Heinrich on the law of the tendency of the rate of profit to fall – a critique^[1]

A criticism of Marx is announced: “If Marx had been able to conclusively prove the connection [accumulation and fall of the rate of profit = two sides of the same coin], then he would have shown that a falling rate of profit belongs to the ‘essence’ of capitalism.” (Heinrich, p. 150-1)

Fall of the profit rate

A table at the beginning of the 13th chapter of Capital Vol. 3 illustrates that with equal rates of surplus value, different (rising) compositions of capital mean different (declining) rates of profit. This series expresses “the actual tendency of capitalist production.” (Marx, Capital Vol. 3, Penguin ed., p. 318) Because the capitalists set on reducing wage unit costs by increasing the productivity of labor by means of new production processes as the means to draw extra profit, they combine relatively less and less advances in variable capital with relatively bigger and bigger advances in constant capital. Because this is the typical course of accumulation, the falling rate of profit, which the table illustrates, represents the real development of the typical individual capital and therefore, in the sum total, also a principle of the total social capital, which therefore can be expressed in relation to “any specific quantity” of capitals:

“The law of the falling rate of profit, as expressing the same or even a rising rate of surplus-value, means in other words: taking any particular quantity of average social capital, e.g. a capital of 100, an ever greater portion of this is represented by means of labour and an ever lesser portion by living labour. Since the total mass of living labour added to the means of production falls in relation to the value of these means of production, so too does the unpaid labour, and the portion of value in which it is represented, in relation to the value of the total capital advanced. Alternatively, an ever smaller aliquot part of the total capital laid out is converted into living labour, and hence the total capital absorbs ever less surplus labor in relation to its size, even though the ratio between the unpaid and paid parts of the labour applied may at the same time be growing. The relative decline in the variable capital and increase in the constant capital, even while both portions grow in absolute terms, is, as we have said, simply another expression for the increased productivity of labour.” (Marx, p. 322)

It is really about nothing more (and nothing less) than grasping the effect of the necessarily occurring increase of the organic composition on the profit rate:

“Since the mass of living labour applied continuously declines in relation to the mass of objectified labour that it sets in motion, i.e. the productively consumed means of production, the part of this living labour that is unpaid and objectified in surplus-value must also stand in an ever-decreasing ratio to the value of the total capital applied. But this ratio between the mass of surplus-value and the total capital applied in fact constitutes the rate of profit, which must therefore steadily fall.” (Marx, p. 319)

That is “the law as such.” This connection is conclusively proved, even if all the determinations of the “law as such” are still not on the table: “We shall show later on why this fall does not present itself in such an absolute form, but rather more in the tendency to a progressive fall.” (Marx, p. 319)

I. Refutation of Heinrich’s criticisms

Heinrich bases his criticism on the relation of the rate of surplus-value and the organic composition as factors of the profit rate.

“In order to prove that the rate of profit necessarily falls, it is not sufficient to prove that c/v increases. One must also show that c/v increases by a certain degree that the condition just named [c/v increases faster than s/v] is fulfilled. And here lies the fundamental difficulty for every proof of the ‘law of the tendency of the rate of profit to fall’: a general statement about the degree of increase for c/v is not possible. In one case, a specific increase in productivity can be achieved through a small quantity of additional constant capital; c/v thus increases only a little bit, which can lead to the rate of profit rising, not falling, as a result of the increasing rate of surplus value. In another case, the same proportional increase in productivity may require a large amount of additional constant capital; c/v thus increases strongly, and the rate of profit eventually declines.” (Heinrich, p. 151-2)

1) Heinrich (at first) does not question that c/v rises. His argument is that it is possible that the rate of surplus-value rises stronger than the organic composition grows. If one cannot know how the (numerical) ratios move precisely, if it is therefore possible that the rate of surplus-value can over-proportionately improve in the individual case, if it therefore can also rise over-proportionately in the social average, then it cannot be ruled out that the rise of the rate of surplus-value overcompensates for the rise of the organic composition – so that a rising profit rate can accompany accumulation.

