The Limits of the Mixed Economy. Paul Mattick 1969



Marx was not particularly interested in demonstrating the viability of anarchic capitalism. His concern with the law of value relates to his “ultimate aim to lay bare the economic laws of motion of modern society.”[1] The best points in Capital, Marx wrote to Engels, “are 1) the twofold character of labor, according to whether it is expressed in use-value or exchange-value (all understanding of the facts depends upon this); and, 2) the treatment of surplus-value independently of its particular forms of profit, interest, groundrent, etc.”[2] The twofold character of labor-power is, of course, the equivalent of the social relations of capital production as a production of surplus-value. And the independent treatment of surplus-value points to this basic social relationship, which lies hidden behind the various categories in which surplus-value is split up among its various appropriators.

Capitalist production is production of exchange-value by way of production of commodities. Its goal is surplus-value as additional exchange-value. Surplus-value is the difference between the exchange-value of labor power and its actual productive capacity. It is the time relation between the labor necessary to sustain and re produce the workers and the labor that falls to the capitalists in the form of surplus-products, later realized in profits. From the standpoint of the labor theory of value, the exchange-value of a commodity decreases with the increasing productivity of labor. More use-value in commodity form finds its expression in the same or less exchange-value as the socially necessary labor-time incorporated in them declines.

The development of the social productivity of labor in capitalism expresses itself on the one hand in the decrease of exchange-value relative to the use-value of commodities, and on the other hand in an increase of the mass of use-values which compensates for the declining exchange-value. Viewed capitalistically, a mere increase in productivity is senseless unless it involves an increase of surplus- value in terms of exchange-value. This requires an increase in the rate of exploitation, in the “rate of surplus-value,” which, in turn, involves a change in the relation between necessary and surplus- labor time. It can be accomplished either by lengthening the total working time or by shortening the work period required to cover the exchange-value of labor-power. One can assume, however, that capital expansion in a closed system will reach a point where the number of workers cannot be increased, where the working time cannot be prolonged, and where that part of the labor-time during which the workers produce their own means of existence cannot be any further shortened. At such a point capital accumulation would come to an end.

The increases of productivity, of surplus-value, and of the accumulation of capital are all one and the same process. They all imply that capital invested in the means of production grows faster than that invested in labor power. In Capital, Marx constructs a value-model of capital development in terms of the conceptual entity “total capital,” with its social aggregates of wages, profits, and investments. Although all directly discernable connections between value and price are lost in the actual exchange process, a consideration of “society as a whole” shows that all prices together – regardless of their relations to each other – represent total value. This allows for a value analysis of capital development. The concept, “society as a whole,” like the value concept itself, is justified not only as a necessary theoretical device but s a valid abstraction from reality.

In general, social development is based on the growing productive power of social labor. Increasing the productivity of labor means that more can be produced in less time. This is accomplished through the development of means and methods of production or, under capitalist conditions, by the accumulation of capital. The growth of capital changes its organic composition. To give Marx’s own definition of the term, “the composition of capital is to be understood in a twofold sense. On the side of value, it is determined by the proportion in which it is divided into constant capital or the value of the means of production, and variable capital or value of labor-power, the sum total of wages. On the side of material, as it functions in the process of production, all capital is divided into means of production and living labor-power. This latter composition is determined by the relations between the mass of the means of production employed, on the one hand, and the mass of labor necessary for their employment on the other. I call the former the value-composition, the latter the technical composition of capital. Between the two, there is a strict correlation. To express this, I call the value-composition of capital, in so far as it is determined by its technical composition and mirrors. the changes of the latter, the organic composition of capital.”[3]

