Schrödinger’s Capital: Heinrich’s hilarious ‘refutation’ of Marx on the falling rate of profit
NOTE 22: The falling rate of profit and the collapse of production on the basis of exchange value
In part 2 of his 2013 essay, Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s, Heinrich argues Marx makes a far-reaching assertion that is impossible to demonstrate empirically: in the long term the rate of profit must fall. As Heinrich points out the very nature of the law — that it only points to a tendency — implies past historical data cannot simply be projected indefinitely into the future. The rate of profit may well have fallen in the past or it may have risen, but this does not mean a given historical trend will continue in the future.
The argument Heinrich makes in this section appears to challenge a long-standing Marxist assumption that there is at least an indirect link between capitalist crisis and social revolution. For some Marxists — notably, Andrew Kliman and company — the crisis produced by the falling rate of profit is a theoretically necessary assumption, because such a crisis is thought to be the material force that ultimately triggers a working class social revolution. Without the crisis, and the deepening poverty and political discontent it creates, many Marxists have no ready explanation for why the working class would overthrow capital. Thus, if we accept Heinrich’s argument about the falling rate of profit, what are we left with as a trigger for the social revolution?
I will return to this point at another time.
The law and its counteracting influences
Heinrich offers two reasons for his conclusion: first, Marx does not show that his law is capable of overcoming the counteracting tendencies in the long-term as he asserts. Second, Heinrich argues Marx fails to even demonstrate the law itself exists. Heinrich concentrates his entire argument on this latter point. Since Heinrich just makes the first point and then promptly ignores it, it might be interesting to see if in fact he is correct.
Here is Heinrich’s full statement:
“Marx assumes that the fall in the rate of profit, derived as a law, in the long term outweighs all counteracting factors. Yet Marx does not offer a reason for this.”
Is Heinrich’s accusation true? Of course not and here is why: In the law of the tendency of the rate of profit to fall, the counteracting influences are not an exception to Marx’s argument on the law of the tendency of the rate of profit to fall; they are the real story.
Some Marxists tend focus on the law of the tendency of the rate of profit to fall itself because (they think) it is the direct trigger for crises and thus the indirect trigger for the social revolution. But here is the thing: As I argued in the previous note, crises aren’t important in Marx’s theory. In fact, crises are so unimportant, Marxists generally agree Marx never even bothered to offer a crisis theory. Unlike our theoretically inept post-war Marxists, Marx did not care all that much about crises at all — calling them merely forcible adjustments of the conditions of capitalist production.
This is not the way Marx approached the counteracting influences to the fall in the rate of profit. In volume 3 Marx makes it clear that if it were not for the counteracting influences, capitalism would have collapsed long ago. As Marx put it, bourgeois simpletons very quickly went from expecting the mode of production to collapse to wondering why it didn’t. The reason it did not collapse as quickly as they expected was the counteracting influences.
The real significance of counteracting influences
To put this as simply as a value-form school simpleton like Heinrich might require: the counteracting influences themselves are the immediate, real and historically relevant expression of the law of the tendency of the rate of profit to fall.
In chapter 14, Marx explains to his readers that the rate of profit falls because of the impact capital has on the productivity of social labor:
“The rate of profit does not fall because labour becomes less productive, but because it becomes more productive.”
And, in Chapter 15 of volume 3, Marx has this to say about why the long-term tendency of the rate of profit is toward decline:
“The rate of profit does not sink because the labourer is exploited any less, but because generally less labour is employed in proportion to the employed capital.”
To understand the significance of Marx’s points, we have to recall that, in Marx’s theory, labor is the only source of value. As the productivity of labor increases and the employment of living labor decreases in proportion to constant capital, the value newly created in production decreases in proportion to that portion which simply represents to value of the constant capital used up in production. Once labor employed in production reached zero, the value of the newly created product would be zero and thus the rate of profit possible would be zero.
The argument is so simple there is hardly any question raised by it except, “Okay, when? How long do we have to wait for capitalism to collapse?”
To make his argument against the idea the rate of profit must fall, Heinrich points to the counteracting or countervailing tendencies offsetting such a fall. Marx, says Heinrich, failed to prove his case that the rate of profit must fall. The problem with Heinrich’s argument, however, is that Marx pointed to the countervailing tendencies not as an exception to his thesis, but as the necessary result of the falling rate of profit.
Marx lists six influences acting in opposition to or paralyzing the effects of the fall in the rate of profit:
- Increasing intensity of exploitation, i.e., a tendency toward absolute development of the productive forces;
- depression of wages below the value of labour-power, i.e., the collapse of production on the basis of exchange value;
- cheapening of elements of constant capital, i.e., devaluation of the existing capital;
- relative over-population, i.e., the formation of a permanent population of surplus labor power;
- foreign trade, i.e., the expansion of the world market;
- the increase of stock capital, i.e., the concentration and centralization capital.
These are the measures capital takes to reverse the law of the tendency of the rate of profit to fall or to paralyze it. It is important to note that they do counter the law, but, according to Marx, the counteracting influences on the profit rate reverse the tendency toward decline of the profit rate only at the cost of accelerating the tendency, precisely because they are ultimately aimed at increasing the productivity of labor and of expanding that portion of the labor day that is unpaid.
