Profits have done nicely

Rate of profit: False premises, false conclusions

Did the tendency for the rate of profit to fall cause the crisis of 2008-09? On the contrary, says Arthur Bough, the annual rate of profit remained high

The debate over Karl Marx’s ‘law of the tendency for the rate of profit to fall’ is based on false premises. It has a number of aspects:

1. Is there any such law to begin with?

2. Is it a basis of Marx’s theory of crisis?

3. Does it mean capitalism increasingly becomes prone to crisis, necessitating the collapse of the system?

4. Does it explain the crisis of 2008-09?

The answers to these questions are respectively:

1. Yes, but it is not the law that some believe it to be.

2. No.

3. No - not at least on the basis of the information we have currently.

4. No.

Marx and Engels refer to the falling rate of profit in relation to the capital advanced and, when they write of the “rate of profit” in this context, they do so on the basis of a single turnover of capital, and so are essentially discussing the profit margin. They distinguish this from the real rate of profit by describing the latter everywhere rather as the annual rate of profit, or general annual rate of profit, just as they distinguish the rate of surplus value from the annual rate of surplus value.

Marx devotes considerable time to demonstrating that, as the rate of profit falls, the mass of profit must rise:

The number of labourers employed by capital, hence the absolute mass of the labour set in motion by it, and therefore the absolute mass of surplus labour absorbed by it, the mass of the surplus value produced by it, and therefore the absolute mass of the profit produced by it, can, consequently, increase, and increase progressively, in spite of the progressive drop in the rate of profit. And this not only can be so: aside from temporary fluctuations, it mustbe so, on the basis of capitalist production.1

He demonstrates that there is no reason, therefore, why this law should lead to a collapse of capitalism:

A distinction must be made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, overproduction and crises are something different. Permanent crises do not exist.2

Yet it is on this basis of a continual fall in the rate of profit that many who claim that the law is the main, or only, basis of Marx’s theory of crisis rest their argument. Those who believe the law must lead to some ultimate collapse of capitalism base themselves on the same catastrophist ideas put forward by Ricardo, against which Marx was arguing.

The only way the law could cause permanent stagnation would be if capital, and its harnessing of science and technology to its needs, absolutely ran out of innovations, by which new use-values could be turned into commodities, providing capital with new lines of production, into which the released capital, accumulated surplus value and relative surplus population could be employed. At the moment, there is no indication of that being likely. In fact, the number of innovations seems to be increasing, not decreasing.

The argument that the law explains the financial crisis of 2008, and the economic crisis that followed it, is wrong because of the premises upon which the argument is based. Those that make it do so not on the basis of the law being about falling profit margins, but in the context of it being a law of a falling general annual rate of profit. The argument is that this rate of profit had been falling, and this meant that capital did not have the available surplus value to accumulate rapidly, as it has done in previous periods, and also that this low rate of profit was a disincentive for capital to invest.

This is different from the argument which Marx and Engels describe in Capital volume 3, chapters 6 and 15, about falling profit margins facilitating crises of overproduction. There could be prolonged periods of stagnation, such as 1825-43, 1865-90, 1920-45, and 1974-99, but this does not reflect the situation prior to 2008. Prior to these periods of stagnation, conditions for a fall in the general annual rate of profit are established, but in the latter half of the period of stagnation the general annual rate of profit rises, and the conditions are created for the next boom cycle. In the 20 years preceding 2008, the general annual rate of profit rose, and was reflected in the massive global accumulation of capital. Between 2000 and 2010, the global working class increased by 30%, fixed capital formation doubled, global GDP doubled, and between 2002 and 2007 trade increased by 15% a year - five times faster than 1980-94.


Marx uses three definitions of ‘rate of profit’, discounting his modification of the original to account for merchant capital. The first is based on the advanced productive capital, but the definition in chapter 13, where he sets out “The law as such”, is essentially equivalent to the profit margin, and based on the laid-out capital. A lot of the analysis in the chapter is conducted in precisely these terms - of the division of the price of a commodity unit into the proportion of wages, wear and tear, materials, and profit. Marx and Engels, in that chapter, however, specifically set out the danger of confusing this rate of profit, p/k, with the real rate of profit. This is their third definition, the general annual rate of profit, which had been set out in chapter 4. It is actually the original definition, but specifically defining the effect of the rate of turnover.

