The Rate of Profit The surplus-value created by the labour of the wage-workers in the process of production is the source from which are drawn the incomes of all the exploiting classes of capitalist society. Let us first examine the laws by force of which surplus-value assumes the form of the profit of those capitalists who have invested their capital in the production of commodities.
The value of a commodity produced in a capitalist enterprise break down into three parts: (1) the value of the constant capital, (part of the value of the machinery and buildings, the value of the raw material, fuel, etc.); (2) the value of the variable capital; and (3) surplus-value. The magnitude of a commodity's value is determined by the amount of socially-necessary labour required for producing it. But the capitalist does not, expend his own labour in producing the commodity, he lays out his capital for this purpose.
The capitalist costs of production of a commodity consist of the outlay of constant and variable capital (c+v), i.e., of expenditure on means of production and on workers' wages. The cost of the commodity to the capitalist is measured by the outlay of capital, its cost to society is measured by the outlay of labour. Therefore the capitalist costs of production of a commodity are less than its value, or the real costs of its production (c+v+s). The difference between value, or real costs of production, and capitalist costs of production is equal to the surplus-value (5) which the capitalist appropriates without compensation.
When the capitalist sells a commodity which has been produced in his enterprise, surplus-value makes its appearance as a definite surplus over and above the capitalist costs of production. The capitalist sets this surplus, in determining the profitability of the enterprise, against the capital which he has advanced, i.e., all the capital invested in production. Surplus-value, placed in relation to total capital, take the form of profit.
In so far as surplus-value is compared not with variable capital only but with capital as a whole-the difference between constant capital, spent on purchasing means of production, and variable capital, spent on hiring labour-power, is hidden. As a result the deceptive appearance is created that profit is engendered by capital itself. In reality, however, the source of profit is surplus-value, created only by the workers, by labour-power, the value of which is embodied in variable capital. Profit is surplus-value compared with the total capital invested in production and appearing outwardly to be engendered by the capital. Owing to this peculiarity of profit Marx calls it the transmuted form of surplus-value.
In similar fashion as the form of wages conceals the exploitation of wage-labour, creating the false impression that all labour is paid for, so also the form of profit in its turn hides from view the relationship of exploitation, creating a misleading appearance of profit being created by capital. Thus the forms assumed by capitalist production relations obscure and mask their true nature.
The degree of profitability of a capitalist enterprise for its owner is determined by the rate of profit. The rate of profit is the proportion between the surplus-value and the total capital advanced, expressed as a percentage. For example, if the total capital advanced is 200,000 dollars, and the year's profit amounts to 40,000 dollars, then the rate of profit = 40,000/200,000x100 or 20 per cent.
Inasmuch as the total capital advanced is greater than the variable capital, the rate of profit (s/c+v) is less than the rate of surplus-value (s/v). Suppose, in our example, that the capital of 200,000 dollars consists of 160,000 dollars of constant capital and 40,000 dollars of variable capital, then the rate of surplus is 40,000/40,000x100=100 per cent, but the rate of profit is 20 per cent, or one-fifth of the rate of surplus-value.
The rate of profit depends first of all on the rate of surplus-value. The higher the rate of surplus-value the higher, other things being equal, will be the rate of profit. All the factors which increase the rate of surplus-value, i.e., which raise the degree of exploitation of labour by capital (lengthening the working day, raising the intensity and productivity of labour, etc.) also increase the rate of profit.
Further, the rate of profit depends on the organic composition of capital. As we know, the organic composition of capital is the proportion between constant and variable capital. The lower the organic composition of capital, i.e., the larger the relative weight in the capital of its variable part (the value of labour-power), the larger, with the same rate of surplus-value, will the rate of profit be. And, conversely, the higher the organic composition of capital, the lower the rate of profit.
One of the factors which affect the rate of profit is economy in the use of constant capital. Finally, the rapidity of turnover of capital affects the rate of profit. The more rapid the turnover of capital, the higher the annual rate of profit, which represents the relation between the surplus-value produced, in the year to the total capital advanced. And, conversely, a slowing down in the turnover of capital leads to a lowering of the annual rate of profit.