The counteracting influences and the end of labor
For Marx, the counteracting tendencies do not ultimately prevent the fall in the rate of profit. Just the opposite. The counteracting influences generalize its effects by facilitating both the expansion of the mode of production, while rapidly increasing the productivity of social labor. Through device of the counteracting influences, the productive forces bound up with social labor become more concentrated and centralized, more productive of surplus value, more widely spread throughout the world market; rendering both a growing mass of capital and a growing population of laborers superfluous to the production of material wealth.
Like a sorcerer’s apprentice, the efforts to counter the falling rate of profit only ensures the collapse of capital takes with it not just wage labor, but all labor.
To understand why this is so, take only the first of the countervailing tendencies: the exploitation of the working class is increased by introduction of machines, extension of the social labor day, and introduction of women and children into the labor force — all steps taken to increase both the absolute volume of surplus and its relative proportion to the total labor employed in production. The increased employment of workers increases profits, the application of machinery and technology increases the relative portion, but both also accelerate the accumulation that brought about the fall in the first place.
The rate of profit, Marx argued, is the goad of capitalist production. Its fall triggers efforts to double down on the very cause of the falling rate of profit: to increase the productivity of labor, but on a still greater scale. The measures implemented to raise the rate of profit in the short-term not only accelerates its fall in the long-term because they are directly aimed at increasing the productivity of labor, but eventually brings the epoch of labor itself to a close.
“For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come – namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.”
The rate of profit and the collapse of exchange value
In any case, Heinrich next turns his attention to a mathematical proof of Marx’s thesis on the rate of profit. And here, it would have made sense for Heinrich to begin with the extreme case for Marx argument, namely when variable capital (v) equal zero, in order to illustrate Marx’s argument.
Given the formula for the rate of profit:
p = s/(c+v)
We set the value of variable capital at zero, which, consistent with Marx assumption that labor is the only source of value, means s = 0 as well:
p = 0/(c+0)
Which reduces to:
p = 0/c
And thus means:
p = 0
Obviously, if the value of v is zero, the surplus value produced must be zero, and the formula reduced to zero divided by the mass of constant capital. Since labor power is the only source of value and surplus value, once employed labor power equals zero, the profit rate falls to zero.
There are really only two arguments that can be made against Marx on this point:
- Labor power is not the source of value and surplus value (an assertion made by the value-form school); or,
- The employment of living labor can never actually fall to zero (which implies a state policy of full employment).
Post-1971 currency and the collapse of exchange value
However, so long as any living labor is employed in production, the capitalist can conceivably increase the rate of surplus value either by further reducing wages, increasing the social working day or both. This argument is what makes Heinrich reference to Keynes in the excerpt from his (Heinrich’s) book, The Science of Value. Heinrich argues,
“[The] objection that Keynes (1936, p. 11) raised against the neo-classical theory of wages can also be brought to bear upon Marx’s determination of the value of labour-power: the labourer does not receive a specific basket of goods as compensation, but rather a particular sum of money; the real wage and therefore the “value of labour-power” thus first emerge subsequently, when the prices for individual goods on the market have emerged.”
Heinrich warns us that the worker is not paid with commodities but with a money. The value of the commodities required for the worker to replenish her labor power and the exchange value paid out for her labor power in the form of money wages are not necessarily the same thing. Thus, it is entirely possible that even if the real variable capital employed in production cannot reach zero, a valueless fiat currency can be substituted for commodity money, effectively reducing the real value of wages — v in the equation, p=s/(c+v) — to zero, without a corresponding reduction of s (surplus value) to zero.
To be sure, this would clearly violate Marx’s assumption that commodities are exchanged more or less at their values. However, as Heinrich explains in the excerpt, at least in theory the conditions of exchange have no direct relation to the condition governing the production of surplus value. The exchange of equivalents, (m-c and c’-m’), take place in circulation, while the production of surplus value occurs outside of exchange during the production of the commodities.
Interestingly enough, in chapter 14, when writing on the counteracting influences on the rate of profit, Marx calls the depression of wages below the value of labor power, “one of the most important factors checking the tendency of the rate of profit to fall.” With the replacement of commodity money by a valueless, state-issued, inconvertible, fiat currency, the real exchange value of wages can be reduced as far below the value of labor power as these wages can go; namely, to zero.
If Marx’s argument in chapter 14 was too complicated for a simpleton like Heinrich to grasp, Henryk Grossman reiterated it in no uncertain terms in his own 1929 essay on the subject, “Law of the Accumulation and Breakdown”, where he explains that at a certain point in the development of the productive forces the rate of profit can only be maintained by continuously reducing wages below the value of labor power.
“I have shown that even if all conditions of proportionality are maintained and accumulation occurs within the limits imposed by population, the further preservation of these limits is objectively impossible. The system of production described in Bauer’s own scheme has to breakdown or the conditions specified for the system have to be violated. (My emphasis.) Beyond a definite point of time the system cannot survive at the postulated rate of surplus value of 100 per cent. There is a growing shortage of surplus value and, under the given conditions, a continuous overaccumulation. the only alternative is to violate the conditions postulated. Wages have to be cut in order to push the rate of surplus value even higher. (My emphasis) This cut in wages would not be a purely temporary phenomenon that vanishes once equilibrium is re-established; it will have to be continuous. After year 36 either wages have to be cut continually and periodically or a reserve army must come into being.”
The collapse of production on the basis of exchange value consists entirely in replacing commodity money with a currency that expresses the value of labor power as zero.