Saturday, June 30, 2012

master servicers incentives and the Geanakoplos solution

 "Most anything a master servicer does to rework a loan will create big winners but also some big losers among the security holders to whom the servicer holds equal duties... By allowing foreclosures to proceed without much intervention, they avoid potentially huge lawsuits by injured security holders

On top of the legal risks, reworking loans can be costly for master servicers. They need to document what new monthly payment a homeowner can afford and assess fluctuating property values to determine whether foreclosing would yield more or less than reworking. It’s costly just to track down the distressed homeowners, who are understandably inclined to ignore calls from master servicers that they sense may be all too eager to foreclose."

To solve this problem

                   move the reworking function from the paralyzed master servicers
         and transfers it to community-based, government-appointed trustees.
       These trustees would be given no information about which securities
      are derived from which mortgages, or how those securities would be
         affected by the reworking and foreclosure decisions they make.
Instead of worrying about which securities might be harmed, the blind trustees would consider, loan by loan, whether a reworking would bring in more money than a foreclosure... The trustees would be hired from the ranks of community bankers, and thus have the expertise the judiciary lacks...
Our plan does not require that the loans be reassembled from the securities in which they are now divided, nor does it require the buying up of any loans or securities. It does require the transfer of the servicers’ duty to rework loans to government trustees. It requires that restrictions in some servicing contracts, like those on how many loans can be reworked in each pool, be eliminated when the duty to rework is transferred to the trustees... Once the trustees have examined the loans — leaving some unchanged, reworking others and recommending foreclosure on the rest — they would pass those decisions to the government clearing house for transmittal back to the appropriate servicers... "

sethi nails it

"I don't see how it would help resolve the fight over claims that is crippling our recovery. Higher inflation can certainly reduce the real value of outstanding debt in an accounting sense, but this doesn't mean that distressed borrowers will be able to meet their obligations at the originally contracted terms. In order for them to do so, it is necessary that their nominal income rises, not just nominal income in the aggregate. And monetary policy via asset purchases would seem to put money disproportionately in the pockets of existing asset holders, who are more likely to be creditors than debtors. Put differently, while the Fed has the capacity to raise nominal income, it does not have much control over the manner in which this increment is distributed across the population. And the distribution matters.Similar issues arise with inflation. Inflation is just the growth rate of an index number, a weighted average of prices for a broad range of goods and services. The Fed can certainly raise the growth rate of this average, but has virtually no control over its individual components. That is, it cannot increase the inflation rate without simultaneously affecting relative prices. For instance, purchases of assets that drive down long term interest rates will lead to portfolio shifts and an increase in the price of commodities, which are now an actively traded asset class. This in turn will raise input costs for some firms more than others, and these cost increases will affect wages and prices to varying degrees depending on competitive conditions. "

Friday, June 29, 2012

great contraction north hemi job loss


we're number one at 17.6%..... dutch silver at 12%

Source: Organization for Economic Cooperation and Development.

in related numbers

euro commission bank union plan

four pillars:

"a single deposit protection scheme covering all EU (or eurozone) banks;

 a common resolution authority and common resolution fund, at least for systemically important and cross-border banks;

 a single European supervisor for the same banks;

 a uniform rule book for prudential supervision of all banks in Europe "

value added warrants part 19: the VA warrant system subsidizes price cuts in an optimally inflation product price system

if you have to buy warrants to cover the value added stream of the firm
despite the Q P
you might push a lower markup over input values

credit ration scrooge award goes to SBA !

" Small Business Administration loan requests and applications for loans/lines of credit from large national banks tended to be the least successful, whereas applications for vendor trade credit and commercial loans/line-of-credit from community banks had the highest average success rating"

SBA oughta be handing out loans these days like napkins at a  barbecue


Thursday, June 28, 2012

falling rate of profit part III

We have seen in the first part of this book that the rate of profit expresses the rate of surplus-value always lower than it actually is. We have just seen that even a rising rate of surplus-value has a tendency to express itself in a falling rate of profit. The rate of profit would equal the rate of surplus-value only if c = 0, i.e. , if the total capital were paid out in wages. A falling rate of profit does not express a falling rate of surplus-value, unless the proportion of the value of the constant capital to the quantity of labour-power which sets it in motion remains unchanged or the amount of labour-power increases in relation to the value of the constant capital.

On the plea of analysing the rate of profit, Ricardo actually analyses the rate of surplus-value alone, and this only on the assumption that the working-day is intensively and extensively a constant magnitude.

A fall in the rate of profit and accelerated accumulation are different expressions of the same process only in so far as both reflect the development of productiveness. Accumulation, in turn, hastens the fall of the rate of profit, inasmuch as it implies concentration of labour on a large scale, and thus a higher composition of capital. On the other hand, a fall in the rate of profit again hastens the concentration of capital and its centralisation through expropriation of minor capitalists, the few direct producers who still have anything left to be expropriated. This accelerates accumulation with regard to mass, although the rate of accumulation falls with the rate of profit.

On the other hand, the rate of self-expansion of the total capital, or the rate of profit, being the goad of capitalist production (just as self-expansion of capital is its only purpose), its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population. Those economists, therefore, who, like Ricardo, regard the capitalist mode of production as absolute, feel at this point that it creates a barrier itself, and for this reason attribute the barrier to Nature (in the theory of rent), not to production. But the main thing about their horror of the falling rate of profit is the feeling that capitalist production meets in the development of its productive forces a barrier which has nothing to do with the production of wealth as such; and this peculiar barrier testifies to the limitations and to the merely historical, transitory character of the capitalist mode of production; testifies that for the production of wealth, it is not an absolute mode, moreover, that at a certain stage it rather conflicts with its further development.

True, Ricardo and his school considered only industrial profit, which includes interest. But the rate of ground-rent likewise has a tendency to fall, although its absolute mass increases, and may also increase proportionately more than industrial profit. (E. West, [Essay on the Application of Capital to Land, London, 1815. — Ed] who developed the law of ground-rent before Ricardo.) If we consider the total social capital C, and use p1 for the industrial profit that remains after deducting interest and ground-rent, i for interest, and r for ground-rent, then s/C = p/C = p1 + i + r/C = p1/C + i/C + r/C. We have seen that while s, the total amount of surplus-value, is continually increasing in the course of capitalist development, s/C is just as steadily declining, because C grows still more rapidly than s. Therefore it is by no means a contradiction for p1, i, and r to be steadily increasing, each individually, while s/C = p/C, as well as p1/C, i/C, and r/C, should each by itself be steadily shrinking, or that p1 should increase in relation to i, or r in relation to p1 or to p1 and i. With a rising total surplus-value or profit s = p, and a simultaneously falling rate of profit s/C = p/C, the proportions of the parts p1, i, and r, which make up s = p, may change at will within the limits set by the total amount of s without thereby affecting the magnitude of s or s/C.

The mutual variation of p1, i, and r is merely a varying distribution of s among different classes. Consequently, p1/C, i/C, or r/C, the rate of individual industrial profit, the rate of interest, and the ratio of ground-rent to the total capital, may rise in relation to one another, while s/C, the general rate of profit, falls. The only condition is that the sum of all three = s/C. If the rate of profit falls from 50% to 25%, because the composition of a certain capital with, say, a rate of surplus-value = 100% has changed from 50c + 50v to 75c + 25v, then a capital of 1,000 will yield a profit of 500 in the first case, and in the second a Capital of 4,000 will yield a profit of 1,000. We see that s or p have doubled, while p' has fallen by one-half. And if that 50% was formerly divided into 20 profit, 10 interest, and 20 rent, then p1/C = 20%, i/C = 10%, and r/C = 20%. If the proportions had remained the same after the change from 50% to 25%, then p1/C = 10%, i/C = 5%, and r/C = 10%. If, however, p1/C should fall to 8% and i/C to 4%, then r/C would rise to 13%. The relative magnitude of r would have risen as against p1 and i, while p would have remained the same. Under both assumptions, the sum of p1, i, and r would have increased, because produced by a capital four times as large. Furthermore, Ricardo's assumption that originally industrial profit (plus interest) contains the entire surplus-value is historically and logically false. It is rather the progress of capitalist production which 1) gives the whole profit directly to the industrial and commercial capitalists for further distribution, and 2) reduces rent to the excess over the profit. On this capitalist basis, again, the rent grows, being a portion of profit (i.e. , of the surplus-value viewed as the product of the total capital), but not that specific portion of the product, which the capitalist pockets.

Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given. And the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour. It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.

The creation of this surplus-value makes up the direct process of production, which, as we have said, has no other limits but those mentioned above. As soon as all the surplus-labour it was possible to squeeze out has been embodied in commodities, surplus-value has been produced. But this production of surplus-value completes but the first act of the capitalist process of production — the direct production process. Capital has absorbed so and so much unpaid labour. With the development of the process, which expresses itself in a drop in the rate of profit, the mass of surplus-value thus produced swells to immense dimensions. Now comes the second act of the process. The entire mass of commodities, i.e. , the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value, must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited, but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital. The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute consumer power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus-value on an extended scale. This is law for capitalist production, imposed by incessant revolutions in the methods of production themselves, by the depreciation of existing capital always bound up with them, by the general competitive struggle and the need to improve production and expand its scale merely as a means of self-preservation and under penalty of ruin. The market must, therefore, be continually extended, so that its interrelations and the conditions regulating them assume more and more the form of a natural law working independently of the producer, and become ever more uncontrollable. This internal contradiction seeks to resolve itself through expansion of the outlying field of production. But the more productiveness develops, the more it finds itself at variance with the narrow basis on which the conditions of consumption rest. It is no contradiction at all on this self-contradictory basis that there should be an excess of capital simultaneously with a growing surplus of population. For while a combination of these two would, indeed, increase the mass of produced surplus-value, it would at the same time intensify the contradiction between the conditions under which this surplus-value is produced and those under which it is realised.

If a certain rate of profit is given, the mass of profit will always depend on the magnitude of the advanced capital. The accumulation, however, is then determined by that portion of this mass which is reconverted into capital. As for this portion, being equal to the profit minus the revenue consumed by the capitalists, it will depend not merely on the value of this mass, but also on the cheapness of the commodities which the capitalist can buy with it, commodities which pass partly into his consumption, his revenue, and partly into his constant capital. (Wages are here assumed to be given.)

The mass of capital set in motion by the labourer, whose value he preserves by his labour and reproduces in his product, is quite different from the value which he adds to it. If the mass of the capital = 1,000 and the added labour = 100, the reproduced capital = 1,100. If the mass = 100 and the added labour = 20, the reproduced capital = 120. In the first case the rate of profit = 10%, in the second = 20%. And yet more can be accumulated out of 100 than out of 20. And thus the river of capital rolls on (aside from its depreciation through increase of the productiveness), or its accumulation does, not in proportion to the rate of profit, but in proportion to the impetus it already possesses. So far as it is based on a high rate of surplus-value, a high rate of profit is possible when the working-day is very long, although labour is not highly productive. It is possible, because the wants of the labourers are very small, hence average wages very low, although the labour itself is unproductive. The low wages will correspond to the labourers' lack of energy. Capital then accumulates slowly, in spite of the high rate of profit. Population is stagnant and the working-time which the product costs, is great, while the wages paid to the labourer etare small.

The rate of profit does not sink because the labourer is exploited any less, but because generally less labour is employed in proportion to the employed capital.

If, as shown, a falling rate of profit is bound up with an increase in the mass of profit, a larger portion of the annual product of labour is appropriated by the capitalist under the category of capital (as a replacement for consumed capital) and a relatively smaller portion under the category of profit. Hence the fantastic idea of priest Chalmers, [Th. Chalmers, On Political Economy in Connexion with the Moral State and Moral Prospects of Society, Second edition, Glasgow, 1832, p. 88. — Ed] that the less of the annual product is expended by capitalists as capital, the greater the profits they pocket. In which case the state church comes to their assistance, to care for the consumption of the greater part of the surplus-product, rather than having it used as capital. The preacher confounds cause with effect. Furthermore, the mass of profit increases in spite of its slower rate with the growth of the invested capital. However, this requires a simultaneous concentration of capital, since the conditions of production then demand employment of capital on a larger scale. It also requires its centralisation, i.e. , the swallowing up of the small capitalists by the big and their deprivation of capital. It is again but an instance of separating — raised to the second power — the conditions of production from the producers to whose number these small capitalists still belong, since their own labour continues to play a role in their case. The labour of a capitalist stands altogether in inverse proportion to the size of his capital, i.e. , to the degree in which he is a capitalist. It is this same severance of the conditions of production, on the one hand, from the producers, on the other, that forms the conception of capital. It begins with primitive accumulation (Buch I, Kap. XXIV [English edition: Part VIII. — Ed.]), appears as a permanent process in the accumulation and concentration of capital, and expresses itself finally as centralisation of existing capitals in a few hands and a deprivation of many of their capital (to which expropriation is now changed). This process would soon bring about the collapse of capitalist production if it were not for counteracting tendencies, which have a continuous decentralising effect alongside the centripetal one.

