World in Crisis: A Global Analysis of Marx’s Law of Profitability

Marx’s law of profitability is shown in World in Crisis to explain today’s long depression, but ending capitalism requires a political strategy, argues Dominic Alexander

Guglielmo Carchedi and Michael Roberts, eds., World in Crisis: A Global Analysis of Marx’s Law of Profitability (Haymarket Books 2018), viii, 462pp.

Ostensibly, we live in a society where free speech reigns, yet in practice, there are clear and remarkably narrow limits to acceptable public discourse on major questions of how the system is to be run. These limits are so ingrained that it is difficult even to notice their presence. In relation to economic policy, the premise is always that everyone in society has the same interest in a ‘strong’ economy, which can only mean one where profits for capitalists are high. It is unsayable that capital and labour might have opposed and incompatible interests.

Sometimes the underlying reality surfaces, as was the case in the mounting derision for David Cameron’s claim that we are all in this together, at a time when austerity for wages and public services contrasted with the size of bankers bonuses. Yet, it has always been the case that social-democratic politicians have had to claim that their alternative policies, favouring labour to some degree, would also be good for capital. In government, reformists have to prove they are able to do better for profitability than would capital’s favoured party.

Community of interests or class antagonisms

Managing capitalism to the benefit of both capital and labour is difficult to achieve, at the very least, and probably impossible for any length of time. Social-democratic governments are therefore boxed into limiting or abandoning policies that would favour working-class standards of living, or even the general social good (think of environmental policy). Fundamentally, capitalism is an antagonistic system, as Marx insisted. It is true that in times of a long upswing in capital profitability, particularly when labour is becoming more productive, it becomes possible for living standards to rise. However, when profitability is threatened, then the institutions of labour, trade unions in particular, will immediately come under severe attack, and the demands of workers will be represented as just too greedy, and certainly unrealistic, ‘in the current economic climate’.

The long-term driver of these cycles of fair and foul economic weather, about which we can supposedly do nothing, is the process which Marx analysed as the tendency for the rate of profit to fall (TRPF). It is important to understand that this tendency, referred to by Carchedi and Roberts as a ‘law’, in Marx’s original sense, is an underlying and long-term phenomenon, which is often off-set by many countervailing tendencies. Productivity gains, reductions in the cost of living, and other factors, frequently mask the impact of the TRPF in the short term, to the extent that its existence has even been denied in some quarters.

World in Crisis presents detailed evidence from across the world, and over the long historical span, to show that the tendency does really exist, and has a clear and ultimately dominant influence in determining the general state of economies, nationally and globally. The main polemical theme, in most of the pieces from various authors, runs against notions that capitalism can be stabilised. The clear implication is that the wish to deny the reality of the TRPF is rooted in a desire to find a way that capitalism can be said to be compatible with a reasonable economic deal for most of the people.

Keynesian demand management

The target here is broadly Keynesian economic thinking, of various varieties. The Keynesian argument, briefly, is that a lack of aggregate demand in the economy is the cause of economic slowdowns, depressions and recessions. The solution is simple, which is to intervene in the economy by stoking demand through government spending. However, if major depressions are ultimately caused by a decline in the rate of profit, whatever other proximate causes or mediations might be involved, then boosting demand will not itself restore the rate of profit.

The classic example of a Keynesian type of intervention into depression was Roosevelt’s New Deal in 1930s America, but these policies, it is argued, did not bring the country out of the slump. Only the extraordinary government spending and the colossal destruction of capital brought about by World War Two enabled the rate of profit to rise again, bringing the world into the post-war boom. In contrast, when wages rise relative to profits, as they did from 1948 to 1986, then the average rate of profit falls, which lies contrary to Keynesian assumptions that aggregate demand supports growth (p.64). The means by which capitalism can restore itself to profitability are, therefore, inimical to the interests of the mass of people. The slashing of wages and the cost of social reproduction are the most immediate mechanisms that are likely to be employed, but a crisis normally leads to widespread destruction of existing capital as well. It was only this solution that prepared the ground for the post-war economic ‘miracle’; that brief time when it seemed the interests of capital and labour could be reconciled.

It is true that a rising productivity of labour, at times of the introduction of important new technologies, can significantly raise profitability to a degree that enables wages to increase. This was also a factor lying behind the rise in living standards in the developed world after World War Two. The problem here is that new technology means a rising capital investment replacing the mass of labour that is needed in production; technically, this is called a rise in the organic composition of capital.

