The determination of the rate of profit

If we assume the turnover period of variable capital is given and assume no realization difficulties—all commodities that are produced are sold at their prices of production—the rate of profit will depend on two variables. One is the rate of surplus value—the ratio of unpaid to paid labor. This can be represented algebraically by the expression s/v. The other variable is the ratio of constant to variable capital, or c/v—what Marx called the composition of capital.

Composition of capital versus organic composition of capital

The composition of capital will change if wages, measured in terms of values—quantities of abstract labor measured in some unit of time—changes. For example, if wages fall in terms of value, everything else remaining unchanged, there will be relatively more constant capital and less variable capital than before. The composition of capital c/v will have risen.

However, though less variable capital relative to constant capital will have been used than before, a given quantity of variable capital will now produce more surplus value. All else remaining equal, a rise in the composition of capital produced by a fall in the value of the variable capital will result in a rise in the rate of profit.

Suppose, however, that the capitalists replace some of their variable capital—workers—with machines. Remember, we are measuring the machines here in terms only of their value. Here, in contrast to the first case, we assume the value of variable capital and the rate of surplus value s/v remains unchanged.

Now, more of the total productive capital will consist of constant capital, which produces no surplus value, and less will consist of variable capital, which does produce surplus value. Since here, unlike in the first example, the rate of surplus value has remained unchanged, the fall in the portion of the capital that produces surplus value will produce a fall in the rate of profit.

In order to differentiate between these two very different cases, which produce opposite effects on the rate of profit, Marx called a rise in the composition of capital produced by a rise in the use of machinery a rise in the organic composition of capital.

Capitalist competition forces the individual industrial capitalists to do all they can to lower the cost price of the commodities they produce. The term cost price refers the cost to the industrial capitalist of producing a given commodity, not the cost to society of producing it. (1) The cost price represents the amount of (abstract) labor that the industrial capitalists actually pay for. It is in the interest of the industrial capitalists to reduce as much as possible the amount of labor that they pay for while increasing as much as possible the amount of the labor that the industrial capitalists do not pay for—surplus value.

The cost price of the commodity is, therefore, the capital—constant plus variable—that industrial capitalists must productively consume to produce a given commodity of a given use value and quality.

As capitalism develops, the amount of capital that is used to produce a given commodity of a given use value and quality progressively declines. But capitalist production is a process of the accumulation of capital. Leaving aside temporary crises, the quantity of capital defined in terms of value must progressively increase over the life span of the capitalist mode of production.

Therefore, the fall in the capital used to produce the individual commodities must be compensated for by a rise in the total quantity of commodities produced if the value of total social capital is to grow. Outside of crises and a war economy, the history of capitalist production sees a continuous rise in the total quantity of commodities produced. This is why the capitalists must find new markets or enlarge old ones if capitalism is to continue. Contrary to Say’s Law, the increase in commodity production does not necessarily equal an increase in markets.

Two types of depreciation of fixed capital

Fixed capital, unlike circulating capital, transfers its value little by little to the commodities it helps produce. If all goes well, the entire value of a given piece of fixed capital should be transferred to the commodities by the time it can no longer physically function. But what happens if the value of commodities changes during the lifetime of the elements of fixed capital?

Circulating capital has as a rule a short lifetime, and while prices can sometimes change dramatically even over short periods, changes in values—outside of agriculture—should be more or less insignificant during the lifetime of most circulating capital. But this is not the case with fixed capital.

Therefore, in addition to the gradual transfer of value from a piece of fixed capital to the commodities being produced, the value of a machine, for example, will fall as the quantity of abstract human labor necessary to produce that machine falls. Marx called this second type of depreciation moral depreciation, or what is called by accountants functional depreciation. Periodically, individual industrial capitalists or corporations are obliged to “write off” a considerable amount of the value represented by their fixed capital.

A similar effect occurs if more powerful machines are invented that though they have the same value as the existing machines will increase the quantity of commodities produced. These newer machines transfer the same quantity of value as the older machines to the commodities they help produce, but the same quantity of value is spread out over a greater quantity of commodities. As a result, the value of each individual commodity falls.

For example, with the newer machine it might be possible to produce twice as many commodities as it was with the old machine. Once the newer machine has become generalized in industry, the old machine will only be able to transfer half the value to the commodities it helps produce than before. Competition will see to it that the commodities produced with the old and new machines will sell at exactly the same price. As a result, the value of the older machines will fall in half, obliging their owners—if they do their bookkeeping correctly—to write off half their value on their books.

