 additional workers. In other words, 10 workers were initially employed, and to provide for 1,000 phones instead of 100 would have required an additional 90 workers. The cost of the fixed capital is £100 (wear and tear), equal to the wages of 10 workers, so, as long as it resulted in no more than 80 workers being employed in total, it would be profitable. I have only assumed 30 workers are employed. Suppose, instead 70 workers are employed. That still implies a saving of £100 per year in wages, as a result of the introduction in new technology, over and above what would have been the case on the basis of the old technology.

    In that case, we would have £2,000 (fixed capital) + £700 wages = £2700 advanced capital. Surplus value, £700. Annual rate of profit 700/2700 = 25.93%, which is nearly three times the original 9% annual rate of profit. The cost of production is £200 (wear and tear) + £700 wages = £900, plus the average profit of £700, gives a price of production of £1,600, or £1.60 per phone. The price per phone is still here, nearly half what it originally was. The rate of profit/profit margin is 700/900 = 77.78%. That is nearly 50% more than it was originally.

    Again, I have not included here, any of the additional effects that would result in a rise in the rate of surplus value, and rate of profit as a result of these rises in technologically driven productivity reducing the value of labour-power, but which would inevitably result from such technological improvements.

    This kind of development can be seen in a whole range of areas of production. Indeed, Marx makes the same kinds of points relating to mineral production where, increases in productivity do not result in an increased quantity of raw material being processed (the output is itself the raw material used by other industries), but only of an increase in the use of auxiliary materials, for oiling machines, powering steam engines etc., whilst the actual proportion of both fixed capital cost, and of labour declines in the value of total output, as productivity rises, and these costs are divided over a much larger mass of output. I have previously referred to the fact that thousands of PC’s can now be employed for what once was the cost of a single mainframe computer, and each of these thousands of PC’s employs an operator producing surplus value, as opposed to the handful of workers employed by the single mainframe computer. This is the same kind of process that Marx discusses in Theories of Surplus Value, Chapter 12 et al.

    But, it can similarly be seen in things such as healthcare, where, as I have said the massive reduction in the cost of sequencing the genome, as a result of huge technological developments and improvements in productivity, mean that thousands of people can now be employed in such production, each producing surplus value. A similar argument can be made in regard for things such as the development of boring equipment used on the Channel Tunnel, which meant that, although it theoretically replaced tens of thousands of workers who would have been required with picks and shovels to dig it, actually resulted in thousands of workers being employed, because otherwise the construction would not have gone ahead. What would have been unprofitable, became profitable on the basis of the introduction of this labour-saving technology.
    The same can be said about all of those new technologies used in hospitals, schools, and so on which now make possible the provision of services that previously would not have been possible.

    To reiterate the distinction between mineral extraction (which applies to water supply too) and manufacturing, as set out by Marx it is this. The coal (water) capitalist does not buy coal (water) – just as a hospital does not buy patients – to utilise as raw material (circulating constant capital) to be processed into the end product. in the way that say a yarn producer buys cotton as raw material to be processed into yarn. Nor does the coal (water) capitalist acquire the the coal/water in kind from their own production, to act as raw material, in the way that say a farmer acquires seeds as raw material, by setting aside a portion of their output of grain. The coal producer does set aside a part of their output of coal, but not to use as raw material, only as auxiliary material, to power steam engines, to pump water from the mine etc.

    The water capitalist does not set aside a portion of the water they supply to utilise in that way. The virgin water they supply, is like the coal of the coal producer. It comes to them as a free gift of nature, the only value it has is in relation to the labour expended upon its extraction, and transport to market. In other words, the higher that value, the higher the amount of labour thereby expended, but likewise, therefore, the higher the amount of new value created, and the higher the amount of surplus value also then produced. In terms of the water capitalist, the water they get back to process, far from being something they buy as raw material to process, in the way a yarn producer buys cotton, the treatment of the water/sewage is itself a service that the water capitalist sells to consumers, and for which they are paid. The water capitalist does not buy sewage from those consumers to use as raw material to process. It is not a cost to them, is not an advance of capital on their part for circulating constant capital, but is itself the sale of a commodity/service, i.e. sewage treatment.