The difficulty here is that labour is the only source of surplus value, which is realised as profit through circulation in the market. If there is a fall in the amount of labour needed compared to the amount of capital invested in production, then ultimately the rate of profit will fall. The waves of productivity gains that have been a constant feature of capitalism since the industrial revolution all inexorably led to a renewed decline in the rate of profit, as the effects of productivity worked their way through the system. That is to say, capitalism eats itself.

Carchedi and Roberts emphasise that the only solution to this central contradiction of the system is to replace it with one of production that is not based on profit, or a system of social ownership and control. In this, the authors are clearly correct, and are true to Marx in seeing capitalism as inherently destructive, making crisis inescapable and endemic. The only solution is a workers’ revolution and the creation of socialism. However, the problem lies precisely in moving beyond the logic of capitalism, and creating a situation where the socialisation of production, distribution and exchange becomes a viable proposition.

Analysis can confirm the evidence for the necessity of the abolition of capitalism, but that in itself will move only a few people at an individual level. The limits of political discourse cannot be overcome without a mass movement changing the terms of debate, and this requires a political strategy. Consciousness changes through action rather than reflection. Consequently, there needs to be an agenda for change that can bring large numbers of people from an acceptance of existing structures through to enthusiasm for fundamental change. Moreover, lives are lived in the present, not in the long term. Capitalism may be doomed in the end, but if socialism is to succeed it, we must be able to propose remedies that can clearly address our current distress, as well as providing a bridge towards the long-term alternative.

It is probably because of this political reality that many on the left have been drawn to Keynesian solutions, and even to repudiating the reality of the Marx’s law of profitability, as that calls the former into question. Roberts sees this reaction as an accommodation to capitalism, whose only consequence can be policies designed to save the system rather than replacing it. This, arguably, has been the impact of most, if not all, reformist social-democratic governments of the last century.

The law of profitability

So, the evidence for the law of profitability needs to be carefully considered. World in Crisis does offer robust, wide-ranging and convincing empirical proofs of its existence and significance. Chapters cover the long-term rate of profit for the US, Japan, the UK, Spain, Greece, Brazil and China, all showing interesting variations on the general pattern, that reflect different histories and individual economies. Yet, in graph after graph, the historical trend is clear, and shows remarkable convergences. It is even possible to calculate a world rate of profit, which shows the broad direction of profitability:

‘From the nineteenth century to the 1970s, there was, except for the period 1930-44, a very regular downward trend, which was then interrupted by a sharp decline during the period 1970-82. The subsequent partial recovery has been very limited, from a 10.6 percent average in core countries in 1980-84 to a 12.9 percent average in 1995-99, below even the 1970-74 level. The last decades clearly appear as those with lower levels of profitability, with 2009 almost repeating the historic trough of 1982, and thus reversing the cycle of very limited recovery started in the 1980s’ (p.141).

The overall trend therefore maps very closely onto the pattern of boom and depression, with profit rates clearly falling during economic upswings, and usually recovering during depressions, for example the 1930s, as weaker capital is destroyed, and the conditions for new waves of investment are created. It is notable therefore that since the 2008 crisis, signs of the recovery of profitability have been very weak. For Michael Roberts, this is partially because the weaker capitals have not been subject to the scale of destruction seen in earlier slumps. Capital is now stuck in a low profitability rut, despite the severity of attacks on wages and conditions.

From the vantage point of Japan, the problem can be seen to have begun even earlier than 2008, with productive capacity there actually declining in absolute terms even during an economic upturn. This enabled a recovery of profitability, but with no growth in investment. Such a scenario is out of step with historical patterns, to the point that it can be said that ‘in contemporary capitalism and particularly in Japan, the cyclical self-recovery mechanism, originally described by Marx in an epoch of capitalist ascent, has broken down’ (p.173). It is patterns like this that add urgency to the authors’ insistence that capitalism cannot be fixed or managed, but must be replaced in its entirety by a system that is not based upon profitability.

The evidence seems abundantly clear to the authors of World in Crisis that the tendencies of rates of profit clearly are causative of economic cycles and long-term trends: ‘The evidence is quite overwhelming that profits peak several quarters before the recession, while investment peaks immediately before the recession. Then profits recover before investment does’ (p.109). It remains, however, to be explained why so many economists ignore or reject the TRPF.

Objections to the TRPF

Mainstream economics simply dismisses the entirety of the labour theory of value which underpins Marx’s law of profitability, to the point that ‘for conventional economics … it remains a mystery why crises are preceded by a rise in labor productivity’ (p.52). Such economists cannot grasp that if labour is the source of surplus value, then when proportionally less labour is being used in production, there will be a decrease in new value being created. As a result, the rate of profit will fall. Competition between capitals compels firms to attempt to increase their labour productivity in order to out-sell their rivals, but this process, where successful, will generalise across industry, and pull down the overall rate of profit. Investment will become less attractive, and a slump will ensue.