For reasons of simplification in his discussion of the evolution of the rate of profit in “Capital” Volume III, Marx assumed that fixed capital transfers its full value to the commodities it helps produce once it has been fully consumed by its industrial capitalist owners. This assumption, though it has great value as an abstraction, ignores the fact that capitalist production involves a continuous revolution in the means of production.

Sharp changes in the values of agricultural raw materials can also occur before the capital they represent is productively consumed by their industrial capitalist owners. For example, a harvest failure in a major cotton-growing region will cause the value—as well as the market price—of cotton to rise. If there is a bountiful harvest the following year, the value of the capital represented by the cotton will fall. If industrial capitalist spinners had purchased the cotton at a price that reflected its value during a bad year for growing, they will likely incur a major loss.

However, what is a mere possibility with the value of short-lived commodities that represent circulating capital becomes a certainty in the case of the long-lived commodities that represent fixed capital. With the progress of science and technology and its inevitable application into capitalist production, the value of the existing fixed capital must fall independently of the physical wear and tear on machines.

Realistically, the industrial capitalists can hope to recover only a fraction of the value of their fixed capital. As a result, they attempt to consume the value of that capital as fast as possible—for example, by running factories around the clock.

Here we find that a major internal force that checks the fall in the rate of profit—the cheapening of the elements of fixed capital—also causes major losses for the industrial capitalists. The cheapening of the commodities that make up fixed capital holds down the growth of the organic composition of capital c/v by lowering the value of c.

The rise in the organic composition of capital is therefore considerably less than an examination of the technical composition of capital would suggest at first glance. When we are inside a modern factory packed with highly computerized machines but employing far fewer workers than in former times, we might get the impression that the organic composition of the capital represented by the factory is higher than it actually is.

To visualize in our mind’s eye the organic composition of the capital that is represented by the factory, we have to imagine these machines as quantities of (abstract) human labor and not the physical machinery. It is the ratio of the abstract labor—value—that the machine and the elements of constant circulating capital represent, on one hand, to the value represented by the purchased labor power of the workers who work in the factories, on the other, that determines the organic composition of the capital of the factory.

However, the same force that holds in check the rise in the organic composition of capital—the devaluation of the existing mass of fixed capital independently of its physically wearing out—also leads to major losses for the industrial capitalists and thus reduces their rate of profit independently of the organic composition of capital at any fixed instant in time.

Therefore, in order to fully understand the forces in the real world that determine the rate of profit, we have to think in terms not only of fixed quantities but also rates of change. Here crises play a major role. During a crisis, market prices will fall to levels that reflect the new lower value of the commodities, including those commodities that make up fixed capital. The social value represented by the total social capital that has been expanding suddenly contracts, and the social value of the the capital of individual factories and whole firms can even vanish entirely. (2)

Over time, however, the amount of capital that vanishes during crises must be less than the amount of capital that is accumulated between crises if capitalist production is to continue.

What regulates the growth in the organic composition of capital?

The maximum rate of growth in the organic composition of capital is determined by the development of science and technology at a given point in time. In reality, the rate of growth in the organic composition of capital will be much less because the industrial capitalists are interested only in minimizing the labor they actually pay for.

On average, the industrial capitalists pay for the entire quantity of dead labor they productively consume but pay for only a fraction of the living—or direct—labor. This gives capitalism its vampire-like nature, where dead labor—represented by a capitalist—exploits living labor—represented by workers. Therefore, the higher the rate of surplus value—the less living labor the industrial capitalists actually pays for—the slower will be the rate of increase in the organic composition of capital. Indeed, if the rate of surplus value increases sufficiently, the organic composition might even fall.

Therefore, the higher the rate of surplus value s/v, the lower will be the rate of growth of the organic composition of capital c/v. But the lower the rate of growth of the organic composition of capital, the higher will be the growth in the demand for labor power. At some point, the growing demand for labor power will shift the balance of forces on the labor market from the buyers of labor power—the capitalists—to the sellers of labor power—the workers. The rate of surplus value will stop growing and even start to fall. At this point, we would expect to see a renewed rise in the rate of growth in the organic composition of capital.