It follows from this definitions that there is a difference between the rise of the value composition of capital and the rise of its material-technical composition. For instance, “if the capital-value employed ... in spinning is 7/8 constant and 1/8 variable, whilst at the beginning of the 18th century it was 1/2 constant and 1/2 variable ... the mass of raw material, instruments of labor, etc., that a certain quantity of spinning labor consumes productively today is many hundred times greater than at the beginning of the 18th century. The reason is simply that, with the increasing productivity of labor, not only does the mass of the means of production consumed by it increase, but their value compared with their mass diminishes. Their value therefore rises absolutely, but not in proportion to their mass. The increase of the difference between constant and variable capital is, therefore, much less than that of the difference between the mass of the means of production into which the constant, and the mass of the labor power into which the variable, capital is converted. The former difference increases with the latter, but in a smaller degree.”[4]

The organic composition of capital reflects this particular relationship between value and material composition. The gradual change in the organic composition of capital occurs more or less in all spheres and branches of production. The average of individual compositions yields the composition of the total capital in any particular branch of production, and the average of the aver ages in all branches of production yields the composition of the total social capital. It is with this final average that Marx is concerned when he deals with the general law of capital accumulation.

To repeat: the rise of the organic composition of capital implies that the mass of the means of productions and production itself, rise faster than the value composition of capital; which follows, by the law of value, from the decrease of exchange-value caused by the increasing productivity of labor. By assuming a constant rate of surplus-value the rising organic composition of capital leads to a gradual fall of the rate of profit, since it is only the variable part of capital which yields surplus-value while the rate of profit is “measured” on total investments, i.e. constant and variable combined.

The tendency of the rate of profit to fall is compensated through the increasing productivity of labor which results from the higher organic composition of capital. Capital accumulation, according to Marx, expresses itself “on the one hand in a tendency to a progressive fall of the rate of profit, and on the other hand in a progressive increase of the absolute mass of the appropriated surplus-value or profit; so that on the whole a relative decrease of variable capital and profits is accompanied by an absolute in crease of both. This twofold effect can express itself only in the growth of the total capital at a ratio more rapid than that expressed in the fall of the rate of profit.”[5]

Capital may accumulate and maintain a given rate of profit when the value of the variable capital and the value of the constant capital grow at the same pace. This would, however, imply capital formation without an increase in the productivity of labor, which contradicts the real development of capitalism, particularly its vast technological advancement. The absence of capital accumulation may not cause a fall in the rate of profit. But a non-accumulating capitalism is only a temporary possibility; it is a capitalism in crisis. For capitalist production is conceivable only in terms of accumulation. Generally, capital formation always displaces labor and to that extent reduces the rate of profit while simultaneously increasing both the rate and the mass of surplus-value.

As long as the rate of surplus-value can be sufficiently increased, the tendency for the rate of profit to fall is only latent. To “demonstrate” a declining rate of profit one may assume a stationary rate of surplus-value in an otherwise expanding capitalist system. But a situation in which exploitation cannot be increased enough to offset the tendential fall of the rate of profit is not foreseeable. Marx himself pointed out that the abstract scheme of capital development was not enough to provide any predictions about the actual world. All crises in capitalism must be explained out of the given empirical conditions, “out of the real movement of capitalist production, competition, and credit.”[6] The value analysis of capital development postulates “the possibility of crises by a mere consideration of the general nature of capital, without regard to the additional and real relations that form the conditions of the real production process.”[7]

Nevertheless, the law of the falling rate of profit was for Marx, “the most important law of political economy.”[8] Simple though “the law of the falling rate of profit” appears to be, the classical economists had “tried in vain to discover it.”[9] They had not succeeded because they had been “tinkering with the distinction between constant and variable capital without ever defining it accurately”[10] Ricardo, for instance, “equated profit with surplus value,”[11] but he did not observe its relation to total capital. Thus he failed to recognize the falling rate of profit as an immanent law of capital accumulation. Although incapable of predicting the end of capitalism in any specific sense, the recognition of the falling rate of profit as the immanent law of capital expansion destroyed the illusion that capitalism could ever reach the state of tranquility its apologists held out as the hope of the future. It implies that all the concrete contradictions encountered in reality cannot be considered accidental or remediable shortcomings. These difficulties, singly and as a developmental pattern, are due to a trend inherent in capital production itself. When capitalism’s inner connections are grasped, Marx wrote, “all theoretical belief in the permanent necessity of existing conditions breaks down before their practical collapse.”[12]

