Crisis theory, the law of the tendency of the rate of profit to fall and Marx’s studies in the 1870s, Monthly Review, April 2013

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A critique of Michael Heinrich, Crisis theory, the law of the tendency of the rate of profit to fall and Marx’s studies in the 1870s, Monthly Review, April 2013.

By G Carchedi and M Roberts

Michael Heinrich’s article is really a continuation of the argument by the Monthly Review (MR) that Marx’s law of the tendency of the rate of profit to fall (LTRPF) is not the main cause of economic crises. In the view of Heinrich, Marx’s law is theoretically wrong, illogical and empirically unjustifiable and unjustified.

Heinrich makes the following points: 1) Marx’s law is inconsistent because its categories are indeterminate; 2) it is empirically unproven and even unjustifiable on any measure of verification; 3) Engels edited Marx’s works badly, distorting his views about the law in Capital Vol. 3; 4) Marx himself, in writings during the 1870s, began to have doubts about the law as the cause of crises and started to abandon it in favour of some theory that took into account credit, interest rates and the problem of realisation (similar to Keynesian theory); 5) Marx died before he could present these revisions of his crisis theory, so there is no coherent Marxist theory of crisis.1

Let’s take these points one by one.

1) Marx’s law of profitability is inconsistent and illogical. This argument has been thrown up regularly since Bohm Bawerk, through Bortkiewicz, Sweezy and the MR, to the neo-Ricardians and now Heinrich.2

The LTPRF, the ‘law as such’, says that the rate of profit will tend to fall over time because the organic composition of capital (the ratio of the value of constant capital to variable capital) will tend to rise. This flows from the basic equation of profitability, s/c+v. If constant capital (machinery, plant, raw materials etc.) rises faster than the variable capital (the value of labour power and the only creator of value), the rate of profit will fall, other things – including the rate of surplus value - being equal.

There are two issues involved here. The first is why, when labour is ejected, the organic composition should rise rather than fall. Heinrich considers Marx’s example of the fall in labour power from 24 to 2 workers. Against the thesis that this implies an increase in the organic composition of capital, Heinrich comments that “we cannot exclude the possibility that the capital used to employ the two workers is smaller than that required to employ twenty-four”. Sure, we cannot rule out that a decrease in labour power is accompanied by a greater decrease in assets. But Marx is rightly concerned not with incidental occurrences but with regularities and tendencies. Heinrich, on the other hand, is here concerned with an exception to the rule in order to invalidate the rule. If for Heinrich a persistent – even though cyclical - decrease in the organic composition of capital is the rule, he should submit valid theoretical arguments and empirical data. He does neither.

Marx, on the contrary, has bulletproof arguments. In order to increase their profitability, the capitalists must increase their (labourers’) productivity. The way to do this is to introduce new means of production, which are both labour shedding and productivity increasing. Capitalists investing in less efficient and thus lower productivity means of production, which imply a lower organic composition of capital, would be doomed to bankruptcy. Thus, as a rule, due to the application of new technologies, the number of labourers per unit of capital invested falls, i.e. the organic composition rises.3 As for empirical evidence, it is overwhelming. To mention only one example, in the productive sectors of the US economy, the number of labourers per one million of (deflated) dollars of assets has fallen persistently from 65 in 1947 to 6 in 20104.

The second issue is the role of the rate of surplus value when it is allowed to change, i.e. to rise. For Marx this is a countertendency. Not so for Heinrich. For him, it is part of the Law. As he says: “contrary to a widespread notion, the increase in the rate of surplus value as a result of the increase in the productivity (of labour) is not one of the counteracting factors but rather one of the conditions under which the law as such is supposed to be derived”. Let us see why. Marx’s formula for the average rate of profit (ARP) is s/(c+v). Call it formula (A). This formula can also be written as (s/v)/[(c/v)+1]. Call that formula (B). Heinrich argues that, given that in (B) the rate of surplus value, just as the organic composition, is an integral part of the rate of profit, and given that we do not know which of these two factors rises or falls more quickly, the direction of the movement of the average rate of profit (ARP) is indeterminate, quite aside from the countertendencies.

