Tendency of the Rate of Profit to Fall, Law of

a law of capitalist production.

The fall in the general (average) rate of profit as a result of the growth of the organic composition of capital is a manifestation of a specific form of development of productive forces. It expresses the limits of the capitalist mode of production and the historically limited nature of capitalism. This law, discovered by K. Marx, is associated with his previous scientific discoveries: the theory of surplus value and the division of capital into constant and variable. Marx regarded the fall in the rate of profit as a concrete manifestation of the law of capitalist accumulation (seeACCUMULATION OF CAPITAL).

With the development of capitalist production, the general (average) rate of profit has a progressive tendency to fall. The general rate of profit of total social capital is calculated as the relation between the mass of profit for a certain period of circulation of capital and the advanced total capital: p/(c + v), where p is the mass of profit from total social capital during the period of circulation and c + v is the advanced total social capital, consisting in part of constant capital (c) and in part of variable capital (v). In social terms, the mass of profit (p) is the same as the mass of surplus value (m). and the relation pl(c + v) is equivalent to m/(c + v). The fall in the rate of profit expresses the relative decrease of surplus value in relation to advanced total capital and the reduction in the degree of increase of capital.

The fall in the average rate of profit is a result of the development of capitalist production. In the development of capitalist production, capital constantly increases quantitatively and changes qualitatively in its inner structure, and in the relative decrease of variable capital in relation to constant capital.

As capitalist production advances, the natural-material elements of constant capital increase the most rapidly. The value of constant capital increases less rapidly, and the value of total advanced capital still less rapidly. The value of variable capital, which is exchanged for living labor (the source of surplus value), increases the least rapidly. The total advanced capital therefore increases more rapidly than the mass of surplus value increases, and, in consequence, the general rate of profit falls. Thus, the law of the fall of the general rate of profit has a dual character—variable capital and profit decrease relatively and increase absolutely.

The process by which total social capital increases runs considerably ahead of the absolute increase in the number of workers. Since it is precisely the living labor of the workers that generates surplus value, surplus value grows absolutely but declines relative to total capital. For capital, the law of increased productivity of labor is not of absolute importance (seeINCREASED PRODUCTIVITY OF LABOR, LAW OF). The limit to the increase of capitalist productivity of labor is the surplus labor time of workers for the creation of surplus value, which assures the growth of capital and the parasitic consumption on the part of the capitalists themselves. Capital has no interest in the absolute economy of living labor for social production.

The law of the fall of the rate of profit, though a general law of capitalist production, is mitigated by countervailing factors. Its effect therefore has the character of a progressive tendency. The most general causes for the weakening of the effect of the law are, first, an increase in the degree of exploitation of the workers, which makes up for the decline in the proportion of variable capital; second, the reduction of wages below the value of labor power; third, the cheapening of the elements of constant capital; fourth, relative overpopulation and unemployment, which contribute to a fall in the price of labor power; fifth, foreign trade; and, finally, an increase in joint-stock capital, which pays interest lower in magnitude than the average profit and which is inoperative in the equalization of the general rate of profit. “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” (K. Marx and F. Engels, Soch.. 2nd ed., vol. 25, part 1, p. 262).

This tendency expresses the historically limited nature of the capitalist mode of production and lays bare the limits of the capitalist mode’s development. The growth of productive forces within the framework of capitalist production comes into sharp conflict with the conditions required for the growth of the value of capital. The capitalist form of production renders superfluous a certain part of productive forces: that part which cannot be used as a means of exploitation for the assurance of a certain rate of profit and a certain degree of growth of capital. In 1972, according to studies by the University of Pennsylvania in the USA, the use of productive capacity was 76 percent in Italy, 78 percent in the USA, and 84 percent in the Federal Republic of Germany and in Great Britain. In the developed capitalist countries, the production apparatus was underutilized, on the average, by 19.6 percent. Industry thus produced $137 billion (1963 prices) less than it could otherwise have produced.

Unemployment is another expression of the underutilization and destruction of society’s most precious productive force—labor power. In the developed capitalist countries, unemployment was 8.3 million in 1973, 9.5 million in 1974, and more than 15 million in 1975.

With the monopolies’ dominance the factors that in various forms and to varying degrees counteracted the fall of the rate of profit in premonopoly capitalism have been intensified. Similarly, new factors have appeared. Additional profits have been transformed into permanent monopoly superprofits. The amount of capital used by the monopolies has grown enormously, and the mass of profit has increased correspondingly. The monopolies have had growing opportunities to reduce production costs, including the cheapening of the elements of constant capital through the establishment of artificially low prices for electric power and raw materials, both in their own countries and in trade with underdeveloped countries. Amortization deductions have been used extensively as a source of expanded production—as opposed to capitalization of the surplus value and, on this basis, the mass of profit has increased independently of the rate of profit and rate of accumulation. The defense industries have made superprofits at the expense of the militarization of the economy. Scientific and technological advances have been used to intensify exploitation through the intensification of labor.

All these countervailing factors restrain the tendency of the rate of profit to fall and can even bring a long-term rise in the rate of profit. Nevertheless, they cannot undo the law itself. In conditions of state-monopoly capitalism, the law of the tendency of the rate of profit to fall appears in a new guise—the growth in the rate of profit lags behind the growth in the rate of surplus value. According to statistics compiled by Soviet economists (see S. L. Vygodskii, Contemporary Capitalism. Moscow, 1969), in order to raise the rate of profit in US manufacturing from 26.9 percent in 1929 to 38.9 percent in 1966, monopoly capital had to increase the rate of surplus value over the same period from 181 percent to 314 percent—that is, by 133 percent.

The fall in the rate of profit involves a danger to capitalist production that, as Marx put it, even Ricardo dimly sensed. Contemporary bourgeois economists clearly see that the revolutionary significance of the tendency of the rate of profit to fall is a direct threat to the capitalist mode of production. Therefore, they deny the law in theory. All the same, the scale and intensity of the enormous combined efforts of the monopolies and the bourgeois state to conteract the law and to preserve the main stimulus to capitalist production—an increase in the rate of profit—testify to the force and significance of the law. The primary means of counteracting the law—an increase in the exploitation of the absolute majority of the population in the capitalist and developing countries for the benefit of a handful of monopolists who constitute an insignificant fraction of the population—further sharpens the contradictions of capitalism.