How crises raise the rate of profit

A crisis—once the problems of realization that caused the crisis in the first place are resolved by the crisis—will raise the rate of profit in three ways. One, directly through a rise in the rate of surplus value. Remember, if the organic composition of capital is given, the higher the rate of surplus value the higher will be the rate of profit.

Second, a crisis lowers the value of the existing constant capital in terms of market prices, and it is market prices that count for the capitalist. And third, a crisis raises the rate of profit by slowing the rise in the organic composition of capital in the period that follows the crisis. The rising rate of surplus value encourages the capitalists to use more “labor-intensive” methods of production—to use the slang of the (bourgeois) economists—which checks the rise in the organic composition of capital.

All else remaining equal, the deeper a crisis and the longer the mass unemployment created by the crisis lasts, the slower will be the growth in the organic composition. The result will be that the more the value of old fixed capital that has been destroyed is written off, the higher will be the rate of profit in the post-crisis period.  (3)

Therefore, in the wake of a crisis it is likely that the rise in the rate of surplus value will exceed the rise in the organic composition of capital for a certain period of time.

These forces work in the exact opposite way during a boom. As the demand for the commodity labor power rises, wages rise, and the rate of surplus value stagnates or even falls. The capitalists respond by increasing the role of machinery in production, which leads to a rise in the organic composition of capital. The combination of a falling rate of surplus value and an accelerating rate of growth of the organic composition of capital puts downward pressure on the rate of profit. This downward pressure becomes considerably greater once the turnover of variable capital approaches the maximum allowed by the technical conditions of production and transportation.

Therefore, the more rapidly capitalist production develops the greater will be the downward pressure on the rate of profit. Since the tendency of capitalism is to develop production without limit—a tendency that is held in check in the real world by the periodic crises of generalized overproduction of commodities—the tendency of the rate of profit is indeed, contrary to Heinrich, downward. But crises and the post-crisis periods of depression and stagnation that crises breed provide a powerful check on the tendency of the rate of profit to fall.

Heinrich’s attack on the law of the tendency of the rate of profit to fall

Heinrich, as we know, does not accept the above arguments. Contrary to Marx, Heinrich claims that there is no downward tendency in the rate of profit. Ignoring the tendency of capitalism to develop without limit, which creates a tendency for the organic composition of capital c/v to develop more rapidly than the rise in the rate of surplus value s/v, Heinrich holds that it is purely a matter of chance whether it is the rate of surplus value s/v or the organic composition of capital c/v that rises faster. The rate of profit, Heinrich insists, is just as likely to rise as it is to fall. Heinrich concludes that the historical tendency of the rate of profit is indeterminate. Therefore, Heinrich concludes that Marx’s law of the tendency of the rate of profit to fall is false.

Heinrich without knowing it produces a mathematical model of the collapse of capitalism

As part of his attempt to refute Marx on the historical tendency of the rate of profit to fall, Heinrich takes an example from Marx himself. Suppose 24 workers perform two hours of surplus labor every day. The total amount of surplus labor—surplus value—produced every day will come out to 48 hours. Now suppose due to a radical rise in the productivity of labor, only two workers are employed in place of the previous 24. Even if the two workers were to “live on air,” as Marx liked to say, and never slept, they could only perform 48 hours of unpaid labor in a day.

In other words, in the face of a decline in the number of productive of surplus value workers, the mass of surplus value cannot grow indefinitely. That is, if the number of workers declines, sooner or later the mass of profit measured in terms of value must stop growing and then decline.

“Marx,” Heinrich writes, “thought that he had sufficiently proven the law of the tendency of the rate of profit to fall using this consideration.” “But,” Heinrich concludes, “that was not the case.” (p. 153) And why not?

Here Marx is using the example of the 48 workers as a representative of the total social capital. We should imagine many zeros after the numbers 48 and 2. Keeping this in mind, Heinrich provides the following example.

“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.” (p. 153)

In other words, the mass of profit declines, but as long as the total capital of society contracts sufficiently, a smaller mass of profit will represent a higher rate of profit because it will be calculated on a smaller total advanced capital.

Arithmetic is correct, but attempted refutation is invalid

The arithmetic is correct. So hasn’t Heinrich proven his point?

In their review of Heinrich’s “The Unmaking of Marx’s Capital,” entitled “Heinrich’s Attempt to Eliminate Marx’s Crisis Theory,” Andrew Kliman, Alan Freeman, Nick Potts, Alexey Gusev, and Brendan Cooney point out, “Heinrich’s attempted refutation is invalid because it presumes that capital is dis-accumulated and thereby violates a crucial premise of the LTFRP.”