Under capitalism the distribution of capital among various branches of production and the development of technique take place in a ferocious competitive struggle.
Competition within a particular branch of production must be distinguished from competition between branches.
Competition within a branch means competition among enterprises in one and the same line of production, all producing commodities of the same kind, each of which tries to secure more advantageous disposal of its commodities and to obtain additional profit. The separate enterprises concerned work in varying conditions and differ one from another in their scale and in their level of technical equipment and organisation of production. Consequently the individual values of the commodities produced in the different enterprises are not the same. But competition between enterprises in one and the same branch of production leads to the price of commodities being determined not by their individual values but by the social value of these commodities. And the magnitude of this social value of the commodities concerned, as has been mentioned, depends on the average conditions of production in the particular branch.
As a result of the fact that the price of commodities is determined by their social value, those enterprises gain in which the, technique of production and the productivity of labour is higher than the average level in the branch concerned and, consequently, where the individual value of the commodities produced is lower than the social value. These enterprises receive an additional profit, or super-profit, which is a form of the extra surplus-value which we have examined earlier (in Chapter VII).
Thus, as a result of competition within a particular branch of production varying rates of profit are formed in different enterprises of the branch in question. Competition between different enterprises of one and the same branch leads to a squeezing-out of the small and medium enterprises by the large-scale ones. In order to hold their ground in the competitive struggle, those capitalists who own backward enterprises endeavour to introduce in them the technical improvements adopted by their competitors who own technically more developed enterprises. As a result a heightening of the organic composition of capital takes place in the branch as a whole, the super-profit which the capitalists who own the technically more advanced enterprises have been receiving now disappears, and a general lowering of the rate of profit takes place. This obliges the capitalists again to introduce technical improvements. Thus, in the process of competition within a particular branch, there takes place the development of technique and the growth of the productive forces.
Competition between branches means competition between the capitalists of different branches of production over the most profitable way of investing capital. The capitals invested in different branches of production have varying organic compositions. Since surplus-value is created only by the labour of wage-workers, in enterprises in those branches of production where a low organic composition of capital prevails a capital of the same size produces a relatively large mass of surplus-value. In enterprises with a higher organic composition of capital, a relatively smaller amount of surplus-value is produced. The competitive struggle between capitalists of different branches leads, however, to the amount of profit on capitals of equal size becoming equalised.
Let us suppose that in society there are three branches of production-leatherworking, textiles and engineering-with capitals of the same size but differing in organic composition. The amount of the capital advanced in each of these branches is 100 units (millions of pounds sterling, say). The capital of the leatherworking branch consists of 70 units of constant capital and 30 units of variable, that of the textile branch consists of 80 units of constant and 20 of variable, and that of the engineering branch consists of 90 units of constant and 10 units of variable. Let the rate of surplus-value of all three branches be the same and be 100 per cent. So, then, in the leatherworking branch 30 units of surplus-value will be produced in the textile branch 20 and in the engineering branch 10. The value of the commodities in the first branch will be equal to 130, in the second to 120, in the third to 110, and in all three branches together-360 units.
If the commodities are sold at their values, then in the leatherworking branch the rate of profit will be 30 per cent, in the textile branch 20 per cent and in the engineering branch 10 per cent. Such a distribution of profit will be quite advantageous to the capitalists in the leatherworking branch of production, but disadvantageous to the capitalists in the engineering branch. Under these conditions, the entrepreneurs in the engineering branch will seek more advantageous application for their capitals. This application for their capitals they will find in the leatherworking branch. A flow of capital from the engineering branch to the leatherworking branch will take place. In consequence, the quantities of commodities produced in the leatherworking branch will grow, competition will inevitably become more acute and will oblige the entrepreneurs in this branch to lower the prices of their commodities, which it will lead also to a reduction in the rate of profit. Conversely, in the engineering branch the quantities of commodities produced will fall and the changed relationship between supply and demand will enable the entrepreneurs to raise the process of their commodities, as a result of which the rate of profit will also rise.
The fall in prices in the leatherworking branch and the rise in prices in the engineering branch will continue until the rate of profit in all three branches becomes approximately the same.