II. Conflict Between Expansion Of Production And Production Of Surplus-Value

The development of the social productiveness of labour is manifested in two ways: first, in the magnitude of the already produced productive forces, the value and mass of the conditions of production under which new production is carried on, and in the absolute magnitude of the already accumulated productive capital; secondly, in the relative smallness of the portion of total capital laid out in wages, i.e. , in the relatively small quantity of living labour required for the reproduction and self-expansion of a given capital, for mass production. This also implies concentration of capital.

In relation to employed labour-power the development of the productivity again reveals itself in two ways: First, in the increase of surplus-labour, i.e. , the reduction of the necessary labour-time required for the reproduction of labour-power. Secondly, in the decrease of the quantity of labour-power (the number of labourers) generally employed to set in motion a given capital.

The two movements not only go hand in hand, but mutually influence one another and are phenomena in which the same law expresses itself. Yet they affect the rate of profit in opposite ways. The total mass of profit is equal to the total mass of surplus-value, the rate of profit = s/C = surplus-value/advanced total capital. The surplus-value, however, as a total, is determined first by its rate, and second by the mass of labour simultaneously employed at this rate, or, what amounts to the same, by the magnitude of the variable capital. One of these factors, the rate of surplus-value, rises, and the other, the number of labourers, falls (relatively or absolutely). Inasmuch as the development of the productive forces reduces the paid portion of employed labour, it raises the surplus-value, because it raises its rate; but inasmuch as it reduces the total mass of labour employed by a given capital, it reduces the factor of the number by which the rate of surplus-value is multiplied to obtain its mass. Two labourers, each working 12 hours daily, cannot produce the same mass of surplus-value as 24 who work only 2 hours, even if they could live on air and hence did not have to work for themselves at all. In this respect, then, the compensation of the reduced number of labourers by intensifying the degree of exploitation has certain insurmountable limits. It may, for this reason, well check the fall in the rate of profit, but cannot prevent it altogether.

With the development of the capitalist mode of production, therefore, the rate of profit falls, while its mass increases with the growing mass of the capital employed. Given the rate, the absolute increase in the mass of capital depends on its existing magnitude. But, on the other hand, if this magnitude is given, the proportion of its growth, i.e. , the rate of its increment, depends on the rate of profit. The increase in the productiveness (which, moreover, we repeat, always goes hand in hand with a depreciation of the available capital) can directly only increase the value of the existing capital if by raising the rate of profit it increases that portion of the value of the annual product which is reconverted into capital. As concerns the productivity of labour, this can only occur (since this productivity has nothing direct to do with the value of the existing capital) by raising the relative surplus-value, or reducing the value of the constant capital, so that the commodities which enter either the reproduction of labour-power, or the elements of constant capital, are cheapened. Both imply a depreciation of the existing capital, and both go hand in hand with a reduction of the variable capital in relation to the constant. Both cause a fall in the rate of profit, and both slow it down. Furthermore, inasmuch as an increased rate of profit causes a greater demand for labour, it tends to increase the working population and thus the material, whose exploitation makes real capital out of capital.

Indirectly, however, the development of the productivity of labour contributes to the increase of the value of the existing capital by increasing the mass and variety of use-values in which the same exchange-value is represented and which form the material substance, i.e. , the material elements of capital, the material objects making up the constant capital directly, and the variable capital at least indirectly. More products which may be converted into capital, whatever their exchange-value, are created with the same capital and the same labour. These products may serve to absorb additional labour, hence also additional surplus-labour, and therefore create additional capital. The amount of labour which a capital can command does not depend on its value, but on the mass of raw and auxiliary materials, machinery and elements of fixed capital and necessities of life, all of which it comprises, whatever their value may be. As the mass of the labour employed, and thus of surplus-labour increases, there is also a growth in the value of the reproduced capital and in the surplus-value newly added to it.

These two elements embraced by the process of accumulation, however, are not to be regarded merely as existing side by side in repose, as Ricardo does. They contain a contradiction which manifests itself in contradictory tendencies and phenomena. These antagonistic agencies counteract each other simultaneously.

Alongside the stimulants of an actual increase of the labouring population, which spring from the increase of the portion of the total social product serving as capital, there are agencies which create a merely relative over-population.

Alongside the fall in the rate of profit mass of capitals grows, and hand in hand with this there occurs a depreciation of existing capitals which checks the fall and gives an accelerating motion to the accumulation of capital-values.

Alongside the development of productivity there develops a higher composition of capital, i.e., the relative decrease of the ratio of variable to constant capital.

These different influences may at one time operate predominantly side by side in space, and at another succeed each other in time. From time to time the conflict of antagonistic agencies finds vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium.

The contradiction, to put it in a very general way, consists in that the capitalist mode of production involves a tendency towards absolute development of the productive forces, regardless of the value and surplus-value it contains, and regardless of the social conditions under which capitalist production takes place; while, on the other hand, its aim is to preserve the value of the existing capital and promote its self-expansion to the highest limit (i.e., to promote an ever more rapid growth of this value). The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.

The periodical depreciation of existing capital — one of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital-value through formation of new capital — disturbs the given conditions, within which the process of circulation and reproduction of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process.

The decrease of variable in relation to constant capital, which goes hand in hand with the development of the productive forces, stimulates the growth of the labouring population, while continually creating an artificial over-population. The accumulation of capital in terms of value is slowed down by the falling rate of profit, to hasten still more the accumulation of use-values, while this, in its turn, adds new momentum to accumulation in terms of value.

Capitalist production seeks continually to overcome these immanent barriers, but overcomes them only by means which again place these barriers in its way and on a more formidable scale.

The real barrier of capitalist production is capital itself. It is that capital and its self-expansion appear as the starting and the closing point, the motive and the purpose of production; that production is only production for capital and not vice versa, the means of production are not mere means for a constant expansion of the living process of the society of producers. The limits within which the preservation and self-expansion of the value of capital resting on the expropriation and pauperisation of the great mass of producers can alone move — these limits come continually into conflict with the methods of production employed by capital for its purposes, which drive towards unlimited extension of production, towards production as an end in itself, towards unconditional development of the social productivity of labour. The means — unconditional development of the productive forces of society — comes continually into conflict with the limited purpose, the self-expansion of the existing capital. The capitalist mode of production is, for this reason, a historical means of developing the material forces of production and creating an appropriate world-market and is, at the same time, a continual conflict between this its historical task and its own corresponding relations of social production.

III. Excess Capital And Excess Population

A drop in the rate of profit is attended by a rise in the minimum capital required by an individual capitalist for the productive employment of labour; required both for its exploitation generally, and for making the consumed labour-time suffice as the labour-time necessary for the production of the commodities, so that it does not exceed the average social labour-time required for the production of the commodities. Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises. The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.

Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital. To appreciate what this over-accumulation is (its closer analysis follows later), one need only assume it to be absolute. When would over-production of capital be absolute? Overproduction which would affect not just one or another, or a few important spheres of production, but would be absolute in its full scope, hence would extend to all fields of production?

There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.

In reality, it would appear that a portion of the capital would lie completely or partially idle (because it would have to crowd out some of the active capital before it could expand its own value), and the other portion would produce values at a lower rate of profit, owing to the pressure of unemployed or but partly employed capital. It would be immaterial in this respect if a part of the additional capital were to take the place of the old capital, and the latter were to take its position in the additional capital. We should still always have the old sum of capital on one side, and the sum of additional capital on the other. The fall in the rate of profit would then be accompanied by an absolute decrease in the mass of profit, since the mass of employed labour-power could not be increased and the rate of surplus-value raised under the conditions we had assumed, so that the mass of surplus-value could not be increased either. And the reduced mass of profit would have to be calculated on an increased total capital. But even if it is assumed that the employed capital continues to self-expand at the old rate of profit, and the mass of profit hence remains the same, this mass would still he calculated on an increased total capital, this likewise implying a fall in the rate of profit. If a total capital of 1,000 yielded a profit of 100, and after being increased to 1,500 still yielded 100, then, in the second case, 1,000 would yield only 66⅔. Self-expansion of the old capital, in the absolute sense, would have been reduced. The capital = 1,000 would yield no more under the new circumstances than formerly a capital = 666⅔.

It is evident, however, that this actual depreciation of the old capital could not occur without a struggle, and that the additional capital ΔC could not assume the functions of capital without a struggle. The rate of profit would not fall under the effect of competition due to over-production of capital. It would rather be the reverse; it would be the competitive struggle which would begin because the fallen rate of profit and over-production of capital originate from the same conditions. The part of ΔC in the hands of old functioning capitalists would be allowed to remain more or less idle to prevent a depreciation of their own original capital and not to narrow its place in the field of production. Or they would employ it, even at a momentary loss, to shift the need of keeping additional capital idle on newcomers and on their competitors in general.

That portion of ΔC which is in new hands would seek to assume a place for itself at the expense of the old capital, and would accomplish this in part by forcing a portion of the old capital to lie idle. It would compel the old capital to give up its old place and withdraw to join completely or partially unemployed additional capital.

A portion of the old capital has to lie unused under all circumstances; it has to give up its characteristic quality as capital, so far as acting as such and producing value is concerned. The competitive struggle would decide what part of it would be particularly affected. So long as things go well, competition effects an operating fraternity of the capitalist class, as we have seen in the case of the equalisation of the general rate of profit, so that each shares in the common loot in proportion to the size of his respective investment. But as soon as it no longer is a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another. The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist's interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.

How is this conflict settled and the conditions restored which correspond to the "sound" operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.

But the equilibrium would be restored under all circumstances through the withdrawal or even the destruction of more or less capital. This would extend partly to the material substance of capital, i.e., a part of the means of production, of fixed and circulating capital, would not operate, not act as capital; some of the operating establishments would then be brought to a standstill. Although, in this respect, time attacks and worsens all means of production (except land), the stoppage would in reality cause far greater damage to the means of production. However, the main effect in this case would be that these means of production would cease to function as such, that their function as means of production would be disturbed for a shorter or longer period.

The main damage, and that of the most acute nature, would occur in respect to capital, and in so far as the latter possesses the characteristic of value it would occur in respect to the values of capitals. That portion of the value of a capital which exists only in the form of claims on prospective shares of surplus-value, i.e., profit, in fact in the form of promissory notes on production in various forms, is immediately depreciated by the reduction of the receipts on which it is calculated. A part of the gold and silver lies unused, i.e., does not function as capital. Part of the commodities on the market can complete their process of circulation and reproduction only through an immense contraction of their prices, hence through a depreciation of the capital which they represent. The elements of fixed capital are depreciated to a greater or lesser degree in just the same way. It must be added that definite, presupposed, price relations govern the process of reproduction, so that the latter is halted and thrown into confusion by a general drop in prices. This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction.

But there would have been still other agencies at work at the same time. The stagnation of production would have laid off a part of the working-class and would thereby have placed the employed part in a situation, where it would have to submit to a reduction of wages even below the average. This has the very same effect on capital as an increase of the relative or absolute surplus-value at average wages would have had. Prosperity would have led to more marriages among labourers and reduced the decimation of offspring. While implying a real increase in population, this does not signify an increase in the actual working population. But it affects the relations of the labourer to capital in the same way as an increase of the number of actually working labourers would have affected them. On the other hand, the fall in prices and the competitive struggle would have driven every capitalist to lower the individual value of his total product below its general value by means of new machines, new and improved working methods, new combinations, i.e., to increase the productivity of a given quantity of labour, to lower the proportion of variable to constant capital, and thereby to release some labourers; in short, to create an artificial over-population. Ultimately, the depreciation of the elements of constant capital would itself tend to raise the rate of profit. The mass of employed constant capital would have increased in relation to variable, but its value could have fallen. The ensuing stagnation of production would have prepared — within capitalistic limits — a subsequent expansion of production.