First, we will explain how Heinrich puts forth changes in the value quantities and how they line up with Marx’s explanations:

a) Changes in the rate of surplus-value

Marx explains in Ch. 14 as “counteracting factors”: “... other factors in this intensification, as for example the accelerated speed of the machines, which will use up more raw material in the same space of time, but, as far as the fixed capital is concerned, the fact that this wears out the machines that much faster does not in any way affect the ratio of their value to the price of the labour that sets them in motion. In particular, however, it is the prolongation of the working day, this discovery of modern industry, which increases the amount of surplus labour appropriated without basically altering the ratio of the labour-power applied to the constant capital that this sets in motion, and which in point of fact rather reduces the constant capital in relative terms.” (Marx, p. 340)

That, however, changes nothing in principle in the direction:

“It has already been shown, moreover, and this forms the real secret of the tendential fall in the rate of profit, that the procedures for producing relative surplus-value are based, by and large, either on transforming as much as possible of a given amount of labour into surplus-value or on spending as little as possible labour in general in relation to the capital advanced; so that the same reasons that permit the level of exploitation of labour to increase make it impossible to exploit as much labour as before with the same total capital.” (Marx, p. 340)

That’s why it is correct, in explaining the “law as such,” to put aside the increase of the rate of surplus-value as a counteracting factor, because in the normal case the increase of the rate of surplus-value is only purchased by means of increasing the organic composition, hence it includes the fall of the profit rate.

b) Falling value of constant capital

In other places (Fall of the Profit Rate), Heinrich cites the falling value of the elements of constant capital as a possible reason for the rate of profit still rising in the course of accumulation. Does this happen as in economic reality?

Take the case that a capital accesses a more favorable source of the components of constant capital, raw materials or more favorable new machinery. What happens?

- For the seller of constant capital, the basis of the price change was a higher productivity in constant capital production, which contributes to the general lowering rate of profit.

- For the buyer, the purchase has a positive impact on the wages he advances: his relatively growing constant capital, purchased in order to get into the competition over average profit with a bigger heap of commodities that are more cheaply produced, asserts itself relatively less as rising composition. In relation to competitors in his branch, this impact devalues their capital; the cheaper constant capital works in the whole branch as a kick-start and means for accumulation and thereby once again as a starting point for competitive practices which again work as a reason for lowering rates of profit.

-This shows that, as a proof against the fall of the profit rate, it is no good to refer to a counteracting factor, because on the one hand the lowering rate of profit is assumed on the part of the seller, on the other hand it is egged on again, thus it is not disproved, but confirmed.

2) Heinrich’s biggest weakness is that he argues entirely with the possibility. He does not come up with economic reasons why his “cases” should necessarily be the way they are on average, in the typical case of accumulating capitals. Actually, he commits himself to this criteria: “If the falling rate of profit is in fact a typical tendency, then it must demonstrate itself in the case of a typical individual capital. Marx’s arguments refer to such a typical individual capital.” (Heinrich, p. 151) Because with regard to a “typical individual capital,” the abstraction already includes that this capital can show what’s universal in accumulation – otherwise it would not be “typical,” but any random capital. The “typical case” simply does not mean: every individual case goes in such a way, but: it is justified as an example of the general development of the capitals.

Marx in his table in fact refers to a “typical individual capital”: typical, because the normal case of accumulation gets expressed in the series: the increase in the productivity of labor by means of machinery, rising organic composition, hence fall of the profit rate. Because this is the normal case of accumulation, this counts for a typical individual capital just like for the social total social capital and each of its parts. Nothing more is held by Marx than this simple connection: Accumulation = rising organic composition; what does that mean for the profit rate? It falls, because the advance which must be used for a specific profit rises.

Heinrich, by contrast, does not refer to a typical capital, but to an any random one: every possible case should show the law. In this respect, in carrying out his criticism, he contradicts his announcement: to show in the “typical individual capital” that the connection maintained by Marx between accumulation and the developing profit rate is not sustainable.

His case-constructions follow the pattern: One can also imagine a capital that, e.g., with a little additional constant capital effects a lot of improvement in the productivity of labor, etc. His conclusion: “Because in the individual case p' can rise, no statement about its general development is possible.”

This is nonsense: the individual case must present reasons why this individual case corresponds to the general development, to the average, to the typical course.

In this respect, the cases presented by Heinrich are not at all real cases of the thing or examples in which the necessities of the capitals are explained, but only cases of its course of action devoid of any logical concept.

3) If for Heinrich the “law” is violated if a possible case can be shown in which the profit rate does not fall, then Heinrich confuses “law of accumulation” (fall of the profit rate as necessarily included in accumulation) with “inevitability” – as if it deals with a sort of a physical law where every object is subject to the earth’s gravitational pull and where it is actually about quantitative relations between the physical dimensions “mass” and “acceleration” which rule in nature.