    Rather than the sewage, used as raw material, in the production of water, being a cost for the water supplier, it is an income. So, the more of this sewage they process, or are able to process due to rising technology facilitating higher productivity, rather than the costs of the water capitalist rising, their income rises, from the increased sale of this service. For example, where i live in a rural area, we have a septic tank, so Severn Trent loses out on being able to charge me for sewage services; where my sister’s friend lived in our youth, they did not have flushing toilets, but the contents were collected by the muck truck. Only when the sewage network is expanded, like with the telephone network above, is it possible to draw such areas in to the realm of the utility provider.

    The water capitalist having sold sewage treatment as a service, is then able to use the sewage, as the basis of producing additional water supplies, but the sewage, even as raw material being processed, does not constitute circulating constant capital, for the reason cited above, i.e. not only has it come to them at no cost, but it has actually come to them at a negative cost! Its like someone who offers a house clearance service, who gets paid to clear people’s houses, after they have died, and who then also gets to restore, and sell any of the items they have already been paid to clear. The items constitute the raw material, which again comes to them at a negative cost, and the materials used in restoration, only constitute auxiliary materials.

    The same with the water capitalist, the chlorine etc. represents auxiliary materials. The more technology improves so that the more can be processed, and output increased, the more fixed capital costs are spread out, and whilst this increase in technology/productivity means that less labour might be employed relative to output, the absolute amount of labour rises, and the amount of surplus value rises with it, whilst there is no corresponding increase in the value of circulating constant capital – indeed in relation to sewage treatment, the more output increases, the more the negative cost of the raw material increases.

    The same drive as for all capital, to raise productivity exists here, so as to reduce the labour relative to output, and to do so by introducing labour saving technology, but as output expands by an even greater amount, the mass of labour employed still tends to rise, and so the mass of surplus value rises. With no corresponding rise in the value of raw material, and with the unit cost of fixed capital continually falling as output rises, and technological development brings about a reduction in the value of that fixed capital, and a moral depreciation of existing fixed capital, so it creates the basis for a tendency for the annual rate of profit to rise.

    Given that 80% of new value creation, and so surplus value production, is now in the realm of service industries, where the processing of raw materials forms only a minor element, this is why the law of the tendency for the rate of profit to fall is now defunct, as it applies as Marx describes only to an economy where manufacturing, and the processing of an increasing mass of raw material, as circulating constant capital is the dominating feature.

  3. I’ve finished reading this very interesting post, and would like to make these further comments.

    1. On the question of the NHS, the same argument holds as in relation to the supply of water. There is nothing in this example that entails an increase in the quantity of raw material processed resulting directly from a technologically driven rise in productivity, which is the basis of Marx’s theory of falling profits. If the output of the health service is healthcare, then the raw material to be processed is patients, and drugs etc. form only auxiliary materials. But patients just like coal from a coal mine or water from a well do not constitute circulating constant capital, whose value rises in conjunction with rising productivity, and an increased mass of processed material.

    The use of high-tech equipment as with any other machines under capitalism is only introduced where its cost is less than the paid labour it replaces. By replacing labour, it may thereby reduce the mass of labour employed, and thereby the basis of surplus value, but it may by the same token reduce the value of capital advanced, and thereby raise the annual rate of profit, which is the basis of the average rate of profit. And, experience indicates that this is not in any case what happens. The high tech equipment is rather used as a means of raising labour productivity, so as to process a higher throughput of patients, so that if anything we see more labour employed in healthcare, and this greater mass of labour, even with a constant rate of surplus value, results in a higher mass of surplus value, and because the mass of circulating constant capital does not rise proportionately in such an industry, rather than the conditions being created for a falling rate of profit, if anything, the conditions are set for a rising rate of profit, as the value of the high-tech equipment falls, and results in a moral depreciation of the existing fixed capital stock.

