The Law of the Tendency of the Rate of Profit to Fall

Also known as the “law of the tendency of the general rate of profit to fall”. It refers to the objective tendency of the average rate of profit to fall as the organic composition of social capital increases.

The school of classical English political economy was the first to discover this phenomenon and has never been able to solve the mystery of the tendency of the rate of profit to fall. “The whole of political economy since Adam Smith has been circling around the solution of this secret.” Marx first scientifically explained the law of the tendency of the rate of profit to fall in his Economic Manuscripts of 1857–1858.

Under the capitalist system, individual capitalists compete to reduce the costs of production by improving technology and increasing the productivity of labor in order to pursue surplus-profits and gain an advantage in competition. In this way, the organic composition of capital in each branch of production increases continuously, which inevitably causes the average organic composition of social capital to increase. In the increased sum of social capital, constant capital grows faster than variable capital, which leads to a decrease in the average rate of profit. Assuming that the absolute amount of constant capital keeps increasing, the total amount of capital also keeps increasing, the absolute amount of variable capital remains unchanged, and the rate surplus-value (m) is 100% constant in a certain period of time, the average rate of profit shows a tendency to fall. The fall in the average rate of profit is the inevitable result of the increasing productivity of labor and the increase in the average organic composition of social capital under capitalist conditions, which is an objective tendency that is independent from the will of capitalists. Marx said: “The progressive tendency of the general rate of profit to fall is just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labor.”

A fall in the average rate of profit does not mean a fall in the rate of surplus-value or a decrease in the degree of exploitation of workers. This is because the average rate of profit will fall even if the rate of surplus-value remains unchanged or even if the rate of surplus-value keeps increasing. For example, under circumstances that the organic composition of capital is 60c : 40v, if the rate of surplus-value is 100%, the rate of profit will be 40%; if the rate of surplus-value rises to 150% and the organic composition of capital increases to 80c : 20v, the rate of profit will fall to 30%.

A fall in the average rate of profit also in no way implies that the mass of profit obtained by the capitalist will decrease. The size of the mass of profit depends on two factors: the rate of profit and the mass of capital. As accumulation of capital grows, the total amount of social capital is increasing, so the total amount of profit will continue to increase despite the tendency of the average rate of profit to fall. A fall in the rate of profit and an increase in the mass of profit occur simultaneously; they are two aspects of the same process. For example, if social capital increases from 1,000 to 3,000, and the organic composition of capital increases from 60c : 40v to 80c : 20v, under the condition that the rates of surplus-value are all 100%, the rate of profit will fall from 40% to 20%, while the mass of profit increases from 400 to 600. Therefore, Marx sometimes called the law of the tendency of the average rate of profit to fall the double-edged law of a decrease in the rate of profit and a simultaneous increase in the mass of profit.

The fall in the rate of profit and the increase in the mass of profit is the inevitable result of the law of accumulation of capital. The accumulation of capital causes the organic composition of capital to increase, raising the rate of profit, while simultaneously increasing the total amount of social capital. As the total amount of capital increases, variable capital decreases in relative terms compared to constant capital, but it increases in absolute terms, as does the mass of labor exploited, and hence the mass of surplus-value and profit. Marx said: “As the process of production and accumulation advances therefore, the mass of available and appropriated surplus-labor, and hence the absolute mass of profit appropriated by the social capital, must grow. Along with the volume, however, the same laws of production and accumulation increase also the value of the constant capital in a mounting progression more rapidly than that of the variable part of capital, invested as it is in living labor. Hence, the same laws produce for the social capital a growing absolute mass of profit, and a falling rate of profit.”

In capitalist society, the fall in the average rate of profit is slow. This is because a series of factors act in the opposite direction, checking, retarding and partially offsetting this fall, so that it is only of tendential nature. These factors are: the intensification of the exploitation of workers by capitalists; the depression of wages below the value of labor-power; the fall in the value of the means of production, such as machinery, equipment and raw materials, due to the increase in the productivity of labor; the adoption of manual labor in certain branches caused by the existence of a large relative surplus population; the development of foreign trade and the increase of stock capital, etc. These factors will not cancel this law but may weaken it. “Therefore, this law is in effect only as a tendency; its effect and results will only become clear and will be demonstrated under certain circumstances and over a long period of time.”

The action of the law of the tendency of the average rate of profit to fall has exacerbated various contradictions of capitalist society: the contradiction between the expansion of production and the valorization, between over-population and over-capitalization, between production and consumption, between the bourgeoisie and the proletariat, between the developed capitalist countries and the colonial and developing countries, and among the various exploiting groups of the bourgeoisie, etc. This has fully demonstrated the limitations and the historically transitory nature of the capitalist mode of production.