First it must be held: Heinrich argues against a content of the “law” which Marx doesn’t have.

Second: Heinrich does not take Marx’s “formula” as what it is: an illustration or visualization of the economic connections, but as an algorithm for computing economic quantities. The formula should explain capitalism – only in this way can one carry out any insertion desired into the formula according to the “rules of fractions.”

Not that the carried out arithmetic operations would be wrong; they are already as formal as possible. But if one handles the fall of the profit rate as a problem of correct fractions, then one strips Marx’s “categories” of their economic content and transforms them into the contrary, into ratios that are qualitatively neutral:

“Now let’s consider what happens with a production increase to the numerator and denominator of our fraction. The rate of surplus-value rises, and the surplus-value produced by each individual worker also rises with it. The numerator of our fraction thus grows. We come to the denominator. The constant capital per labor-power should grow as well, but we do not know by how much. Can we then assume that the denominator increases? Here we must not only consider c, but also v and the value of labor power declines! This however means
- If c increases only slightly, then the increase of c does not also compensate for the fall of v, the total capital then decreases. In this case, the rate of profit would rise.
- If c rises slightly stronger, then it perhaps compensates the fall of v, the total capital would remain constant or even slightly increase. However, if the total capital increases in percentage by less than s, then the rate of profit rises anyway.
- Only when c increases so strongly that it compensates for the decrease of v and allows even the percentage of total capital to grow faster than the rate of surplus value, the rate of profit falls.
One also sees here: it is not sufficient justification for the falling rate of profit that one knows that c increases relative to v, c must rise to some extent (and indeed the more it does, the greater the productivity increase is). Again, one can calculate how much c must rise in order for the rate of profit to fall with it, but whether c actually increases that much, we do not know. It is obviously no argument that allows a statement about whether a certain productivity increase is reached with greater or only a slight increase of c. Therefore nothing can be said on this level of reflection about the movement of the rate of profit – no matter which formula is taken as a basis.” (Fall of the Profit Rate).

Obviously no argument? The argument says: lowering the wage cost per piece by means of new production processes is the central lever of the capitals for extra profit. Why does Heinrich prefer to imagine huge increases of the rate of surplus-value which should come about without capital having to use this lever for it?

4) “If we assume that 24 workers perform two hours of surplus labor every day, then the total amount of surplus labor is 48 hours. But if the number of workers declines to two, then these two workers are not able to perform 48 hours of surplus labor per day, regardless of how large the rate of surplus value is. This conclusion can be generalized: if the number of employees declines beyond a certain critical mass, then at some point the amount of surplus value produced also declines, regardless of how strong the rate of surplus value increases. Marx thought he had sufficiently proven the law of the tendency of the rate of profit to fall using this consideration.” (Heinrich, p. 152-3)

Heinrich refers here to Marx’s arguments in section 2 of chapter 15. The example of the 2 workers who can not deliver a bigger mass of surplus-value than 12 workers if they work 24 hours for zero wages illustrates the disproof of the notion which wants to have found a remedy against the falling rate of profit in the production of masses of surplus-value through methods of absolute surplus-value production: one simply has the workers produce more! Not that capital does not always come back again to this means to restore its profit rate: one can take this today from the omnipresent calls for “unpaid overtime”; this is still done even today. However, Marx points to the immanent barriers in the will and physical constitution of the workers, which is why capital also always comes back to the methods of relative surplus-value production – with its immanent effect on the profit rate. However, when capital increases the productivity of labor, it changes the organic composition, so that it has (maybe absolutely even more but) relatively fewer workers producing in an enlarged constant capital. More absolute surplus-value can be extorted from them, although, because of the barriers mentioned: “In this connection, therefore, the compensation for the reduced number of labourers provided by a rise in the level of exploitation of labour has certain limits that cannot be overstepped; this can certainly check the fall in the rate of profit, but it cannot cancel it out.” (Marx, p. 356)

Heinrich, however, takes this as if it was a “case” which Marx wanted to prove the fall of the profit rate: “Marx thought he had sufficiently proven the law of the tendency of the rate of profit to fall using this consideration. But that was not the case. A declining mass of surplus value s ....” (Heinrich, p. 153)