In Capital volume 2, Marx analyses the effect of the rate of turnover on the annual rate of surplus value. His analysis is extensive, and central to his study of the circulation of capital. Yet he rightly does not complicate his further examples by continually making a distinction between the rate of surplus value and the annual rate of surplus value. Perhaps, if he had known the shape debates over the law would take, he might have done so.

In volume 3, chapter 4,Marx and Engels again specifically set out the effect of the rate of turnover on the annual rate of surplus value and annual rate of profit, and also mention its role, at length, in chapters 9, 10, 13 and 18, particularly warning against the dangers of treating the profit realised on the annually laid-out capital as equal to the real rate of profit. Yet nearly all the arguments over whether the rate of profit has been rising or falling over recent decades have, as well as being really a measurement of the rate of surplus value rather than the rate of profit, been based on measurement of profit relative to the annually laid-out capital rather than the advanced capital.

The real rate of profit is repeatedly stated as being s/C, where s is the total surplus value for the period, and C is the advanced capital. But Engels warns:

The rate of profit is calculated on the total capital invested, but for a definite time - actually a year. The rate of profit is the ratio of the surplus value, or profit, produced and realised in a year, to the total capital calculated in percent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide.

On the other hand, the profit made in the course of a year is merely the sum of profits on commodities produced and sold during that same year. Now, if we calculate the profit on the cost-price of commodities, we obtain a rate of profit = p/k, in which p stands for the profit realised during one year, and k for the sum of the cost-prices of commodities produced and sold within the same period. It is evident that this rate of profit, p/k, will not coincide with the actual rate of profit, p/C - mass of profit divided by total capital - unless k = C: that is, unless the capital is turned over in exactly one year.3

Engels provides three examples showing the effect of the process by which the organic composition of capital rises, causing this rate of profit to fall, but which at the same time causes the annual rate of profit to rise, because the rate of turnover rises.

Marx and Engels had a particular reason for using this definition of rate of profit in explaining the law. Marx wanted to show that the formulation of Mill, Say and Ricardo was wrong. These three bourgeois economists believed that the falling rate of profit was connected to a falling mass of profit. Marx showed that, even as this rate of profit fell, the mass of profit must rise, because these are both caused by the same process of an expansion of capital and rise in social productivity. The reason p/k falls is because productivity rises, due to an expansion of capital. There results a massive expansion of the quantity of commodity units produced. The profit per unit falls, but by less than the expansion of the quantity of units produced, so the mass of profit continually rises despite these falling profit margins. The two things are different sides of the same phenomenon.

As Engels sets out above, p/k is the same thing as the total surplus value divided by the total laid-out capital, plus wear and tear of fixed capital. The former is p multiplied by the total quantity of commodity units, and the latter is k multiplied by the total number of commodity units. It is on this basis that these falling profit margins create the potential for crises of overproduction, even as (and even because) the actual rate of profit - the general annual rate of profit - is rising, along with the mass of profit.

Annual rate

A rising annual rate of profit - ie, the profit measured against the capital advanced, including the fixed capital - and a rising mass of profit cause capitalists to expand rapidly; former managers and workers borrow money-capital to set up in business and so on. The quantity of commodity units produced increases rapidly, whilst profit margins and individual unit values decline.

In volume 3, chapter 6, Marx shows how this sharp rise in activity pushes up demand and the market price of inputs, including labour-power, squeezes profit margins even more, because these costs cannot be passed on to final product prices. The more they are squeezed, the higher the potential for overproduction, as the number of commodities thrown onto the market rises so much that demand fails to expand enough to absorb it all at market prices higher than the cost-price, due to the elasticity of demand - even though the higher productivity may have reduced the value and cost-price per unit massively:

The same value can be embodied in very different quantities [of commodities]. But the use-value - consumption - depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.4

That it is this definition of ‘rate of profit’ that Marx and Engels are using is shown by the other consequences they elaborate. For example, as a proportion of the price of each commodity unit, the wear and tear of fixed capital, as well as wages and profits, declines:

The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour - both continually decrease.5

For fixed capital, as a proportion of the laid-out capital, this is correct, but, measured against the advanced capital, it is not. This is only the capital advanced for a turnover period and, as productivity rises, due to technological improvement of fixed capital, the turnover period shortens, because the required output is produced and circulated in a proportionately shorter time. The laid-out capital rises relative to the advanced capital, because the number of turnovers per year rises proportionately to the rise in productivity.

