Profits are Up! Profit Rates are Down!
The rich are getting richer! 745 Billionaires in the U.S. gained 5 TRILLION in wealth from early 2020 to Oct.2021 while real wages for workers declined.
Yet Marxist economist Michael Roberts says “Profit margins are sliding down as costs of production rise and revenue growth slows”
How can both things be true? See below for an explanation. First some Definitions:
Rate of Profit: the percentage return on total investment.
Value: the socially necessary labor time it takes to produce a product. Value is the underlying basis of price.
Surplus value: the portion of new value added by workers that goes into the pocket of the capitalist. It is the basis of profit, interest, and rent.
Rate of Exploitation: The ratio of workers’ wages and benefits to the surplus value that the capitalists take from the workers
One of the key contradictions of capitalism is the tendency for the rate of profit to decline. Human labor is the source of value and therefore surplus value, the basis of all forms of capitalist profit. Capitalists try to increase profits by reducing the cost of their inputs, first and foremost labor power, while keeping up the market price of their output. One way they do this by replacing labor with machinery. The first capitalist to produce a product with less labor time embodied in it has an advantage over other capitalists. The first capitalist with the new method can cut their costs and prices and out compete others, or pocket higher profits, or a combination of both.
As soon as the innovation spreads to other producers, the first capitalist loses their advantage. The net result is that all capitalists are now producing with the new more capital-intensive methods. This lowers the overall industry wide rate of profit since more labor has been eliminated from the production process and labor is the source of value.
Marx noted countervailing tendencies. The most important was the increase in the rate of exploitation. The basket of consumer goods that workers rely on cheapens in value through the process of automation which increases the productivity of labor. For example, if it used to take 2 hours of the workers’ labor to reproduce the value of the goods they need to survive, now it only takes one hour. The boss who used to take 6 hours of the workers’ production for surplus value , can now take 7 hours while leaving the worker with the same standard of living, assuming consumer goods’ price reflects their new lower value.
This countervailing tendency helps retard the decline in the rate of profit but does not eliminate it. New labor-saving methods continue to arise, squeezing further the source of surplus value.
Political policies also back up the capitalist desire to increase the rate of exploitation: taxes on workers, anti-union laws, increased austerity, and cuts in the social wage etc.
This overall process has been accelerated under neo-liberalism. Much of the neo-liberal program was aimed at increasing the rate of exploitation. This worked as designed. One report was that in the U.S., 50 trillion dollars was transferred from the bottom 90% of the population to the top 1% over several decades. The mass of profit has grown tremendously even as the rate of profit has faced continual downward pressure. The lack of profitable investment opportunities has led to increasing financialization and speculation. Financial enterprises now take in a significant portion of the overall profits of the U.S. (and other) economies.
However, a rise in the mass of profit exacerbates the problem over time. Increasing the mass of profit is like gorging on a big meal after a period of fasting. It feels good but soon after indigestion and weight gain set in. Later new hunger follows but binging again leads to more indigestion. Likewise, the increase in the mass of profit ameliorates the problem of declining profit rates temporarily. It feels good for the capitalist. It takes the pressure off for now.
The problem is that for the capitalist, the key is the rate of profit. He is competing with other capitalists to get financing based on the rate of return. Competition to obtain the highest possible rate of profit is at the heart of the system.
Once the mass of profit has shot up, it must be profitably invested. The existence of the new mass of profit puts even greater pressure on capitalists to find a place to put it. If there are few opportunities for good profit making, the new mass of profit will reduce the overall rate of profit. Why? — because the rate of profit is determined by the mass of new surplus value divided by the previously existing total capital. The newly created surplus value in this round becomes part of the previously existing total capital in the next round. Downward pressure on the rate of profit increases the tendency to speculation, bubbles, and new recessions/depressions.
The cruel, disgusting concentration of wealth is inevitable under capitalism. Each capitalist is driven by competition to accelerate this process. But just as an addict needs more and more of a drug to get high, a capitalist needs more and more wealth to fulfill his mission. The thrill of each new high rapidly dissipates and the quest continues.
It is important to understand this process. The concentration of wealth under capitalism shows that it is an inhumane system that puts the luxuries of the rich over the needs of the poor. Exposing the mass of profit at the top and the concentration of wealth is important in winning people to Marxism. However, leaving our critique at this level can lead to attempts at reformist solutions. If the only problem is maldistribution, it may seem that higher taxes on the rich perhaps combined with more social spending can solve inequality.
In fact, the tendency of the rate of profit to decline is a necessary contradiction that leads to the undermining of capitalism no matter what the governmental policies are. Better distribution of income or even wealth will be resisted by the capitalists and their state. Even if it could be achieved, it would reduce profits and therefore accelerate the tendency of the rate of profit to decline. This would undercut the lifeblood of the system, the rate of profit. Undermining the lifeblood leads to deeper crises.
Marxists support higher taxes on the rich. These higher taxes can be a way to temporarily ameliorate social conditions by putting more resources into education, health care, etc. However, higher taxes undermine the rate of profit, and the rate of profit is what causes capitalists to invest. Lack of investment leads to recessions and depressions. Economic crisis reduces government revenues that social spending depends on. There is no stable long-term solution to meeting social needs under capitalism. Equality and capitalism are incompatible.
It is not enough to understand that capitalism is immoral and should be overthrown. It is also important to show through its internal contradictions that it is vulnerable and can be overthrown. Understanding the tendency of the rate of profit to decline is an important way to show capitalism’s vulnerability.
The rise in the rate of exploitation is a vicious destructive process that hurts and even kills workers. However, even this vicious process lays the basis for the ultimate undoing of capitalism. It does this by over time increasing the mass of profit that must be profitably invested and therefore exerting a downward pressure on the rate of profit, which is the goal and lifeblood of capitalism.
There is no way around this under capitalism. If the rate of exploitation does not increase, the rate of profit will fall faster right now. This will lead to crisis. If the rate of exploitation increases it may uphold the rate of profit for now, but it leads to greater downward pressure on the rate of profit and therefore crises later.
Marxists want to squeeze the capitalists as much as possible. We want to limit exploitation. We want workers to get more of the value that they produce. We want to win as much for the working class as possible now. We want to undermine capitalist wealth and power on the way to eliminating it altogether. We fight for the immediate needs and interests of the working class as part of the process of building a struggle to overthrow the oppressive and exploitive system.
Fight for reforms but have no illusions that capitalism can be reformed into a humane system!