And thus the cycle would run its course anew. Part of the capital, depreciated by its functional stagnation, would recover its old value. For the rest, the same vicious circle would be described once more under expanded conditions of production, with an expanded market and increased productive forces.

However, even under the extreme conditions assumed by us this absolute over-production of capital is not absolute over-production, not absolute over-production of means of production. It is over-production of means of production only in so far as the latter serve as capital, and consequently include a self-expansion of value, must produce an additional value in proportion to the increased mass.

Yet it would still be over-production, because capital would be unable to exploit labour to the degree required by a "sound", "normal" development of the process of capitalist production, to a degree which would at least increase the mass of profit along with the growing mass of the employed capital; to a degree which would, therefore, prevent the rate of profit from falling as much as the capital grows, or even more rapidly.

Over-production of capital is never anything more than over-production of means of production — of means of labour and necessities of life — which may serve as capital, i.e., may serve to exploit labour at a given degree of exploitation; a fall in the intensity of exploitation below a certain point, however, calls forth disturbances, and stoppages in the capitalist production process, crises, and destruction of capital. It is no contradiction that this over-production of capital is accompanied by more or less considerable relative over-population. The circumstances which increased the productiveness of labour, augmented the mass of produced commodities, expanded markets, accelerated accumulation of capital both in terms of its mass and its value, and lowered the rate of profit — these same circumstances have also created, and continuously create, a relative overpopulation, an over-population of labourers not employed by the surplus-capital owing to the low degree of exploitation at which alone they could be employed, or at least owing to the low rate of profit which they would yield at the given degree of exploitation.

If capital is sent abroad, this is not done because it absolutely could not be applied at home, but because it can be employed at a higher rate of profit in a foreign country. But such capital is absolute excess capital for the employed labouring population and for the home country in general. It exists as such alongside the relative over-population, and this is an illustration of how both of them exist side by side, and mutually influence one another.

On the other hand, a fall in the rate of profit connected with accumulation necessarily calls forth a competitive struggle. Compensation of a fall in the rate of profit by a rise in the mass of profit applies only to the total social capital and to the big, firmly placed capitalists. The new additional capital operating independently does not enjoy any such compensating conditions. It must still win them, and so it is that a fall in the rate of profit calls forth a competitive struggle among capitalists, not vice versa. To be sure, the competitive struggle is accompanied by a temporary rise in wages and a resultant further temporary fall of the rate of profit. The same occurs when there is an over-production of commodities, when markets are overstocked. Since the aim of capital is not to minister to certain wants, but to produce profit, and since it accomplishes this purpose by methods which adapt the mass of production to the scale of production, not vice versa, a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier. Furthermore, capital consists of commodities, and therefore over-production of capital implies over-production of commodities. Hence the peculiar phenomenon of economists who deny over-production of commodities, admitting over-production of capital. To say that there is no general over-production, but rather a disproportion within the various branches of production, is no more than to say that under capitalist production the proportionality of the individual branches of production springs as a continual process from disproportionality, because the cohesion of the aggregate production imposes itself as a blind law upon the agents of production, and not as a law which, being understood and hence controlled by their common mind, brings the productive process under their joint control. It amounts furthermore to demanding that countries in which capitalist production is not developed, should consume and produce at a rate which suits the countries with capitalist production. If it is said that over-production is only relative, this is quite correct; but the entire capitalist mode of production is only a relative one, whose barriers are not absolute. They are absolute only for this mode, i.e., on its basis. How could there otherwise be a shortage of demand for the very commodities which the mass of the people lack, and how would it be possible for this demand to be sought abroad, in foreign markets, to pay the labourers at home the average amount of necessities of life? This is possible only because in this specific capitalist interrelation the surplus-product assumes a form in which its owner cannot offer it for consumption, unless it first reconverts itself into capital for him. If it is finally said that the capitalists have only to exchange and consume their commodities among themselves, then the entire nature of the capitalist mode of production is lost sight of; and also forgotten is the fact that it is a matter of expanding the value of the capital, not consuming it. In short, all these objections to the obvious phenomena of over-production (phenomena which pay no heed to these objections) amount to the contention that the barriers of capitalist production are not barriers of production generally, and therefore not barriers of this specific, capitalist mode of production. The contradiction of the capitalist mode of production, however, lies precisely in its tendency towards an absolute development of the productive forces, which continually come into conflict with the specific conditions of production in which capital moves, and alone can move.

There are not too many necessities of life produced, in proportion to the existing population. Quite the reverse. Too little is produced to decently and humanely satisfy the wants of the great mass.

There are not too many means of production produced to employ the able-bodied portion of the population. Quite the reverse. In the first place, too large a portion of the produced population is not really capable of working, and is through force of circumstances made dependent on exploiting the labour of others, or on labour which can pass under this name only under a miserable mode of production. In the second place, not enough means of production are produced to permit the employment of the entire able-bodied population under the most productive conditions, so that their absolute working period could be shortened by the mass and effectiveness of the constant capital employed during working-hours.

On the other hand, too many means of labour and necessities of life are produced at times to permit of their serving as means for the exploitation of labourers at a certain rate of profit. Too many commodities are produced to permit of a realisation and conversion into new capital of the value and surplus-value contained in them under the conditions of distribution and consumption peculiar to capitalist production, i.e., too many to permit of the consummation of this process without constantly recurring explosions.

Not too much wealth is produced. But at times too much wealth is produced in its capitalistic, self-contradictory forms.

The limitations of the capitalist mode of production come to the surface:

1) In that the development of the productivity of labour creates out of the falling rate of profit a law which at a certain point comes into antagonistic conflict with this development and must be overcome constantly through crises.

2) In that the expansion or contraction of production are determined by the appropriation of unpaid labour and the proportion of this unpaid labour to materialised labour in general, or, to speak the language of the capitalists, by profit and the proportion of this profit to the employed capital, thus by a definite rate of profit, rather than the relation of production to social requirements, i.e., to the requirements of' socially developed human beings. It is for this reason that the capitalist mode of production meets with barriers at a certain expanded stage of production which, if viewed from the other premise, would reversely have been altogether inadequate. It comes to a standstill at a point fixed by the production and realisation of profit, and not the satisfaction of requirements.

If the rate of profit falls, there follows, on the one hand, an exertion of capital in order that the individual capitalists, through improved methods, etc., may depress the value of their individual commodity below the social average value and thereby realise an extra profit at the prevailing market-price. On the other hand, there appears swindling and a general promotion of swindling by recourse to frenzied ventures with new methods of production, new investments of capital, new adventures, all for the sake of securing a shred of extra profit which is independent of the general average and rises above it.

The rate of profit, i.e., the relative increment of capital, is above all important to all new offshoots of capital seeking to find an independent place for themselves. And as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out. The rate of profit is the motive power of capitalist production. Things are produced only so long as they can be produced with a profit. Hence the concern of the English economists over the decline of the rate of profit. The fact that the bare possibility of this happening should worry Ricardo, shows his profound understanding of the conditions of capitalist production. It is that which is held against him, it is his unconcern about "human beings," and his having an eye solely for the development of the productive forces, whatever the cost in human beings and capital-values — it is precisely that which is the important thing about him. Development of the productive forces of social labour is the historical task and justification of capital. This is just the way in which it unconsciously creates the material requirements of a higher mode of production. What worries Ricardo is the fact that the rate of profit, the stimulating principle of capitalist production, the fundamental premise and driving force of accumulation, should be endangered by the development of production itself. And here the quantitative proportion means everything. There is, indeed, something deeper behind it, of which he is only vaguely aware. It comes to the surface here in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself — that it has its barrier, that it is relative, that it is not an absolute, but only a historical mode of production corresponding to a definite limited epoch in the development of the material requirements of production.

IV. Supplementary Remarks

Since the development of the productivity of labour proceeds very disproportionately in the various lines of industry, and not only disproportionately in degree but frequently also in opposite directions, it follows that the mass of average profit (= surplus-value) must be substantially below the level one would naturally expect after the development of the productiveness in the most advanced branches of industry. The fact that the development of the productivity in different lines of industry proceeds at substantially different rates and frequently even in opposite directions, is not due merely to the anarchy of competition and the peculiarity of the bourgeois mode of production. Productivity of labour is also bound up with natural conditions, which frequently become less productive as productivity grows — inasmuch as the latter depends on social conditions. Hence the opposite movements in these different spheres — progress here, and retrogression there. Consider the mere influence of the seasons, for instance, on which the bulk of raw materials depends for its mass, the exhaustion of forest lands, coal and iron mines, etc.

While the circulating part of constant capital, such as raw materials, etc., continually increases its mass in proportion to the productivity of labour, this is not the case with fixed capital, such as buildings, machinery, and lighting and heating facilities, etc. Although in absolute terms a machine becomes dearer with the growth of its bodily mass, it becomes relatively cheaper. If five labourers produce ten times as much of a commodity as before, this does not increase the outlay for fixed capital ten-fold; although the value of this part of constant capital increases with the development of the productiveness, it does not by any means increase in the same proportion. We have frequently pointed out the difference in the ratio of constant to variable capital as expressed in the fall of the rate of profit, and the difference in the same ratio as expressed in relation to the individual commodity and its price with the development of the productivity of labour.

[The value of a commodity is determined by the total labour-time of past and living labour incorporated in it. The increase in labour productivity consists precisely in that the share of living labour is reduced while that of past labour is increased, but in such a way that the total quantity of labour incorporated in that commodity declines; in such a way, therefore, that living labour decreases more than past labour increases. The past labour contained in the value of a commodity — the constant part of capital — consists partly of the wear and tear of fixed, partly of circulating, constant capital entirely consumed by that commodity, such as raw and auxiliary materials. The portion of value deriving from raw and auxiliary materials must decrease with the increased productivity of labour, because with regard to these materials the productivity expresses itself precisely by reducing their value. On the other hand, it is most characteristic of rising labour productivity that the fixed part of constant capital is strongly augmented, and with it that portion of its value which is transferred by wear and tear to the commodities. For a new method of production to represent a real increase in productivity, it must transfer a smaller additional portion of the value of fixed capital to each unit of the commodity in wear and tear than the portion of value deducted from it through the saving in living labour; in short, it must reduce the value of the commodity. It must obviously do so even if, as it occurs in some cases, an additional value goes into the value of the commodity for more or dearer raw or auxiliary materials over and above the additional portion for wear and tear of the fixed capital. All additions to the value must be more than offset by the reduction in value resulting from the decrease in living labour.

This reduction of the total quantity of labour going into a commodity seems, accordingly, to be the essential criterion of increased productivity of labour, no matter under what social conditions production is carried on. Productivity of labour, indeed, would always be measured by this standard in a society, in which producers regulate their production according to a preconceived plan, or even under simple commodity-production. But how does the matter stand under capitalist production?

Suppose, a certain line of capitalist industry produces a normal unit of its commodity under the following conditions: The wear and tear of fixed capital amounts to ½ shilling per piece; raw and auxiliary materials go into it to the amount of 17½ shillings per piece; wages, 2 shillings; and surplus-value, 2 shillings at a rate of surplus-value of 100%. Total value = 22 shillings. We assume for the sake of simplicity that the capital in this line of production has the average composition of social capital, so that the price of production of the commodity is identical with its value, and the profit of the capitalist with the created surplus-value. Then the cost-price of the commodity = ½ + 17½ + 2 = 20s., the average rate of profit 2/20 = 10%, and the price of production per piece of the commodity, like its value = 22s.

Suppose a machine is invented which reduces by half the living labour required per piece of the commodity, but trebles that portion of its value accounted for by the wear and tear of the fixed capital. In that case, the calculation is: Wear and tear = 1½ s., raw and auxiliary materials, as before, 17½s., wages, 1s., surplus-value 1s., total 21s. The commodity then falls 1s. in value; the new machine has certainly increased the productivity of labour. But the capitalist sees the matter as follows: his cost-price is now 1½s. for wear, 17½s. for raw and auxiliary materials, 1s. for wages, total 20s., as before. Since the rate of profit is not immediately altered by the new machine, he will receive 10% over his cost-price, that is, 2s. The price of production, then, remains unaltered = 22s., but is 1s. above the value. For a society producing under capitalist conditions the commodity has not cheapened. The new machine is no improvement for it. The capitalist is, therefore, not interested in introducing it. And since its introduction would make his present, not as yet worn-out, machinery simply worthless, would turn it into scrap-iron, hence would cause a positive loss, he takes good care not to commit this, what is for him a utopian, mistake.