The table (Fig 1) indicates how higher productivity affects the rate of surplus value and percentage of unit price for these elements. It also shows that, while profit per unit falls from £0.33 per unit to £0.05 per unit, the mass of profit due to the same process rises from £990 (£0.33 x 3,000 units), to £6,803 (£0.052 x 129,994 units).

A boom, with rising annual rates and masses of profit, causes an increase in the volume of production. Workers and managers set up businesses - the plethora of small capital - often through borrowing. Over the last 20 years this has created the massive growth of capital globally, and the swelling mass of money-capital that drove down global interest rates. Simultaneously, the boom causes input costs, which cannot all be passed on, to rise (copper prices rose from around $0.60 in 1999 to $4.50 in 2011), or for demand to fail to rise sufficiently to absorb the additional supply. Market price falls below cost of production, and capitals with highest costs - usually those that form the plethora - go bust. This may then cause a crisis of the second form: a payments crisis. This is the condition Marx describes for a crisis of overproduction:

In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus labour to necessary labour.6

In other words, the rate of profit falls, because the boom causes wages to rise and the rate of surplus value to fall.

The fact that the law here is really a law of falling profit margins is also evidenced by the countervailing forces listed by Marx and Engels in chapters 13 and 14, which do not include the effect of the rate of turnover. Yet both repeatedly set out the danger of confusing the rate of profit, p/k, with the general annual rate of profit, s/C, as a measure of the total realised profit against the advanced, as opposed to laid-out, capital. The countervailing forces raise both the rate of profit and the general annual rate of profit, whereas the change in the rate of turnover only affects the general annual rate of profit. The former may be falling, whilst the latter rises, both as a result of the same cause - rising productivity. The fact that Marx and Engels do not deal with it as a countervailing force is because what they mean by ‘rate of profit’ here is profit margin, not the general annual rate of profit.

Understood as a law of falling profit margins, its validity can be more easily seen. Continually rising productivity causes not only the value of commodity units to fall, but also the profit margin and the mass of profit per unit. The fall in the rate of profit can only be understood as a fall in respect of these existing commodities. Meanwhile, when new commodities come along, like the pocket calculator in the 1970s, their value is always relatively high, as is the profit margin per unit too:

These new lines start out predominantly with living labour, and by degrees pass through the same evolution as the other lines of production. In either case the variable capital makes up a considerable portion of the total capital and wages are below the average, so that both the rate and mass of surplus value in these lines of production are unusually high. Since the general rate of profit is formed by levelling the rates of profit in the individual branches of production, however, the same factor which brings about the tendency in the rate of profit to fall again produces a counterbalance to this tendency and more or less paralyses its effects.7

And these new lines arise precisely because the rise in social productivity, which raises the rate of turnover, both releases capital and causes the annual rate of profit to rise. As Marx sets out in the Grundrisse, this process necessarily leads to the development of ever new use-values:

On the other side, the production of relative surplus value- ie, production of surplus value based on the increase and development of the productive forces - requires the production of new consumption; requires that the consuming circle within circulation expands, as did the productive circle previously ... The value of the old industry is preserved by the creation of the fund for a new one, in which the relation of capital and labour posits itself in a newform.8

A central aspect of the law - that the organic composition of capital continuously rises - is, therefore, undermined. I do not have space here to set out in detail all the other reasons why that is the case, but I have done so elsewhere.9 I will summarise those reasons in addition to the countervailing forces Marx himself outlines.

Technological improvement relatively reduces the quantity of fixed capital employed, as Marx describes - one machine replacing several - but it also has the same effect in relation to material. Energy is used more efficiently, waste is reduced and waste products are utilised - synthetic and other more effective materials are employed. New commodities simply use fewer materials. An iPhone uses physically less material than a 1980s telephone; computer chips have far more power, but use much less material than 1950s electric valves. The value of these materials falls significantly too.

Changes in consumption patterns mean that newer industries - those providing services, for example - rely much more on variable than constant capital, compared to old-style manufacturing production. Moreover, the argument that the organic composition must rise, because output must continually increase to reduce unit prices, by relatively reducing the ratio of labour to material, is only true if the requirement is always to produce at lower prices. That people will pay £5 for a cup of coffee, and inflated prices for commodities with a designer label, etc, indicates that, once basic necessities are accounted for, this is no longer necessarily the case.