Not so. Here Heinrich implicitly questions a basic rule of scientific procedure. To assess the relation between profitability and the organic composition, Marx holds other factors, including the rate of surplus value, constant. This is a common scientific procedure and it reveals the ‘tendency’ that Marx wants to show. We can re-write (A) as (B), but the fact that the rate of exploitation appears explicitly in (B) does not imply that we should drop the initial assumption of a constant rate of exploitation. First, we must establish the inverse relation between the organic composition and the ARP. Then we can let the rate of exploitation fluctuate and see how this fluctuation affects the initial relation. So the rate of exploitation becomes one of the counter-tendencies because, as we shall see, in the end the negative effect of the rise in the organic composition re-emerges in spite of the countertendencies. But here is the point: the tendential fall in the ARP would hold also if Heinrich critique were valid. We shall see this too in a moment. Let us begin with the former point.

The interplay between the organic composition of capital and the rate of surplus value co-determines the cyclical fluctuations of the ARP. But this does not imply indeterminateness. In the long run the ARP must fall through troughs and peaks, i.e. eventually the rise in the rate of surplus value cannot stop the ARP from falling because it cannot outstrip the rise in the organic composition of capital. But why? The reason is that there is a socially determined insuperable limit to the extension of the working day. When that limit is reached, the ARP falls.

It is of course possible to construct numerical examples showing that the rise in the rate of exploitation can check the negative effect of the rise in the organic composition either forever or for a (very) long time. But this is empty mathematical formalism. In reality, the limit of the working day beyond which it is impossible to go is the outcome of a constant confrontation between capital and labour. Even a small increase in the organic composition might require a socially unsustainable rise in the rate of surplus value and thus in the socially acceptable extension of the working day. What determines how long it will last before the rate of surplus value reaches its limit is not the time derived from mathematical formulas but the time of class struggle, the time needed by labour to stop the increase in the rate of exploitation and possibly reduce it. This is the meaning of ‘in the long run’.

Let us exemplify. Let $1 be the equivalent of 1 hour and let each unit of labour (L) cost $4. Then, if each time c increases by $8=8h, v decreases by 1L=$4=4h

Labour units



S needed for ROP = 33.3%



Hours per unit of labour

Rate of surplus value









































This example shows that the more the OCC rises, the closer the rate of surplus value gets to the point at which the working day cannot be lengthened any longer. If the OCC rises from 2 to 18, the rate of exploitation needed to prevent the ARP from falling rises from 100% to 632.5%, which means that the working day would have to be 29.3 hours long, an obvious impossibility. But it is not necessary to hypothesize such an extreme example. For example, given a working day of 8 hours, in the example above, even a rise in the OCC from 2 to 3 requires a possibly socially unsustainable increase in the working day from 8 hours to 9.3 hours. This is why we should assume that the downward movement is the tendency and the upward movement is the countertendency. And this is what allows us to conclude that the system tends towards crises, i.e. that crises are inevitable, rather than towards equilibrium.

We can now see that Heinrich’s critique of the Law, as being indeterminate, is wrong even on its own terms. Even assuming for the sake of argument that there are two contradictory movements within the Law, namely the rise of the organic composition and of the rate of surplus value, there is no indeterminateness because the rise in the organic composition pushes the working day towards its socially unsustainable limit.

Marx’s LTRPF is thus logically consistent. But it is also empirically supported. Heinrich both misunderstands the former and overlooks the latter. Let us then turn to empirical verification.

2. Heinrich’s second argument is that: “With this law, Marx formulates a very far-reaching existential proposition which cannot be empirically proved or refuted.”

We agree that any economic, indeed any scientific, law, must be empirically observable and subject to falsification and must have predictive value too. We contend that both of these levels of proof are met by Marx’s law.