In its early stages, capital formation seemed to be merely a quantitative increase in capital. Through the rising organic composition of capital, it became a qualitative change. Newly-added capital attracts fewer and fewer laborers in proportion to its magnitude, and the reproduced capital, which partakes of the changing capital composition, repels more and more of the laborers formerly employed by it. Still, accumulation implies an increase in the laboring population, since part of the surplus-value must be re-transformed into additional variable capital. To do this requires an accelerated rate of capital expansion. According to Marx, “it is not merely that an accelerated accumulation of total capital, accelerated in constantly growing progression, is needed to absorb an additional number of workers, or even, on account of the constant metamorphosis of old capital, to keep employed those already functioning. In its turn, this increasing accumulation and centralization becomes a source of new changes in the composition of capital, of a more accelerated diminution of its variable, as compared with its constant constituent.”[13]

However, the extension of capital production brings new capital of low organic composition into the market economy. Thus the relative decline of the variable capital is mitigated by its absolute growth. Technological development reduces the capital-value of the means of production and thereby slows up the growing discrepancy between constant and variable capital. The tendency of the rate of profit to fall is compensated for by these and other “counter-tendencies.” The question is, however, whether this is always possible.

As previously noted, there are two ways of increasing the rate of surplus-value for a given capital: lengthening the working-day, or shortening that part of the working-day during which the workers produce the equivalent of their exchange-value. This holds true also for the imaginary “society as a whole,” i.e. the world “treated as one nation in which capitalist production prevails everywhere, in order to examine the object of our investigation in its integrity, free from all disturbing subsidiary circumstances.”[14] In this model of capital production the rate of surplus-value may be increased, by increasing the total labor-time or by decreasing that part of the total labor-time which is the equivalent of variable capital. But there are definite limits beyond which the absolute labor-time cannot be extended and the necessary labor-time (the labor-time falling to the workers) cannot be reduced. This is as true for the total mass of social labor as it is for the individual worker. However, the limits which apply in the case of the individual worker are observable, while those which limit “society as a whole,” or any existing society, are not. To speak in extremes: the absolute working-time during any one day cannot exceed 24 hours, and the necessary labor-time cannot be reduced to zero. The extraction of surplus-value has both natural and social boundaries.

The tendency of the rate of profit to fall is a theoretical conclusion derived by applying the labor theory of value to the capital formation process. As a result of the increasing productivity of labor, we will recall, the value of commodities declines with the reduction of the labor-time required for their production. But more commodities are now produced during the time previously needed for fewer of them. Spread over a greater mass of use-values, exchange-value is also enlarged, though to a lesser degree, and capital accumulates. A similar process affects the profitability of capital. Although the rate of profit declines with the rising organic composition of capital, the mass of surplus-value increases with the mass of the accumulated capital. For any definite amount of capital the rate of profit will be lower. But since the total mass of capital is larger, there is more surplus-value; and capital realizes the same, or even a higher, profitability. In Marx’s words, the same causes “which bring about an absolute decrease of surplus-value and profit on a given capital, and consequently in the percentage of the rate of profit, produce an increase of the absolute mass of surplus-value and rof it appropriated by the total capital.”[15] This is so, because “while any aliquot part, any 100 of the social capital, any 100 of average social composition, is a given magnitude, for which a fall in the rate of profit implies a fall in the absolute magnitude of profit just because the capital which serves as a standard of measurement is a constant magnitude, the magnitude of the social capital, on the other hand, as well as that of the capital in the hands of the individual capitalists, ... varies inversely with the decrease of its variable portion.”[16] Despite the fall in the rate of profit, “there may be an absolute increase of the number of laborers employed by capital ... an absolute increase of the mass of surplus-value absorbed, and consequently an absolute increase in the mass of the produced profit. And this increase may be progressive. And it may not only be so. On the basis of capitalist production, it must be so, aside from temporary fluctuations.”[17]