This will happen when the commodities produced by all three branches are sold at 120 units (130+120+110)/3. The average profit of each of the branches will then be 20 units. The average profit is an equal profit on capitals of the same, magnitude invested in different branches of production.
And so, competition between branches leads to the differing rates of profit existing in different branches of capitalist production being equalised to a general (or average) rate of profit. This equalisation takes place through a flow of capital (and consequently, also of labour) from Some branches to others.
Through the formation of an average rate of profit the capitalists of some branches (in our example, leatherworking) are deprived of part of the surplus-value created by their workers. On the other hand, the capitalists in other branches (in our example, engineering) realise extra surplus-value. This means that the first sell their commodities at prices below their value, while the second sell them at prices above their value.
The price of a commodity in any of the branches is now composed of the cost of production (100 units) and the average profit (20 units).
The price which equals the cost of production of a commodity plus the average profit is the price of production. In the separate enterprises of a particular branch, as a result of the differences in the conditions of production, there exists different individual prices of production which are determined by the individual costs of production plus the average profit.
But the commodities are realised at an averaged-out, uniform price of production. The process of formation of an average rate of profit and price of production may be depicted in the form of the following table:
| Branches of production | Constant capital | Variable capital | Surplus- value | Value of commodities | Average rate of profit (%) | Price of production of commodities | Variation of price of production from value |
| Leatherworking | 70 | 30 | 30 | 130 | 30 | 120 | -10 |
| Textile | |||||||
| 80 | 20 | 20 | 120 | 20 | 120 | Equal | |
| Engineering | 90 | 10 | 10 | 110 | 10 | 120 | +10 |
| Total | 240 | 60 | 60 | 360 | 20 | 360 |
The commodities produced in each of the three branches are sold at 120 units (millions of dollars, say). Yet the value of the commodities in the leatherworking branch is 130 units, in the, textile branch 120 and in the engineering branch 110. In contrast to what happens under simple commodity production, under capitalism commodities are sold not at prices which correspond to their value but at prices which correspond to their prices of production.
The transformation of value into price of production is result of the historical development of capitalist production. Under conditions of simple commodity production the market price of commodities in general correspond to their values. In the first stages of capitalism's development significant differences were still retained between the rates of profit in different branches of production, since the separate branches were as yet insufficiently interconnected, and craft and other restrictions in existed which hindered the free flow of capital from some branches to others. The process of forming the average rate of profit and transforming value into price of production was brought to completion only with the triumph of capitalist machine industry. With the transformation of value into price of production the basic economic law of capitalism, the law of surplus-value, becomes concrete and finds expression in their form of the average rate of profit.
Bourgeois economists try to refute Marx's labour theory of value by referring to the fact that in particular branches the prices of production do not coincide with the values of the commodities. In reality, however, the law of value fully retains its force in capitalist conditions, for the price of production is merely a modified form of value.
This is shown by the following circumstances:
First, some entrepreneurs sell their commodities above their value, others below, but the capitalists as a whole, taken together, realise the full amount of the value of their commodities. On the scale of society as a whole the sum total of prices of production is equal to the sum total of the values of all commodities.
Second, the sum total of the profit received by the whole class of capitalists is equal to the sum total of the surplus-value produced by all the unpaid labour of the proletariat. The magnitude of the average rate of profit depends on the magnitude of the surplus-value produced in society.
Third, a reduction in the value of commodities leads to a reduction in their prices of production, an increase in the value of commodities leads to the raising of their prices of production.
Thus, the law of the average rate of profit operates in capitalist society; it means that the different rates of profit which depend on the differences in the organic composition of capital in different branches of production are levelled out, as a result of competition, to a common (average) rate of profit. The law of the average rate of profit, like all the laws of the capitalist mode of production, manifests itself spontaneously through innumerable variations and fluctuations. In the struggle for the most profitable application of capital a ferocious competitive struggle is waged between the capitalists. They endeavour to place their capital in those branches of industry which promise them the largest profits. In the hunt for high profits a flow of capital from one branch to another takes place, and as a result of this an average rate of profit is established.