I would go even further. It not only violates a crucial premise of the LTFRP, it stands in contradiction to the very essence of the capitalist mode of production. The capitalist mode of production is above all a process of the accumulation of capital. And remember, capital is measured not in terms of the use values that make up the commodities that represent capital but in terms of value. Therefore, the kind of development of the productive forces that Heinrich imagines in the above example is simply not compatible with the capitalist mode of production.

In Heinrich’s example, once the losses the capitalists suffer as result of the moral devaluation of their constant capital is subtracted from their profits, the capitalists are not only not successfully raising the rate of profit in the face of a rising organic composition of capital, they are operating at an actual loss. In his attempt to refute Marx, Heinrich has actually produced a mathematical model—without realizing it—of the collapse of capitalism! (4)

In fact, Heinrich’s example—borrowed from Marx—implies the opposite of what he thinks he is demonstrating. It shows that while it is possible to create mathematical examples that show a faster rise in the rate of surplus value than the rate of growth of the organic composition, the rate of profit of the system as a whole is biased in the other direction, toward a fall in the rate of profit. Hence the TRPF. This, however, does not mean that there cannot be periods where the rate of profit indeed rises as we will see below.

Marx’s laws of motion of capitalist development

The competition between workers and capitalists, combined with the progress of science and technology, means that the organic composition will rise over time. However, the unemployment that is both directly created by mechanization and today’s computerization and indirectly created through the crises that are caused in part by the destruction of part of the value of the existing, mostly fixed, capital, along with the cheapening of the means of subsistence, makes possible the reduction of wages in terms of value. The latter causes the rate of surplus value to rise. The rising rate of surplus value holds in check the rise in the organic composition—and saves capitalism from the fate that befalls it in Heinrich’s model.

Instead, over long periods of time we will probably see a gradual decline in the rate of profit that is compensated for by a tremendous growth in the mass of profit. If the mass of profit fails to grow for any extended period of time, capitalism will end. Therefore, we can expect the capitalists and their governments to stop at nothing to keep both the rate and mass of surplus value growing. These in a nutshell are Marx’s laws of motion of capitalist development.

The tendency of the rate of profit since 1970

Marx’s theory of the evolution of the rate of profit implies that if capitalism can find vast new quantities of cheap labor to exploit, the rate of profit will likely rise until the cheap labor is exhausted. Isn’t this exactly what has been happening since the “Volcker shock” of 1979-82?

First, we have seen a shift of industrial production from the old centers of capitalist production—the imperialist countries of the United States, Western Europe and Japan—to low-wage, high-population countries located mostly in Asia that possess huge peasant populations. These peasants are accustomed to an extremely low standard of living and hard manual labor. They therefore provide an ideal recruiting ground for factory workers largely absent in the imperialist countries, including the traditional “white colonies” of the British Empire—Australia, Canada and New Zealand.

Indeed, the tendency of capitalist industrial production to shift from Western Europe and Japan to Asia has been going on since before the First World War.

First came the rapid industrialization of Japan that began well before the outbreak of World War I and reached its climax in the generation that followed World War II. Towards the end of the 20th century, the rapid industrialization that had completely transformed Japan finally led to a substantial rise in wages.

The rise in Japanese wages was followed by the development of economic stagnation in Japan as industrial production shifted to areas where cheap labor remained abundant. First, we saw the rapid industrialization of South Korea and Taiwan. However, the amount of potential new recruits from the peasant populations of those countries to the industrial working class was limited by their relatively small size.

As a result, we saw first a considerable rise in the wages of South Korean and Taiwanese workers and now signs of industrial stagnation in those countries. In order to fight the tendency toward declining profit rates, capital has been obliged to shift industrial production to countries with far larger populations—India and, above all, mainland China.

The rapid industrialization of China has, however, begun to cause a noticeable rise in wages in that country. There are now growing signs of slowing economic growth in China as the business press begins to complain about shortages of labor and rising wages. In order to resist the fall in the rate of profit, capital is being forced to look for even cheaper labor, which can be found in the Indian subcontinent.