    I have given an example of a similar situation in relation a hotel. Suppose, the cost of producing a hotel/hospital falls, so that a 200 bed facility can be produced for the same cost as previously was the case for a 100 bed facility. If the rate of productivity for hotel/hospital workers remains constant, then to service the guests/patients, twice the amount of labour is now required. Rather than reducing the employed labour, the consequence is that it is increased, and this doubling of the employed labour results in a doubling of the surplus value, whilst the advanced fixed capital for the hotel/hospital has remained constant, and no significant increase in circulating constant capital arises, because it consists only of auxiliary materials, bed clothes that require laundering etc., soap for hotel rooms, medicines for patients. The consequence is that surplus value rises relative to advanced capital and the annual rate of profit thereby rises.

    2. The long-term tendency for the rate of profit to fall is not a fundamental contradiction in the operation of capitalism. Rather, the conditions that lead to it are the means by which the fundamental contradiction of capitalism, whereby overproduction arises, is resolved. The overproduction arises from a fundamental contradiction whereby periodically capital expands relative to the available working-population, to a degree whereby no further expansion is possible without causing wages to rise and the rate of surplus value to fall causing a sharp drop in profits, which breaks out as a crisis of overproduction. Its in response to this that capital is incentivised to seek out new labour saving technologies, which raise the rate of surplus value, by creating a relative surplus population, and thereby reducing wages.

    Its interesting looking at the graph at the top of the post. It is headed “Which way profitability goes tells you which way capitalism goes”. But, then look at what the graph tells us. It shows the rate of profit falling in the years after WWII, before a short pick-up from around 1955-63, before the rate of profit began to fall again. But, that period was a period of very strong capitalist growth, indeed right through into the on set of the period of crisis from around 1974. So, clearly here the way profitability was heading did not tell you which way capitalism was going.

    In fact, its during that period, as capitalism grew rapidly, and the demand for labour-power rose along with it, that this rise in demand for labour-power brought about large rises in the wage share, which was the cause of the profits squeeze during that period, as described by Glyn and Sutcliffe and others, both in Britain and elsewhere, rather than the law of falling profits, and which thereby created the conditions, in the 1970’s for the onset of crisis, which then prompted the search for new labour saving technologies in the latter part of that decade, which were increasingly rolled out during the 1980’s.

    The effect of the introduction of that new labour saving technology, which thereby raised productivity, and created the conditions for the operation of the law of falling profits, is actually seen in the 1980’s, as that new technology is rolled out. But during that period, what we see is not a falling rate of profit, but a rising rate of profit! But, I know few people who actually lived through the 1980’s, with the mass unemployment rising to over 6 million in Britain, the repeated recessions, the savage attacks on wages, repeated industrial disputes, who would describe the period as the chart author does as being a period of “neo-liberal boom”!

    Similarly, the chart indicates the period after 1999 as being a period of “Crisis”. But, nothing could be further from the truth, as I have set out elsewhere. A new global boom began in 1999, with global capital expanding massively, the global working-class increased by a third in the decade after 1999, global trade soared, compared with the previous period, fixed capital investment doubled, and output quantities increased phenomenally. Hardly a period of crisis! In fact,as with the period described as the “Golden Age” on the chart, after WWII, what was seen in the early 2000’s, was a rapid increase in demand for labour-power across the globe, as this expansion got underway, and wages started to rise quickly, particularly in newly industrialising countries in Asia etc. A look at the improvements in diet in China, as I have set out elsewhere illustrates that point.

    And again, it was this process of the rapid expansion of capital, using up existing labour supplies, which results in rising wages, and a reduction, or at least a slow down in the rise, of the rate of surplus value, which as in the early 1960’s begins to cause a squeeze on profits, and which in the mid 2000’s, was sufficient, given the astronomical level of previously inflated asset prices, to cause interest rates to rise enough of cause those bubbles to burst leading to the financial crash of 2008. But, the period since then has been an artificially induced coma, an attempt to hold back that economic growth, so as to hold back wage growth, the squeeze on profits, and rise in interest rates, in a vain hope to sustain those over inflated asset prices.

