[OPE-L:8297] A possible reason why profit rates do not equalise

From: clyder@gn.apc.org
Date: Thu Jan 09 2003 - 07:04:48 EST


I have been thinking about the problem of why the
rate of profit between sectors does not appear to
equalise in the way expected by Marx.

Readers will recall that this intersectoral equalisation
is supposed to ensure that industries of differing
organic compositions of capital will all show the
same rate of profit, even though those with a
high organic composition produce proportionately
less surplus value. This was to be effected by
industries with a high organic composition selling
their output above its value and contrawise for
those of low organic composition.

What we have found empirically is that although
industries with a high organic composition of capital
do sell somewhat above their value, this increment
is not sufficient to offset the higher organic
composition. It looks as if their is a sort of
competition going on between the law of the 
equalisation of the rate of profit and the law
of value. This is consistent with the evidence
that labour values and prices of production seem
to be almost equally good predictors of market

It has occured to me that this apparent competition 
between the law of value and the law of the equalisation
of profit rates may in fact be a reflection of the
class struggle between labour and capital.

The causal mechanism proposed for the equalisation
of profit rates by Marx was the flow of capital
from low return to high return sectors. The flow
of capital out of low return sectors would in
turn lead to shortages of supply in these sectors
so that prices would rise until profit rates equalised.
Whilst something of this sort probably does occur
in the long run, in the short run things are
somewhat different.

Consider the car industry compared to the software
industry. Ford almost certainly has a higher organic
composition than Microsoft, it also probably has a
lower rate of profit. This sort of difference in
profit rates would have contributed to the boom
in software stocks relative to heavy industry stocks
over the 90s. 

But what does this mean for Ford. In the short run
it is much easier to restrict dividends to shareholders
than it is to cut wage bills. A firm can survive 
not paying a dividend for a year. If it tried paying
no wages for a couple of months it would have no
workforce. Since it is the need of firms to meet their
wage bill that enforces the law of value, this implies
that in the short run at least the law of value is
more pressing to them.

In the medium term, Ford can try laying off workers
and intensifying labour. This from the firms point of view
has the effect of raising the rate of profit, but
from the point of view of the whole automotive sector
it is worse than useless. GM will be doing the same
thing, and in the absence of a cartel, the lower costs
of production for each firm will be reflected in price
cutting. The net effect will have been to reduce the
labour force in car production but leave the capital
stock unchanged - leading to an even higher organic
composition of capital relative to the software industry.

The mechanism that Marx relies upon to equalise profit
rates is only likely to operate smoothly if there is no
excess capacity in any sector, and relatively low organic
compositions. If there is excess capacity, then the flow
of capital into high profit sectors will leave the low
profit sectors with considerable excess capacity for 
a long time. This is particularly the case with sectors
that have high organic composition since these have
long lived capital stock which only tends to be removed
when the factories in question are actually making a loss.
If they are making a loss, it will be because the selling
price is below the cost of production and thus below
value ( assuming this is an industry wide phenomenon ).
At this point we are talking about the operation of the
law of value not the operation of the law of the equalisation
of profit rates.

High organic composition industries are also the ones
most likely to have excess capacity since large investments
in boom times will last for a couple of more business

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