Market share can be won, and profits made, by appealing to the idea of quality, rather than cheapness, and indeed the latter usually undermines the image of the former. Mercedes does not make large profits selling cars to China on the basis of their cheapness, and the quality is associated with the value added by labour, not the value transferred from materials. But, even where low prices remain a concern, the main value of many new commodities comes from the complex labour used in their production, not the value of the material contained in them. A computer game has no material really involved in it - it is simply downloaded. The value comes from the labour of the computer programmers who developed it.


Even where technology replaces labour-power, so that the number of workers employed falls, changes in the nature of production mean that the labour employed is also changed. As Marx sets out in the passage from the Grundrisse cited earlier, this continual expansion of the range of use-values consumed changes the nature of labour too. It is a point dealt with in Capital volume 3, in relation to the enhancement of labour by the extension of public education, which is one reason why capital developed the welfare state:

... likewise the discovery, creation and satisfaction of new needs arising from society itself; the cultivation of all the qualities of the social human being, production of the same in a form as rich as possible in needs, because rich in qualities and relations - production of this being as the most total and universal possible social product, for, in order to take gratification in a many-sided way, he must be capable of many pleasures [genussfähig], hence cultured to a high degree - is likewise a condition of production founded on capital.10

Rising social productivity causes a rise in the organic composition of capital. Technological change improves the quality of machines, enabling the same quantity of labour to process more material in a given time. But the reverse of this is that the turnover period falls in the same proportion.

For example, a firm employs 10 spinning machines, each with five spindles, and 10 workers to mind the machines, which are replaced each year. Assume a 50-week year, constituting the turnover period, during which 100,000 kilos of yarn are produced from spinning 100,000 kilos of cotton. The machines cost £100 each, the cotton £1,000 and the wages £1,000, with a 100% rate of surplus value, producing £1,000 of profit. The value of production is then £4,000. The rate of profit is 33.3%.

A technological development results in spinning machines with 50 rather than five spindles. The machines cost £100, as before, and still require only one worker each to mind them. These machines spin 10 times as much cotton as before in a year. The 100,000 kilos of yarn required for the turnover period is now produced in five weeks rather than 50 weeks. Assuming no circulation time for this capital, that means it now turns over 10 times per year, rather than once, just as the organic composition of capital has risen tenfold. The rate of profit is now much lower, because the same quantity of variable capital has been employed, producing the same quantity of surplus value in the year. But the capital laid out for materials has increased tenfold.

Profit, p, is £1,000, but the laid-out capital (cost of production), k, is £1,000 for machines, £10,000 for cotton, and £1,000 for wages. So, p/k is 1,000/12,000 = 8.5%. The conclusions Marx draws can be seen here. The value of a kilo of yarn has fallen from £4,000/100,000 = £0.04 per kilo to £13,000/1,000,000 = £0.013 per kilo. The proportion of the price per kilo accounted for by wear and tear of fixed capital has fallen, alongside the proportion for wages and profit, whilst the proportion for materials has risen.

But the situation in respect of the general annual rate of profit is quite different. It is calculated by measuring the surplus value for the turnover period and multiplying it by the number of turnover periods, and then dividing this by the advanced capital: ie, the capital advanced for the turnover period. This is given by Marx’s formula, s x n/C. The variable capital advanced for a turnover period of five weeks is £100. With a 100% rate of surplus value, the surplus value is then also £100. Multiplying this by the number of turnovers for the year gives a figure of total surplus value of £1,000. The other capital advanced is £1,000 for machines, which have to be wholly present for production to take place, and £1,000 for the 100,000 kilos of cotton to be processed during the turnover period. Total advanced capital is then £2,100, and the annual rate of profit is £1,000/£2,100 = 47.62%.

So, although the rate of profit has fallen from 33.3% to 8.5%, the cause of this tendency for the rate of profit to fall - a rise in social productivity, causing the organic composition of capital to rise - simultaneously causes the general annual rate of profit to rise - from 33.3%, to 47.62%! Moreover, the capital advanced originally was £3,000, but now it is only £2,100, so £900 of capital has been released as a direct consequence of the rise in social productivity, and rate of turnover. This £900 of capital could be used to expand production further in this sector or in some new sphere of production. To understand the importance of this, compare one of the new industries, such as a restaurant chain, to an old manufacturing industry. The latter may turn over its capital only 10 times a year, whereas the former turns over its capital every day, or 365 times a year!

