Machines, Productivity, and Profit

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One of the most commonly-heard terms in the bourgeois economics departments is “productivity.” The vulgar economists of course define “productivity” as the price of output relative to the price of input. So capital has its “productivity” and labor has its “productivity,” and each is rewarded accordingly, or so they say. As Marxists however, we really need to do better than this.

Marx laid out his conception of productivity in the first chapter of Capital, Vol. 1.

The value of a commodity would therefore remain constant, if the labour time required for its production also remained constant. But the latter changes with every variation in the productiveness of labour. This productiveness is determined by various circumstances, amongst others, by the average amount of skill of the workmen, the state of science, and the degree of its practical application, the social organisation of production, the extent and capabilities of the means of production, and by physical conditions…

In general, the greater the productiveness of labour, the less is the labour time required for the production of an article, the less is the amount of labour crystallised in that article, and the less is its value; and vice versâ, the less the productiveness of labour, the greater is the labour time required for the production of an article, and the greater is its value.[1]

In other words, productivity in the Marxist sense is the amount of stuff workers can produce in a given amount of time. This is mediated by the factors listed by Marx above, e.g. the skill of labor, the state of science, the social organization of production, etc. However, more productive workers don’t produce more value. In fact, with a higher productivity of labor, the value embodied in each commodity goes down. This is easy to see. If work is more productive, it takes less time to make each commodity, and if increases in productivity are widespread, then the socially necessary labor time embodied in each commodity—the value of the commodities—decreases.

Fundamentally, this fact that increased productivity does not increase value is the source of one of the inherent contradictions of capitalism: the contradiction between the short-term interests of individual capitalists, and the long-term profitability of a capitalist economy. Investigating productivity, and how this relates to profit, will uncover one of the main catalysts of capitalist crisis.


Why do capitalists want to increase productivity?

If increasing productivity does not actually increase the amount of value being produced, then why do capitalists want to increase productivity? The reason is because capitalists are not directly concerned with increasing value, they are concerned with maximizing their own profits. And although surplus value is ultimately the source of profit, profit appears to the capitalist as merely the difference between the money they make and the money they invest in production. There are thus ways for the individual capitalist, in the short-term, to increase hir profits compared to hir competitors without the amount of actual value being produced going up in the long run. Primarily, there are two ways.

One way is tied to the social aspect of the market. Let’s say an innovating capitalist implements some new technology no one else has yet, that allows hir firm to produce twice as many commodities in a given amount of time as anyone else. This means that for the innovating capitalist, each commodity can be produced with half the amount of labor input as others. Yet, because the capitalist sells commodities on the market where there are other produces, this innovating capitalist can still get away with selling hir firm’s commodities for the same price as everyone else. Needing only half the labor input to produce each commodity, but selling each commodity for the same price as everyone else, means this capitalist makes profits well above her competitors on every commodity sold. These profits are fleeting however. Once this new technology becomes widespread, then the productivity of the whole economy will increase, and prices across the board will fall. In other words, the innovating capitalist ceases to make profits over other capitalists when new technologies become more common.

The other way in which increasing productivity can increase profits for capitalists in the short-term is by reducing the value of labor-power, and thus effectively the amount in wages capitalists have to pay their workers. Increasing productivity in the realm of consumer goods lowers the value and in turn the prices of those consumer goods. This means that workers will need less money to be able to purchase the goods they need. If the worker can afford the commodities s/he needs with less money, then the capitalists can get away with paying hir less. And if wages are depressed, profits for capitalists increase. However, an increase in profit through these means is quite temporary, for reasons that will be discussed in detail later on. As will be shown shortly, increasing productivity in this manner cannot lead to a long-term increase in the rate of profit.


The long-term effect on the whole economy of increasing productivity

As already mentioned, a general increase in productivity lowers the unit value of each commodity, and so although the volume of stuff being produced may increase, the amount of value being produced does not. Yet, in the short-term, increasing productivity can increase profits for individual capitalists and for certain industries over others. It thus appears to the capitalist that productivity is the ultimate source of profit, rather than the reality that in the end, there would be no profit without labor.

In their quest to increase productivity, capitalists invest more and more in new technologies that make the production process more efficient, and end up increasing the amount of fixed capital (machines, raw materials, etc.) involved in the production process relative to variable capital (investment in labor). The concept of the “organic composition of capital” is useful in understanding this phenomenon. The organic composition of capital is equal to the ratio between fixed capital and variable capital insomuch as capitalists increase this ratio in order to increase productivity. So in short, an effect of the continual drive of capitalists to increase productivity is that the organic composition of capital for the economy increases—i.e. there is a tendency for the amount of machines, raw materials, etc. to increase relative to the amount of labor involved in the production process. This has serious consequences for the capitalist economy as a whole.


The tendency for the rate of profit to fall

The most major effect of an increasing organic composition of capital on a capitalist economy is that there is a long-term tendency for the rate of profit to fall. To prove this, we will need to use some algebra, so before proceeding we should define some Marxist categories in terms of symbols:

s = surplus value

v = variable capital (investment in labor)

c = fixed capital (machines, raw materials, etc.)

r = rate of profit.

The rate of profit in these terms is defined as the ratio between surplus value and total capital invested, or:

rop.

This can equivalently be expressed in the following terms:

rop2

or in plain terms, the rate of profit = the rate of exploitation × the percentage of capital that is variable capital.

When the capitalists increase the organic composition of capital (c/v) in search of higher productivity, the percentage of capital that is variable capital decreases. And as we can see from the above equation, if the percentage of capital that is variable capital decreases, the rate of profit also decreases, assuming the rate of exploitation stays the same.

Of course, the rate of exploitation (surplus value relative to investment in labor) can change. Increasing the rate of exploitation is one of the main ways that the tendency for the rate of profit to fall can be counteracted in the short term. The amount of labor workers perform can be increased, or wages can be reduced through unemployment or other means. Capitalists can also exploit labor in other countries to make up for lower profits domestically. But there are physical limits to how much workers can be exploited. Wages cannot fall below zero and there are no more than 24 hours in a day. Therefore, in the long run, the tendency for the rate of profit to fall wins out.

What we have shown here is that, although increasing productivity can increase profits for individual capitalists in the short-term, at the end of the day, increasing productivity—which is primarily achieved through an increase in the organic composition of capital—leads to a tendency for the rate of profit of the whole economy to fall. This tendency, which inevitably wins out against others, is the root of capitalist crisis. Falling profits mean stagnation and decay, a situation which capital abhors. Of course, this does not necessarily spell system collapse; in crisis there are new investment opportunities and new avenues for profit recovery. But the tendency for the rate of profit to fall does not go away. Its real consequence is cyclical, perpetual crisis, and at a fundamental level, this contradiction between the short-term interest of the individual and the long-term profitability of the system is the root of the “boom and bust” nature of capitalism.

- Morton Esters

Notes

1. Karl Marx, Capital: Critique of Political Economy, Vol. 1 (Marxist Internet Archive), Ch. 1. http://www.marxists.org/archive/marx/works/1867-c1/ch01.htm