    The strength of the underlying conditions is now manifesting itself again. The patient is coming out of the drug induced coma, and starting to sit up, and get stroppy. The global economy is growing above trend in 90% of its components, and at a rate not seen since the early 2000’s. Employment is rising (over 300,000 in the US for February alone), and wages are starting to rise with it, pace the pay rise and 28 hour week won by IGMetall workers in Germany, a couple of weeks ago)

    • 1. I think you are right that patients cannot be considered as circulating constant capital but I don’t agree that there can be no increase in the quantity of raw material processed resulting directly from a technologically driven rise in productivity. This is because I don’t think that it is quite true that high-tech equipment is only introduced where its cost is less than the paid labour it replaces if we slightly modify this statement by recognizing that the introduction of high-tech is introduced into health services to carry out procedures that would previously not have been carried out.

      This involves not only high tech equipment but also consumables – pacemakers, synthetic body parts such as knee caps (Belfast led the world in this), and in new and very expensive drug treatments. These treatments are more expensive because of these costs although the cost falls due to improved productivity over time and the removal of such things as drug patents. However, to the extent that such procedures displace more routine procedures that are no longer carried out because of other treatments this is an off-setting tendency. As in the water example I wouldn’t under-estimate the cost of circulating constant capital.

      My objective in making these points is not to disagree that in general productivity increases in service industry do not involve the increase in circulating constant capital that is so clearly the case in manufacturing industry, but to note that we must be clear how this is the case in each industry and any counter-tendencies that may arise.

      2. As to whether the tendency for the rate of profit to fall is a fundamental contradiction, I suppose this depends on the level of abstraction of the discussion. The contradiction between the use vale and exchange value of the commodity might seem to be more fundamental. The point I was making was that this tendency operates even if the counter tendencies that exist outweigh it, and will exist even if the growth of service industry means that it becomes significantly outweighed. In the latter case the argument that there is an ineluctable decline in the rate of profit because of the rise in the constant capital share of the value of production falls and empirical claims as to its demonstration, as claimed in the graph at the top of the post, become more doubtful.

      • Part 1 (I will write a second part of this response, when I have time, as a reply to your second comment below)

        “This is because I don’t think that it is quite true that high-tech equipment is only introduced where its cost is less than the paid labour it replaces if we slightly modify this statement by recognizing that the introduction of high-tech is introduced into health services to carry out procedures that would previously not have been carried out.”

        But, this applies to all labour-saving technology. It is the proponents of the law of the tendency for the rate of profit to fall, as a cause of crises, that have misunderstood the point about technology replacing labour to mean that it is only a replacement of existing labour. Marx never made that argument, and, in the example I have given, in relation to telecoms, extended to water etc., you will see that I do not either. In my example, the technology is introduced into telecoms because it replaces 70, or in the alternative example, 20 potential workers. Marx notes,

        “If it be said that 100 millions of people would be required in England to spin with the old spinning-wheel the cotton that is now spun with mules by 500,000 people, this does not mean that the mules took the place of those millions who never existed. It means only this, that many millions of workpeople would be required to replace the spinning machinery. If, on the other hand, we say, that in England the power-loom threw 800,000 weavers on the streets, we do not refer to existing machinery, that would have to be replaced by a definite number of workpeople, but to a number of weavers in existence who were actually replaced or displaced by the looms.”

        (Capital I, Chapter 15)

        And, this is precisely the point. Marx analysis and explanation of the tendency for the rate of profit to fall, unlike that of Smith, Ricardo and Malthus, and the modern day catastrophists, is NOT that it is a result of a fall in the mass of surplus value or profit, but that it necessarily implies an increase in the mass of surplus value/profit. It does so, because it goes along with an increase in the mass of capital, and with a rise in both the rate of surplus value, and the mass of employed labour, which necessarily thereby results in an increased mass of profit. Marx law is based not on a fall in the rate of surplus value, or mass of surplus value, but a rise, but an absolute rise, which is nevertheless a relative fall compared with the mass of capital laid out to produce it.