Fleeing rising wages in the, at least until recently, rapidly industrializing countries of Asia, capital has developed a huge garment industry in Bangladesh, where wages and working conditions are rock bottom and therefore ideal from the viewpoint of capital. As a result, on April 24, 2013, a whole block of factories and an associated shopping center simply collapsed, killing at least a thousand people. By cutting so many corners in the construction of these factory buildings, the garment capitalists held down the value of their constant capital—buildings are, after all, a part of constant capital—that, combined with the rock bottom wages they pay their largely women workers, effectively resisted the tendency of the rate of profit to fall.

Or at least it did until the factories simply collapsed. This is an example of capitalist production taken to the extreme—collapsing quite literally and taking the lives of a thousand or more workers with it. This horrible event shows to what extent the capitalists will go to resist the tendency of the rate of profit to fall! Not for nothing did Marx describe the falling tendency of the rate of profit as the most important law in all political economy.

Only two weeks later, an additional eight workers were killed in Bangladesh in a factory fire.

The law of the tendency of the rate of profit to fall explains why capital is so hostile to wage increases or improved working conditions and why the industrial capitalists have been driven from country to country in a never-ending search for ever lower wages and even worse working conditions.

To its great credit, Monthly Review has published many articles—for example, John Smith’s article in the July-August 2012 issue, which illustrates to what extent capital has shifted industrial production from the old imperialist countries, where wages are relatively high, to the “global South,” where wages are horribly low. As it stands, there is a growing gap between Monthly Review’s empirical view of the world and the economic theories that Monthly Review has been supporting. (5)

As we saw last month, the rate of profit, unlike the rate of interest, is not directly observable, which explains why there can be so much disagreement among Marxists about the actual direction of the rate of profit over the last four decades. Andrew Kliman believes that the rate of profit has failed to recover from its fall in the 1970s. Bill Jeffries draws the opposite conclusion, holding that the rate of profit has risen because of growth in the rate of surplus value.

Let’s imagine an alternate history. What would have happened to the rate of profit if the Soviet Union and Eastern Europe had maintained the path of socialist construction and China and Vietnam had developed along the lines of the Soviet economy rather than along the capitalist lines that they have done in reality. Let’s further assume that India and Bangladesh had joined the socialist bloc, something that many believed would soon happen in the revolutionary years that followed World War II. In that case, the rate of profit would be far lower today than it actually is.

Therefore, Marx’s theory of the tendency of the rate of profit to fall, which Heinrich and the editors of Monthly Review dispute, provides powerful clues as to why the policies of the U.S. and its world empire are what they are. Isn’t the key to much of U.S. foreign policy found precisely in the tendency of the rate of profit to fall?

The law of the tendency of the rate of profit to fall and the fate of capitalist production

If the rate of profit continues to fall, won’t this eventually cause capitalist production to break down due to the fall forcing the working class to make a revolution? This idea has been a subject of much debate in the Marxist movement for more than a century.

Rosa Luxemburg denied that the fall in the rate of profit would ever cause capitalism to collapse because, according to her, the fall in the rate of profit would always be compensated for by the rise in the mass of profit. Instead, she sought the inevitable end of capitalism in the alleged impossibility of realizing surplus value in a pure capitalist economy where simple commodity production has disappeared. Other Marxists, including Heinrich, deny that there is any tendency for the rate of profit to fall at all.

Marx, however, did believe that the tendency in the rate of profit to fall had implications for the inevitable transformation of capitalism into socialism. He wrote: “the main thing about [the horror expressed by economists like Ricardo] of the falling rate of profit is the feeling that the capitalist mode of production meets in the development of its productive forces a barrier which has nothing to do with the production of wealth as such; but this peculiar barrier testifies to the limitations and to the merely historical, transitory character of the capitalist mode of production….” (“Capital,” Volume III, Chap. 15)

I will not deal with this question any further here. Instead, I will deal with it when I examine Heinrich’s critique of the economics of “world view Marxism” as a whole.

Did Marx abandon his theory of the tendency of the rate of profit to fall?

In his article published in the April 2013 Monthly Review, Heinrich attempts to show that Marx “probably” pretty much gave up on his LTRPF. We, of course, cannot be certain what was in Marx’s head. Heinrich believes that Marx’s coworker Frederic Engels failed to realize it and edited Volume III of “Capital” to make it appear that Marx had to the end of his life upheld a theory that he had in reality largely given up on. The blundering, if well-meaning, Engels therefore helped lay the foundation of the “world view Marxism” that was to dominate the left wing of the world working-class movement for the following century.