Objections do not just come from conventional economics, however, but also from notable Marxists. David Harvey has repeatedly argued that the TRPF is relatively unimportant, as the many countervailing factors that can restore the rate of profit will always cancel it out (p.134). The empirical evidence in World in Crisis would appear to contradict that argument, but a thread running through many of the discussions here is to show how the law of profitability interacts with countervailing tendencies, to produce the fairly unpredictable economic cycles seen historically.

Firstly, it is important to recognise that the law of profitability does not operate in a mechanistic and mono-causal manner, but that crises are the product of the interaction of factors, with the rate of profit acting as the underlying motor. The correlation between profitability and crisis is not a spurious one as can occur ‘when series trend up together or trend down together, or trend in the opposite directions’, rather than when ‘they oscillate following each other or mirroring each other repeatedly’ (p.117). The latter is the case with profitability rates and the economic cycle.

Finance and the rate of profit

One of the objections to the argument that falls in profitability are causative of crises lies in the difficulty of calculating value and profitability in Marx’s terms, since value in itself is not recognised by capitalists’ own measurements. Here Tony Norwood argues indeed that the current data does not allow ‘a good approximation for the rate of profit on capitalist production as understood by Marx’ (p.371). One problem, for example, is the difficulty in separating profits made by productive investment, and ‘fictitious profits’ made in the financial sphere (fictitious because they are based on speculation as to the value that may be produced in the ‘real’ economy in the future). Since many firms deal in both areas at the same time, this bedevils attempts to distinguish the productive and non-productive spheres. Norwood however agrees with the general approach taken by the other studies in World in Crisis that an approximation can be made to Marx’s rate of profit. The data taken in aggregate, and over the historical long term, reveals the underlying tendencies, despite the proximate difficulties in calculations.

The issue of separating the productive and non-productive profits comes back to the arguments about whether falling profit rates cause slumps, or other factors. For many economists, particularly on the Left, the 2008 crisis was caused not by falling profitability but by the financial sector itself. It is true that the impact of financial profits on the UK rate of profit makes it rise before the 2008 crisis, (p.195) suggesting at first glance that the crisis was one created within the finance sector. This later is essential to the system, particularly in providing credit for investment, but it has a tendency to become unmoored from productive realities, and during a crisis in productive profitability, becomes a haven for capital seeking a better return (pp.7-8). This results in fictious profits being made in this sector, which hide the underlying profitability problem.

In an economy like Britain’s, with a disproportionate reliance on financial firms, profitability rates can be distorted in the short term by a flight into finance, caused by the real decline in the rate of profit:

‘British capitalism is increasingly a “rentier” economy, which sucks up surplus value appropriated by other manufacturing economies and circulates and redistributes capital looking for a higher profit in return for a “cut” – through interest rates, commissions, and fees’ (pp.196-7).

Thus, in fact, ‘if financial crises emerge before economic crises, the former are the catalyst of the latter’, but the underlying cause relates to profitability in the productive economy (p.61).

Long-term analysis and short-term policy

If we take the economic arguments here to be compellingly argued, there remains a political problem. The explicit view of most of the contributors is that the analysis of the TRPF shows that capitalism cannot be managed, but must be replaced, if we are to be freed of a world of recurring economic crisis, and permanent war on wages and conditions. The difficulty is that it is far easier to gain support for amelioration of conditions in the immediate term than for wholesale structural transformation. At the very least, there needs to be a clear pathway to a different kind of economy, while people’s lives can be improved in the present.

The TRPF argument can be placed in overly stark terms, rejecting the validity of any measures short of the replacement of capitalism. The issue here, however, is that the TRPF is a long-term phenomenon, and other tendencies and factors do play a significant role in economic matters, if not the finally causative one. Thus, while the evidence does seem to show that Keynesian policies are not, in fact, decisive in bringing capitalist economies out of crisis, this is not quite the same as to argue that state intervention cannot be positive from the point of view of the working class.

On the one hand, a simple attempt to stimulate demand does not in fact restore profitability. In particular, it is argued here convincingly, policies that are monetary focused, like the present use of quantitative easing to boost investment, are ineffective in the face of underlying conditions that keep profit rates low. In the present period, government policies across the developed world have simply acted to prevent weaker capitals from extinction, thus blocking off one avenue to a restoration of profitability.