While for Marx it comes down to explaining a barrier to the increase of the rate of surplus-value which capital pursues to counter the fall of the profit rate, Heinrich construes it as a “case” with a declining (!) mass of surplus value. However, Marx has proved that the fall of the profit rate is accompanied by rising masses of surplus-value. Economically, the “case” makes no sense, but as “cases for calculating fractions” one can of course again factor a possibly rising profit rate:

“If constant capital does not increase strongly enough to compensate the reduction of variable capital, then the total capital advanced declines. In this case, we have a declining mass of surplus value and declining capital. Whether the rate of profit falls depends upon what falls quicker, the mass of surplus value or the advanced capital. If the mass of surplus value falls quicker than the advanced capital, then the profit rate declines; if the advanced capital declines quicker than the surplus value, then the rate of profit increases despite the reduction in the mass of surplus value. In contrast to Marx, we cannot assume a ‘law of the tendency of the rate of profit to fall.’ This doesn’t mean that the rate if profit can’t fall, which may very well be the case. However, the rate of profit can also rise. A long-lasting tendency for the rate of profit to fall cannot be substantiated at the general level of argumentation by Marx in Capital.” (Heinrich, p. 153)

Heinrich is dealing with “cases” which evidently do not deal with accumulation – a “declining capital” and a declining mass of surplus value sound to us more like crisis! But the fall of the profit rate is a law of accumulation.

II. “Do we need the law of the tendency of the rate of profit to fall?” (Fall of the Profit Rate)

A strange question: either the law is part of the explanation of capital or it is not. If Marx had made an error here, it would be easy to drop it. What does one need correct theory for? Heinrich in his introduction, in any case, had still known that it matters how one explains something that one stands against. Now, however, he says:

“Although rather simple considerations already call into question Marx’s reasons for the ‘law of the tendency of the profit rate to fall,’ this law has been doggedly defended in traditional Marxism. Such doggedness often results from the belief that this law is necessary in order to establish capitalism’s tendency to collapse or at least its susceptibility to crisis. If one must give up this law, so the inversion of an argument, then there is no more ‘objective’ basis for the overthrow of capitalistic relations, because then one must admit that capitalism has no immanent barrier and in principle could function free of crisis.” (Value Theory)

So brown-nosing the left “we” is not alien to Heinrich. Why should those who believe in a “collapse” ditch the falling rate of profit? Not maybe because they look at Heinrich’s arguments and then share his view that the falling rate of profit does not exist as a law of capitalism, because the correct explanation matters. But, because the falling rate of profit is not necessary for their need to prove the real non-functioning of capitalism, in that respect Heinrich promises reimbursement for it (!?).

This would have to be followed up if for Heinrich it were about the principle of the mistake. For good measure, the following additional quotes:

“But even if the ‘law’ was valid, it would not deliver what is promised by many of its defenders. Because it can not say anything about the extent and speed of the fall of the rate of profit: a rapid fall (e.g. in 5 years from 12% to 8%) with significant effects, would be just as consistent with the law as a slower fall (e.g. in 100 years from 10.7% to 10.3%), which hardly anyone would notice. The actual statement of the law – tendential fall of the rate of profit to an unknown extent and in unknown periods – is far too weak to serve as the basis for a crisis theory. On the other hand, the susceptibility of capitalist socialization to crisis can be well justified without any reference to this ‘law.’” (Value Theory)

“Even if this ‘law’ could be proved, it would have no meaning for the discussion of crisis and stability of capitalism. It would mean only that there is a tendency for the rate of profit to fall. But it can not explain in which periods the rate of profit falls to what extent (in 100 years from 11.9% to 11.7%? We would not know).” (Fall of the Profit Rate)

What does “only” mean here? This is exactly what is stated, and this tendency of the rate of profit to fall determines the competition of the capitalists.

The quotes again demonstrate the dissolution of the explanation into quantitative ratios. The proof of the falling rate of profit would consist for him in the fact that one can calculate it to the decimal point.