A lot of what Heinrich writes is mere speculation. Marx lived quite close to Engels in London during his final years and presumably the two men had many discussions on political economy among other things that have not been preserved. (6) If Marx had growing doubts about the falling tendency of the rate of profit, he apparently failed to get this point across to Engels. In the end, we have no idea what thoughts occurred to Marx unless he wrote them down.

But Heinrich does refer to an obscure note by Marx meant for a later edition of “Capital” Volume I that Heinrich thinks indicates that Marx had indeed abandoned the LTRPF. Here, Marx leaves a written trail so we can examine it. As Heinrich documents, the note was written after the manuscript that became Volume III of “Capital” was written. Unlike Heinrich’s speculations on what Marx was thinking, here we have something concrete that we can work with.

Marx writes: “Note here for working out later: if the extension is only quantitative, then for a greater and a smaller capital in the same branch of business the profits are as the magnitudes of the capitals advanced. If the quantitative extension induces a qualitative change, then the rate of profit on the larger capital rises at the same time.” (Marx, Capital, Vol. 1, 781, as quoted by Heinrich)

The phrase “are as the magnitudes of the capitals advanced” indicates that Marx has in mind the rate of profit.

The context of the quote makes clear that in using the term “quantitative extension” and “qualitative change,” Marx is referring to the organic composition of capital. Marx indicates that if we have two capitals of different sizes working in the same branch of industry but of equal organic compositions they will have equal rates of profit, though the larger capital will yield a larger mass of profit.

But, and here Heinrich thinks he has found something of a “smoking gun,” Marx also indicates that if the larger capital has a higher organic composition, it will realize a higher rate of profit. But since the larger capital has a higher organic composition of capital, shouldn’t the larger capital have a lower rate of profit, though it might still have a higher mass of profit?

But Marx draws opposite conclusions. Instead of seeing the rise in the organic composition of capital leading to a lower rate of profit, Marx here assumes that the higher organic composition of capital leads to a higher rate of profit. Heinrich reasons that by the time Marx wrote this note, he no longer believed in the law of the tendency of the rate of profit to fall.

Marx never got around to developing his idea. So, let’s attempt to develop Marx’s idea here. I am forced to do this in order to see whether the note gives any support to the claim that Marx had abandoned his theory of the tendency of the rate of profit to fall.

The context of the quote makes clear that Marx here had in mind a situation where we have two different capitals that are producing commodities with identical use values and qualities. One capital is larger than the other. Let’s call the owner of the smaller capital capitalist number one and the owner of the larger capital capitalist number two.

In this case, one where the two capitals have identical organic compositions and identical labor productivities, the larger capital will exploit more workers and will therefore realize a larger mass of profit for its owner, capitalist number two. But the rate of profit yielded to its owner will be identical with the rate of profit on the smaller capital, just as Marx indicates in the text of the note.

But suppose the second larger capital has a higher organic composition of capital. Marx here indicates that the larger capital with a higher organic composition of capital yields a higher rate of profit to its owner than the smaller capital with a lower organic composition. Heinrich reasons if Marx still believed in his law of the tendency of the rate of profit to fall, he wouldn’t have written this.

What Heinrich forgets is that in formulating his law of the tendency of the rate of profit to fall, Marx had in mind the organic composition of the total social capital, not separate competing capitals. In the passage under consideration, Marx had in mind two different organic compositions of two different individual capitals operating in the same branch of industry.

Let’s examine the case where the two capitals have two different organic compositions of capital. The laws of competition require that our two fellows have to sell their commodities at exactly the same price. In Volume I, Marx assumes that the industrial capitalists sell their commodities at prices that directly reflect their values. For the most part in Volume I, and indeed in Volume II as well, Marx in effect assumes that all industrial capitals have the same organic composition of capital, and have the same turnover periods of their variable capitals.

Under these admittedly highly unrealistic assumptions, the direct prices of commodities will equal their prices of production. As long as commodities sell at their direct prices, equal capitals will realize equal profits in equal periods of time.

The other consequence of the above assumption is that the commodities produced by different individual capitals have the same individual values. Competition indeed tends toward such a situation, since it forces each individual capital under pain of ruin to adopt the cheapest possible method of production—that is, produce with the lowest possible cost price.

