It falls over time, that’s bad for porkies
In the quest to make as much money as possible, capitalists actually create the conditions that produce less profit. They create conditions that pay workers less over time which means workers can’t afford to buy the goods they produce which means a smaller market for the piggies. They can get around this by expanding into new markets (international business) but that only works for so long. Eventually they can’t keep growing and in order for investors to keep making money they have to start cutting costs internally which ultimately hurts the business/economy as a whole.
That’s actually a separate issue, crises of overproduction are unique to capitalism because of “anarchistic” production.
Decreasing rate of profit is what happens with “innovation”. As you develop the means of production, you increase the productivity of a working hour at the expense of a larger capital outlay in means of production. This creates the conditions for monopoly as the only capitals able to front the money for a profitable enterprise are existing large ones.
Small firms are pushed out because the profitability of a working hour is set by the output of the large manufacturers, so as those small holders fail, their workforces go to work for the large capital for less pay even though their productive output is higher because they’re paying for the cost of the initial capital outlay with their surplus value.
Capitalism has a lot of rate of profit problems. I think you’re probably thinking of the tendency of the rate of profit to fall (TRPF), though, which is an idea Marx touched on and that Marxists later got very interested in because taken to its natural conclusion it means capitalism has a particular death spiral.
I’ll give a short description, but also it’s best to read Marx directly, because even though it takes a good amount of time, uses references and language specific to the 19th century, and is just plain dense, there is no substitute for understanding what the heck he was talking about and responding to and I have yet to find an explainer that doesn’t inject some factionalism, and usually a liberal Western academic one.
Anyways, the short version is that under relatively typical conditions of capitalism, the overall bulk rate of profit should tend to go down. The rate of profit is a percentage - if the company makes $520 and spends $500, then the rate of profit can be found by dividing and subtracting 1: 520/500-1=1.04-1=0.04=4%. So, aggregated over all companies and profits, TRPF says it tends to go down. “Tends” means it will sometimes go up as well, but if you plot a line through it over many years, it’ll be sloped down.
Under capitalism, the whole system is premised on maximizing profit: it’s how you compete, it’s how you get bigger, and therefore how you gain power and get what you want. Under this model of capitalism, profit-seeking is key to investment in the first place, as the only reason to invest is an expectation of return. If profit rates get too low, investmemt ceases ans there is a crisis.
The focus on TRPF is whether itb s an inherent property of capitalism, for which Marx set up an argument. There are more subtleties to it (read Marx!) but I will give the simplified version.
The basic math is that under conditions of capitalist competition, profit-seeking occurs through cost reductions: spending less than $500 above means more profit. Costs can be split into two categories: labor and everything else. There tendd to be an incentive to automate, which shifts costs from labor into the “everything else” category, so long as the total cost is lower. ATMs are cheaper for banks than employing a bunch of tellers.
When a given company takes the first step in automation, they cut their costs and therefore increase their own profits. However, other companies can also simply buy the automating thing, so they will also do this and then cut their prices in an attempt to compete. This means the equilibrium from automation doesn’t result in increased profits in aggregate over time, and could even be a zero-sum game.
The Marxist nail in the coffin is the explanation of how value is created via labor, which translates (simplified) into profit truly emerging from a graft of workers’ labor to the company (capitalist), so if the amount of labor required to make a thing goes down, so does thr room for profit. Capitalism incentivizes a decrease in its own rate of profit.
Please keep in mind that Marx’s argument is better than this and really getting it requires understanding his formulation of value in the production and exchange of commodities. It is also something that starts as a first principles argument but is best understood situationalky and through the analysis of real crises of capitalism. Michael Roberts has written pretty well about this.
*1.04-1 lol i looked for a while despite knowing the calc because of this. Thought you did some "multiply all terms by 2"action or something
I think a tangential but very relevant read of the TRPF is that it explains the continued expansion of the capital and extraction frontier, and current-day colonialism and imperialism. The rate of profit can only rise by cutting costs or selling more while keeping costs relatively the same, therefore there is a constant need to find new labor pools that can be used to further cut costs, and at the same time, inserting that previously untapped population into the profit-generating system. That is why capitalism increasingly sticks its nose in the Global South, to extract labor, resources, and profit at very little cost.
