En Passant

There is a dagger at the heart of capitalism. It is the tendency of the rate of profit to fall.

If Marx is right about this tendency then it doesn’t really matter in the long term whether you are a stimulator or tax cutter, a Keynesian or a Friedmanite. Stimulus packages, tax cuts, letting business go bankrupt at terrible social cost – you don’t in the short to medium term restore profit rates.

From capital’s point of view attacks on workers’ living standards are one important way of doing that. So, while unemployment increases and demand falls, the  bosses will attempt to cut wages and other conditions, impose speed ups and force more productivity out of workers.

In fact Government spending to stimulate demand may be a substitute for the other obvious way to do that – increasing real wages. Such Government spending can only be a short term and insufficient stimulus compared to real wage increases.

Another tack for workers, apart from real wage increases, might be to fight for a cut in working hours without loss of pay. During the Depression the ACTU had a 30 hour week as a policy to address the crisis. In the US a proposal to cut the working week to 35 hours only narrowly lost after FDR lobbied against it.

Real wage increases and reduced working hours challenge the very essence of our society – profit, profit, profit. So instead of better living standards we’ll get a mickey mouse stimulus package to staunch any possible real wage increases or hours reductions.

And to give the impression that Rudd is actually doing something.

So what is all this rate of profit palaver we socialists go on and on about?  Is there really a tendency for it to fall?

Let me use a longish quote from an article in Socialist Alternative called ‘Why is the economy so stuffed? A Marxist explanation‘ by Sandra Bloodworth.

Workers produce profits for bosses day in and day out, so you might think that capitalists would be happy with whatever they can get out of the bargain. But you’d be wrong. They don’t just compare what they spent on workers with what they get. They calculate their return by comparing the amount of profit they get to their total outlay, including raw materials, machinery etc., i.e. the means of production. They may seem to make obscene amounts of profit. But unless it represents a certain percentage return on that total outlay, they will think investing isn’t worth it.

Competition forces capitalists to constantly invest in machinery to produce goods more cheaply than their rivals in order to seize the market. But we also saw that profit is only produced by the workers employed. The machinery and raw materials contribute to the value of the commodities, but are themselves the products of the labour of a previous round of production. So they can only pass on the already existing value congealed in them. The raw materials get used up, and the machines wear out in the process. The new value is created by the workers who work those machines, and who work unpaid for part of the day.

In any rational society which aimed to satisfy human need, the more commodities able to be produced by more efficient production, the more wealth society would enjoy. But under capitalism, because all production is for profit, this actually creates problems. This is a fundamental contradiction in the system. The constant introduction of new machinery to undercut the prices of other capitalists is fine for the first few, but the problem is, more and more capitalists are now paying out larger amounts on machinery compared to the only source of new value – their workers.

And this is one of the central contradictions which afflict the system. If capitalists spend more on machines and less on the only source of surplus value and therefore profits, then their profit rate will fall. And if profit rates fall, capitalists aren’t so keen to invest, and can bring on a slump. The boom slump cycle happens with monotonous regularity. The tendency of the rate of profit to fall is a long-term tendency. It can affect the contours of the business cycle but it is a separate process working its way through in the long run.

Why do they keep investing in machinery over workers if it drags down their profits? Competition, in a word. They have no choice; capitalists who don’t participate in the rat race will be driven out of the market because their products are too expensive.

Because the system has not collapsed, and because there have been times when profit rates revived from previous periods, or stayed high for long periods such as in the long boom from 1945 to 1972, critics of Marx dismiss the tendency of the rate of profit to fall as wrong.

But Marx deliberately referred to the tendency of the rate of profit to fall. It is not an iron law of necessity. Also built into the system is what Marx called “countervailing factors.” And in volume III of Capital he discusses them. The most important of them we are familiar with over the last 30-odd years of the neo-liberal agenda. First, increasing the intensity of exploitation – making workers work faster, squeezing more value from them. Secondly, cutting wages and driving down living standards.

However the most important countervailing factor is the crisis. In each slump in the business cycle, those capitalists who survive can buy up the capital of those who go to the wall more cheaply than it’s worth. Some capital is actually destroyed, as factories lie idle and machinery is left to rust. When I was in Hungary in the late 1990s, approaching Budapest by train you saw kilometres of factories that had been left to rot in the huge crisis that had hit Eastern Europe ten years earlier. In the US you see swathes of industrial land abandoned, sometimes turned into slums where the very poor (mostly Black) take shelter.

This waste is a travesty against humanity’s needs. But for capitalism, it serves an essential purpose: it cheapens the means of production, unemployment usually forces workers onto the defensive and therefore wages can be lowered. And this price-cutting lays the basis for the next boom.

However, the slumps may not be sufficient to get the system going. And then, at a particular juncture, the usual slump of the cycle can become catastrophic. This was what happened in the 1929 Wall Street stock exchange crash. Unemployment skyrocketed, millions were thrown into poverty, including many previously comfortable middle class people who saw their life savings wiped out by bank crashes, plummeting share prices, or by their small businesses collapsing. In the Great Depression, world production fell by one-third, unemployment in Australia and the US were around 30 per cent for years. Workers lived in shantytowns of shacks made of tin, cardboard, whatever could be scrounged, in rich cities like Melbourne and Sydney. Wheat was piled high with rats gorging themselves while workers’ children went to school barefooted and malnourished.

If Marx is right, then politically the alternative is not to reform capitalism since crisis is in-built into the system. Capitalism at its heart is economically unreformable. Booms, slumps, and ‘deep recessions’ are part of the way capitalism runs, with all the misery that creates. They are not aberrations – they are the natural expression of a sick system.

The alternative to this madness is the mass of producers rising up and shaking off the chains of exploitation and organising democratically to produce goods and services to satisfy human need.  That’s socialism.