It is this general annual rate of profit which determines the extent to which capital can be expanded, and not the rate of profit discussed by Marx in chapter 13. The same factors which cause the latter rate to fall simultaneously cause the former to rise, and also bring about a release of capital for additional accumulation.

It is impossible to calculate the general annual rate of profit, because it requires data for the capital value advanced in production. There are two problems. As Marx describes in Capital volume 2, the constant capital consumed by department 1 does not form part of the total social exchange: ie, does not appear in national accounts as revenue. Secondly, there is no data on the average rate of turnover of the total social capital, from national accounts. The real value of national output, as Marx says in volume 2, is C+V+S, but the national accounts only provide information on V+S: ie, on the value of new production represented in revenues (wages, profits, interest, rent and taxes). Measurement of the rate of profit on this basis is a calculation of the rate of surplus value. Adding in the value of the fixed capital stock modifies that, but does not account for the circulating constant capital. The same process that causes the rate of profit to fall causes the rate of turnover of capital to rise, and so any such measures must necessarily understate the rise in the general annual rate of profit.

As I have set out elsewhere,11 even if you use these measures of the ‘rate of profit’to obtaina more realistic measure of the general annual rate of profit, it is necessary to include an adjustment for the changes in the rate of turnover of capital. Marx and Engels note that the biggest effect on the rate of turnover is the rise in productivity - the same process that causes the rise in the organic composition of capital and fall in the rate of profit. The rise in productivity means the quantity of production required for any working period is produced that much more quickly, shortening the working period, and consequently reducing the value of the capital advanced, as illustrated above. But also this same rise in social productivity speeds up the circulation period of capital, by improving transport, as well as the means of circulating commodity-capital and money-capital. Moreover, as Marx sets out in discussing merchant capital, although it may not produce surplus value, its greater productivity can produce a higher rate of realised profit.

Using an average 2% annual rise in productivity as a proxy for the annual rise in the rate of turnover since 1950, the compound effect is that the rate of turnover today should be three times what it was then. Using Doug Henwood’s US data for the rate of profit,12 I calculate the general annual rate of profit today would be around 25%, compared to his figure of around 8% in 1950. Apart from a temporary, but sharp, reduction around 2000 (probably due to the overproduction in technology that resulted in the tech bubble and crash), the rate of profit on this basis rose from around 1980, but most notably from the late 1980s (around 8%) to 2010 (25%).

Future crises

The fall in the rate of profit (profit margin), arising from rapidly expanding accumulation, driven by a high general annual rate of profit, could explain a sharp crisis of overproduction, such as that which affected technology in 2000, and it will undoubtedly explain future crises of overproduction emanating from China, but it does not explain the financial crisis of 2008.

On the contrary, the financial crisis of 2008 can be explained by the high general annual rates of profit that had existed for 20 years, and produced huge volumes of potential money-capital, driving down global interest rates. That, alongside huge injections of liquidity to prevent deflation of global commodity prices, as a consequence of the same process of massive rises in social productivity, caused the blowing up, from the 1980s, of massive speculative bubbles, which repeatedly burst, only to be quickly reflated by even bigger injections of liquidity to prevent the inevitable insolvency of the banks and financial institutions.

The fact that the general annual rate of profit is likely to begin to fall, and may already be falling from this point, may well be the cause of the next crisis. But not for the reasons given by those who have argued for it as an explanation of 2008. It may cause a crisis because it will produce a decline in the supply of potential money-capital relative to its demand. This would cause interest rates to rise, thereby sparking a much bigger financial crisis than 2008.


1. K Marx Capital Vol 3, chapter 13, p218.

2. K Marx Theories of surplus value Vol 2, chapter 17.

3. K Marx Capital Vol 3, chapter 13.

4. K Marx Theories of surplus value Vol 3, pp118-19.

5. www.marxists.org/archive/marx/works/1894-c3/ch06.htm.

6. www.marxists.org/archive/marx/works/1894-c3/ch15.htm.

7. www.marxists.org/archive/marx/works/1894-c3/ch14.htm.

8. www.marxists.org/archive/marx/works/1857/grundrisse/ch08.htm.

9. http://boffyblog.blogspot.co.uk/2014/04/the-law-of-tendency-for-rate-of-profit.html.

10. loc cit.

11. http://boffyblog.blogspot.co.uk/2013/07/the-rates-of-profit-interest-and_3.html.

12. http://lbo-news.com/2012/06/26/profitability-high-and-maybe-past-its-peak.