First, we can measure the rate of profit in capitalist economies using Marxist categories and test the law against its components. And a host of scholars have done just that for various national economies and even for the world capitalist economy.5 And that includes Marx himself.6

What are the empirical issues? Does the rate of profit fall over a long period as the organic composition rises? Does the rate of profit rise when the organic composition falls or the rate of surplus value rises more than the organic composition increases? Does the rate of profit recover if there is sharp fall in the organic composition of capital through the destruction of capital? The answer to these empirical questions is yes. And the correlations between Marx’s variables (organic composition and the rate of exploitation etc) and the outcome (the rate of profit) are high.7

Apart from all the studies cited (see references), here are some examples for the UK and the US economies8. Between 1963 and 1975, the UK rate of profit fell 28%, while the organic composition of capital rose 20% and the rate of surplus value fell 19%. Between 1975 when the UK rate of profit troughed, and 1996, it rose 50%, while the organic composition of capital rose 17% but the rate of surplus value rose 66%. Finally, from 1996 to 2008, the rate of profit fell 11%, as the organic composition of capital rose 16% and the rate of surplus value was flat. All these three phases are compatible with Marx’s LTRPF. Indeed, over the whole period, 1963 to 2008, the organic composition of capital rose 63%, while the rate of surplus value rose 33%, so the rate of profit fell in a secular trend.

In the case of the US economy, the rate of profit fell 24% from 1963 to a trough in 1982, while the organic composition of capital rose 16% and the rate of surplus value fell 16%. Then the rate of profit rose 15% to a peak in 1997, while the organic composition of capital rose 9% but was outstripped by the rise in the rate of surplus value of 22%. From 1997 to 2008, the rate of profit fell 12% while the organic composition of capital rose 22%, outstripping the rate of surplus value, up only 2%. Again, all three phases fit Marx’s law, when the organic composition of capital rose faster than the rate of surplus value, the rate of profit fell and vice versa. Over the 45 years to 2008, the US rate of profit fell secularly by 21% because the organic composition of capital rose 51% while the rate of surplus value rose just 5%. The rise in the organic composition of capital explained 62% of the fall in the rate of profit, while there was no significant correlation with the rise in the rate of surplus value9.

Second, there are empirical studies of Marx’s law that show that it is a reasonable predictor of future events, including the recent Great Recession of 2008-9.10 These studies show that when the rate of profit starts to fall a crisis or economic slump will occur some time thereafter and, even more specifically, the recession begins when the mass of profit falls as a result of a falling rate of profit11. This is more than we can say about any studies that aim to justify alternative explanations of crises based on the ‘problem of realisation’ (consumption or investment) or on high interest-rates or lack of credit, Keynesian-style.

Thus there is a body of evidence to support the view that Marx’s law does operate in capitalist economies and that it is the key (underlying) factor in booms and busts. If Heinrich disagrees (and he does)12, then what is his evidence to the contrary and what alternative explanation does he offer that can be empirically analysed?

3. Heinrich’s third argument is that Marx himself started to doubt his own LTRPF as an explanation of crises.

According to Heinrich, Engels revised and edited Marx’s notes in the chapters in Capital Vol. 3 on the LTRPF in such a way that it made it seem Marx was fully committed to it when in fact a close reading of the writing would show he was not. So Engels falsely “created an impression of an already largely completed theory of crisis”.

Well, we are no experts on the origination of each chapter in Capital, but we are not convinced that Engels making up a title for one of the chapters on LTRPF is sufficient to dismiss Engels’ efforts to put Marx’s detailed notes together into some order without misleading the reader about Marx’s intentions.

4. And that brings us to Heinrich’s fourth argument. What is the justification for saying that Marx became doubtful about his law of profitability? Heinrich says Presumably, Marx was plagued with considerable doubts” (our emphasis) because he started talking about doing a chapter on credit. And “these doubts were probably amplified in the course of the 1870s” (our emphasis). The use of the adverbs ‘presumably’ and ‘probably’ indicates that Heinrich is uncertain about his thesis.

Heinrich claims that, in the 1870s, Marx was looking at the role of national banks in the course of a crisis, so Marx must have no longer thought the LTRPF was relevant without credit being involved. But there is plenty of material in his works on the role of money and credit well before the ‘revisionist’ years of the 1870s. Moreover, why should the intention to write a chapter on credit indicate that Marx was plagued with major doubts about the law? Would the addition of another element (a counter tendency) to the explanation of crises invalidate the law? Only if one adopts an “either-or” approach namely that either the increase in the organic composition or the credit crunch is the cause of crisis. But such an approach has nothing to do with Marx’s method.