The law of increased productivity of labour is not, therefore, absolutely valid for capital. So far as capital is concerned, productiveness does not increase through a saving in living labour in general, but only through a saving in the paid portion of living labour, as compared to labour expended in the past, as we have already indicated in passing in Book I (Kap. XI II, 2, 5. 409/398). [English edition: Ch. XV, 2. — Ed.] Here the capitalist mode of production is beset with another contradiction. Its historical mission is unconstrained development in geometrical progression of the productivity of human labour. It goes back on its mission whenever, as here, it checks the development of productivity. It thus demonstrates again that it is becoming senile and that it is more and more outlived.] [1]

Under competition, the increasing minimum of capital required with the increase in productivity for the successful operation of an independent industrial establishment, assumes the following aspect: As soon as the new, more expensive equipment has become universally established, smaller capitals are henceforth excluded from this industry. Smaller capitals can carry on independently in the various spheres of industry only in the infancy of mechanical inventions. Very large undertakings, such as railways, on the other hand, which have an unusually high proportion of constant capital, do not yield the average rate of profit, but only a portion of it, only an interest. Otherwise the general rate of profit would have fallen still lower. But this offers direct employment to large concentrations of capital in the form of stocks.

Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.

The increase in the absolute number of labourers does not occur in all branches of production, and not uniformly in all, in spite of the relative decrease of variable capital laid out in wages. In agriculture, the decrease of the element of living labour may be absolute.

At any rate, it is but a requirement of the capitalist mode of production that the number of wage-workers should increase absolutely, in spite of its relative decrease. Labour-power becomes redundant for it as soon as it is no longer necessary to employ it for 12 to 15 hours daily. A development of productive forces which would diminish the absolute number of labourers, i.e., enable the entire nation to accomplish its total production in a shorter time span, would cause a revolution, because it would put the bulk of the population out of the running. This is another manifestation of the specific barrier of capitalist production, showing also that capitalist production is by no means an absolute form for the development of the productive forces and for the creation of wealth, but rather that at a certain point it comes into collision with this development. This collision appears partly in periodical crises, which arise from the circumstance that now this and now that portion of the labouring population becomes redundant under its old mode of employment. The limit of capitalist production is the excess time of the labourers. The absolute spare time gained by society does not concern it. The development of productivity concerns it only in so far as it increases the surplus labour-time of the working-class, not because it decreases the labour-time for material production in general. It moves thus in a contradiction.

We have seen that the growing accumulation of capital implies its growing concentration. Thus grows the power of capital, the alienation of the conditions of social production personified in the capitalist from the real producers. Capital comes more and more to the fore as a social power, whose agent is the capitalist. This social power no longer stands in any possible relation to that which the labour of a single individual can create. It becomes an alienated, independent, social power, which stands opposed to society as an object, and as an object that is the capitalist's source of power. The contradiction between the general social power into which capital develops, on the one hand, and the private power of the individual capitalists over these social conditions of production, on the other, becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions. This transformation stems from the development of the productive forces under capitalist production, and from the ways and means by which this development takes place.

No capitalist ever voluntarily introduces a new method of production, no matter how much more productive it may be, and how much it may increase the rate of surplus-value, so long as it reduces the rate of profit. Yet every such new method of production cheapens the commodities. Hence, the capitalist sells them originally above their prices of production, or, perhaps, above their value. He pockets the difference between their costs of production and the market-prices of the same commodities produced at higher costs of production. He can do this, because the average labour-time required socially for the production of these latter commodities is higher than the labour-time required for the new methods of production. His method of production stands above the social average. But competition makes it general and subject to the general law. There follows a fall in the rate of profit — perhaps first in this sphere of production, and eventually it achieves a balance with the rest — which is, therefore, wholly independent of the will of the capitalist.

It is still to be added to this point, that this same law also governs those spheres of production, whose product passes neither directly nor indirectly into the consumption of the labourers, or into the conditions under which their necessities are produced; it applies, therefore, also to those spheres of production, in which there is no cheapening of commodities to increase the relative surplus-value or cheapen labour-power. (At any rate, a cheapening of constant capital in all these lines may increase the rate of profit, with the exploitation of labour remaining the same.) As soon as the new production method begins to spread, and thereby to furnish tangible proof that these commodities can actually be produced more cheaply, the capitalists working with the old methods of production must sell their product below its full price of production, because the value of this commodity has fallen, and because the labour-time required by them to produce it is greater than the social average. In one word — and this appears as an effect of competition — these capitalists must also introduce the new method of production, in which the proportion of variable to constant capital has been reduced.

All the circumstances which lead to the use of machinery cheapening the price of a commodity produced by it, come down in the last analysis to a reduction of the quantity of labour absorbed by a single piece of the commodity; and secondly, to a reduction in the wear-and-tear portion of the machinery, whose value goes into a single piece of the commodity. The less rapid the wear of machinery, the more the commodities over which it is distributed, and the more living labour it replaces before its term of reproduction arrives. In both cases the quantity and value of the fixed constant capital increase in relation to the variable.

"All other things being equal, the power of a nation to save from its profits varies with the rate of profits: is great when they are high, less, when low; but as the rate of profits declines, all other things do not remain equal.... A low rate of profits is ordinarily accompanied by a rapid rate of accumulation, relatively to the numbers of the people, as in England ... a high rate of profit by a slower rate of accumulation, relatively to the numbers of the people. Examples: Poland, Russia, India, etc." (Richard Jones, An Introductory Lecture on Political Economy, London, 1833, p. 50 ff.)

Jones emphasises correctly that in spite of the falling rate of profit the inducements and faculties to accumulate are augmented; first, on account of the growing relative overpopulation; second, because the growing productivity of labour is accompanied by an increase in the mass of use-values represented by the same exchange-value, hence in the material elements of capital; third, because the branches of production become more varied; fourth, due to the development of the credit system, the stock companies, etc., and the resultant case of converting money into capital without becoming an industrial capitalist; fifth, because the wants and the greed for wealth increase; and, sixth, because the mass of investments in fixed capital grows, etc.

Three cardinal facts of capitalist production:

1) Concentration of means of production in few hands, whereby they cease to appear as the property of the immediate labourers and turn into social production capacities. Even if initially they are the private property of capitalists. These are the trustees of bourgeois society, but they pocket all the proceeds of this trusteeship.

2) Organisation of labour itself into social labour: through co-operation, division of labour, and the uniting of labour with the natural sciences.

In these two senses, the capitalist mode of production abolishes private property and private labour, even though in contradictory forms.

3) Creation of the world-market.

The stupendous productivity developing under the capitalist mode of production relative to population, and the increase, if not in the same proportion, of capital-values (not just of their material substance), which grow much more rapidly than the population, contradict the basis, which constantly narrows in relation to the expanding wealth, and for which all this immense productiveness works. They also contradict the conditions under which this swelling capital augments its value. Hence the crises.

falling rate of profit :part II : counteracting tendencies

If we consider the enormous development of the productive forces of social labour in the last 30 years alone as compared with all preceding periods; if we consider, in particular, the enormous mass of fixed capital, aside from the actual machinery, which goes into the process of social production as a whole, then the difficulty which has hitherto troubled the economist, namely to explain the falling rate of profit, gives place to its opposite, namely to explain why this fall is not greater and more rapid. There must be some counteracting influences at work, which cross and annul the effect of the general law, and which give it merely the characteristic of a tendency, for which reason we have referred to the fall of the general rate of profit as a tendency to fall.

The following are the most general counterbalancing forces:


The degree of exploitation of labour, the appropriation of surplus-labour and surplus-value, is raised notably by lengthening the working-day and intensifying labour. These two points have been comprehensively treated in Book I as incidental to the production of absolute and relative surplus-value. There are many ways of intensifying labour which imply an increase of constant, as compared to variable, capital, and hence a fall in the rate of profit, such as compelling a labourer to operate a larger number of machines. In such cases — and in most procedures serving the production of relative surplus-values — the same causes which increase the rate of surplus-value, may also, from the standpoint of given quantities of invested total capital, involve a fall in the mass of surplus-value. But there are other aspects of intensification, such as the greater velocities of machinery, which consume more raw material in the same time, but, so far as the fixed capital is concerned, wear out the machinery so much faster, and yet do not in any way affect the relation of its value to the price of the labour which sets it in motion. But notably, it is prolongation of the working-day, this invention of modern industry, which increases the mass of appropriated surplus-labour without essentially altering the proportion of the employed labour-power to the constant capital set in motion by it, and which rather tends to reduce this capital relatively. Moreover, it has already been demonstrated — and this constitutes the real secret of the tendency of the rate of profit to fall — that the manipulations to produce relative surplus-value amount, on the whole, to transforming as much as possible of a certain quantity of labour into surplus-value, on the one hand, and employing as little labour as possible in proportion to the invested capital, on the other, so that the same reasons which permit raising the intensity of exploitation rule out exploiting the same quantity of labour as before by the same capital. These are the counteracting tendencies, which, while effecting a rise in the rate of surplus-value, also tend to decrease the mass of surplus-value, and hence the rate of profit produced by a certain capital. Mention should also be made here of the widespread introduction of female and child labour, in so far as the whole family must now perform more surplus-labour for capital than before, even when the total amount of their wages increases, which is by no means always the case. — Everything that promotes the production of relative surplus-value by mere improvement in methods, as in agriculture, without altering the magnitude of the invested capital, has the same effect. The constant capital, it is true, does not, in such cases, increase in relation to the variable, inasmuch as we regard the variable capital as an index of the amount of labour-power employed, but the mass of the product does increase in proportion to the labour-power employed. The same occurs, if the productiveness of labour (no matter, whether its product goes into the labourer's consumption or into the elements of constant capital) is freed from hindrances in communications, from arbitrary or other restrictions which have become obstacles in the course of time; from fetters of all kinds, without directly affecting the ratio of variable to constant capital.

It might be asked whether the factors that check the fall of the rate of profit, but that always hasten its fall in the last analysis, whether these include the temporary, but always recurring, elevations in surplus-value above the general level, which keep occurring now in this and now in that line of production redounding to the benefit of those individual capitalists, who make use of inventions, etc., before these are introduced elsewhere. This question must be answered in the affirmative.

The mass of surplus-value produced by a capital of a given magnitude is the product of two factors — the rate of surplus-value multiplied by the number of labourers employed at this rate. At a given rate of surplus-value it therefore depends on the number of labourers, and it depends on the rate of surplus-value when the number of labourers is given. Generally, therefore, it depends on the composite ratio of the absolute magnitudes of the variable capital and the rate of surplus-value. Now we have seen that, on the average, the same factors which raise the rate of relative surplus-value lower the mass of the employed labour-power. It is evident, however, that this will occur to a greater or lesser extent, depending on the definite proportion in which this conflicting movement obtains, and that the tendency towards a reduction in the rate of profit is notably weakened by a rise in the rate of absolute surplus-value, which originates with the lengthening of the working-day.

We saw in the case of the rate of profit that a drop in the rate was generally accompanied by an increase in the mass of profit, due to the increasing mass of total capital employed. From the standpoint of the total variable capital of society, the surplus-value it has produced is equal to the profit it has produced. Both the absolute mass and the rate of surplus-value have increased; the one because the quantity of labour-power employed by society has grown, and the other, because the intensity of exploitation of this labour-power has increased. But in the case of a capital of a given magnitude, e.g., 100, the rate of surplus-value may increase, while the average mass may decrease; for the rate is determined by the proportion, in which the variable capital produces value, while the mass is determined by the proportion of variable capital to the total capital.

