This law is set forth in the third section of the third book (posthumous) of Das Kapital. A few criticisms have been made of it, which vary from that of Sombart, who says that it is developed in the most striking manner (in glänzendster Weise), to that of Loria, who defines it as 'a metaphysical pistol shot (sic) from beyond the Rhine,' and thinks that he refutes it by an objection which is in fact quite inappropriate. Others have thought the law certainly true, but that it explained only partially the fact of the decline in the rate of profits and required to be combined with other laws already known to classical economics. But most of those who have studied Marx's economic theories have not examined it at all; his opponents (like Bohm Bawerk) reject it by implication, when they reject Marx's fundamental principles; the Marxians welcome it, German fashion, humbly and submissively, without discussion, with that lack of freedom and intellectual originality which Is noticeable in all their writings.
The examination of it attempted here, rests on the same basis as Marx's theories, i.e. it is made from the standpoint of those who accept the essentials of these theories, and hence the premise of labour-value, the distinction between fixed and floating capital, the view of profits as arising from surplus-value, and of the average rate of profits as arising from the equalization, Owing to competition, of the various rates of surplus-value. It is true that I accept all these things in a certain sense, which is not the sense of the ordinary Marxian, inasmuch as they are not looked upon as laws actually working in the economic world, but as the results of comparative investigations into different possible forms of economic society. But such a reservation, which relates to a question discussed by me at length elsewhere, (1) has practically no effect on the present study, whose results would be almost the same, even if these theories of Marx were interpreted in the sense which I consider erroneous. The object here is no longer to determine and define accurately Marx's fundamental concepts, but to see whether, from these concepts, even when interpreted in the current manner, it is ever possible in any way to deduce the law of the fall in the rate of profits. This task I think impossible.
The law was derived by Marx from the study of the effects of technical improvement. Marx states that technical improvement increases the amount and changes the form of the total capital, increasing the proportion of fixed as compared with floating capital, so that by this means the rate of profit is decreased; the latter arises, as is well-known, alit of the surplus-value, the product of the floating capital divided by the total capital. He illustrates the matter thus. Some technical improvement occurs; new machines are made, which formerly did not exist. The capital employed in production has been hitherto, we will suppose, a total of 1,000, divided into 500 fixed and 500 floating, and employing 100 labourers: the surplus-value = 500, i.e. the rate of it is 100 per cent; and hence the rate of profit is 500/1000 = 50 per cent. In consequence of the technical improvement, and of the construction of new machines, the too labourers who are maintained by the variable capital of 500, continue still to be employed in production; but, in order that this may be possible, it is necessary to use a larger fixed capital, which we may suppose 200 larger than before. Hence, as the result of the technical improvement, there will now be a total capital of 1,200, i.e. 700 fixed and 500 floating; and the rate of surplus-value remaining unchanged at 100 per cent, the rate of profit will be 500/1200 = about 41 per cent, i.e. will have decreased from 50 per cent to 41 per cent. Hence the necessary decline in the rate of profit on the hypothesis of technical improvement. But this hypothesis is an actual everyday fact in modern capitalist society. Hence, the actual decline of the average rate of profits in modern capitalist society. But this law is more or less counteracted by other facts, which act in a contrary sense more or less transitorily. Thus the fall is only a tendency.
In order that our study may be clear, it is above all necessary to distinguish the two groups of facts, or the two stages in the same capitalist society which Marx confused and embraced in a single somewhat obscure view.
The first stage is marked by the fact, pure and simple, of a technical improvement. Now technical improvement, among its logical, or what is the same thing, its necessary effects, in no way includes that of an increase in the amount of total capital employed, nor that of leaving the quantity of total capital unchanged. It has rather exactly the opposite as its necessary and immediate effect: i.e. that of limiting the capital employed. It is unnecessary to warn the reader that we are here treating of economic science and that increase and decrease refer always to economic values. In its simplest form, supposing the quantity of objects produced to be constant (200 shoes are required, and there is no reason to increase the production), technical progress will consist, purely and simply, in a saving of social expense: the same production at less expense. And since all cost, in Marx's hypothesis resolves itself into social labour, there will be the same production with less social labour. If it were not so, it would not be worth while to introduce this technical innovation; there would be, economically, no improvement but either the status quo ante or a regression. We must not take into account the other effects which would arise to increase production, greater consumption, increase of population, etc: additional and extraneous facts which are not considered here, since we are concerned with the single fact of technical improvement, all other conditions remaining unchanged. And, in such a case, we cannot represent technical improvement with the increasing series of total capital which Marx employs, viz. 150, 200, 300, 400, 500, etc., but with this decreasing one, 150, 140, 130, 120, 110, etc. And to keep to the illustration used above, if we suppose that the given technical improvement has caused a decrease of 1/10 in the total social labour required, we shall have in place of the original capital of 1,000 a capital of 900, no longer made up of 500 fixed and 500 floating, but of 450 fixed and 450 floating. The decrease must affect proportionally every part of the capital since all of it is, in the final analysis, a product of labour. Of the 100 original labourers, 1/10, i.e. 10 of them will remain unemployed: a fraction of the original capital will remain unemployed; the quantity (or utility) of the goods produced will remain the same.(2*)
When the description of the facts is thus corrected, there is no doubt that the smaller total capital employed, supposing on the one hand, the rate of surplus-value to remain unchanged, and, on the other, lo of the original labourers to be working no longer, would absorb an amount of surplus-value of 450. But the rate of profit would not on this account be changed; or rather, just for this reason the rate of profit could not be altered and would be expressed by 450/900 (as at first 500/1000), i.e. it would be as at first, 50 per cent.