The law is the tendency that also explains the counter-tendencies. The cycle is the outcome of both the tendency and the counter-tendencies. We have examined elsewhere the role of monetary policies, i.e. money supply and interest rate policies in recent crises. Monetary policies can indeed influence the timing of the crises and thus the shape of the cycle but they are neither their cause nor can prevent them.13 This is a general conclusion that holds for all counter-tendencies.

Finally, in Heinrich’s words, Marx attempted “mathematically to grasp the relationship between the rate of surplus value and the rate of profit” in the 1870s. That does not suggest he dropped his previous position.14 Heinrich may argue that, if Marx had shown “a consistent regard for them (these calculations), itshould have led to abandonment of the law” (our emphasis). But why? This is only an opinion.

5. Marx died before he could complete his ambitious task of producing analyses of money, the state and the world economy. But that does not mean we cannot derive from his works a coherent theory of crisis based on his LTRPF, his views on credit and banking (fictitious capital) and on world markets and imperialism. Of course, there is plenty of work to be done in developing Marx’s theory of crisis in relation to modern developments and, as Marx did, we are learning more each day. But Marx’s LTRPF remains the most robust explanation of capitalist crises and something way superior to alternative Keynesian and other mainstream economic explanations, which signally failed to explain the Great Recession.15


Bakir, E., and A. Campbell (2006) “The Effect of Neoliberalism on the Fall of the Rate of Profit in Business Cycles,” Review of Radical Political Economics, vol. 38,no. 3.

Basu, D., and P. Manolakos (2010) Is There a Tendency for the Rate of Profit to Fall? Econometric Evidence for the U.S. Economy, 1948–2007. University of Massachusetts, Amherst.

Basu, D., and R. Vasudevan (2011) Technology, Distribution and the Rate of Profit in the US Economy: Understanding the Current Crisis. University of Massachusetts, Amherst.

Carchedi, G. (1991) Frontiers of Political Economy. London: Verso.

——(2011a) Behind the Crisis. Leiden: Brill.

——(2011b) Behind and Beyond the Crisis, International Socialism, no. 132.

—— (unpublished paper), Marx’s Law and the Crisis: An Empirical Study.

Carchedi G and Roberts M (2013), The long roots of the present crisis: Keynesians, Austerians and Marx’s law, World Review of Political Economy, forthcoming

Cockshott P, Cottrell A, Michaelson G, Testing Marx, some new results from UK data, Capital & Class, 1995, 19: 103,

Dumenil G and Levy D, The crisis of the 21st century, a critical review of alternative interpretations, 2011

Economakis, Anastasiadis and Markaki (2010), An empirical investigation on the US economic performance from 1929 to 2008, Critique 2010

Freeman A (2009), What makes the US rate of profit fall?,

Tapia Granados, J. (2012) Does Investment Call the Tune? Empirical Evidence and Endogenous Theories of the Business Cycle.

Heinrich M (2012). An introduction to the three volumes of Karl Marx’s Capital, Monthly Review Press, translation of German text (2004).


Izquierdo, S. C. (2010) Short and Long Term Dynamics of the US Rate of Profit in the Context of the Current Crisis” paper at the Congrès Marx International VI, September.

Jones, P. (2012) Depreciation, Devaluation and the Rate of Profit, paper to the WAPE/AHE/IIPPE conference.

Kliman, A. (2007) Reclaiming Marx’s Capital, Lexington Books

---------------(2012) The Failure of Capitalist Production, London: Pluto Press.

Kotz D (2007), Accumulation and crisis in the contemporary US economy, Review of Radical Political Economics, June

Marx K, Capital (1970), Penguin edition.

Mavroudeas S. & Ioannides A. (2006), ‘Henryk Grossmann’s Falling Rate of Profit theory of crisis: a presentation and a reply to old and new critics’, Indian Development Review vol.4 no.1.

Miller J (1995), Must the rate of profit really fall?, Progressive Sociologist Network;, (unpublished)

Minqi, L. (2008) The Rise of China and the Demise of the Capitalist World Economy, 4th ed. Cambridge: Harvard University Press.