        But, again, this is precisely the point, because what is it exactly that constitutes the increased mass of laid-out capital? It is the increased mass of raw material. And, Marx sets out that although rising social productivity causes the unit value of that raw material to fall, the rise in productivity is so great that the increased mass of this raw material, then processed, is greater than the fall in the unit value of that material, so that the total value of the circulating constant capital rises. In fact, I’ve set out elsewhere why there is no necessity for that to be the case, but that is another discussion. But, this does not apply when, as in the case of mineral/water extraction and supply, raw material does not enter this process. The materials that enter in these instances only constitute auxiliary materials. The quantity of these materials might increase as output increases, but the whole point is that, as auxiliary materials, they do not increase in proportion to the volume of output, and consequently, because the unit value of these auxiliary materials is reduced by the same processes of rising social productivity – let alone the economies of scale, as production is undertaken on a larger scale – the total value of these auxiliary materials as a proportion of output value falls, and this leads not to a tendency for the rate of profit to fall, but for it to rise!

        In this case, the auxiliary materials are thereby put in the same position as the fixed capital, and its wear and tear, of which Marx says.

        “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.”

        (Capital III, Chapter 15)

        “The point I was making was that this tendency operates even if the counter tendencies that exist outweigh it, and will exist even if the growth of service industry means that it becomes significantly outweighed. In the latter case the argument that there is an ineluctable decline in the rate of profit because of the rise in the constant capital share of the value of production falls and empirical claims as to its demonstration, as claimed in the graph at the top of the post, become more doubtful.”

        Sort of agreed. The most significant aspect of the law of falling profits is not what its catastrophist proponents advocate for it. Its most significant aspect is that it is the explanation for a) the development of an average rate of profit, b) of prices of production, and c) the determination of the allocation of capital. But, as Marx sets out in Capital III, but more extensively in Theories of Surplus Value, it is not just the organic composition of capital, which determines the annual rate of profit, and prices of production, but also the rate of turnover of capital. It is the consequence of these two forces, the organic composition and the rate of turnover, which determine the annual rate of profit in each sphere, and thereby, via competition regulate the flow of capital from low profit areas to higher rate areas.

        But, the fact that the rate of profit in spheres with higher organic compositions or lower than average rates of turnover is lower than in those spheres where the opposite conditions apply, does not at all, mean that the average annual rate of profit for the economy as a whole must be falling, or have a tendency to fall, which is the argument put by the catastrophists. It is quite possible for the rate of profit to be lower as you move in one direction on this spectrum, and higher as you move in the opposite direction, and yet for the average rate of the whole spectrum to be on a rising trend, and that is what I believe exists.

        The explanation for the periods of falling rates of profit, as described in the graph, is not the long-term tendency for the rate of profit to fall, but is a profits squeeze of the type described by Marx, in discussing such situations, in Capital III, Chapter 6 and 15, and in Theories of Surplus Value, whereby the opposite conditions apply, not of a rising rate of productivity and rate of surplus value, but of rising wages – and other input costs – which cause the rate of surplus value, and potentially even the mass of surplus value to fall! In his latest blog posts, Michael Roberts, has given a clear example of that confusion, and blurring of the distinction between the Marxian and Smithian law of falling profits.

        Bob writes,

        “The most intense periods of struggle appear to be when the labour movement is reasonably strong in incomes and organisation but when the profitability of capital has started to fall, according to Marx’s law of profitability.”

        Each of the instances he cites in the blog post have nothing to do with Marx’s Law of falling profits, but are all instances of where the demand for labour-power has risen, wages have risen leading to a squeeze on profits, as the rate of surplus value is reduced, as for example Glyn and Sutcliffe et al described in the 1960’s. But, the fact is that, in order to try to connect periods of crisis with periods of falling profits, the catastrophists are led to abandon Marx’s law of falling profits and to seize upon the Smithian/Ricardian/Malthusian theories instead!

        In terms of what the law of the tendency of the rate of profit to fall has come to mean in the Marxian lexicology, I think its hard to justify it continuing to operate “as a tendency”, if, in fact, the average rate of profit for economies does not have a tendency to fall, over the longer-term, and if the domination of the economy by service industries etc. creates conditions whereby a tendency for the rate of profit to rise is established, and therefore, to cause the average rate of profit in the economy to rise, as a consequence of its effect, via competition, on prices of production, its clear that the average rate of profit will not fall, for those reasons, including in manufacturing industry. The fall in the rate of profit, periodically, together with the outbreak of crises of overproduction, associated with such periods, has thereby to be understood as having different causes, and it is vital for Marxist analysis, as Marx described in examining these two different causes of falling profits, in Theories of Surplus Value, to distinguish between them, because they have fundamentally different consequences for the working-class.