Thus, the distribution of labour and means of production between the different branches of capitalist production takes place on the basis of the law of the average rate of profit. This means that in a developed capitalist society the law of value operates as the spontaneous regulator of production, working through the price of production.
The price of production is that average magnitude around which fluctuate, in the last analysis, the market prices of commodities, i.e., the prices at which commodities are actually bought and sold on the market.
The equalisation of the rate of profit and the transformation of value into price of production still further disguise the relationship of exploitation, still further conceal the true source of the enrichment of the capitalists.
"The actual difference of magnitude between profit and surplus value ... in the various spheres of production now conceals completely the true nature and origin of profit, not only for the capitalist, who has a special interest in deceiving himself on this score, but also for the labourer. By the transformation of values into prices of production, the basis of the determination of value is itself removed from direct observation." (Marx, Capital, Kerr edition, vol. III, p. 198.)
In reality the formation of an average rate of profit means a redistribution of surplus-value among the capitalists in different branches of production. Part of the surplus-value created in branches with a low organic composition of capital is appropriated by the capitalists in the branches with a high composition of capital. It follows that the workers are exploited not only by those capitalists for whom they work but by the entire class of capitalists as a whole. The entire capitalist class has an interest in raising the degree to which the workers are exploited, since this leads to a rise in the average rate of profit. As Marx showed, the average rate of profit is dependent on the degree to which the whole of labour is exploited by the whole of capital.
The law of the average rate of profit expresses, on the one hand, the contradictions and the competitive struggle among the industrial capitalists over the sharing-out of surplus-value, and on the other hand, the profound antagonism between two mutually hostile classes, the bourgeoisie and the proletariat. It testifies to the fact that in capitalist society the bourgeoisie' as a class opposes the proletariat as a whole, that a struggle for particular interests of the workers or of particular groups of workers, a struggle against particular capitalists, cannot lead to a radical change in the position of the working class. The working class can free itself from the yoke of capital only by overthrowing the bourgeoisie as a class, only by abolishing the system of capitalist exploitation itself.
As capitalism develops, the organic composition of capital steadily rises. Each separate entrepreneur, more and more replacing workers by machines, strives to cheapen production, extend the market for his commodities and win super-profit for himself. But when the technical attainments of particular enterprises become widespread, a rise in the organic composition of capital takes place in the majority of enterprises, which leads to a fall in the general rate of profit.
A more rapid growth of fixed capital compared with circulating capital acts in the same direction, leading as it does to a slowing down in the turnover of the whole capital.
Each capitalist, in raising the level of technique, endeavours to obtain the largest possible profit, but the result of the activities of all the capitalists directed to achieving this purpose is something which none of them wanted-a lowering of the general rate of profit.
Let us take our previous example. The sum-total of all the capitals, amounting to 300 units, is made up of 240 units of constant and 60 of variable capital. With the rate of surplus-value at 100 per cent, 60 units of surplus-value are produced, and the rate of profit is 20 per cent. Let us suppose that during twenty years the total amount of capital grows from 300 to 500 units. At the same time as a result of the progress of technique, the organic composition of capital grows. Consequently, the 500 units are divided into 425 units of constant and 75 units of variable capital. In this case, given the previous rate of surplus-value, 75 units of surplus-value will be created. The rate of profit will now be 75/500x100=15 per cent. The amount of profit has grown from 60 to 75 units, but the rate of profit has fallen from 20 per cent to 15 per cent.
So, then, a rise in the organic composition of capital leads to a lowering of the average rate of profit. There are a number of factors, however, which counteract the lowering of the rate of profit.
In the first place, the exploitation of the working class grows. The development of the productive forces of capitalism, which expresses itself in the increasing organic composition of capital, leads at the same time to a growth in the rate of surplus-value. Owing to this, the lowering of the rate of profit takes place more slowly than it would have done had the rate of surplus-value remained the same. Secondly, technical progress, raising the organic composition of capital, gives rise to unemployment, which presses upon the labour market. This enables the employers to reduce wages fixing them well below the value of labour-power.
Thirdly, as the productivity of labour grows, there is a fall in the value of the means of production-machinery, equipment, raw material, etc. This slows down the growth in the organic composition of capital, and, consequently, counteracts the lowering of the rate of profit.