The rise in the rate of surplus-value is a factor which determines the mass of surplus-value, and hence also the rate of profit, for it takes place especially under conditions, in which, as we have previously seen, the constant capital is either not increased at all, or not proportionately increased, in relation to the variable capital. This factor does not abolish the general law. But it causes that law to act rather as a tendency, i.e., as a law whose absolute action is checked, retarded, and weakened, by counteracting circumstances. But since the same influences which raise the rate of surplus-value (even a lengthening of the working-time is a result of large-scale industry) tend to decrease the labour-power employed by a certain capital, it follows that they also tend to reduce the rate of profit and to retard this reduction. If one labourer is compelled to perform as much labour as would rationally be performed by at least two, and if this is done under circumstances in which this one labourer can replace three, then this one labourer will perform as much surplus-labour as was formerly performed by two, and the rate of surplus-value will have risen accordingly. But he will not perform as much as three had performed, and the mass of surplus-value will have decreased accordingly. But this reduction in mass will be compensated, or limited, by the rise in the rate of surplus-value. If the entire population is employed at a higher rate of surplus-value, the mass of surplus-value will increase, in spite of the population remaining the same. It will increase still more if the population increases. And although this is tied up with a relative reduction of the number of employed labourers in proportion to the magnitude of the total capital, this reduction is moderated, or checked, by the rise in the rate of surplus-value.

Before leaving this point, it is to be emphasised once more that with a capital of a given magnitude the rate of surplus-value may rise, while its mass is decreasing, and vice versa. The mass of surplus-value is equal to the rate multiplied by the number of labourers; however, the rate is never calculated on the total, but only on the variable capital, actually only for every working-day. On the other hand, with a given magnitude of capital-value, the rate of profit can neither rise nor fall without the mass of surplus-value also rising or falling.


This is mentioned here only empirically, since, like many other things which might be enumerated, it has nothing to do with the general analysis of capital, but belongs in an analysis of competition, which is not presented in this work. However, it is one of the most important factors checking the tendency of the rate of profit to fall.


Everything said in Part I of this book about factors which raise the rate of profit while the rate of surplus-value remains the same, or regardless of the rate of surplus-value, belongs here. Hence also, with respect to the total capital, that the value of the constant capital does not increase in the same proportion as its material volume. For instance, the quantity of cotton worked up by a single European spinner in a modern factory has grown tremendously compared to the quantity formerly worked up by a European spinner with a spinning-wheel. Yet the value of the worked-up cotton has not grown in the same proportion as its mass. The same applies to machinery and other fixed capital. In short, the same development which increases the mass of the constant capital in relation to the variable reduces the value of its elements as a result of the increased productivity of labour, and therefore prevents the value of constant capital, although it continually increases, from increasing at the same rate as its material volume, i.e., the material volume of the means of production set in motion by the same amount of labour-power. In isolated cases the mass of the elements of constant capital may even increase, while its value remains the same, or falls.

The foregoing is bound up with the depreciation of existing capital (that is, of its material elements), which occurs with the development of industry. This is another continually operating factor which checks the fall of the rate of profit, although it may under certain circumstances encroach on the mass of profit by reducing the mass of the capital yielding a profit. This again shows that the same influences which tend to make the rate of profit fall, also moderate the effects of this tendency.


Its propagation is inseparable from, and hastened by, the development of the productivity of labour as expressed by a fall in the rate of profit. The relative over-population becomes so much more apparent in a country, the more the capitalist mode of production is developed in it. This, again, is the reason why, on the one hand, the more or less imperfect subordination of labour to capital continues in many branches of production, and continues longer than seems at first glance compatible with the general stage of development. This is due to the cheapness and abundance of disposable or unemployed wage-labourers, and to the greater resistance, which some branches of production, by their very nature, render to the transformation of manual work into machine production. On the other hand, new lines of production are opened up, especially for the production of luxuries, and it is these that take as their basis this relative over-population, often set free in other lines of production through the increase of their constant capital. These new lines start out predominantly with living labour, and by degrees pass through the same evolution as the other lines of production. In either case the variable capital makes up a considerable portion of the total capital and wages are below the average, so that both the rate and mass of surplus-value in these lines of production are unusually high. Since the general rate of profit is formed by levelling the rates of profit in the individual branches of production, however, the same factor which brings about the tendency in the rate of profit to fall, again produces a counterbalance to this tendency and more or less paralyses its effects.


Since foreign trade partly cheapens the elements of constant capital, and partly the necessities of life for which the variable capital is exchanged, it tends to raise the rate of profit by increasing the rate of surplus-value and lowering the value of constant capital. It generally acts in this direction by permitting an expansion of the scale of production. It thereby hastens the process of accumulation, on the one hand, but causes the variable capital to shrink in relation to the constant capital, on the other, and thus hastens a fall in the rate of profit. In the same way, the expansion of foreign trade, although the basis of the capitalist mode of production in its infancy, has become its own product, however, with the further progress of the capitalist mode of production, through the innate necessity of this mode of production, its need for an ever-expanding market. Here we see once more the dual nature of this effect. (Ricardo has entirely overlooked this side of foreign trade. [D. Ricardo, On the Principles of Political Economy, and Taxation, Third edition, London, 1824, Ch. VII. — Ed.])

Another question — really beyond the scope of our analysis because of its special nature — is this: Is the general rate of profit raised by the higher rate of profit produced by capital invested in foreign, and particularly colonial, trade?

Capitals invested in foreign trade can yield a higher rate of profit, because, in the first place, there is competition with commodities produced in other countries with inferior production facilities, so that the more advanced country sells its goods above their value even though cheaper than the competing countries. In so far as the labour of the more advanced country is here realised as labour of a higher specific weight, the rate of profit rises, because labour which has not been paid as being of a higher quality is sold as such. The same may obtain in relation to the country, to which commodities are exported and to that from which commodities are imported; namely, the latter may offer more materialised labour in kind than it receives, and yet thereby receive commodities cheaper than it could produce them. Just as a manufacturer who employs a new invention before it becomes generally used, undersells his competitors and yet sells his commodity above its individual value, that is, realises the specifically higher productiveness of the labour he employs as surplus-labour. He thus secures a surplus-profit. As concerns capitals invested in colonies, etc., on the other hand, they may yield higher rates of profit for the simple reason that the rate of profit is higher there due to backward development, and likewise the exploitation of labour, because of the use of slaves, coolies, etc. Why should not these higher rates of profit, realised by capitals invested in certain lines and sent home by them, enter into the equalisation of the general rate of profit and thus tend, pro tanto, to raise it, unless it is the monopolies that stand in the way. [1] There is so much less reason for it, since these spheres of investment of capital are subject to the laws of free competition. What Ricardo fancies is mainly this: with the higher prices realised abroad commodities are bought there in return and sent home. These commodities are thus sold on the home market, which fact can at best be but a temporary extra disadvantage of these favoured spheres of production over others. This illusion falls away as soon as it is divested of its money-form. The favoured country recovers more labour in exchange for less labour, although this difference, this excess is pocketed, as in any exchange between labour and capital, by a certain class. Since the rate of profit is higher, therefore, because it is generally higher in a colonial country, it may, provided natural conditions are favourable, go hand in hand with low commodity-prices. A levelling takes place but not a levelling to the old level, as Ricardo feels.

This same foreign trade develops the capitalist mode of production in the home country, which implies the decrease of variable capital in relation to constant, and, on the other hand, causes over-production in respect to foreign markets, so that in the long run it again has an opposite effect.

We have thus seen in a general way that the same influences which produce a tendency in the general rate of profit to fall, also call forth counter-effects, which hamper, retard, and partly paralyse this fall. The latter do not do away with the law, but impair its effect. Otherwise, it would not be the fall of the general rate of profit, but rather its relative slowness, that would be incomprehensible. Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced.

Before we go on, in order to avoid misunderstandings, we should recall two, repeatedly treated, points.

First: The same process which brings about a cheapening of commodities in the course of the development of the capitalist mode of production, causes a change in the organic composition of the social capital invested in the production of commodities, and consequently lowers the rate of profit. We must be careful, therefore, not to identify the reduction in the relative cost of an individual commodity, including that portion of it which represents wear and tear of machinery, with the rise in the value of the constant in relation to variable capital, although, conversely, every reduction in the relative cost of the constant capital assuming the volume of its material elements remains the same, or increases, tends to raise the rate of profit, i.e., to reduce pro tanto the value of the constant capital in relation to the shrinking proportions of the employed variable capital.

Second: The fact that the newly added living labour contained in the individual commodities, which taken together make up the product of capital, decreases in relation to the materials they contain and the means of labour consumed by them; the fact, therefore, that an ever-decreasing quantity of additional living labour is materialised in them, because their production requires less labour with the development of the social productiveness — this fact does not affect the ratio, in which the living labour contained in the commodities breaks up into paid and unpaid labour. Quite the contrary. Although the total quantity of additional living labour contained in the commodities decreases, the unpaid portion increases in relation to the paid portion, either by an absolute or a relative shrinking of the paid portion; for the same mode of production which reduces the total quantity of additional living labour in a commodity is accompanied by a rise in the absolute and relative surplus-value. The tendency of the rate of profit to fall is bound up with a tendency of the rate of surplus-value to rise, hence with a tendency for the rate of labour exploitation to rise. Nothing is more absurd, for this reason, than to explain the fall in the rate of profit by a rise in the rate of wages, although this may be the case by way of an exception. Statistics is not able to make actual analyses of the rates of wages in different epochs and countries, until the conditions which shape the rate of profit are thoroughly understood. The rate of profit does not fall because labour becomes less productive, but because it becomes more productive. Both the rise in the rate of surplus-value and the fall in the rate of profit are but specific forms through which growing productivity of labour is expressed under capitalism.


The foregoing five points may still be supplemented by the following, which, however, cannot be more fully treated for the present. With the progress of capitalist production, which goes hand in hand with accelerated accumulation, a portion of capital is calculated and applied only as interest-bearing capital. Not in the sense in which every capitalist who lends out capital is satisfied with interest, while the industrial capitalist pockets the investor's profit. This has no bearing on the level of the general rate of profit, because for the latter profit = interest + profit of all kinds + ground rent, the division into these particular categories being immaterial to it. But in the sense that these capitals, although invested in large productive enterprises, yield only large or small amounts of interest, so-called dividends, after all costs have been deducted. In railways, for instance. These do not therefore go into levelling the general rate of profit, because they yield a lower than average rate of profit. If they did enter into it, the general rate of profit would fall much lower. Theoretically, they may be included in the calculation, and the result would then be a lower rate of profit than the seemingly existing rate, which is decisive for the capitalists; it would be lower, because the constant capital particularly in these enterprises is largest in its relation to the variable capital.

falling rate of profit part I

Assuming a given wage and working-day, a variable capital, for instance of 100, represents a certain number of employed labourers. It is the index of this number. Suppose £100 are the wages of 100 labourers for, say, one week. If these labourers perform equal amounts of necessary and surplus-labour, if they work daily as many hours for themselves, i.e., for the reproduction of their wage, as they do for the capitalist, i.e., for the production of surplus-value, then the value of their total product = £200, and the surplus-value they produce would amount to £100. The rate of surplus-value, s/v, would = 100%. But, as we have seen, this rate of surplus-value would nonetheless express itself in very different rates of profit, depending on the different volumes of constant capital c and consequently of the total capital C, because the rate of profit = s/C. The rate of surplus-value is 100%:

If c = 50, and v = 100, then p' = 100/150 = 66⅔%;
c = 100, and v = 100, then p' = 100/200 = 50%;
c = 200, and v = 100, then p' = 100/300 = 33⅓%;
c = 300, and v = 100, then p' = 100/400 = 25%;
c = 400, and v = 100, then p' = 100/500 = 20%.

This is how the same rate of surplus-value would express itself under the same degree of labour exploitation in a falling rate of profit, because the material growth of the constant capital implies also a growth — albeit not in the same proportion — in its value, and consequently in that of the total capital.