III. Capitalism as barrier

“The loss of this ‘law’ can easily be recovered from. Crisis theory depends in no way on this ‘law’ (cf. The Science of Value, p. 341) and capitalism has enough ‘barriers’ even without this ‘law’: not only that the development of the productive forces serves only the narrow purpose of profit maximization – this development takes place in a way that is highly destructive to humans and nature and again and again leads to war via the mediation of the state as ‘ideal collective capitalist.’ One really does not need the alleged ‘law’ in order to be clear about the limited and crisis-prone character of the capitalist mode of production.” (Fall of the Profit Rate)

“For Marx, the law expressed something more general, namely: ‘that the capitalist mode of production comes up against a barrier to the development of the productive forces which has nothing to do with the production of wealth as such; but this characteristic barrier in fact testifies to the restrictiveness and the solely historical and transitory character of the capitalist mode of production.’ (Capital, 3:350) Even without this, the limitations of the capitalist mode of production are already manifest in the fact that development of the forces of production and the production of wealth are subordinate to the valorization of value, and this narrow goal unleashes a glut of destructive forces against humanity and nature. Whether the expression of value in terms of capitalists and accountants rises or falls, it does not alter the fundamentally blinkered character of the capitalist mode of production.” (Heinrich, p. 154)

a) If one has read Volume 1 of Capital, one has in fact learned something about the antagonism of exchange-value and use-value, about a mode of production which usurps the “social metabolism” for the production of value, something that does not get along with use-value and its enjoyment and turns work from the means of producing useful things for consumption into a means of exploitation; about an economy that systematically uses the needs of people to force them into the service of producing a type of wealth from which they are not only excluded, but which is antagonistic to them, making them the means of a purpose harmful to them, which ruins them. Enough reason for a revolution? Indisputably. The knowledge in Vol. 1 about capitalism should always be sufficient to decide to no longer put up with this mode of production.

But does that speak against the interest in explaining how capital proceeds when it subjects every moment of production and circulation to its purpose of profit? Is it really so unexciting if the analysis results here in the news that in the course of accumulation capital pursues the absolute development of the productive forces with the effect that capital itself accrues a barrier to its own expansion, a barrier to the capitalistic production of wealth? (For fulfilling the demand for use-values, the development of productivity would be measured in this purpose and simply as a means to increase this wealth.) From relatively less and less workers, a bigger and bigger mass of surplus-value is generated, and it lacks neither available exploitation material nor additionally produced means of production – but exactly this success of accumulation increasingly creates problems as a result, because the accumulated claims on valorization are valorized worse and worse (with a declining profit rate), and a bigger and bigger advance is necessary in order to successfully participate in the competition over the (declining) average profit.

b) The “destructive forces” in Vol. 1 surely also explain many state measures. But it is fully proper that Marx points to imperialism here. And government austerity programs read like a collection of examples for chapter 14: the state with its force makes itself the advocate for unleashing the counteracting factors in order to improve the national rate of profit, so that capital investment should be more profitable in its nation than elsewhere – a quite current chapter.

However, Heinrich is finished astonishingly quickly with the “limitations”; he doesn’t care about the specific content of the “limitations” in Vols. 1 and 3 and what it criticizes in each case. What then is really important for him in his diagnosis of “limitations”?

c) Profit and the rate of profit are just not “accounting” expressions for surplus-value and the rate of surplus value. Marx introduces the profit rate as a “derived variable” of the rate of surplus-value, but Heinrich again turns it into a mathematical ratio, and completely passes over the new determinations which this transition depends on. Profit, the surplus obtained on an advance, is the practical purpose of capital; production and circulation are subjected to it and turned into the means of profit. The profit rate is thereby the yardstick by which capital measures its success. The fact that the capitalists “slave away” in a sinking rate of profit which determines their competition is in content a new determination of the limitation, a barrier produced by capital itself to its own purpose. Too much wealth becomes the barrier to the production of wealth – this is not a “natural condition” of wealth production per se, but a necessity of capitalism, and this is proved in Vol. 3. It is no surprise that Marx did not care to imagine that the producers of wealth would put up with something like this for long and so wished to hang an expiration date around the neck of capitalism. Until then, however, such an internal contradiction determines the form it takes …!

References

[1] Quotations cited as Heinrich are from Michael Heinrich, An Introduction to the Three Volumes of Karl Marx’s Capital, Monthly Review Press, 2012.
Quotations cited as Fall of the Profit Rate are translated from
http://www.oekonomiekritik.de/309Profitratenfall.htm, letzter Zugriff 2006-01-16
Quotations cited as Value Theory are translated from
http://www.oekonomiekritik.de/605Werttheorie.htm, letzter Zugriff 2006-01-16.