That’s very much true, though it also doesn’t require TRPF to be a behavior of capital. Capital needs to locally maximize profit even if it’s at some equilibrium or profits are already pretty high. It wants the overseas wage slave labor force in order to take profits of 30% instead of 25%. The system creates these monsters.
TRPF particularly derives, in real terms, as a greater acculation of debts that must be paid off. Those debts are the offset of not paying labor. One of Marx’s driving insights was that automation was self-accelerating, and so companies would more and more quickly deprecate perfectly functional machines in order to stay competitive. This shifts costs not only away from labor, but away from maintenance and to debts to fund new machinery.
The most hortible consequence is the increasing power of finance capital due to such a shift. Marx thought it would be kept in check (and that workers demanding power would be part of that), but he ended up only being righy about both in the regrettably small number of countries that had successful revolutions. In capitalist countries, finance ran wild, so we get neoliberalism, which creates profit from the dismantling of productive forces.
We also come full circle there, as neoliberalism is also imperialist. It wants those extra profits in dismantling a healthcare system 6000 miles from the company’s offices. In fact, it needs expansion even more than industrial capital, as it’s built entirely on a house of cards and cannot increase its own productive forces (it doesn’t produce!).
A common general example is manufacturing consumer goods, but because of competition, the wages of the workers making them decrease (for short term profit by the bosses)
However, because the population has less and less discretionary income, they can’t afford the goods they produce! Which in turn creates surplus, depresses the market price and makes the goods ultimately unprofitable to sell.
Goods are priced based on cost of inputs to make those goods. Labor is generally the most expensive input and Marx theorized that labor is the primary way goods get value. You need someone to make something. Raw iron has no value if you have nobody to smelt it. Cotton has no value with nobody to weave it.
Capitalists get profit by selling goods at a higher cost than they pay to make goods. So capitalists generally like to reinvest their profit into labor saving machinery. Labor is the highest cost usually, so saving money on labor is always good.
In the short run, buying a machine that makes 10 t-shirts an hour and paying one person to operate it is more profitable than paying 10 people to make 10 t-shirts an hour by hand.
So the first capitalist to invent this t-shirt making machine will reap enormous profits because now they don’t have to pay 10 people to make those t-shirts. They buy one machine once and it does all the work. They can sell the shirts at 1/10th of the price and blow their competitors out of the water.
But wait I thought you said value is derived from labor, this example shows a capitalist making more money by reducing labor. Here’s where it gets tricky.
Other t-shirt making capitalists will see the profits to be made and will eventually get their own t-shirt making machine. If they don’t, they’ll have to continue paying 10 people to make 10 shirts and will eventually get beaten by the t-shirt machine. So while the inventor of the t-shirt machine made enormous profits in the short run, eventually the rest of the t-shirt making industry will adapt with their own machines or will get priced out.
So now everyone in the t-shirt business has these machines, so they have to continue lowering prices to be competitive. Eventually, all the t-shirt sellers will settle on one price, which is the bare minimum cost of paying one person to operate the t-shirt machine. Each time a seller lowers their prices, they reduce their profits. Before the t-shirt machine was invented, paying workers to make a t-shirt was relatively expensive. Now that EVERYONE has a t-shirt machine, the cost of making a t-shirt is very cheap (once you have the machine that is).
Since the t-shirt is so cheap to make and anyone with upfront capital can get their hands on a t-shirt machine, t-shirts have to be sold for cheap. Which means the industry as a whole isn’t making as much profit as they were when humans made the t-shirts. Production of t-shirts are more efficient with the t-shirt machine, but because capitalists always try to undercut eachother they will get sold for cheaper.
If all the capitalists in one industry agree to to not undercut eachother, it’s an oligopoly and those are “technically” illegal. Oligopolies and monopolies are one way that capitalists try to keep onto profit. Otherwise, they have to make more cuts on the production side. Cutting wages is one way to save money on inputs. Securing a cheaper raw material is another way. But you can only find so many cheap raw materials, you can only cut wages so many times before you can’t make anymore cuts. So assuming the industry doesn’t form a monopoly or oligopoly, the profit will always fall in the long term, even if capitalists make massive short term profits.