This simplest case does not then give us Marx's law, but this other law; 'Technical improvement, supposing all the other conditions remain unchanged, causes a decrease in the amount (not the rate) of surplus-value and of profits.' this law assumes that the 1/10 of the labourers left unemployed become entirely superfluous. These ten labourers are henceforth to be a dead weight supported by the charity of others, or to die of starvation, or to emigrate to a new world. Let them be left to their fate. Social production will remain at its former level, thanks to the technical improvement, but accomplished without their help. This is the hypothesis, but given this hypothesis, of what importance is the law? To see this clearly it will suffice to push the hypothesis yet further, as we are entitled to do, and suppose that the technical improvements continuing, the employment gradually becomes superfluous, not only of 1/10, but of 1/4, 1/3, 1/2 of the labourers, i.e. that the employment of labourers tends to become = 0. In this case capitalist society as such would come entirely to an end, since the utility of labour, on which it is based, would come to an end. Where there is nothing the King loses his rights; and where labour has no utility the capitalist loses his. The ex-capitalists would have no more workmen to impoverish, but would be changed into the owners of automatic fountains of wealth; like those fortunate mortals in the fable enriched by charmed knives, by wonderful lamps, by gardens producing with instantaneous and spontaneous energy all God's gifts. In other words the law here resolves itself into a truism.
But Marx did not think of this truism. He wished to determine exactly the organic law of the variations in the rate of profits. In fact as is seen in the illustration given he does not at all suppose that the energy of labour may become superfluous; but rather that the labourers will find fresh employment with an increase in the original fixed capital. Given technical improvement and production also will be increased; this is the second stage which he considers. The 100 labourers are still all working, the fixed capital with which they work must be increased from 500 to 700, and the total has hence become 1200. The law which he deduces, of the fall in the rate of profits (in the illustration, from 50 per cent to 41 per cent) is not a truism; on the contrary it presents itself with all the importance and originality of a scientific discovery. All depends on seeing whether in the scientific discovery we have indeed the truth.
The crux of Marx's proof lies in the statement; that the labourers who would have had to remain unemployed, find on the contrary employment, but with a capital increased by so much (= 200) over the original. Is this statement correct? On what does Marx base it?
To this fundamental proposition my criticism refers, itself equally fundamental. If it is admitted it amounts to a most complete denial of the truth of the Marxian law. Nevertheless I state my idea in the form of a criticism and doubtfully, because, in dealing with a thinker of Mark's rank, it is necessary to proceed cautiously, and to remember (which I do not forget) that several times errors ascribed to him have been explained as mistakes of his opponents.
For what reason, I ask myself, do the ten unoccupied labourers, in order to be employed afresh, require a constant capital larger than the original?
The technical improvement has not diminished the natural utility of the production (also in our hypothesis it has not increased it either, but has left it unchanged); but it has only diminished its value. There will be then, with the improved technical organization, raw materials, tools, clothing, foodstuffs, etc., of the same total natural utility as at first. The economic value of all these products is diminished, because in them (to employ the metaphor chosen by Marx), is congealed a smaller quantity of labour, i.e. less by the work of ten labourers. But from the point of view of power to satisfy wants, the raw materials, the tools, the clothing, the means of sustenance, etc., remain, in virtue of the technical improvement, of the same rank as at first. If then capitalists and workpeople have remained as temperate as before, and their standard of life has not risen (and this is in the hypothesis), the production will offer as at first means of employment and means of sustenance for the ten labourers left unoccupied. By re-employing them, etc., maintaining them with the original means of subsistence, and setting them to work on the original raw materials or their new products, the capitalists will increase their production, or – what is the same thing – will improve its quality. But since we know that, economically, the value of that capital has diminished, it will come about that a capital economically smaller will absorb the same energy of labour as formerly, i.e. the same amount of profits; and an equal amount of profits with a smaller total capital means an increased rate of profits. Exactly the opposite to what Marx thought it possible to prove.
