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Get your own Free Home Page Marx understood and presented the tendency of the rate of profit to fall as a necessary reflection of the dynamics of the capitalist mode of production. It was shown that accumulation and increasing productivity of capital is reflected in the tendency of the rate of profit to fall. With the development of the capitalist mode of production, therefore, the rate of profit falls while its mass increases with the growing mass of the capital employed. Absolute mass of exploited labour set in motion by the social capital and consequently the absolute mass of surplus labour it appropriates, and the absolute mass of profits increase progressively. The same process produces for social capital, a growing absolute mass of profits and fall in the rate of profit. A fall in the rate of profit hastens the concentration of capital and its centralisation through expropriation of minor capitalists. This accelerates accumulation with regard to mass, although the rate of accumulation falls with the falling rate of profit .
The fall in the rate of profit checks the formation of new independent capitals and this was visualised, by Marx, as a threat to the development of the capitalist production process (Capital, Vol. III, Part 3, Chapter 15 _ ‘Exposition Of The Internal Contradiction Of The Law’). As the rate falls the required capital for extension of production increases and individual capitalists, constrained by their own limited existence, find it extremely difficult to organise sufficient wealth to expand production .
Marx went on to show that 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 i.e. the workers. Capital comes more and more to the fore as a social power, whose agent is the capitalist. In this ambiance what was made irreconcilable was the contradiction between the general social power into which capital develops, on the one hand, and the private power of the individual over those social conditions of production on the other.
Expropriation of capitalists or the dissolution of the private power of the individual capitalists would thus obviously be negation of capital. But joint stock companies in production enterprises were fast developing where individual power of private capitalist was gradually being curbed and personification was dissolving into facelessness. Towards this development Marx had a very ambiguous position _ for him it was a negation of capital, albeit a negative one. And co- operative factories of workers were to him the positive negation of capital (Capital, Vol. III, Part 5, Chapter 27 _ ‘Role Of Credit In Capitalist Production’). In stock companies individual owners, the capitalists, lose significance. As Marx himself stated “Stock companies ... banks ... only the functionary remains and the capitalist disappears as superfluous from the production process.” (Capital, Vol. III, Part 5, Chapter 23 _ ‘Interest and Profit of Enterprise’). Its obvious practical extension, dissolution of capitalism through expropriation of capitalists and state control was attempted but we know with what catastrophic results .
As the rate of profit falls, the absolute amount of the means of production, in value terms, required to set up a production enterprise becomes larger and larger. This increasingly makes it difficult for individual owners to build and run production enterprises, necessitating the formation of joint-stock production enterprises. As this gains momentum, it incapacitates individual capitalists to continue production at a level which is competitive vis-a-vis joint stock production enterprises because stock capital handles far greater amount of absolute wealth than do individual capitalists. This resulted in the demise of the dominance of individual capitalists. But for stock capital, rate of profit does not have that crucial significance that it has for individual owners. The absolute mass of profits compensates for the fall in the rate of profit. Investment continues as long as the absolute amount of profit remains an attraction to the investors. Production process is impaired only when sufficient returns are not realised to pay the taxes and interests besides the cuts & commissions. The stimulating principle of capitalist commodity production becomes more and more absolute profits, whatever the rate of profit.
Marx’s work is coloured by the 19th century reality. Capitalist mode of production was equated with a specific form of capitalism i.e. capitalism predominantly constituted by production units of individual owners i.e. the capitalists. Expropriation of capitalists was thus equated with the dissolution of the capitalist mode of production. Since the tendency of the rate of profit to fall explained the demise of capitalists and posed objective limits to their existence, it was presented as ‘the law’ which would destroy capitalism (see concept notes g, ‘Average rate of profit and its tendency to fall’, pg.41). The possibility of the dominance of joint-stock and state owned production enterprises was not considered. What was not considered was the possibility of an era where instead of innumerable individually owned production units, numerable joint stock enterprises (where the mass of profits would more than compensate the falling rate of profit) would predominantly constitute global production. And therefore it is not surprising to find Marx writing thus: "The rate of profit i.e. the relative increment of capital, is above all important to all new offshoots of capital searching to find an independent place for themselves. And as soon as formation of capital were to fall into the hands of a few established big capitals, for which mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out." (Capital, Vol. III, Chapter 15 _ `Exposition Of The Internal Contradiction Of The Law’, Section 3).
