The declining rate of profit: Avoiding the key issue

James Doughney’s latest contribution to the discussion around Karl Marx’s tendency of the rate of profit to fall largely avoids the key point — the relationship between the proportional rise in the mass of physical capital and productivity rate rises. Leaving aside other issues (what is investment, whether Marx finished his theory, if something is considered a stock or flow, whether demand creates supply or supply creates demand, etc.) for the Okishio/Kalecki critique to hold water it must be shown that any rise in the amount of means of production used in one industry must be more than offset by rises in productivity in sectors supplying those means of production, such that the rise in the mass of constant capital is more than offset by the reduction in its unit price. 

James expresses confusion over this point. Really there is nothing to be confused about: productivity reduces the unit cost of output. The question is whether productivity must reduce the unit cost of output enough to reduce the unit value/price of the accumulated capital by more than its increased amount. Demonstrating this mathematically is as simple as putting the appropriate numbers into the equation; demonstrating it in reality is a different matter altogether. 

Let us assume that the physical proportion of constant capital relative to living labour doubles (twice as many machines, stocks of raw materials, etc, are used in the labour process relative to the number of workers who use them, meaning the technical composition of capital doubles the proportion of means of production relative to labour). If, due to productivity more than doubling, the cost of means of production more than halves, then certis paribus the proportion of spending on constant capital must fall. 

Nobuo Okishio and Michał Kalecki merely assume this is necessarily always true; that it must always occur. They reduce a real but essentially arbitrary phenomena — that productivity cheapens the means of production and therefore offsets the rise in the organic composition of capital — to a tautology — that offset will always be larger than the physical rise in its mass, so the rate of profit (the difference between profits and costs) must rise. Mathematical attempts to refute the theorem are necessarily futile. It is akin to assuming that if the runner with the longest legs always wins the race, then runner X with the longest legs must win the race. The real question is: must the runner with the longest legs always win the race?

Alfred Marshall in his 1895 Principles of Economics sought to prove diminishing marginal utility by assuming a shower of diamonds fell from the sky like rain, but only once. On this assumption, Marshall claimed the scarce diamonds would be rapidly used up and therefore their value would rise, irrespective of production (in this case there is no production). Hence, he claimed, value was determined not by supply but demand and that there was no relationship between labour values and prices. 

Assuming this, David Ricardo’s labour theory of value, which is predicated on conceptually unlimited production, was therefore wrong. The labour theory of value was refuted! But as diamonds do not fall from the sky (not once or ever), Marshall refuted nothing. Similarly, neither have Okishio or Kalecki, as there is no necessary relationship between the rise in the mass of means of production used in one industry and changes in productivity of the different suppliers of those means of production. 

Classical political economy sought an explanation for an observed empirical phenomenon that capitalist cycle profit rates tended to fall. Adam Smith attributed the fall to intensifying competition. Ricardo, in contrast, considered it the result of rising labour costs due to the fall in the marginal quality of agricultural land. Neither explanation stood up, as competition merely redistributes value but does not create it. Although there are differences in the marginal productivity of land, this is not necessarily reflected in the price of staple food stuffs, as the existence of these differences does not exclude changes to their absolute level; that is, the absolute amount of production can go up or down, even while the relative differences remain the same. 

Marx, in contrast, explained falling profits as due to the accumulation process itself. Over time the proportion of dead or constant capital to living labour — the source of all surplus value and, therefore, profit — tended to rise. Hence, as capitalists of necessity accumulate in the search for profits higher than the maximum, falling profit rates were “just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour”. However, if this were a unilinear law, then capitalism would be in a perpetual slump. So, Marx continued, the explanation of

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. (Marx 1894, Capital III, chapter 14) 

Five offsetting factors reduce the law to a tendency: raising the intensity of exploitation, reducing wages below their value, cheapening elements of constant capital, expanding the population that could be exploited by capital, and foreign trade. These factors are almost a list of the key changes that occurred in the world capitalist economy during the 1990s as a result of the Soviet Union’s collapse and China’s transition to the market. The relevance of the law is, ironically, demonstrated in the operation of these factors in causing a rise in profit rates during the period of globalisation (roughly 1991 until 2021), and their current exhaustion as globalisation transitions towards a phase of multipolar crises that defines world capitalism today. 