If it is further assumed that this gradual change in the composition of capital is not confined only to individual spheres of production, but that it occurs more or less in all, or at least in the key spheres of production, so that it involves changes in the average organic composition of the total capital of a certain society, then the gradual growth of constant capital in relation to variable capital must necessarily lead to a gradual fall of the general rate of profit, so long as the rate of surplus-value, or the intensity of exploitation of labour by capital, remain the same. Now we have seen that it is a law of capitalist production that its development is attended by a relative decrease of variable in relation to constant capital, and consequently to the total capital set in motion. This is just another way of saying that owing to the distinctive methods of production developing in the capitalist system the same number of labourers, i.e., the same quantity of labour-power set in motion by a variable capital of a given value, operate, work up and productively consume in the same time span an ever-increasing quantity of means of labour, machinery and fixed capital of all sorts, raw and auxiliary materials — and consequently a constant capital of an ever-increasing value. This continual relative decrease of the variable capital vis-a-vis the constant, and consequently the total capital, is identical with the progressively higher organic composition of the social capital in its average. It is likewise just another expression for the progressive development of the social productivity of labour, which is demonstrated precisely by the fact that the same number of labourers, in the same time, i.e., with less labour, convert an ever-increasing quantity of raw and auxiliary materials into products, thanks to the growing application of machinery and fixed capital in general. To this growing quantity of value of the constant capital — although indicating the growth of the real mass of use-values of which the constant capital materially consists only approximately — corresponds a progressive cheapening of products. Every individual product, considered by itself, contains a smaller quantity of labour than it did on a lower level of production, where the capital invested in wages occupies a far greater place compared to the capital invested in means of production. The hypothetical series drawn up at the beginning of this chapter expresses, therefore, the actual tendency of capitalist production. This mode of production produces a progressive relative decrease of the variable capital as compared to the constant capital, and consequently a continuously rising organic composition of the total capital. The immediate result of this is that the rate of surplus-value, at the same, or even a rising, degree of labour exploitation, is represented by a continually falling general rate of profit. (We shall see later [Present edition: Ch. XIV. — Ed.] why this fall does not manifest itself in an absolute form, but rather as a tendency toward a progressive fall.) The progressive tendency of the general rate of profit to fall is, therefore, just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour. This does not mean to say that the rate of profit may not fall temporarily for other reasons. But proceeding from the nature of the capitalist mode of production, it is thereby proved logical necessity that in its development the general average rate of surplus-value must express itself in a falling general rate of profit. Since the mass of the employed living labour is continually on the decline as compared to the mass of materialised labour set in motion by it, i.e., to the productively consumed means of production, it follows that the portion of living labour, unpaid and congealed in surplus-value, must also be continually on the decrease compared to the amount of value represented by the invested total capital. Since the ratio of the mass of surplus-value to the value of the invested total capital forms the rate of profit, this rate must constantly fall.

Simple as this law appears from the foregoing statements, all of political economy has so far had little success in discovering it, as we shall see in a later part. [K. Marx, Theorien über den Mehrwert. K. Marx/F. Engels, Werke, Band 26, Teil 2, S. 435-66, 541-43. — Ed.] The economists perceived the phenomenon and cudgelled their brains in tortuous attempts to interpret it. Since this law is of great importance to capitalist production, it may be said to be a mystery whose solution has been the goal of all political economy since Adam Smith, the difference between the various schools since Adam Smith having been in the divergent approaches to a solution. When we consider, on the other hand, that up to the present political economy has been running in circles round the distinction between constant and variable capital, but has never known how to define it accurately; that it has never separated surplus-value from profit, and never even considered profit in its pure form as distinct from its different, independent components, such as industrial profit, commercial profit, interest, and ground-rent; that it has never thoroughly analysed the differences in the organic composition of capital, and, for this reason, has never thought of analysing the formation of the general rate of profit — if we consider all this, the failure to solve this riddle is no longer surprising.

We intentionally present this law before going on to the division of profit into different independent categories. The fact that this analysis is made independently of the division of profit into different parts, which fall to the share of different categories of people, shows from the outset that this law is, in its entirety, independent of this division, and just as independent of the mutual relations of the resultant categories of profit. The profit to which we are here referring is but another name for surplus-value itself, which is presented only in its relation to total capital rather than to variable capital, from which it arises. The drop in the rate of profit, therefore, expresses the falling relation of surplus-value to advanced total capital, and is for this reason independent of any division whatsoever of this surplus-value among the various categories.

We have seen that at a certain stage of capitalist development, where the organic composition of capital c : v was 50 : 100, a rate of surplus-value of 100% was expressed in a rate of profit of 66⅔%, and that at a higher stage, where c : v was 400 : 100, the same rate of surplus-value was expressed in a rate of profit of only 20%. What is true of different successive stages of development in one country, is also true of different coexisting stages of development in different countries. In an undeveloped country, in which the former composition of capital is the average, the general rate of profit would = 66⅔%, while in a country with the latter composition and a much higher stage of development it would = 20%.

The difference between the two national rates of profit might disappear, or even be reversed, if labour were less productive in the less developed country, so that a larger quantity of labour were to be represented in a smaller quantity of the same commodities, and a larger exchange-value were represented in less use-value. The labourer would then spend more of his time in reproducing his own means of subsistence, or their value, and less time in producing surplus-value; consequently, he would perform less surplus-labour, with the result that the rate of surplus-value would be lower. Suppose, the labourer of the less developed country were to work ⅔ of the working-day for himself and ⅓ for the capitalist; in accordance with the above illustration, the same labour-power would then be paid with 133⅓ and would furnish a surplus of only 60⅔. A constant capital of 50 would correspond to a variable capital of 433⅓. The rate of surplus-value would amount to 66⅔ : 133⅓ = 50%, and the rate of profit to 66⅔ : 133⅓, or approximately 36%.

Since we have not so far analysed the different component parts of profit, i.e., they do not for the present exist for us, we make the following remarks beforehand merely to avoid misunderstanding: In comparing countries in different stages of development it would be a big mistake to measure the level of the national rate of profit by, say, the level of the national rate of interest, namely when comparing countries with a developed capitalist production with countries in which labour has not yet been formally subjected to capital, although in reality the labourer is exploited by the capitalist (as, for instance, in India, where the ryot manages his farm as an independent producer whose production as such is not, therefore, as yet subordinated to capital, although the usurer may not only rob him of his entire surplus-labour by means of interest, but may also, to use a capitalist term, hack off a part of his wage). This interest comprises all the profit, and more than the profit, instead of merely expressing an aliquot part of the produced surplus-value, or profit, as it does in countries with a developed capitalist production. On the other hand, the rate of interest is, in this case, mostly determined by relations (loans granted by usurers to owners of larger estates who draw ground-rent) which have nothing to do with profit, and rather indicate to what extent usury appropriates ground-rent.

As regards countries possessing different stages of development of capitalist production, and consequently capitals of different organic composition, a country where the normal working-day is shorter than another's may have a higher rate of surplus-value (one of the factors which determines the rate of profit). First, if the English ten-hour working-day is, on account of its higher intensity, equal to an Austrian working-day of 14 hours, then, dividing the working-day equally in both instances, 5 hours of English surplus-labour may represent a greater value on the world-market than 7 hours of Austrian surplus-labour. Second, a larger portion of the English working-day than of the Austrian may represent surplus-labour.

The law of the falling rate of profit, which expresses the same, or even a higher, rate of surplus-value, states, in other words, that any quantity of the average social capital, say, a capital of 100, comprises an ever larger portion or means of labour, and an ever smaller portion of living labour. Therefore, since the aggregate mass of living labour operating the means of production decreases in relation to the value of these means of production, it follows that the unpaid labour and the portion of value in which it is expressed must decline as compared to the value of the advanced total capital. Or: An ever smaller aliquot part of invested total capital is converted into living labour, and this total capital, therefore, absorbs in proportion to its magnitude less and less surplus-labour, although the unpaid part of the labour applied may at the same time grow in relation to the paid part. The relative decrease of the variable and increase of the constant capital, however much both parts may grow in absolute magnitude, is, as we have said, but another expression for greater productivity of labour.

Let a capital of 100 consist of 80c + 20v, and the latter = 20 labourers. Let the rate of surplus-value be 100%, i.e., the labourers work half the day for themselves and the other half for the capitalist. Now let the capital of 100 in a less developed country = 20c + 80v, and let the latter = 80 labourers. But these labourers require 2/3 of the day for themselves, and work only 1/3 for the capitalist. Everything else being equal, the labourers in the first case produce a value of 40, and in the second of 120. The first capital produces 80c + 20v + 20s = 120; rate of profit = 20%. The second capital, 20c + 80v + 40s = 140; rate of profit 40%. In the second case the rate of profit is, therefore, double the first, although the rate of surplus-value in the first = 100%, which is double that of the second, where it is only 50%. But then, a capital of the same magnitude appropriates the surplus-labour of only 20 labourers in the first case, and of 80 labourers in the second case.

The law of the progressive falling of the rate of profit, or the relative decline of appropriated surplus-labour compared to the mass of materialised labour set in motion by living labour, does not rule out in any way that the absolute mass of exploited labour set in motion by the social capital, and consequently the absolute mass of the surplus-labour it appropriates, may grow; nor, that the capitals controlled by individual capitalists may dispose of a growing mass of labour and, hence, of surplus-labour, the latter even though the number of labourers they employ does not increase.

Take a certain working population of, say, two million. Assume, furthermore, that the length and intensity of the average working-day, and the level of wages, and thereby the proportion between necessary and surplus-labour, are given. In that case the aggregate labour of these two million, and their surplus-labour expressed in surplus-value, always produces the same magnitude of value. But with the growth of the mass of the constant (fixed and circulating) capital set in motion by this labour, this produced quantity of value declines in relation to the value of this capital, which value grows with its mass, even if not in quite the same proportion. This ratio, and consequently the rate of profit, shrinks in spite of the fact that the mass of commanded living labour is the same as before, and the same amount of surplus-labour is sucked out of it by the capital. It changes because the mass of materialised labour set in motion by living labour increases, and not because the mass of living labour has shrunk. It is a relative decrease, not an absolute one, and has, in fact, nothing to do with the absolute magnitude of the labour and surplus-labour set in motion. The drop in the rate of profit is not due to an absolute, but only to a relative decrease of the variable part of the total capital, i.e., to its decrease in relation to the constant part.

What applies to any given mass of labour and surplus-labour, also applies to a growing number of labourers, and, thus, under the above assumption, to any growing mass of commanded labour in general, and to its unpaid part, the surplus-labour, in particular. If the working population increases from two million to three, and if the variable capital invested in wages also rises to three million from its former two million, while the constant capital rises from four million to fifteen million, then, under the above assumption of a constant working-day and a constant rate of surplus-value, the mass of surplus-labour, and of surplus-value, rises by one-half, i.e., 50%, from two million to three. Nevertheless, in spite of this growth of the absolute mass of surplus-labour, and hence of surplus-value, by 50%, the ratio of variable to constant capital would fall from 2 : 4 to 3 : 15, and the ratio of surplus-value to total capital would be (in millions)

I. 4c + 2v + 2s; C = 6, p' = 33⅓%.

II. 15c + 3v + 3s; C = 18, p' = 16⅔%.

While the mass of surplus-value has increased by one-half, the rate of profit has fallen by one-half. However, the profit is only the surplus-value calculated in relation to the total social capital, and the mass of profit, its absolute magnitude, is socially equal to the absolute magnitude of the surplus-value. The absolute magnitude of the profit, its total amount, would, therefore, have grown by 50%, in spite of its enormous relative decrease compared to the advanced total capital, or in spite of the enormous decrease in the general rate of profit. The number of labourers employed by capital, hence the absolute mass of the labour set in motion by it, and therefore the absolute mass of surplus-labour absorbed by it, the mass of the surplus-value produced by it, and therefore the absolute mass of the profit produced by it, can, consequently, increase, and increase progressively, in spite of the progressive drop in the rate of profit. And this not only can be so. Aside from temporary fluctuations it must be so, on the basis of capitalist production.

