The Strange Capitalist Embrace of Austerity Viewed in Terms of Marx’s Falling Profit-Rate Law

Marx’s ‘law of the tendential fall in the rate of profit’ holds that there is a tendency, during a phase of capitalist accumulation, for the ‘organic composition of capital’ (constant capital c divided by variable capital v) to rise. Other factors remaining equal, this puts downward pressure on the rate of profit r:

where s is surplus value and s/v is the ‘rate of surplus value’. If the organic composition of capital (c/v) rises, then r will fall unless the rate of surplus value (s/v) is increased sufficiently to offset the effect.

It should be noted that for Marx’s profit-rate law logically to hold, his theory of value must be interpreted in a single-system fashion (explained here). It must also be interpreted temporally. An introduction to the temporal single-system interpretation and some key references can be found in earlier posts (here and here). Further discussion of the interpretation and its implications can be found here and here.

Marx argued that a rise in c/v over time, due to accumulation, would eventually cause r to fall to the point that a crisis ensues. The functional role of crises, in Marx’s theory, is to cause a collapse in capital values (to reduce the prices of the elements of c). This causes c/v to shrink and, other factors remaining equal, the rate of profit to rise. This paves the way for a new phase of capitalist accumulation. Crises, rather than being permanent, are considered to be the way in which profitability is restored after a period of profit-rate decline. From this perspective, if the rate of profit fails to revive in the wake of a crisis, it will be because capitalists and capitalist governments resist the necessary collapse in the valuation of constant capital (the required shrinking of c/v).

There are a few points to notice. One is that, below full utilization of capacity, it is possible for v to be increased relative to c via fiscal policy (limiting the impact of accumulation on c/v). But this reaches its limit at full capacity utilization. A second point is that fiscal policy can be used to reduce the prices of elements of c. This happened, for example, in the US after the Second World War when the government essentially gifted capital equipment to the private sector, selling off capacity that had been developed within the public sector during the war. Arguably, a similar process occurred upon the dissolution of the Soviet Union, with capacity developed over decades in the state sector privatized on the cheap. A third point is that government and capitalists can – and do – constantly try to increase the rate of surplus value (s/v) through union bashing, removal of worker protections, austerity and so on.

The same basic idea can be considered in price terms, with the rate of profit:

In this expression, P is total profit (before its division into retained earnings, dividends, interest and rent). In the present context, the profit-rate expression should be interpreted as relating to produced profit, so P can be taken to include unsold inventories. K is the capital stock. The expression can be written:

Here, Y is total income or output, π is the profit share in income and Θ is the output to capital ratio.

For given distribution (a given profit share π), an increase in capital intensity (a reduction in Θ) puts downward pressure on the rate of profit. Points analogous to those observed in terms of value can be discerned when the profit rate is expressed in price terms. Specifically, the tendency of the profit rate to fall can be attenuated by: (i) raising output more than proportionately to the capital stock (increasing Θ) through a more intensive utilization of capacity (full capacity utilization minimizes the impact of accumulation on Θ); (ii) using policy to make capital investment cheaper (limiting K in price terms); (iii) policies to screw workers so as to raise the profit share in income (policies to increase π).

If, over time, accumulation of the capital stock (a rise in K) is not offset by factors (i)-(iii), the rate of profit falls and, in Marx’s view, results in a crisis that involves a collapse in K (in price terms and to some extent in physical terms) and a revival in the rate of profit.

Now, from a Kaleckian or Keynesian perspective, a revival of the rate of profit in itself will not be sufficient to ensure a recovery of private investment and economic activity. For activity to recover, firms also need to believe that the surplus created in production can actually be realized in exchange. From this standpoint, an assurance of profit realization requires ongoing and growing autonomous expenditure. For the global economy as a whole (for which export-led growth is not an option), the required autonomous expenditure will need to come from government if recovery is to be financially sustainable.

Taking the views of Marx, Kalecki and Keynes into account, it may be that revival in the rate of profit is a necessary condition of capitalist recovery, but not sufficient. It seems that recovery of private investment will require the satisfaction of two conditions: both a revival in the rate of profit (Marx) and a sustained growth in autonomous expenditure (Kalecki, Keynes). For the global economy as a whole, currency-issuing governments are the only limitless source of autonomous expenditure.

My own view is that, in principle, government expenditure could be used to drive capitalist activity so long as the rate of profit remained above some minimum level acceptable to capitalists (whatever that minimum level might be). Even so, in accordance with Marx’s profit-rate tendency, profitability will not be maintained above this low bar indefinitely if capitalists (including capitalist governments) resist the collapse in capital values necessary to revive the rate of profit.

None of this needs to be a problem for society or the economy – as opposed to capitalists – provided government continues to drive demand through its autonomous expenditure. But since, in the absence of private investment, this autonomous demand would increasingly be directed toward not-for-profit activity, it would entail a move beyond capitalism toward socialism.

In my opinion, such a transition to socialism would be a good thing. But, clearly, capitalists can be expected to oppose it.

In this sense, Marx’s profit-rate tendency seems to offer an explanation for the capitalists’ counterproductive resort to austerity. Capitalists want to have their cake and eat it too. They want growth, but only growth that profits them (not growth in not-for-profit activity). They want a higher rate of profit, but they do not want to suffer the collapse in capital values that would deliver a higher rate of profit (for instance, they want to bail out banks rather than let them fail). They oppose growth within a low-profit regime because this implies an economy increasingly dominated by not-for-profit activity.

As for the rest of us, we have no actual need of profit. Nor does it motivate our production. After all, we do not share in profit. Profit, being the result of unpaid labor, is actually a disincentive to productive effort for the vast majority, because it is labor performed for the benefit of a small minority and accumulated into a private stock of wealth, instead of being performed for the benefit of the community as a whole and accumulated into a stock of wealth to be owned in common.


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