However, competition never achieves this in practice, because the means of production are continuously being revolutionized, so what is the cheapest method today will not be the cheapest method tomorrow. At the same time, competition among workers and among the capitalist buyers of labor power will mean that the workers with the same skills will sell their labor power at the same price. Therefore, despite their different organic compositions our two capitalists have to pay exactly the same wage to their workers.

Since capitalist number two works with a capital with a higher organic composition of capital, we must assume that the productivity of labor of his workers is higher than the the productivity of labor of the workers who work for capitalist number one.

Under these assumptions, implicit in Marx’s note, the individual values of commodities must diverge from their social values. Since the second capital with the higher organic composition of capital is assumed to be larger, we can assume that the social value will be somewhere in between the individual values of commodities produced by the two capitals but closer to the lower individual value of capitalist number two, who works with a capital that is both larger in terms of value and has a higher organic composition of capital.

Therefore, our second capitalist will be able to sell his commodities at prices that are somewhat above their individual values, yielding him a super-profit, while the first capitalist will be forced to sell his identical commodities well below their individual value. He will therefore realize a profit that is markedly below the average rate profit.

But since the productivity of the labor of the workers employed by the second capitalist whose capital has a higher organic composition will be higher, a given amount of concrete labor of those who work for the second capitalist will represent a greater amount of abstract human labor than the same amount of concrete labor performed by a worker who works for the smaller industrial capitalist, who uses a capital with a lower organic composition.

That is, a worker who works for capitalist number two will in terms of abstract human labor have a longer work day than the workers who work for capitalist number one, even though in terms of concrete labor they will have identical work days. Remember, the wages of the workers who work for capitalist number one and capitalist number two are identical. Therefore, the second, larger capitalist with a higher composition of capital will employ relatively fewer workers, and the workers he does employ will produce more surplus value.

It is important here to note that our second capitalist with a higher productivity of labor will enjoy a higher rate of surplus value for reasons that are different than the general tendency of the rate of surplus value to grow due to the cheapening of the means of subsistence that is the consequence of the growth of the productivity of labor. If the means of subsistence are cheapened, a capitalist boss can pay his workers less in terms of value while the real wages—the wages in terms of the use values of commodities—remains unchanged or even rise.

However, this is not the reason why the capitalist who works with a higher organic composition of capital enjoys a higher rate of surplus value in the case of competing capitals with different organic compositions of capital. Here we assume that our two capitalists pay the workers the same money wage, the same real wage, and, what really interests us here, the same value wage.

However, as we saw above, while the workers who work for our second capitalist—the one who works with capital with a higher organic composition—perform the same quantity of labor in terms of concrete labor, that labor counts for more abstract labor because of its greater productivity. Therefore, in terms of abstract labor—value production—the workers who work for capitalist number two perform more hours of unpaid labor and therefore produce more surplus value.

The same argument restated in the language of simple bookkeeping

In the language of bookkeeping, the cost price per commodity unit of our second capitalist c + v will be less than the cost price c + v of the first capitalist. We assume that our second fellow has a higher c, but this will be more than compensated for by a lower v. If it were otherwise, our second fellow would not work with a higher organic composition in the first place. He only uses the method that employs a higher organic composition of capital because it lowers his cost price. Like all industrial capitalists, he is interested in achieving the cheapest possible cost price to defeat the competition and maximize his profit.

Despite being able to produce commodities of a given use value and quality at a lower cost price, our second capitalist will be able to sell them at exactly the same price as the first smaller capitalist who works with a capital that has a higher cost price. Therefore, our second fellow will not only have a higher mass of profit due to having more capital but a higher rate of profit because his cost price is lower than capitalist number one.

Therefore, capitalist number two, who works with a capital with a higher organic composition of capital, will realize in addition to the average rate of profit an additional profit, a super-profit. Our first capitalist will have to settle for a rate of profit that is below the average rate of profit. If in time, he cannot correct this situation, he will sooner or later be forced out of business.

This does not mean, however, that if the higher composition of capital becomes generalized throughout the branch of industry in which our capitalists are working—which under the pressure of competition will indeed be the case sooner or later—the rate of profit throughout capitalist industry will rise, which is Heinrich’s implicit assumption here.

Remember, thanks to competition the rate of profit will tend to be equalized not only within the branch of industry in which our two capitalists are working but between that branch of industry and all other branches of industry.