The current period and analyses of the present crises for capitalism echo the original discussion around collapse or Zusammenbruch in the Second International, in the period leading up to World War I. In 1899 Alexander Parvus, Leon Trotsky’s close collaborator, defined the longer phases in the world economy as periods of “Sturm und Drang” (storm and stress) for capitalism. These periods resulted from a combination of the extension or opening of new markets, the rise of new sectors of capital accumulation, the reduction in turnover times, and the advent of new technological advances,

This does not abolish the periodical alternation of upswing and crisis, but the upswing develops in a stronger progression, while the crisis sharpens but its duration is shortened. This continues until the forces of development have unfolded to their full potential. Then a sharp commercial crisis takes place, which finally turns into an economic depression. (cited in Jefferies 2025, War and the World Economy: Trade, Tech and Military Conflicts in a De-globalising World) 

In 1995 Ernest Mandel, a post-war Trotskyist leader, identified the conditions to end the long depression of the 1970-80s as,

A massive “system shock” which combines a sharp rise in the rate of profit (induced by an even steeper rise in the rate of surplus value) and a considerable broadening of the market. The latter could only occur, in the present world situation, through total integration of the former USSR and the People’s Republic of China into the capitalist world market. (Mandel 1995, Long Waves of Capitalist Development) 

This expansion, if combined with major defeats of the working class and Third World national liberation movements, could enable a new period of upswing. Mandel thought it “unlikely,” but in fact these defeats had already occurred by 1995. 

Marx noted

Accumulation can have a rapid effect on the demand for labour only if accumulation was preceded by a large increase in the labouring population, and wages are therefore very low so that even a rise of wages still leaves them low because the demand mainly absorbs unemployed workers rather than competing for those fully employed. (Marx 1861-63, Theories of Surplus Value, chapter 18)

In the newly globalised world, the populations of the former Centrally Planned Economies (CPEs), previously excluded from the world market, were now available for capitalist exploitation. US free market economist Richard Freeman estimated the restoration of capitalism doubled the labour capable of being exploited by the market from approximately 1.46 billion workers to 2.93 billion. The means of production of these states — whole cities (Prague, Moscow, Berlin, Dresden, Warsaw) and attendant infrastructure (electricity, roads, railways, docks, etc) — were appropriated by capitalists free of charge. Barriers to trade attendant on multipolar competition vanished and the expanded market enabled the computer, phone and internet technological revolution. 

Capitalism escaped the slump of the 1970-80s and experienced its most rapid period of growth in history. However, the expansion of the world market during the 1990s was systematically, albeit inadvertently, concealed by the application of neoclassical statistics. Far from a critique of these statistics being “overreaching,” as James puts it, it is necessary, first, to understand the world and, second, to show the absurdity of neoclassical economics. 

Neoclassical statistics do not differentiate between modes of production, as they consider all production to be a form of market economy, albeit “distorted”. CPEs measured the output of the plan through the Material Product System (MPS), which took physical aggregates and allocated them a “value” according to planners’ preference. There was no market mechanism and no value or price, as understood in a market economy. As a result there was no national income, which is a measure of changes in production measured in price. 

How then to measure an economy without a market when national income is a measure of market exchanges (however modified)? By simply pretending that planned economies were in fact a form of market. British economist Angus Maddison, who founded the Maddison World GDP Project, followed the CIA’s Abram Bergson to develop a “counterfactual” — that is fictional — analysis of the Soviet Union’s output, which simply assumed away the difference between planning and the market. These estimates of Soviet national income,

create a counter factual [sic] estimate of what Soviet prices would have been if the economy were run on capitalist lines, removing the ‘distortions’ created by the command economy, and getting a better picture of the real cost of production. (Maddison 1998, “Measuring the Performance of a Communist Command Economy: An Assessment of the CIA Estimates for the U.S.S.R”, Review of Income and Wealth, Series 44, Number 3, September)

The problem was that the difference between central planning and the market was objective, not subjective. There was a real, material, objective difference between planned and market prices. Planned prices were not really prices at all, but applied (insofar as they were at all) post factum by planners according to political criteria. They were subjective not objective; they were not tested in the market through exchange. 