Minqi, L.,F. Xiao, and A. Zhu(2007) Long Waves, Institutional Changes and Historical Trends, Journal of World-Systems Research, vol. XIII, no. 1.

Roberts, M. (2009) The Great Recession: Profit Cycles, Economic Crisis—A Marxist View.

—— (2010) The Causes of the Great Recession: Mainstream and Heterodox Interpretations and the Cherry Pickers, paper at the 10th conference of the Association of Heterodox Economists.

—— (2011) Measuring the Rate of Profit, Profit Cycles and the Next Recession, paper to the 11th AHE Conference.

—— (2012) A World Rate of Profit, paper to the WAPE/AHE/IIPPE conference.

Rosdolsky R (1977), The making of Marx’s Capital.

Shaikh A (1992). A falling rate of profit as the cause of long waves: theory and empirical evidence, in A.Kleinknecht, E.Mandel & I.Wallerstein (eds.), New Findings in Long Wave Research

1 For a critique of Heinrich’s own version of value theory, see Carchedi, 2011a.

2 See Kliman (2007) for a refutation of many of their arguments on this issue. Also see, Rosdolsky (1977), pp398-411.

3 This holds per unit of capital invested. Total employment depends also on capital accumulation.

4 Carchedi and Roberts (2013)

5 Empirical studies of Marx’s law are so numerous that the references at the back do not exhaust the list. So how Heinrich can claim that Marx’s law cannot be empirically analysed is bizarre. See the extensive references at the back.

6 Cockshott, Cottrell and Michaelson (1995) make the point that “It is noteworthy that Marx himself did not hesitate to use empirical data to measure the rate of surplus value. He estimated, using the prevailing wage rates, costs of constant capital and final selling price for No.32 yarn, that the rate of surplus value in the Manchester cotton industry in 1871 was 154 per cent, and that the rate in wheat farming in 1815 was just over 100 per cent (Marx, 1970: 219–220). Throughout the first volume of Capital, Marx constantly uses official statistics and factory inspectors’ reports to justify his theoretical claims. When dealing with the production of absolute surplus value he produces statistics comparing the production of absolute surplus labour in industrial England with feudal Romania: when dealing with the concentration of capital he uses Income Tax statistics to document the concentration of wealth”.

7 For example, see Freeman (2009) , who concludes “Marx’s much-maligned argument that the long-term rise in the organic composition of capital – to which the output-capital bears a simple and direct relation – is the most significant cause of the long-term fall in the profit rate. The empirically dominant cause of all long term movements in the US profit rate between 1929 and 2000, that is, the whole period for which records have been kept, is the ratio between output and capital stock” And see Shaikh (1992), Roberts (2009), Roberts (2010), Carchedi (2011a), Kliman (2012), Tapia Granados (2012), C Izquerdo (2010)

8 The figures presented are from Roberts (unpublished), Carchedi and Roberts (2013 forthcoming), and Carchedi (unpublished).

9 Both Freeman (2009) and Kliman (2012) have found similar correlations. Izquierdo (2010) finds that: “the drop in the productivity the capital from the 1946-1973 period to the 1974 -1983 period explains 78% of the fall in the rate of profit, while the minor decrease in the profit share explains only 22%. Therefore, the declining profitability manifested during the Keynesian period is explained by the technological component of the rate of profit, confirming the expectations of the Marxian law of the tendency of the rate of profit to fall. The scant recovery of the general rate of profit during the neoliberal period is also explained mostly by the productivity of capital, which accounts for 84% of the relative increase in profitability, while the profit share remains nearly constant; it grows only 1% in relative terms –and explains only 16% of the recovery”.

10 See Roberts (2009), Carchedi (2010), Tapia Granados (2012) and Carchedi (2013) unpublished.

11 See Tapia Granados (2012): “with available empirical data for 251 quarters of the U.S. economy… statistical evidence rather supports the hypothesis of causality in the direction of profits determining investment and, in this way, leading the economy toward boom or bust.”

12 See Heinrich (2012)

13 Carchedi (unpublished)

14 See Carchedi (2011) chapter X for another explanation of Marx’s intentions in his mathematical studies

15 See Roberts (2010)

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