Turning to our illustration, the ten labourers will find employment with a capital which, like the utility, has remained the same, but economically has decreased to 900. This means that the rate of profits has increased from 500/1000 to 500/900, i.e. from 50 per cent to about 55 per cent. As to the rate of surplus-value, since the entire value of the total capital is reduced, it must no longer be calculated, as before the technical improvement, as 500/500, nor as in the first stage we considered (in which the technical improvement had made a portion of the labour entirely superfluous) as 450/450, but as 500/450, i.e. it will no longer be 100 per cent, but will have risen to about 111 per cent.
To this criticism of mine I have found no answer, either explicit or implicit, in Marx's work. Only in one passage, where he speaks of the counteracting causes, and in particular of surplus population (Chap. XIV, § iv.), he hints at the case where labour power may be re-employed with a minimum capital. It may be said that here Marx passed close to the difficulty, without striking upon it, i.e. without becoming aware of its importance. And, if he had struck on it, I doubt whether he would have overcome it and passed on; I think rather that his theory would have gone to pieces.
I foresee that it may be said: you have assumed that, owing to the technical improvement, not only would a number of labourers remain unemployed, but also a fraction of the original total capital, i.e. of means of production and means of subsistence; and when the labourers are re-employed, it is true that during the new cycle of production, other fractions of unoccupied capital will not unite with the original fractions, but precisely for this reason the quantity ot production which will result will be increased, and in the next cycle of production a still greater fraction of unoccupied capital will add itself, unless the ten labourers do not continue to be reemployed, in which case the un-occupied fraction will be smaller, but the increase will become constant. Now all these means of production and of sustenance will not be consumed (or will be partially consumed and partially saved), by the capitalist class, and hence there will be an increasing accumulation. The quantities of goods saved, owing to the impulsion of economic interest will not remain un-used in warehouses or strong boxes, but will be thrown on the market as capital seeking employment. This will increase the rate of wages, and hence will have a depressing effect on the rate of profits. Very good, but in such a case we are outside the Marxian law. The factor here considered, is no longer technical improvement taken by itself, but saving, which may be, as stated, encouraged by technical progress, but cannot be inferred from it. For it is true that, if we suppose the case of extravagant capitalists, saving, in spite of technical improvement will not take place. And as technical improvement encourages saving, so the latter, in its turn, by increasing wages, encourages the increase of population, and hence the reduction of wages, and once again a rise in the rate of profits. But, when saving and the increase of population come upon the scene we are already within the sphere of the law of demand and supply, i.e. of ordinary, accredited economics, which Marx despised as vulgar, and out of dislike of which he devised his law of the fall in the rate of profits yielded by the above combination of capital owing to the effect of technical improvement. I, indeed, believe that only the ordinary law of demand and supply can explain the variations in the rate of profit: but to return to it is not indeed to defend Marx's thesis, but rather to ratify its condemnation.
However it is regarded, this thesis seems to me indefensible; and even more indefensible if, leaving aside for a moment logical trains of reasoning and arithmetical calculations, we look at it with the clear intuition of common sense. See hereto follow the strict hypothesis set forth by Marx on one side a capitalist class, and on the other a proletarian class. What effect does technical improvement have? It increases the wealth in the hands of the capitalist class. Is it not intuitively evident that, as a result of technical improvement, the capitalists can, by anticipating commodities whose value is continually decreasing, obtain the same services which they obtained at first from the proletariat? And that hence the relation between value of services and value of capital will change in favour of the former, i.e. that the rate of profits will increase? When commodities (capital) are anticipated, which formerly were reproduced by five hours of labour and now are reproduced by four, the workman will continue to work ten hours. Formerly with five there were ten; now with four there is similarly ten. The sponge costs less, but the quantity of water with which it is saturated is the same. How could Marx suppose that after technical improvement, the expenses of the capitalists would always increase, so that proportionally profits would be in a state of perpetual decline, and would end by making, in face of the total costs, a most wretched figure?
Marx's mistake has been that he has inadvertently attributed a greater value to the fixed capital, which after the technical improvement is worked by the same labourers as before. Certainly anyone who looks at a society in two successive stages of technical development, will find in the second stage a greater number of machines and of tools of every kind. This is a question of statistics, not of economics. Capital (and Marx appears to have neglected this point for the moment) is not estimated by its physical extension, but by its economic value. And economically that capital (supposing all the other conditions remain constant) must be worth less; otherwise no technical improvement would have taken place.