When the market was introduced by Boris Yeltsin’s 1991 Big Bang, centrally planned output collapsed. But the collapse of centrally planned material products represented the creation of market output; of market production and national income. The System of National Accounts (SNA) of neoclassical statisticians obliterated the distinction between planned and market output, thereby measuring the creation of the market as its collapse. Hence, the 1990s, which laid the basis for the hyper-globalisation of 2001-08 was, according to the statistics, a period of contraction and slump. Yet it was central planning that was contracting and slumping, not the market, which was in fact increasing or growing. 

Just as neoclassical statisticians mismeasured the transition of the CPEs to capitalism, so too did the use of their fictional valuations of fixed capital stock to estimate the rate of profit yield lead to completely false results. Their use by Marxist economists shows a basic failure to appreciate the categorical distinction between costs and opportunity costs. This really elementary mistake is conceptually absurd. It treats estimates of future profits as identical to, analogous with or somehow a reflection of, past costs, when there is essentially no relationship between the amount of profit that may be made and the cost of constant fixed capital advanced. 

Leaving aside the conceptual question, there is also a more practical problem. Opportunity cost valuations grossly overestimate the value of fixed capital stock when compared with the Internal Revenue Services (IRS) measures of actual business costs. The stock of fixed capital advanced, or its book value, is estimated by the IRS as Depreciable Assets Less Depreciation (DALD). Depreciable assets are those assets that may be depreciated. In general, they are assets before depreciation has been subtracted from them, just as an inflatable balloon may be inflated but, in general, has not yet been. The subtraction of Accumulated Depreciation (the accumulated reduction in the value of those assets through use) reveals the assets net or book value. This is the amount of fixed capital advanced. 

Using the neoclassical SNA’s opportunity cost fictional data sets overvalues the amount of fixed capital advanced by between five and seven-fold. There use duly measures a rise in the mass of profit as a reduction in the rate of profit by multiplying estimated rises in profits by their anticipated service life. Of course, these conceptual and practical problems do not stop neoclassical statistics from being used. A widely disseminated example of this is World Profit Rates, 1960–2019, authored by Deepankar Basu, Julio Huato, Jesus Lara Jauregui and Evan Wasner this year. It shows US profits slumping between 2001–08 — the period of hyper globalisation and perhaps strongest period of US economic growth in history.

James insists that once we accept “the causal priority of demand” then “rigour demands consistency,” but demand is the result of production; that is, demand is determined by production. He was both bewildered and amused, he said, by my reference to Thomas Malthus. Malthus explained the necessity for a parasite class to consume the social surplus created by workers in production. As workers are only paid a fraction of the value they create, they cannot pay for the surplus out of their wages, leading to an implicit disproportional and inadequate effective demand. 

How then to realise the social surplus? James’ reference to borrowing merely kicks the problem down the road, for where do the lenders get their money from? For Malthus, unproductive consumers provide the demand necessary to pay for the surplus workers cannot afford. Marx remarked what Malthus 

required therefore are buyers who are not sellers, so that the capitalist can realise his profit and sell his commodities “at their value”. Hence the necessity for landlords, pensioners, sinecurists, priests, etc, not to forget their menial servants and retainers. How these “purchasers” come into possession of their means of purchase, how they must first take part of the product from the capitalists without giving any equivalent in order to buy back less than an equivalent with the means thus obtained, Mr. Malthus does not explain. (Marx 1861-63, Theories of Surplus Value, chapter 19) 

The causal priority of demand does not explain — indeed cannot explain — how the purchasers come into possession of the means of purchase. It is a theory predicated on the absence of explanation; that is, the generalisation of amused bewilderment.

I discuss these issues in greater detail in my book 2025 book War and the World Economy and this short introductory video.