The development of the social productivity of labor implies an increased production of use-values, including the means of production, and consequently requires additional labor. This labor depends not on “the value, but on the mass of these means of production (including the means of subsistence) because the laborer in the production process is not operating with the exchange-value, but with the use-value of the means of production.”[18] Accumulation is therefore “accompanied by a growth of the mass of the available and appropriated surplus-labor, and consequently by a growth of the absolute mass of profit appropriated by the social capital.”[19] All that is necessary is that “the multiplier indicating the growth of the total capital must be equal to the divisor indicating the fall of the rate of profit.”[20] In other words, “capital must grow at a faster rate than the rate of profit falls ... In order that the variable portion of the total capital may not only remain the same, but may also increase absolutely, although its percentage in the total capital falls, the total capital must grow at a higher rate than the percentage of the variable capital falls.”[21] Thus the accumulation process itself nullifies the fall of the rate of profit. If the accumulation is large enough, the greater mass of capital of a higher organic composition will yield the same or a greater profit than that brought forth by a smaller total capital of lower organic composition.

Seen in the light of the labor theory of value, accumulation in terms of exchange-value is held in check by the falling rate of profits while the simultaneous growth of use-value, in the form of additional capital, increases the mass of profit and therewith in creases the actual profitability of capital. Nevertheless, accumulation, according to Marx, is characterized by: “First, the increase of surplus-labor, that is, the reduction of the necessary labor time required for the reproduction of labor-power; secondly, the decrease of the labor-power (the number of workers) employed in general for the purpose of setting in motion a given capital.”[22] These occurrences are mutually conditioned by one another and affect the rate of profit in opposite ways. While the rate of surplus-value rises in one direction, the number of laborers falls in the opposite direction. “To the extent that the development of the productive powers reduces the paid portion of the employed labor, it raises the surplus-value by raising its rate; but to the extent that it reduces the total mass of labor employed by a certain capital, it reduces the factor of numbers with which the rate of surplus-value is multiplied in order to calculate its mass. Two laborers each working 12 hours daily, cannot produce the same mass of surplus-value as 24 laborers each working only 2 hours, even if they could live on air and did not have to work for themselves at all.”[23]

Because “the relation between wage labor and capital determines the entire character of the capitalist mode of production,”[24] the fall of the rate of profit can be checked by accumulation but can not be entirely prevented. The compensation for the relative reduction in the number of workers by means of an intensified exploitation cannot go on “forever” but must eventually find its absolute limit in the increasingly greater mass of the reproducible capital and its expansion requirements. Whatever the mass of labor-power in the real capitalist world, in relation to the progressively faster growing constant capital, it must become a relatively diminishing quantity of surplus-value-producing labor-power.

Carried to its “logical end,” a continuously accelerating capital expansion will change the relative decline of the rate of profit into an absolute decline because of a lack of surplus-value with respect to the swollen mass of capital. When this happens, reality will correspond to Marx’s model of capital expansion.

1. Capital, Vol. I, p. 14.

2. Marx-Engels, Selected Correspondence, p. 232

3. Capital, Vol. I, p. 67.

4. Ibid., p. 683

5. Capital, Vol. III, p. 261.

6. K. Marx, Theorien über den Mehrwert, Stuttgart, 1905, Vol. II, p. 286.

7. Ibid., p. 264.

8. K. Marx, Grundrisse, p. 634

9. Capital, Vol. III, p. 249.

10. Ibid.

11. Grundrisse, p. 639.

12. K. Marx, Letters to Dr. Kugelmann, Moscow, 1934, p. 74.

13. Capital, Vol. I, p. 691.

14. Ibid p. 6

15. Capital, Vol. Ill, p. 259.

16. Ibid., p.259.

17. Ibid., p.255.

18. Ibid., p.256.

19. Ibid.

20. Ibid, p.260.

21. Ibid., p.261.

22. Ibid, p. 289.

23. Ibid, p. 290.

24. Ibid, p. 1025.