Therefore, as soon as the superior method of production employed first by capitalist number two becomes generalized, the higher rate of surplus value enjoyed by the second capitalist will disappear. Our second capitalist will then be obliged under the pressure of competition to lower the price of his commodities to their individual values. The temporary super-profit he enjoyed will disappear and he will only realize the average rate of profit. Not only that but if we assume the average rate of surplus value remains unchanged, this new general rate of profit will now be lower than before. Our second capitalist will have lost in two ways. The super-profit that he realized above and beyond the average rate of profit will have vanished, and the average rate of profit will be lower than it was before.

Therefore, contrary to Heinrich, Marx’s note in fact gives no support whatsoever to the theory that Marx had abandoned his theory of the tendency of the rate of profit to fall. In the future, Heinrich would be well advised to drop this argument.

Some final thoughts

Not surprisingly, Heinrich is eager to choose examples that draw attention away from the huge growth in the quantity of fixed capital that marks the real-world history of the capitalist mode of production. He prefers to calculate the rate of profit by the “flow” method that divides the surplus value by the capital that is used up instead of dividing the surplus value by the total mass of accumulated productive capital.

An example of Heinrich playing down the role of fixed capital, and indeed constant capital in general, is provided by the following quote from his “Introduction”:

“At the beginning of this chapter,” Heinrich writes, “it was pointed out the rate of profit can be raised through the economization of constant or through the acceleration of capital turnover….” (p. 150) Heinrich leaves out the fact that the rate of profit can be raised only by an acceleration of the turnover of variable capital.

There is nothing very original in Heinrich’s critique of Marx’s law of the tendency of the rate of profit to fall. These arguments have been repeated by many academic Marxists and other Marx critics for decades. Indeed, Paul Sweezy made the same basic arguments in his “Theory of Capitalist Development,” published in 1942. The real question is why Heinrich is so obsessed with disproving Marx’s law of the tendency of the rate of profit to fall even to the point of committing absurdities such as assuming the dis-accumulation of capital. And why did the editors of Monthly Review choose to publish and prominently display Heinrich’s far from fresh critique of Marx in their April 2013 issue?

Before we can answer these questions, we still have more work to do. We have to examine Heinrich’s interpretation of Marx’s theory of value as a “monetary theory of value.”

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1 This is what the common term “the cost of production” blurs, since we don’t know whether it refers to the cost that the capitalist incurs or the cost society incurs. Marx’s theory of surplus value demonstrates that these are and must be quite different things.

2 Nothing illustrates this better than the videos taken in the early 1980s of U.S. steel factories being blown up by their capitalist owners because the value of the capital that these factories once represented had vanished.

3 Here we have major pieces of a complete theory of capitalist crises. The main thing still missing is a theory of what determines the rate of growth of the markets for commodities. Once we have solved the laws that govern the expansion of markets, we have developed a full theory of capitalist crises.

4 This is not say capitalism will necessarily actually collapse like it does in Heinrich’s model. If the productive forces were to develop in the way they do in Heinrich’s model—labor productivity grows so fast that the number of productive workers declines—the resulting rise in unemployment would cause wages in terms of value to fall so sharply that the resulting rise in the rate of surplus value would once again slow the the development of the productive forces sufficiently to allow the quantity of productive workers to grow once again, allowing the mass of surplus value—profit—to resume its positive growth.

However, what this does demonstrate is that if capitalism is to last forever, there must be a continuous increase in the quantity of productive workers, which means the population must grow forever—not for Malthusian reasons but because of the needs of the capitalist mode of production.

5 One of the reasons why Foster may have published the Heinrich piece was that Paul Sweezy in his “Theory of Capitalist Development” also drew the conclusion that the tendency of the rate of profit is indeterminate for much the same reasons that Heinrich gives. Foster is perhaps partially motivated by his loyalty to Sweezy’s legacy. However, this hardly requires that Foster defend everything Sweezy ever wrote; Sweezy himself didn’t defend everything he ever wrote. No serious thinker including Marx did that.

However, it is true that Sweezy, much like Foster today, was a supporter of the Popular Front, or its American expression—New Deal politics. I will examine this question at end of the series of posts on Heinrich.

6 If only something like the present-day U.S. National Security Agency had existed, we would probably have a virtually complete record of Marx and Engels’ private conversations on political economy and all other subjects they discussed as well. Indeed, we would have records on every other private conversation likely to be eavesdropped on. But alas, Marx and Engels lived before the age of modern surveillance technology, depriving us of records of their private conversations, which might have thrown much light on this question!