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Arne Swabeck

Some Comments on Falling Rate of Profit

(November 1949)

From Fourth International, Vol.10 No.10, November 1949, pp.307-309.
Transcribed & marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

V. Grey’s article, Steel: Achilles of US Industry, published in the October Fourth International, graphically illustrates some of the inexorable contradictions inherent in the process of accumulation of capital. His analysis is excellent, and it follows the Marxist approach to these problems. Moreover, he demonstrates that American industry and especially the steel industry, precisely because of its high technological development, provides the fullest confirmation of the analysis of the laws of capitalist production made by Marx.

Grey lays bare some of the fundamental aspects of these laws as they apply to the steel industry: the disproportionate expansion of constant capital (equipment and raw materials) as against variable capital (labor-power, wages) and the resulting higher organic composition of capital which fosters the tendency of the average rate of profit to fall. This is most apparent in this giant among powerful American industrial combines.

On the whole Grey has performed a most commendable job. But his analysis suffers from a certain weakness. If not directly, at least indirectly, there appears to be an implication that the tendency of the falling average rate of profit is synonymous with what the steel barons proclaim as the “break-even” point for their industry.

In 1939 the steel magnates estimated the “break-even” point to be 50 percent of capacity. Today they insist that this figure has reached between 70 and 75 percent. And this change happened during a decade of war and unprecedented prosperity. Proceeding from this point onward in arithmetical progression one could easily visualize the time – not in the too distant future – when this figure might reach 100 percent, whether or not a depression intervenes. Would the steel industry then have to produce at a loss, go out of business, or be taken over by the state?

On the other hand Robert Nathan, presenting the case for the steel workers union before the Presidential Fact Finding Board, was equally insistent on a “break-even” point for the steel industry today of only 33 percent of capacity.

It is possible, of course, that Nathan does not understand the theory of the tendency of the falling rate of profit or, at least, ignores it. And it is perfectly obvious that the steel magnates would apply every trick of their accounting devices to move the so-called “breakeven” point up to the highest plausible level.

A Page of Skulduggery

It would be a mistake to identify the industrialist’s “break-even” point – arbitrarily and artificially established – with the tendency of the falling rate of profit. It represents rather a page from the chapter of skulduggery and swindles perpetrated by these predatory capitalists essentially for the purpose of defrauding the steel workers of a livable return on their toil.

These techniques were carefully analyzed and presented in great detail by Donald Montgomery, chief of the Washington office of the UAW-CIO, to the Joint Committee of the Economic Report in the hearings on corporate profits held in Washington, D.C. during December 1948. In the case of US Steel these hearings brought out the following:

  1. At the end of 1940 US Steel adopted the “last-in, first-out” (Lifo) method of reporting most of their inventories. With inventory valued at the last or higher cost in a period of increasing prices, with the so-called inventory profits having been written off.
  2. During the war (from 1941 through 1945) capital facilities were depreciated under the five-year amortization certificates (“accelerated depreciation”). This accelerated depreciation during the war amounted to a total of $223 million for the five-year period over and above normal depreciation charges. In the postwar period depreciation allowances were substantially increased to cover “higher replacement costs.” Thus, in the middle of 1947, an additional 30 percent was added to the depreciation allowance. In 1948, this was advanced to 60 percent.
  3. In the twenty-year period – 1928-1947 – depreciation charges amounted to a total of $1,555 million while capital expenditures were $1,594 million. Thus the increased value of the US Steel Corporation since 1928 has been financed almost entirely by depreciation charges and not from any re-invested profits.

But none of these exorbitant depreciation allowances are included in reports of net profits made. Profits appear correspondingly reduced; and the “breakeven” point, moving upward at an accelerated pace, becomes pure fraud.

The realization of profit and the accumulation of capital is the primary urge and the motivating force of all capitalist production. This and this alone is given serious consideration by the steel magnates when demands are made for expansion of productive capacity, or when demands are made for increased wages by the steel workers union.

The phenomenal expansion of the steel industry during the last century of its existence has subjected it ever more to the fundamental laws as well as to the contradictions of capitalist production. Its gigantic machinery operated by relatively few men, so vividly described by Grey, represents the disproportionate expansion of constant capital relative to variable capital. With each new labor-saving machine, labor productivity rises to greater heights and the absolute mass of that part of labor which is unpaid and represents surplus Value is increased.

Living labor alone produces surplus value. But in the steel industry this has meant a continual decline of living labor employed in comparison to the amount of constant capital invested. As a result, the surplus value produced has also continually declined in comparison to the total capital invested. And since the proportion of the mass of surplus value to the value of total capital employed forms the rate of profit, this rate tends to fall continuously.

Falling Rate of Profit

Marx always insisted that the fall in the rate of average profit manifests itself as a tendency and not in absolute form. Its effects become clearly marked only under certain conditions and over long periods. But Marx also established the fact that the same causes which bring about this falling tendency of the rate of profit also produce a counterbalance to this tendency.

The growth of the social productivity of labor expresses itself also in a progressive increase in the absolute mass of the appropriated surplus value or profit; thus on the whole a relative decrease of variable capital and profit is accompanied by an absolute increase of both.

There is an accelerated accumulation of capital. Generally the growth of total capital proceeds at a more rapid ratio than that expressed by the fall of the rate of profit.