Essentially, the capitalist process of production is simultaneously a process of accumulation. We have shown that with the development of capitalist production the mass of values to be simply reproduced, or maintained, increases as the productivity of labour grows, even if the labour-power employed should remain constant. But with the development of social productivity of labour the mass of produced use-values, of which the means of production form a part, grows still more. And the additional labour, through whose appropriation this additional wealth can be reconverted into capital, does not depend on the value, but on the mass of these means of production (including means of subsistence), because in the production process the labourers have nothing to do with the value, but with the use-value, of the means of production. Accumulation itself, however, and the concentration of capital that goes with it, is a material means of increasing productiveness. Now, this growth of the means of production includes the growth of the working population, the creation of a working population, which corresponds to the surplus-capital, or even exceeds its general requirements, thus leading to an over-population of workers. A momentary excess of surplus-capital over the working population it has commandeered, would have a two-fold effect. It could, on the one hand, by raising wages, mitigate the adverse conditions which decimate the offspring of the labourers and would make marriages easier among them, so as gradually to increase the population. On the other hand, by applying methods which yield relative surplus-value (introduction and improvement of machinery) it would produce a far more rapid, artificial, relative over-population, which in its turn, would be a breeding-ground for a really swift propagation of the population, since under capitalist production misery produces population. It therefore follows of itself from the nature of the capitalist process of accumulation, which is but one facet of the capitalist production process, that the increased mass of means of production that is to be converted into capital always finds a correspondingly increased, even excessive, exploitable worker population. As the process of production and accumulation advances therefore, the mass of available and appropriated surplus-labour, and hence the absolute mass of profit appropriated by the social capital, must grow. Along with the volume, however, the same laws of production and accumulation increase also the value of the constant capital in a mounting progression more rapidly than that of the variable part of capital, invested as it is in living labour. Hence, the same laws produce for the social capital a growing absolute mass of profit, and a falling rate of profit.

We shall entirely ignore here that with the advance of capitalist production and the attendant development of the productiveness of social labour and multiplication of production branches, hence products, the same amount of value represents a progressively increasing mass of use-values and enjoyments.

The development of capitalist production and accumulation lifts labour-processes to an increasingly enlarged scale and thus imparts to them ever greater dimensions, and involves accordingly larger investments of capital for each individual establishment. A mounting concentration of capitals (accompanied, though on a smaller scale, by an increase in the number of capitalists) is, therefore, one of its material requirements as well as one of its results. Hand in hand with it, mutually interacting, there occurs a progressive expropriation of the more or less direct producers. It is, then, natural for the individual capitalists to command increasingly large armies of labourers (no matter how much the variable capital may decrease in relation to the constant), and natural, too, that the mass of surplus-value, and hence profit, appropriated by them, should grow simultaneously with, and in spite of, the fall in the rate of profit. The causes which concentrate masses of labourers under the command of individual capitalists, are the very same that swell the mass of the invested fixed capital, and auxiliary and raw materials, in mounting proportion as compared to the mass of employed living labour.

It requires no more than a passing remark at this point to indicate that, given a certain labouring population, the mass of surplus-value, hence the absolute mass of profit, must grow if the rate of surplus-value increases, be it through a lengthening or intensification of the working-day, or through a drop in the value of wages due to an increase in the productiveness of labour, and that it must do so in spite of the relative decrease of variable capital in respect to constant.

The same development of the productiveness of social labour, the same laws which express themselves in a relative decrease of variable as compared to total capital, and in the thereby facilitated accumulation, while this accumulation in its turn becomes a starting-point for the further development of the productiveness and for a further relative decrease of variable capital — this same development manifests itself, aside from temporary fluctuations, in a progressive increase of the total employed labour-power and a progressive increase of the absolute mass of surplus-value, and hence of profit.

Now, what must be the form of this double-edged law of a decrease in the rate of profit and a simultaneous increase in the absolute mass of profit arising from the same causes? As a law based on the fact that under given conditions the appropriated mass of surplus-labour, hence of surplus-value, increases, and that, so far as the total capital is concerned, or the individual capital as an aliquot part of the total capital, profit and surplus-value are identical magnitudes?

Let us take an aliquot part of capital upon which we calculate the rate of profit, e.g., 100. These 100 represent the average composition of the total capital, say, 80c + 20v. We have seen in the second part of this book that the average rate of profit in the various branches of production is determined not by the particular composition of each individual capital, but by the average social composition. As the variable capital decreases relative to the constant, hence the total capital of 100, the rate of profit, or the relative magnitude of surplus-value, i.e., its ratio to the advanced total capital of 100, falls even though the intensity of exploitation were to remain the same, or even to increase. But it is not this relative magnitude alone which falls. The magnitude of the surplus-value or profit absorbed by the total capital of 100 also falls absolutely. At a rate of surplus-value of 100%, a capital of 60c + 40v produces a mass of surplus-value, and hence of profit, amounting to 40; a capital of 80c + 20v a mass of profit of 30; and for a capital of 80c + 20v the profit falls to 20. This falling applies to the mass of surplus-value, and hence of profit, and is due to the fact that the total capital of 100 employs less living labour, and, the intensity of labour exploitation remaining the same, sets in motion less surplus-labour, and therefore produces less surplus-value. Taking any aliquot part of the social capital, i.e., a capital of average composition, as a standard by which to measure surplus-value — and this is done in all profit calculations — a relative fall of surplus-value is generally identical with its absolute fall. In the cases given above, the rate of profit sinks from 40% to 30% and to 20%, because, in fact, the mass of surplus-value, and hence of profit, produced by the same capital falls absolutely from 40 to 30 and to 20. Since the magnitude of the value of the capital, by which the surplus-value is measured, is given as 100, a fall in the proportion of surplus-value to this given magnitude can be only another expression for the decrease of the absolute magnitude of surplus-value and profit. This is, indeed, a tautology. But, as shown, the fact that this decrease occurs at all, arises from the nature of the development of the capitalist process of production.

On the other hand, however, the same causes which bring about an absolute decrease of surplus-value, and hence profit, on a given capital, and consequently of the rate of profit calculated in per cent, produce an increase in the absolute mass of surplus-value, and hence of profit, appropriated by the social capital (i.e., by all capitalists taken as a whole). How does this occur, what is the only way in which this can occur, or what are the conditions obtaining in this seeming contradiction?

If any aliquot part = 100 of the social capital, and hence any 100 of average social composition, is a given magnitude, for which therefore a fall in the rate of profit coincides with a fall in the absolute magnitude of the profit because the capital which here serves as a standard of measurement is a constant magnitude, then the magnitude of the social capital like that of the capital in the hands of individual capitalists, is variable, and in keeping with our assumptions it must vary inversely with the decrease of its variable portion.

In our former illustration, when the percentage of composition was 60c + 40v, the corresponding surplus-value, or profit, was 40, and hence the rate of profit 40%. Suppose, the total capital in this stage of composition was one million. Then the total surplus-value, and hence the total profit, amounted to 400,000. Now, if the composition later = 80c + 20v, while the degree of labour exploitation remained the same, then the surplus-value or profit for each 100 = 20. But since the absolute mass of surplus-value or profit increases, as demonstrated, in spite of the decreasing rate of profit or the decreasing production of surplus-value by every 100 of capital — increases, say, from 400,000 to 440,000, then this occurs solely because the total capital which formed at the time of this new composition has risen to 2,200,000. The mass of the total capital set in motion has risen to 220%, while the rate of profit has fallen by 50%. Had the total capital no more than doubled, it would have to produce as much surplus-value and profit to obtain a rate of profit of 20% as the old capital of 1,000,000 produced at 40%. Had it grown to less than double, it would have produced less surplus-value, or profit, than the old capital of 1,000,000, which, in its former composition, would have had to grow from 1,000,000 to no more than 1,100,000 to raise its surplus-value from 400,000 to 440,000.

We again meet here the previously defined law that the relative decrease of the variable capital, hence the development of the social productiveness of labour, involves an increasingly large mass of total capital to set in motion the same quantity of labour-power and squeeze out the same quantity of surplus-labour. Consequently, the possibility of a relative surplus of labouring people develops proportionately to the advances made by capitalist production not because the productiveness of social labour decreases, but because it increases. It does not therefore arise out of an absolute disproportion between labour and the means of subsistence, or the means for the production of these means of subsistence, but out of a disproportion occasioned by capitalist exploitation of labour, a disproportion between the progressive growth of capital and its relatively shrinking need for an increasing population.

Should the rate of profit fall by 50%, it would shrink one-half. If the mass of profit is to remain the same, the capital must be doubled. For the mass of profit made at a declining rate of profit to remain the same, the multiplier indicating the growth of the total capital must be equal to the divisor indicating the fall of the rate of profit. If the rate of profit falls from 40 to 20, the total capital must rise inversely at the rate of 20 : 40 to obtain the same result. If the rate of profit falls from 40 to 8, the capital would have to increase at the rate of 8 : 40, or five-fold. A capital of 1,000,000 at 40% produces 400,000, and a capital of 5,000,000 at 8% likewise produces 400,000. This applies if we want the result to remain the same. But if the result is to be higher, then the capital must grow at a greater rate than the rate of profit falls. In other words, for the variable portion of the total capital not to remain the same in absolute terms, but to increase absolutely in spite of its falling in percentage of the total capital, the total capital must grow at a faster rate than the percentage of the variable capital falls. It must grow so considerably that in its new composition it should require more than the old portion of variable capital to purchase labour-power. If the variable portion of a capital = 100 should fall from 40 to 20, the total capital must rise higher than 200 to be able to employ a larger variable capital than 40.

Even if the exploited mass of the working population were to remain constant, and only the length and intensity of the working-day were to increase, the mass of the invested capital would have to increase, since it would have to be greater in order to employ the same mass of labour under the old conditions of exploitation after the composition of capital changes.

Thus, the same development of the social productiveness of labour expresses itself with the progress of capitalist production on the one hand in a tendency of the rate of profit to fall progressively and, on the other, in a progressive growth of the absolute mass of the appropriated surplus-value, or profit; so that on the whole a relative decrease of variable capital and profit is accompanied by an absolute increase of both. This two-fold effect, as we have seen, can express itself only in a growth of the total capital at a pace more rapid than that at which the rate of profit falls. For an absolutely increased variable capital to be employed in a capital of higher composition, or one in which the constant capital has increased relatively more, the total capital must not only grow proportionately to its higher composition, but still more rapidly. It follows, then, that as the capitalist mode of production develops, an ever larger quantity of capital is required to employ the same, let alone an increased, amount of labour-power. Thus, on a capitalist foundation, the increasing productiveness of labour necessarily and permanently creates a seeming over-population of labouring people. If the variable capital forms just 1/6 of the total capital instead of the former ½, the total capital must be trebled to employ the same amount of labour-power. And if twice as much labour-power is to be employed, the total capital must increase six-fold.

Political economy, which has until now been unable to explain the law of the tendency of the rate of profit to fall, pointed self-consolingly to the increasing mass of profit, i.e., to the growth of the absolute magnitude of profit, be it for the individual capitalist or for the social capital, but this was also based on mere platitude and speculation.

To say that the mass of profit is determined by two factors — first, the rate of profit, and, secondly, the mass of capital invested at this rate, is mere tautology. It is therefore but a corollary of this tautology to say that there is a possibility for the mass of profit to grow even though the rate of profit may fall at the same time. It does not help us one step farther, since it is just as possible for the capital to increase without the mass of profit growing, and for it to increase even while the mass of profit falls. For 100 at 25% yields 25, and 400 at 5% yields only 20.[1] But if the same causes which make the rate of profit fall, entail the accumulation, i.e., the formation, of additional capital, and if each additional capital employs additional labour and produces additional surplus-value; if, on the other hand, the mere fall in the rate of profit implies that the constant capital, and with it the total old capital, have increased, then this process ceases to be mysterious. We shall see later [K. Marx, Theorien über den Mehrwert. K. Marx/F. Engels, Werke, Band 26, Teil 2,. S. 435-66, 541- 43. — Ed] to what deliberate falsifications some people resort in their calculations to spirit away the possibility of an increase in the mass of profit simultaneous with a decrease in the rate of profit.

We have shown how the same causes that bring about a tendency for the general rate of profit to fall necessitate an accelerated accumulation of capital and, consequently, an increase in the absolute magnitude, or total mass, of the surplus-labour (surplus-value, profit) appropriated by it. Just as everything appears reversed in competition, and thus in the consciousness of the agents of competition, so also this law, this inner and necessary connection between two seeming contradictions. It is evident that within the proportions indicated above a capitalist disposing of a large capital will receive a larger mass of profit than a small capitalist making seemingly high profits. Even a cursory examination of competition shows, furthermore, that under certain circumstances, when the greater capitalist wishes to make room for himself on the market, and to crowd out the smaller ones, as happens in times of crises, he makes practical use of this, i.e., he deliberately lowers his rate of profit in order to drive the smaller ones to the wall. Merchants capital, which we shall describe in detail later, also notably exhibits phenomena which appear to attribute a fall in profit to an expansion of business, and thus of capital. The scientific expression for this false conception will be given later. Similar superficial observations result from a comparison of rates of profit in individual lines of business, distinguished either as subject to free competition, or to monopoly. The utterly shallow conception existing in the minds of the agents of competition is found in Roscher, namely, that a reduction in the rate of profit is "more prudent and humane". [Roscher, Die Grundlage der Nationalökonomie, 3 Auflage, 1858, 108, S. 192. — Ed.] The fall in the rate of profit appears in this case as an effect of an increase in capital and of the concomitant calculation of the capitalist that the mass of profits pocketed by him will be greater at a smaller rate of profit. This entire conception (with the exception of Adam Smith's, which we shall mention later) [K. Marx, Theorien über den Mehrwert. K. Marx/F. Engels, Werke, Band 26, Teil 2, S. 214-28. — Ed.] rests on an utter misapprehension of what the general rate of profit is, and on the crude notion that prices are actually determined by adding a more or less arbitrary quota of profit to the true value of commodities. Crude as these ideas are, they arise necessarily out of the inverted aspect which the immanent laws of capitalist production represent in competition.

