The Law of Accumulation and the Falling Rate of Profit

Under capitalism, all business people try to acquire more surplus value in order to increase their profit. Surplus value is, by definition, derived from labor. Thus we might ex­pect capitalists to seek out labor-intensive production methods in order to maximize their profits. In fact, however, they continually strive to substitute capital for labor. The incentive to do so is spelled out by Marx in Capital: Like every other increase in the productiveness of labour, machinery is to cheapen commodities, and, by shortening the portion of the working day, in which the labourer works for himself, to lengthen the other portion that he gives, without equivalent, to the capitalist. In short, it is a means for producing surplus value (Cap­ital, I, p. 405).

The individual capitalist can profitably substitute capital for labor because it takes time to adjust to new methods of production. The first capitalist to in­troduce labor-saving machinery will therefore be able to produce at lower costs than his or her rivals and yet sell at a price determined in the market by the prevalence of less mechanized firms.
However, what is true for the individual is not true for all. If every capitalist introduces more machinery, the organic composition of capital is increased; surplus value falls, and so does the average rate of profit. Hence the collective effect of each capitalist's drive to accumulate more capital and more profit tends to drive down the average rate of profit.

Another reason why the rate of profit may fall over time is that workers may push for higher wage rates. If realized, this prospect will drive up production costs, while prices will still be determined by "socially necessary labor." Ricardo also recognized this prospect, but he felt that such a development would be checked by the Malthusian population trap. But Marx was no Malthusian. Instead, he maintained that population is culturally and socially determined. Therefore, higher wages will not necessarily be forced down again by rapid population growth.

The Law of Increasing Concentration and the Centralization of Industry

The drive for profit described above eventually and inevitably leads to a greater substitution of capital for labor and transforms small-scale industry into large-scale enterprises with a more marked division of labor and far greater capacity for output. This increase in production and productive capac­ity, Marx felt, would lead to general overproduction, thus driving prices down to the point where only the most efficient producers would survive. The less efficient firms would be driven out of business by the above circumstances, their assets being gobbled up by the survivors. Consequently, industry would become more and more centralized, and economic power would be increas­ingly concentrated in the hands of a few.

The Law of a Growing Industrial Reserve Army

The dynamic change that accompanies technological innovation and capital-labor substitution has a drastic effect on the working class—unemployment. In the passage below, note how Marx turns the division of labor that Smith hailed as an economic blessing into a curse:

The self-expansion of capital by means of machinery is directly proportional to the number of workers whose means of livelihood have been destroyed by this machin­ery. The whole system of capitalist production is based upon the fact that the worker sells his labour power as a commodity. Thanks to the division of labour, this labour power becomes specialised, is reduced to skill in handling a particular tool. As soon as the handling of this tool becomes the work of a machine, the use-value and the exchange-value of the worker's labour power disappear. The worker becomes unsalable, like paper money which is no longer legal tender. That portion of the working class which machinery has thus rendered superfluous... either goes to the wall in the unequal struggle of the old handicraft and manufacturing industry against machine industry, or else floods all the more easily accessible branches of industry, swamps the labor market, and sinks the price of labour-power below its value (Cap­ital, I, p. 470).

This displacement of workers by machines creates a "growing industrial army of unemployed," one of the inherent contradictions Marx saw within capitalism. As the foregoing discussion illustrates, this unemployment is of two types: (1) technological unemployment (caused by the substitution of ma­chinery for labor) and (2) cyclical unemployment (caused by overproduction, which in turn is caused by increasing concentration and centralization).

The Law of Increasing Misery of the Proletariat

As the industrial reserve army grows, so does the misery of the proletariat. In addition, capitalists gen­erally seek to offset a falling rate of profit by lowering wages, imposing longer workdays, introducing child and female labor, and so forth. All this contrib­utes to the absolute misery of the working class.

The first effect of widespread use of machinery is to bring women and chil­dren into the labor force, for slight muscular strength can be amplified by the use of machines. Instead of selling only his own labor power, therefore, the worker is forced to sell that of his wife and children. In Marx's words, the worker "becomes a slave trader." Such exposure to the rigors of factory life leads to high child mortality rates and to moral degradation among women and children, and Marx sought to confirm these facts by citations from public-health reports in Britain.

As the most powerful means for shortening the working time required to produce a commodity, the machine also becomes the most powerful means for prolonging the workday, so that the capitalist can appropriate more surplus value. Moreover, specialized and costly machinery left idle even for short pe­riods is expensive to capitalists, so they strive to minimize the length of idle machine time. According to Marx, the result is longer workdays, less leisure time, and more misery for the laborer. Longer workdays and intensification of work effort sap the strength and longevity of the working class.

From a historical standpoint, this seems the least valid of Marx's argu­ments. In strictly economic terms, Marx's doomsday prophecy has not been fulfilled. Of course it is unclear whether the working class has made great eco­nomic strides because of Marx's influence or despite his prediction of increas­ing misery. At any rate, his formulation of the increasing-misery doctrine does not lend itself readily to empirical testing. Orthodox Marxians have attempted to reconcile actual working conditions with this part of Marx's theory by as­serting that the relative misery of the working class has increased—they point to the dehumanizing effects of today's automated production, increasing alien­ation and polarization of workers, ethnic minorities, and so on.

The Law of Crises and Depressions

In a very modern fashion, Marx linked the explanation of business cycles to investment spending. He noted that cap­italists will invest more at some times than at others. When the army of un­employed grows and wages fall, capitalists will tend to hire more labor and invest less in machinery and equipment. But when wages rise, as we have seen, capitalists will substitute machines for workers, bringing about unem­ployment and depressed wages. This causes periodic crises. Marx's crisis the­ory is part of his intention to demonstrate the increasing-misery doctrine. Thus the mere occurrence of crises was not enough; he also had to show capitalism's susceptibility to crises of increasing severity. He did this by stressing the never-ending drive of the capitalist for accumulation.

In Marx, increasing misery is related to unemployment, which in turn is a consequence of the capitalist's efforts to accumulate capital, as outlined above. This drive to accumulate is, in turn, self-contradictory and is in fact a major cause of economic crises because it leads to the overproduction of cap­ital. To quote Marx:

As soon as capital would have grown to such a proportion compared with the labouring population, that... the increased capital produces no larger, or even smaller, quantities of surplus-value than it did before its increase there would be an overproduction of capital. That is to say, increased capital C + AC would not pro­duce any more profit.. .there would be a strong and sudden fall in the average rate of profit... due to a change in the composition of capital... {Capital, III, pp. 294-295). This falling average rate of profit would signal the impending crisis. Over time, these crises would become more severe; that is, they would affect more people (because of increases in population over time) and last longer. Moreover, ac­cording to Marx, there would be a tendency toward permanent depression be­cause the industrial reserve army gets larger as the crises become more severe. The logical outcome of such a tendency is social revolution. Eventually the proletariat must unite, throw off their chains, and take over the means of pro­duction.