  4. Very interesting post, which I haven’t yet completed. However, preliminarily wanted to take up this point:-

    “Of course, it must be understood that many industries are described as service industries that actually produce physical commodities and these are subject to the same tendencies of development as classical manufacturing industry.

    Infrastructure industries are sometimes considered as service industries but the water and sewerage industry for example produces a physical product and then transforms it. I recall visiting a new sewerage works that had a large bank of electronic equipment. When I asked the manger how many staff worked at the plant he said there was five, but these were all going to be transferred elsewhere because the plant could work remotely and required only a regular visit by one member of staff to check everything was ok.”

    I don’t think this is right. Its like the example Marx gives of, for example mineral extraction – though mineral extraction is not, of course, a service industry. In other words, Marx explains that what is involved in the law of falling profits is the rising mass of raw material processed, as part of the manufacturing process, due to rising productivity. But, in the case of mineral extraction it is not a question of more raw material being processed, but a greater mass of raw material being produced, as the end commodity. The increased mass of raw material does not enter as an increased quantity of circulating constant capital, thereby acting to depress the rate of profit, is itself output as the resultant commodity-capital. It entres not on the input sid as an additional cost, but on the output side as additional income.

    If we take water supply, we could take the water as having no value, because it is the free gift of nature. The materials going into its processing, again amount only to auxiliary materials, for example chlorine. The main constant capital involved in its supply, is of fixed rather than circulating capital, in the form of treatment works, pumping stations, and pipes. In large part, the more output is increased, the more this fixed capital is utilised more effectively, thereby reducing unit fixed costs, whilst there is no corresponding rise in variable costs.

    • To the extent that water is simply a free input to production and then the final product, yielding income, you are correct. It is however the case that the free water that falls from the sky is not the water that we drink, but is modified more our less by chemical additives that vary proportionately to production. The scale of such additives is not insignificant.

      If we look at my local water company’s regulatory accounts for the most recent year (Northern Ireland Water) we can see that the cost of such materials was over £5m, which doesn’t seem like much compared to total costs of £318.5m but are around a quarter of labour costs of £21m. Power costs are more significant at nearly £27m so that these costs, that may to some extent be variable, are higher than the cost of labour. What dwarfs them both is depreciation at £132m, which shows the extent to which fixed constant capital dominates production. Expenditure on maintaining and upgrading this infrastructure is also a prominent feature of this industry and cash spent on this during the year was £126m – almost six times the cost of labour power.

      It should also be remembered that while water in its more or less pure state is a gift of god, sewerage, which is the other bigger part of the industry, is a gift from humanity. It might be expected that the admixture of chemicals and materials for this might be greater but the accounts don’t show this, although this may be partly due to some wastewater costs being covered by the PPP contract.

      The industry is thus dominated by fixed constant capital and it can only partly be understood as raw material being processed as the end commodity while increased production of this commodity is not accompanied by increased variable constant capital costs.

      • As promised this is the second part of my response. Sorry for the delay.

        “To the extent that water is simply a free input to production and then the final product, yielding income, you are correct. It is however the case that the free water that falls from the sky is not the water that we drink, but is modified more our less by chemical additives that vary proportionately to production. The scale of such additives is not insignificant.”

        True, but the coal that is dug from the ground is not the coal that is burned on an open fire, or in a furnace. It is washed, sorted, bagged and transported. But, at no point in this process is the coal itself raw material, and nor are the chemicals or other elements of circulating constant capital, used in this process, raw material. The coal itself only becomes raw material, when it is sold to the iron maker etc. Whether in the case of water or coal, the chemicals materials used as auxiliary material do not increase in mass proportionately to output, but, in any case, as I pointed out in Part 1, the rises in social productivity, that act to reduce the value of these auxiliary materials, offset any increase in the mass consumed.