The law that a fall in the rate of profit due to the development of productiveness is accompanied by an increase in the mass of profit, also expresses itself in the fact that a fall in the price of commodities produced by a capital is accompanied by a relative increase of the masses of profit contained in them and realised by their sale.

Since the development of the productiveness and the correspondingly higher composition of capital sets in motion an ever-increasing quantity of means of production through a constantly decreasing quantity of labour, every aliquot part of the total product, i.e., every single commodity, or each particular lot of commodities in the total mass of products, absorbs less living labour, and also contains less materialised labour, both in the depreciation of the fixed capital applied and in the raw and auxiliary materials consumed. Hence every single commodity contains a smaller sum of labour materialised in means of production and of labour newly added during production. This causes the price of the individual commodity to fall. But the mass of profits contained in the individual commodities may nevertheless increase if the rate of the absolute or relative surplus-value grows. The commodity contains less newly added labour, but its unpaid portion grows in relation to its paid portion. However, this is the case only within certain limits. With the absolute amount of living labour newly incorporated in individual commodities decreasing enormously as production develops, the absolute mass of unpaid labour contained in them will likewise decrease, however much it may have grown as compared to the paid portion. The mass of profit on each individual commodity will shrink considerably with the development of the productiveness of labour, in spite of a growth in the rate of surplus-value. And this reduction, just as the fall in the rate of profit, is only delayed by the cheapening of the elements of constant capital and by the other circumstances set forth in the first part of this book, which increase the rate of profit at a given, or even falling, rate of surplus-value.

That the price of individual commodities whose sum makes up the total product of capital falls, means simply that a certain quantity of labour is realised in a larger quantity of commodities, so that each individual commodity contains less labour than before. This is the case even if the price of one part of constant capital, such as raw material, etc., should rise. Outside of a few cases (for instance, if the productiveness of labour uniformly cheapens all elements of the constant, and the variable, capital), the rate of profit will fall, in spite of the higher rate of surplus-value, 1) because even a larger unpaid portion of the smaller total amount of newly added labour is smaller than a smaller aliquot unpaid portion of the former larger amount and 2) because the higher composition of capital is expressed in the individual commodity by the fact that the portion of its value in which newly added labour is materialised decreases in relation to the portion of its value which represents raw and auxiliary material, and the wear and tear of fixed capital. This change in the proportion of the various component parts in the price of individual commodities, i.e., the decrease of that portion of the price in which newly added living labour is materialised, and the increase of that portion of it in which formerly materialised labour is represented, is the form which expresses the decrease of the variable in relation to the constant capital through the price of the individual commodities. Just as this decrease is absolute for a certain amount of capital, say of 100, it is also absolute for every individual commodity as an aliquot part of the reproduced capital. However, the rate of profit, if calculated merely on the elements of the price of an individual commodity, would be different from what it actually is. And for the following reason:

[The rate of profit is calculated on the total capital invested, but for a definite time, actually a year. The rate of profit is the ratio of the surplus-value, or profit, produced and realised in a year, to the total capital calculated in per cent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide.

On the other hand, the profit made in the course of a year is merely the sum of profits on commodities produced and sold during that same year. Now, if we calculate the profit on the cost-price of commodities, we obtain a rate of profit = p/k in which p stands for the profit realised during one year, and k for the sum of the cost-prices of commodities produced and sold within the same period. It is evident that this rate of profit p/k will not coincide with the actual rate of profit p/C, mass of profit divided by total capital, unless k = C, that is, unless the capital is turned over in exactly one year.

Let us take three different conditions of an industrial capital.

I. A capital of £8,000 produces and sells annually 5,000 pieces of a commodity at 30s. per piece, thus making an annual turnover of £7,500. It makes a profit of 10s. on each piece, or £2,500 per year. Every piece, then, contains 20s. advanced capital and 10s. profit, so that the rate of profit per piece is 10/20 = 50%. The turned-over sum of £7,500 contains £5,000 advanced capital and £2,500 profit. Rate of profit per turnover, p/k, likewise 50%. But calculated on the total capital the rate of profit p/C = 2,500/8,000 = 31¼%

II. The capital rises to £10,000. Owing to increased productivity of labour it is able to produce annually 10,000 pieces of the commodity at a cost-price of 20s. per piece. Suppose the commodity is sold at a profit of 4s., hence at 24s. per piece. In that case the price of the annual product = £12,000, of which £10,000 is advanced capital and £2,000 is profit. The rate of profit p/k = 4/20 per piece, and 2,000/10,000 for the annual turnover, or in both cases = 20%. And since the total capital is equal to the sum of the cost-prices, namely £10,000, it follows that p/C, the actual rate of profit, is in this case also 20%.

III. Let the capital rise to £15,000 owing to a constant growth of the productiveness of labour, and let it annually produce 30,000 pieces of the commodity at a cost-price of 13s. per piece, each piece being sold at a profit of 2s., or at 15s. The annual turnover therefore = 30,000×15s. = £22,500, of which £19,500 is advanced capital and £3,000 profit. The rate of profit p/k then = 2/13 = 3,000/19,500 = 15 5/13%. But p/C = 3,000/15,000 = 20%.

We see, therefore, that only in case II, where the turned-over capital-value is equal to the total capital, the rate of profit per piece, or per total amount of turnover, is the same as the rate of profit calculated on the total capital. In case I, in which the amount of the turnover is smaller than the total capital, the rate of profit calculated on the cost-price of the commodity is higher; and in case III, in which the total capital is smaller than the amount of the turnover, it is lower than the actual rate calculated on the total capital. This is a general rule.

In commercial practice, the turnover is generally calculated inaccurately. It is assumed that the capital has been turned over once as soon as the sum of the realised commodity-prices equals the sum of the invested total capital. But the capital can complete one whole turnover only when the sum of the cost-prices of the realised commodities equals the sum of the total capital. — F.E.]

This again shows how important it is in capitalist production to regard individual commodities, or the commodity-product of a certain period, as products of advanced capital and in relation to the total capital which produces them, rather than in isolation, by themselves, as mere commodities.

The rate of profit must be calculated by measuring the mass of produced and realised surplus-value not only in relation to the consumed portion of capital reappearing in the commodities, but also to this part plus that portion of unconsumed but applied capital which continues to operate in production. However, the mass of profit cannot be equal to anything but the mass of profit or surplus-value, contained in the commodities themselves, and to be realised by their sale.

If the productivity of industry increases, the price of individual commodities falls. There is less labour in them, less paid and unpaid labour. Suppose, the same labour produces, say, triple its former product. Then ⅔ less labour yields individual product. And since profit can make up but a portion of the amount of labour contained in an individual commodity, the mass of profit in the individual commodity must decrease, and this takes place within certain limits, even if the rate of surplus-value should rise. In any case, the mass of profit on the total product does not fall below the original mass of profit so long as the capital employs the same number of labourers at the same degree of exploitation. (This may also occur if fewer labourers are employed at a higher rate of exploitation.) For the mass of profit on the individual product decreases proportionately to the increase in the number of products. The mass of profit remains the same, but it is distributed differently over the total amount of commodities. Nor does this alter the distribution between the labourers and capitalists of the amount of value created by newly added labour. The mass of profit cannot increase so long as the same amount of labour is employed, unless the unpaid surplus-labour increases, or, should intensity of exploitation remain the same, unless the number of labourers grows. Or, both these causes may combine to produce this result. In all these cases — which, however, in accordance with our assumption, presuppose an increase of constant capital as compared to variable, and an increase in the magnitude of total capital — the individual commodity contains a smaller mass of profit and the rate of profit falls even if calculated on the individual commodity. A given quantity of newly added labour materialises in a larger quantity of commodities. The price of the individual commodity falls. Considered abstractly the rate of profit may remain the same, even though the price of the individual commodity may fall as a result of greater productiveness of labour and a simultaneous increase in the number of this cheaper commodity if, for instance, the increase in productiveness of labour acts uniformly and simultaneously on all the elements of the commodity, so that its total price falls in the same proportion in which the productivity of labour increases, while, on the other hand, the mutual relation of the different elements of the price of the commodity remains the same. The rate of profit could even rise if a rise in the rate of surplus-value were accompanied by a substantial reduction in the value of the elements of constant, and particularly of fixed, capital.

But in reality, as we have seen, the rate of profit will fall in the long run. In no case does a fall in the price of any individual commodity by itself give a clue to the rate of profit. Everything depends on the magnitude of the total capital invested in its production. For instance, if the price of one yard of fabric falls from 3s. to 1⅔s., if we know that before this price reduction it contained 1⅔s. constant capital, yarn, etc., ⅔s. wages, and ⅔s. profit, while after the reduction it contains 1s. constant capital, $#8531s. wages, and ⅓s. profit, we cannot tell if the rate of profit has remained the same or not. This depends on whether, and by how much, the advanced total capital has increased, and how many yards more it produces in a given time.

The phenomenon, springing from the nature of the capitalist mode of production, that increasing productivity of labour implies a drop in the price of the individual commodity, or of a certain mass of commodities, an increase in the number of commodities, a reduction in the mass of profit on the individual commodity and in the rate of profit on the aggregate of commodities, and an increase in the mass of profit on the total quantity of commodities — this phenomenon appears on the surface only in a reduction of the mass of profit on the individual commodity, a fall in its price, an increase in the mass of profit on the augmented total number of commodities produced by the total social capital or an individual capitalist. It then appears as if the capitalist adds less profit to the price of the individual commodity of his own free will, and makes up for it through the greater number of commodities he produces. This conception rests upon the notion of profit upon alienation, which, in its turn, is deduced from the conception of merchant capital.

We have previously seen in Book I (4 and 7 Abschnitt) [English edition: Parts IV and VII. — Ed.] that the mass of commodities growing along with the productivity of labour and the cheapening of the individual commodity as such (as long as these commodities do not enter the price of labour-power as determinants) — that this does not affect the proportion between paid and unpaid labour in the individual commodity, in spite of the falling price.

Since all things appear distorted, namely, reversed in competition, the individual capitalist may imagine: 1) that he is reducing his profit on the individual commodity by cutting its price, but still making a greater profit by selling a larger quantity of commodities; 2) that he fixes the price of the individual commodities and that he determines the price of the total product by multiplication, while the original process is really one of division (see Book I, Kap. X, S. 281 [English edition: Ch. XII. — Ed]), and multiplication is only correct secondarily, since it is based on that division. The vulgar economist does practically no more than translate the singular concepts of the capitalists, who are in the thrall of competition, into a seemingly more theoretical and generalised language, and attempt to substantiate the justice of those conceptions.

The fall in commodity-prices and the rise in the mass of profit on the augmented mass of these cheapened commodities is, in fact, but another expression for the law of the falling rate of profit attended by a simultaneously increasing mass of profit.

The analysis of how far a falling rate of profit may coincide with rising prices no more belongs here than that of the point previously discussed in Book I (S. 280-81 [English edition: Ch. XII. — Ed.]), concerning relative surplus-value. A capitalist working with improved but not as yet generally adopted methods of production sells below the market-price, but above his individual price of production; his rate of profit rises until competition levels it out. During this equalisation period the second requisite, expansion of the invested capital, makes its appearance. According to the degree of this expansion the capitalist will be able to employ a part of his former labourers, actually perhaps all of them, or even more, under the new conditions, and hence to produce the same, or a greater, mass of profit.