Let us suppose that an employer compels his workers, who formerly were operating five looms, to operate twenty. As a result of the growth in the productivity of labour in the manufacture of looms, however, the value of looms has fallen by half. Consequently, twenty looms are now worth not four times as much as five but only twice as much. Therefore the share of constant capital per worker grows not fourfold but only twofold.
Fourthly, the lowering of the average rate of profit is counteracted by economy in constant capital effected by the capitalist at the expense of the health and lives of his workers. In order to enlarge their profits employers compel their workers to do their work in workshops which are too small and without adequate ventilation, and they economise on the devices which are needed for safety. In consequence of this niggardliness on the part of the capitalists, the workers' health is undermined, an enormous number of accidents happen, and the death rate rises among the working population.
Fifthly, the fall in the rate of profit is held up because of the nonequivalent exchange which exists in the sphere of foreign trade, when the entrepreneurs of advanced capitalist countries, through selling their commodities in colonial countries, obtain super-profit.
All these counteracting factors do not abolish but merely weaken the lowering of the rate of profit and convert it into a tendency. Thus, the raising of the organic composition of capital has as its inevitable consequence the law of the tendency of the general (or average) rate of profit to fall.
The fall in the rate of profit does not mean a reduction in the amount of profit, i.e., in the total volume of surplus-value produced by the working class. On the contrary, the amount of profit grows both in connection with the rise in the rate of surplus-value and as a result of the growth in the number of workers exploited by capital. For example, in the U.S.A. the total of industrial profit, calculated from the official data of the Census of Industry, amounted in 1859 to 316 million dollars, in 1869 to 516 million, in 1879 to 660 million, in 1889 to 1,513 million, and in 1899 to 2,245 million.
The capitalists try by intensifying to the utmost the exploitation of the workers to weaken the tendency of the rate of profit to fall. This leads to the contradictions between proletariat and bourgeoisie becoming more acute.
The law of the tendency of the rate of profit to fall intensifies the struggle within the bourgeoisie itself over the distribution of the total mass of profit.
In their drive for higher profits the capitalists invest their capital in backward countries, where working hands are cheaper and the organic composition of capital is lower than in countries with highly-developed industry: and they begin to exploit the peoples of these countries intensively. This leads to a sharpening of the contradictions between the developed capitalist countries and the backward ones, between metropolitan countries and colonies.
Further, in order to keep prices at a high level, entrepreneurs join together in associations of various kinds. By this means they manage to secure high profits.
Finally, striving to make up for the fall in the rate of profit by increasing its amount, the capitalists extend the scale of production far beyond the limits of demand effective in terms of money. In this connection, the contradictions caused by the tendency of the rate of profit to fall make themselves felt especially sharply during crises.
The law of the tendency of the rate of profit to fall is one of the clearest indications of the historical limitations of the capitalist mode of production. In sharpening the contradictions of capitalism, this law shows vividly that at a certain stage the bourgeois system becomes an obstacle to the further development of the productive forces.
(1) Profit is surplus-value taken in comparison with the-total capital invested in production and appearing from outside as though produced by this capital. The rate of profit means the relation of the amount of surplus-value produced to the total capital, expressed as a percentage.
(2) Competition within a branch of production leads to the prices of identical commodities being determined not by the individual but by the social value of these commodities. Competition between branches leads to a flow of capital from one branch to another, to the formation of an average rate of profit throughout the field of capitalist production. On the basis of the law of the average rate of profit there takes place a distribution of labour and means of production among the various branches of capitalist economy.
(3) As a result of the equalisation of the rate of profit commodities are sold not at their values but as their prices of production. The price of production is the price which equals the cost of producing the commodity plus the average profit. The price of production is a modified form of the value. The sum-total of the prices of production is equal to the sum-total of the values of all commodities; with a change in the value o commodities their price of production also changes.
(4) As capitalism develops, in proportion to the growth in the organic composition of capital the average rate of profit shows a tendency to fall.
At the same time the amount of profit steadily grows. The law of the tendency of the average rate of profit to fall leads to the contradictions of capitalism becoming acute.