This is probably being done out of a fear of the disruptive consequences of major firms failing, but compounds this inner contradiction of capitalism. Quantitative easing allows defunct enterprises to carry on as corporate zombies. It is also clearly the case that Keynesian solutions started to fail in the 1970s as a result of downward pressures on employment, in their turn due to productivity gains. With an ever higher organic composition of capital, encouraging investment could not compensate for reduced demand for labour in production.

Roberts argues that if ‘the state brings about a redistribution of value from capital to labor through pro-labor legislation, progressive taxation, or higher subsidies’, this will not have the intended effect of restoring economic growth, as it will result in a fall in the rate of profit (pp.20-1). The detailed exposition of this argument is alarming, as it could be taken to mean that the state shouldn’t engage in pro-labour policies, as this will prevent a return to profitability and therefore an end to recession and crisis. However, the main target here is the Keynesian idea that the interest of both capital and the working class can be served by boosting consumer demand. Marxists sometimes accept this, since surplus value can only be realised as profit if demand is sustained. However, Roberts is arguing that the interests of capital and labour are necessarily opposed, and demand management will not work. This is because it is not demand which drives investment but profitability.

Economic analysis and political strategy

The controversy here arises, in part, from differences in perspective. There is an analytical gap between the long-term dynamics of capitalism, and the utility of government policy in the short term. In the end, capitalism is a system so riven with de-stabilising contradictions, that economic measures are necessarily a matter of kicking the can down the road. Capitalism has always been faced with a continuous search for solutions that always turn themselves into the next problem. It is true that, particularly in the long view, higher wages can depress the rate of profit, if they are not accompanied by a rise in productivity. Nevertheless, capital exists and reproduces itself by means of a continual cycle through various states in production and circulation. The surplus value that is created in the production process can only be realised if the commodities that are manufactured are in fact sold. Demand is a variable that matters, and is essential to the reproduction of capital. There is a tendency towards ‘underconsumption’, the problem that a lack of demand frustrates capital’s ability to realise surplus value as profit, through the exchange of its products.

Although Marx can be found to attack under consumptionist economic theories, he can also be quoted in support of them (pp.98-9). Rather than resolving this by claiming that one statement is to be preferred to another, a better understanding is to accept that Marx rejected any theory which saw one tendency alone as the simple driver of capitalism. Instead, Marx’s exhaustive analysis was intended to work through the full consequences of the multiplicity of tendencies in dialectical relationship with one another. So, demand stimulus can have an immediate reflationary impact, arresting, while not solving, the depth of an economic slump. In the longer term, however, rises in the organic composition of capital, leading to lower rates of surplus value, cannot be addressed through the standard Keynesian toolkit.

Given all this, socialists should still argue for pro-labour economic policies, on the basis of supporting and improving the standard of living of working people in the present. The argument should be that capitalism must be forced to find solutions to crisis out of its own resources. It is equally politically damaging for socialists to argue that nothing positive can be done until the revolution, as it is to fall into the Keynesian trap of claiming that the interests of capital and labour can both be served through demand-stimulus policies. There is then a necessary contradiction for socialist politics outside of an actual revolutionary situation, as there needs to be a credible immediate response to crisis. If socialists cannot suggest positive measures in the present, dangerous reactionary arguments will fill the void.

The radical left certainly must be able to seize the opportunity of a crisis to pose a revolutionary alternative. Yet, in order to do so, the left must be able to propose immediate pro-labour measures, as well as pointing beyond the logic of capitalism. Measures which might restore profitability but hurt employment and the standard of living must be opposed as counter-productive. Socialists should certainly avoid those types of Keynesian policy which simply seek to encourage capital investment for its own purposes, and which allow capital to retain institutional power.

The left must argue aggressively for the socialisation of production, infrastructure and finance, as well as defending the full funding of social institutions, like education and welfare. Reflationary policies have their place in this, as part of government intervention to promote the social good. Being trapped into justifying economic policy on the basis of its appeal to capital must be avoided. Instead, pro-labour policies should be defended as protecting the population from the worst of capitalist crisis, as well as pointing beyond capitalism, to a different model for the organisation of all of society.

Dominic Alexander

Dominic Alexander is a member of Counterfire, for which he is the book review editor. He is a longstanding activist in north London. He is a historian whose work includes the book Saints and Animals in the Middle Ages (2008), a social history of medieval wonder tales, and articles on London’s first revolutionary, William Longbeard, and the revolt of 1196, in Viator 48:3 (2017), and Science and Society 84:3 (July 2020). He is also the author of the Counterfire books, The Limits of Keynesianism (2018) and Trotsky in the Bronze Age (2020).