Again not surprisingly among counteracting influences Marx included increase in stock capital . With the progress of capitalist production, which goes hand in hand with accumulation, a portion of capital is calculated and applied only as interest bearing (or dividend bearing) capital (Capital, Vol.III, Part 3, Chapter 14- ‘Counteracting Influences’). As per his analyses these capitals, although invested in large production enterprises, yield only large or small amounts of interest, so called dividends, after all costs have been deducted (Capital, Vol.III, Part 5, Chapter 27 _ ‘The Role of Credit in Capitalist Enterprise’). These do not therefore go into leveling the general rate of profit. If they do enter into it, the general rate of profit would fall much lower. Theoretically, they may be included in the calculation, and the result would then be a lower rate of profit than the seemingly existing rate, which is decisive for the capitalists. Thus the falling rate of profit though would create immense problems in extension of production for individual capitalists, would not affect these dividend bearing enterprises. Railways was cited as an example for such large enterprises.
The scope of operation of the general law of the tendency of the rate of profit to decline was implicit but never explicitly stated. But the scope may be guessed at by considering the fact that the development of stock companies was included within counteracting forces. Translated to present day reality it means inclusion of almost total global capital, excluding a non-significant part, within counteracting forces!
Given that the average rate of profit was derived by Marx by explicitly excluding joint stock production enterprises, the concept or the term ‘average rate of profit’ has become meaningless with the overwhelming dominance of joint stock and limited companies in production enterprises. The tendency of the rate of profit to fall does not, indeed can not, explain any significant political economic reality in the present. Obsession with the significance of the rate of profit and its tendency to fall in the present results in very sad and shabby attempts in force-fitting data to outdated concepts. Since a hundred years now the capitalists, the individual owners, have lost significance as fractions of total capital. Individually owned enterprises perhaps do-exist, but their produce all put together adds up to a very insignificant proportion of global produce. Instead, stock companies, limited companies and state enterprises proliferate. Here the stakes of the managements in the total investment are insignificant. Their share of the produce in terms of managerial salaries and cuts & commissions add upto 10 to 15 % of the total produce. Interests and taxes hack up the biggest share of total produce. Enterprises which predominate today mostly run on loans from banks, pension funds and other financial institutions. Out of the total investment, shares of thousands of shareholders form around 10 to 15% and the rest are all borrowings from pension funds, banks and other financial institutions. Even within shares, the majority of shares are owned by financial institutions, other companies and mutual funds. Insignificant percentages of shares are owned by individuals. And as per Marx’s own analyses, the average rate of profit does not include even the stock companies of 19th century which were far less faceless than the production enterprises of today.
Given this meaninglessness of the ‘average rate of profit’, to say that ‘the tendency of the rate of profit to fall’ is ‘the law of capital’ is absolutely farcical. That this farce is widely enacted can possibly be explained as an ideology or apology for bureaucratic or management run capitalism.
It is difficult, as it is, to give any significance to rate of profit in the 20th century. It is still more difficult to give credence to a theorisation, in circulation, which asserts that war plays an instrumental role in decreasing the organic composition of capital and thereby raising the rate of profit. It is said that war by destroying capital lowers the organic composition of capital and thus raises the rate of profit thereby making another cycle of capital accumulation possible .
Capital is a social relation of wage labour based production for the market. Material and human destruction is not destruction of capital. War does not undermine market and money relation-ships. Rather, capital as a social relation expands during war.
State indebtedness, interest payments, reparation payments, inter-state loans, war loot and highly raised taxation facilitate investment flows and capital formation. Though it must be said that these also lead to enormous growth of fictitious capital .
War does not lower the organic composition of capital. The pace acquired by armaments research and the transfer of its havoc, new technologies, to industrial sphere raises the organic composition of capital. Ruthless war time measures to overcome wage-workers’ resistances to work intensification itself gears towards a higher organic composition of capital. Mobilisation for armed forces makes it necessary to devise machines and processes that require lesser number of persons to operate them. War entails cut-down on personal consumption, which means shifting of investments from production of personal consumption (i.e. branches, in general, with lower organic composition of capital) to branches producing armaments and means of production (which have relatively higher composition of capital). War demands and facilitates huge investments in transport and communications. The organic composition of capital in roads, railways, cables and satellites is very high. War leads to greater weightage of high organic composition spheres in capital as a whole. Not only does war facilitate the growth of organic composition of capital, it also provides ideological cover for the same. A bomb exploded is not capital destroyed - it lives in account books.
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