An external circumstance which might serve to explain Marx's error is the fact that the third book of Das Kapital is a posthumous work, some parts of which are hardly sketched out, and amongst these that of the law of the rate of profits, which, moreover, does not relate to the establishment of principles, but, being a consequence and an application of these, was perhaps not worked out to the same extent as the fundamental or central part of the theory.(3*) It it probable that the author, if he could have gone over his rough draft again, would have materially modified it or entirely discarded it. But perhaps some internal reason could also be found for this strange mistake, in that Marx always misused the comparative method without disclosing any distinct knowledge of his procedure. And it might be that, as already in his earlier investigations, he perpetually transferred labour-value from a hypothetical society to the actual capitalist society, so in this new problem he has been led to estimate the worth of the technical capital in a more advanced society at the rate of value of that in a less advanced society. In this impossible attempt his method has here broken in his hands.
As we have disputed the actual basis of the Marxian law, it seems indeed superfluous to follow out its further developments, which are advanced in a form worked out with but little care. It is enough to remark that in these developments, as in general, throughout Das Kapital, there is a continuous medley of theoretical deductions and historical descriptions, of logical and of material connections. The defect, however, becomes in this instance an advantage, because many of the observations made by Marx, understood as historical descriptions of what usually happens in modern society, will be found to be true and can be saved from the shipwreck, as regards the theory of the law, with which by chance they are feebly connected. And it would even be possible to make such an investigation in respect to that very portion which we have disputed, i.e. to enquire what facts, actually observed by him, could have impelled Marx to construct his law, i.e. to give of these facts an explanation which is theoretically unjustifiable.
Marx attributed the greatest importance to the discovery of the law of the fall in the rate of prof is. Herein day for him 'the mystery over which all economists from Adam Smith onwards have toiled'; and in the different attempts to solve the problem he saw the explanation of the divergence between the various schools of economists. Ricardo's bewilderment in face of the phenomenon of the progressive decrease in the rate of profits seemed to him fresh evidence of the earnestness of mind of that writer, who discerned the vital importance of the problem for capitalist society. That the solution had not been found before his, Marx's, time, appeared to him easily explicable, when it was remembered that until then political economy had sought gropingly for the distinction between fixed and floating capital without succeeding in formulating it, and had not been able to explain surplus-value in distinction from profits, nor profit itself in its purity, independently of the separate fractions of it in competition amongst themselves; and that, in the end, it had been unable to analyse completely the difference in the organic composition of capital, and much less, the formation of the general rate of profits.
His explanation being now rejected, a double problem presents itself. The first question relates to fact. It is needful to ask: does the fact spoken of actually exist, and how does it exist? Has a gradual decline in the rate of profits been ascertained? And in which countries, and in what circumstances? The second question relates to the cause: since, whilst we have seen that there could only be one economic reason for the phenomenon, (the law of demand and supply), there may be several historical causes, and these may vary in different cases. The decline in the rate of profits may happen owing to a nominal increase in wages due to an increase in the rent of land, or it may happen owing to a real increase in wages due to stronger organisation among the workpeople, or it may happen owing to an increase, also real, in wages resulting from saving and from growing accumulations, which increase the capital in search of employment. This investigation must be made without prejudices, whether optimistic or pessimistic, apologetic or controversial; and economists have sinned but too often in all these ways. The listeners have seized upon the result of limited and qualified investigations, now in order to sing a hymn to the spontaneous force of progress, which will gradually cause the disappearance of capitalists or reduce interest to 2 per cent; now in order to terrify their audience by a spectacle no less fantastic, of landed proprietors as the sole owners of all the goods of society!(4*)
1. See chaps. III and IV.
2. We here suppose a series of productive periods already rapidly passed through, which may suffice to replace the whole of the total capital by the new technical processes. It is evident however, that as fixed capital is replaced in successive portions, in a first stage, goods are used as capital, whose cost of reproduction no longer corresponds to their original cost of production, A, whose actual social value no longer corresponds to the original one. But to consider the separate stages would here cause a useless complication.
3. The explanation of the way in which the average rate of profit arises belongs to the fundamental part of the third book of Das Kapital, and Marx must have thought it out together with the fundamental chapters in the first book.
4. This is the case contemplated by Ricardo in the celebrated § 44 of chapter vi, On Profits: Marx appears to attach little importance to this case, having complete faith in the continued technical progress of agriculture, not to speak of other counteracting causes. It is necessary to add that Marx in conformity with his law, maintains that the rent of land also has a tendency to fall, although it may increase its total amount, or its proportion in reference to industrial profits: see vol. iii, 223-4.