        Furthermore, a point I did not raise in Part 1, is that this very rise in productivity also increases the rate of turnover of capital, so that, in terms of the amount of circulating constant capital advanced, it is continually being reduced, which acts to raise the annual rate of profit. As I pointed out some time ago, in a response to Estoban Maito, the introduction even of things such as payment for water and other utilities via, monthly direct debits acts to speed up the turnover of capital, because with millions of people having a monthly direct debit, on average, the utility companies have money coming in every day of the year, thereby turning over the equivalent amount of advanced capital.

        And herein also lies the point in relation to your comments about NI Water. Fixed capital as with all modern industry dominates, and that is illustrated by the amount of wear and tear of that fixed capital, as a component of production costs. But, we don’t know here what the mass of labour employed would be had all of this fixed capital not been introduced. Marx’s argument, and that which I also set out in Part 1, is that although this mass of employed labour falls relative to what it would have been on the basis of previous technologies, it rises absolutely, and this absolute rise is itself a function of the expansion of the capital, and of the fixed capital. But, in addition, what all of this fixed capital brings about is a much greater increase in output, as well as a rise in the rate of turnover of the capital. That is the point I described in relation to telecoms, but it applies equally well here to water supply.
        As Marx indicates, in one of the quotes I gave in Part 1 the absolute amount of fixed capital may well rise substantially, and yet will fall relatively. If, the value of fixed capital has doubled, to give the figure of £132 million for wear and tear, its unit cost per litre of water will have halved if the amount of water now supplied has quadrupled. And, although on the basis of previous technology, to effect this increase in output would have required a quadrupling of the workforce, the current technology means that it has only trebled, that still represents an absolute increase in the amount of labour employed, and consequently of the surplus value produced, bringing with it an increase in the rate of surplus value and profit.

        “It should also be remembered that while water in its more or less pure state is a gift of god, sewerage, which is the other bigger part of the industry, is a gift from humanity.”

        I dealt with this in my very first comment on 12th March. Its precisely because it is a “gift from humanity” that it is the opposite of a raw material cost! As I said in my initial comment, its more like the situation of someone who gets paid to undertake a house clearance, and who then after a cleaning up some of the articles they have cleared, sells them on as antiques! Far from the water company having to buy sewage as raw material, and thereby forming a component of its circulating constant capital, it gets paid to collect it from households. The more it collects, the more it gets paid. Consequently, the more it increases its output of water, made possible by an increased collection of sewage, the more its net production costs are thereby reduced. God doesn’t pay NI Water to take his rainwater, for selling on, but Northern Ireland households do pay them to take their sewage, and sell it back to them as clean water.

        As I set out in my blog post on why the Marxian Law of the Tendency for the Rate of Profit to Fall is defunct, in order for the increase in fixed capital to result in a fall in the rate of profit, in conditions where there is no corresponding increase in the mass of raw material processed, it would require it to result not just in a relative fall in the amount of potential labour employed, but an absolute fall. That is possible in certain conditions. For example, in my book on Marx and Engels Theories of Crisis, I have described the different situation that arises with different industries, at varying stages of maturity. If we take UK coal mining, for example, it employed, if my memory serves me right, around 2 million people at the start of the last century, and that actual number employed fell significantly. It fell particularly sharply after nationalisation, as the industry was recapitalised, and new machinery introduced.

        At a certain point some industries may find that it is very difficult to expand production, and find additional markets. Those industries, as they introduce various forms of intensive accumulation, replace labour only in order to reduce production costs, as a means of attempting to raise profits, rather than attempting to increase their output. In each of these industries where the absolute levels of employment fall, must see the mass of surplus value produced fall, unless the rate of surplus value, or rate of turnover of capital is increased by a large enough proportion to offset the fall in employment.

        But, for each of these industries there are new industries arising for which this is not the case, and which is enabled to provide employment – usually, as Marx says not immediate, but for the next generation – that more than compensates. That is why despite all of the mechanisation, absolute levels of employment have continued to increase, and levels of surplus value have increased along with it, even before the question of rate of surplus value, rate of turnover, cheapening of constant capital and so on is taken into account.

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