According to R. Weidenhammer’s analysis in the American Economic Review for March 1933 the rate of profit on the invested capital of the US Steel Corporation fell from approximately 8 percent in 1902 to 4.5 percent in 1927-1929 (the rate rose sharply during the war years of 1916-17). But the corporation’s surplus rose from $25 million in 1902 to $700 million in 1929 while its assets increased more than threefold. In other words a vastly increased mass of profit compensated for the diminishing rate of profit.

One of the outstanding factors counteracting the tendency of the falling rate of profit is represented by a greater intensity of exploitation of labor. This tends to raise the rate of profit by increasing surplus value without a corresponding increase in the value of fixed capital. Various methods of rationalization of production including actual speedup are applied. US News and World Report, July 1949, states: “All US factories, as a group, operated at a rate of efficiency that was 7 percent higher during the first four months of this year than it- was in all of 1948, on the basis of official indexes.” It is to be assumed that the steel magnates enjoyed their share of this greater intensity of exploitation of labor.

The tendency of the falling rate of profit is checked also by such means as the cheapening of the elements of constant capital. This may apply to both equipment and raw materials.

Prices of raw materials are often cheapened by the development of synthetics and other substitutes, by greater efficiency of production and greater supply, and, not least of all, by more intense exploitation of colonial labor. Apparently it was not too difficult for Robert Nathan to prove before the Fact Finding Board that Big Steel could grant the thirty-cent-an-hour package demanded by the union out of the saving from the recent fall in the cost of raw materials alone.

It is just as true for machinery and other fixed capital as for raw materials that value does not grow in proportion to their mass. Both the quantity and the productivity of the former tend to increase more than their price. For the machinery and tool-producing industry this trend is more marked than in the average of capitalist production as a whole. Thus the same development which increases the mass of constant capital relatively over that of variable capital, reduces the value, of its elements as a result of the increased productivity of labor.

Effect of Monopoly

However, the rate of profit within the process of production itself depends also o,n many other circumstances. Even entirely apart from surplus values produced or economies affected in constant capital, the rate of profit depends on what Marx calls the second act of the process of capitalist production – the sale of the products.

The rate of profit depends not least of all on the constellation of the market. For instance, during the recent war period monopoly capitalism sold its output at arbitrarily set prices to the government in which the monopoly capitalists were also represented in person. In addition the government helped to hold down costs of production through its OPA measures. Prices and profits were not lowered by competition, and advertising costs could be held to a minimum. All of fixed capital, including its new additions, was set into motion by labor.

This “market” absorbed the enlarged output of commodities and permitted a complete realization of surplus value and profit. No doubt the rate of profit experienced a new even though temporary rise. Of this booty, to be sure, the masters of the steel industry pocketed their bountiful share, and they are now giving a demonstration of their determination to fight to. the bitter end against any encroachment on their swollen profits.

On the whole the monopoly control of American industry, with its arbitrary price-fixing and tariff protection for the big internal market, exerts its effect in checking the falling rate of profit. Externally, American imperialism, after its victory in the war, endeavored to extend this check to the world market by the elimination of such competitors as Germany and Japan. However, it thereby extends also all its own internal antagonisms and becomes more inextricably bound up with the malignant growth of paralysis and decay of world capitalist economy.

For the sake of clarity on some of these important aspects of the laws of capitalist production I thought it necessary to submit these remarks as an extension to Grey’s article. However, I can readily agree to Grey’s forecast of the future vulnerability of the steel industry which holds true in general for capitalist industry as a whole.

Life and Death Struggle

Like a “floating” foundation threatening collapse, the tendency of the falling rate of profit shows the constantly deeper cracks and fissures in the structure of capitalist economy. The industrial overlords are compelled to struggle incessantly to brace it up. Both the tendency of the falling rate of profit and the struggle against it condition the most fundamental aspect of capitalist development.

Since the rate of profit is the incentive to capitalist production, its falling tendency checks the formation of new independent capital. Even the efforts to offset the tendency by increasing the mass of profit through changing the organic composition of capital succeeds only temporarily, inasmuch as this change again asserts its downward pressure. The tendency of the falling rate of profit aggravates the contradictions between the absolute development of production and the limited conditions of consumption.

That the steel industry gave a resounding “NO” in answer to the big clamor for further expansion of productive capacity is quite understandable from their point of view. From its roaring infancy, the steel industry grew with the development of new industry and the industrialization of new regions. Now the decline of the rate of expansion is easily observable. Roughly this corresponds to the declining rate of expansion for American industry as a whole.

But.it would not be correct to ascribe this entirely to the tendency of the falling rate of profit. The constantly higher organic composition of capital also sets into motion simultaneously and antagonistically a restriction of the growth of the market by imposing new limitations upon the purchasing power of the great mass of the workers. Capitalism develops the forces of production far more rapidly than the forces of consumption, and the latter are subject to a number of specific laws. Thus, wages tend to fall relatively as output and profits rise. Consumer income rises at a slower pace than investment income. That is why the steel barons get cold chills as they anticipate the ultimate effects of the high cost of excess capacity.

The decline of the rate of expansion of capitalist production gives expression also to a decline of ability, or of the means of converting profits into capital. This carries with it a decline of the ability to create a consumers market. Marx put this whole question in a nutshell when he said:

“The real barrier of capitalist production is capital itself. It is the fact that capital and its self-expansion appear as the starting and closing point, as the motive and aim of production; that production is merely production for capital, and not vice versa, the means of production mere means for an ever expanding system of the life process for the benefit of the society of producers.” (Capital, Vol.III, page 293.)

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