[86] _La produzione capitalistica_, Turin, Bocca, 1899.

[87] Graziadei will allow me to point out to him that it is not the first time that he has made discoveries that turn out to be equivocal.

Some years ago when carrying on a controversy, in the review _Critica sociale_, on the theory of the origin of profits in Marx's system, Graziadei (vol. IV., n. 22, 16th Nov. 1894, p. 348) wrote; 'We can very readily imagine a society, in which profits exist, not indeed with surplus-labour, but with _no labour_. If, in fact, for all _the labour_ now accomplished by man was subst.i.tuted the work of machines, these latter, with a relatively small quant.i.ty of commodities would produce an enormously greater quant.i.ty. Now, given a capitalist organisation of society, this technical phenomenon would afford a basis for a social phenomenon, viz.: that the ruling cla.s.s being able to enjoy by itself alone the difference between the product and the consumption of the machine, would see at their disposal an excess of products over the consumption of the _labourers_, _i.e._, a surplus-product, much larger than when the feeble muscular force of man still co-operated in production.' But here Graziadei neglects to explain how _labourers_ could ever exist, and _profits_ of labour, in a hypothetical society, based on _non-labour_, and in which _all the labour_ actually done by man would be done by machines. What would the labourers be doing there? The work of Sisyphus or the Danaides? In his hypothesis the proletariat would either be maintained by the charity of the ruling cla.s.s, or would end by rapidly disappearing, destroyed by starvation. For if he supposed that the machines would produce automatically a superfluity of goods for the whole of that society, then he was simply constructing by hypothesis a land of _Cocaigne_.

[88] 'As follower of Joshua ... to stop the sun.'

_CHAPTER V._ A CRITICISM OF THE MARXIAN LAW OF THE FALL IN THE RATE OF PROFITS

_Interpretation here given a.s.sumes acceptance of Marx's main principles: Necessary decline in rate of profit on hypothesis of technical improvement: Two successive stages confused by Marx: More accurately a decline in amount of profit: Marx a.s.sumes that would be an increase of capital: Would be same capital and increase in rate of profits: Decline in rate of profits due to other reasons._

This law is set forth in the third section of the third book (posthumous) of _Das Kapital_. A few criticisms have been made of it, which vary from that of Sombart, who says that it is developed _in the most striking manner_ (in glanzendster Weise), to that of Loria, who defines it as 'a metaphysical pistol shot (_sic_) from beyond the Rhine,' and thinks that he refutes it by an objection which is in fact quite inappropriate. Others have thought the law certainly true, but that it explained only partially the fact of the decline in the rate of profits and required to be combined with other laws already known to cla.s.sical economics. But most of those who have studied Marx's economic theories have not examined it at all; his opponents (like Bohm Bawerk) reject it by implication, when they reject Marx's fundamental principles; the Marxians welcome it, German fashion, humbly and submissively, without discussion, with that lack of freedom and intellectual originality which is noticeable in all their writings.

The examination of it attempted here, rests on the same basis as Marx's theories, _i.e._ it is made from the standpoint of those who accept the essentials of these theories, and hence the premiss of _labour-value_, the distinction between _fixed_ and _floating_ capital, the view of profits as arising from _surplus-value_, and of the _average rate_ of profits as arising from the equalisation, owing to compet.i.tion, of the various rates of surplus-value. It is true that I accept all these things _in a certain sense_, which is not the sense of the ordinary Marxian, inasmuch as they are not looked upon as _laws actually working in the economic world_, but as _the results of comparative investigations into different possible forms of economic society_. But such a reservation, which relates to a question discussed by me at length elsewhere,[89] has practically no effect on the present study, whose results would be almost the same, even if these theories of Marx were interpreted in the sense which I consider erroneous. The object here is no longer to determine and define accurately Marx's fundamental concepts, but to see whether, from these concepts, even when interpreted in the current manner, it is ever possible in any way to deduce the _law of the fall in the rate of profits_. This task I think impossible.

The law was derived by Marx from the study of the effects of technical improvement. Marx states that technical improvement increases the amount and changes the form of the total capital, increasing the proportion of fixed as compared with floating capital, so that by this means the rate of profit is decreased; the latter arises, as is well-known, out of the surplus-value, the product of the floating capital divided by the total capital. He ill.u.s.trates the matter thus.

Some technical improvement occurs; new machines are made, which formerly did not exist. The capital employed in production has been hitherto, we will suppose, a total of 1,000, divided into 500 fixed and 500 floating, and employing 100 labourers: the surplus-value = 500, _i.e._ the rate of it is 100 per cent.; and hence the rate of profit is 500/1000 = 50 per cent. In consequence of the technical improvement, and of the construction of new machines, the 100 labourers who are maintained by the variable capital of 500, continue still to be employed in production; but, in order that this may be possible, it is necessary to use a larger fixed capital, which we may suppose 200 larger than before. Hence, as the result of the technical improvement, there will now be a total capital of 1,200, _i.e._ 700 fixed and 500 floating; and the rate of surplus-value remaining unchanged at 100 per cent., the rate of profit will be 500/1200 = about 41 per cent., _i.e._ will have decreased from 50 per cent. to 41 per cent. Hence the necessary decline in the rate of profit on the _hypothesis_ of technical improvement. But this _hypothesis_ is an actual everyday _fact_ in modern capitalist society. Hence, the _actual_ decline of the average rate of profits in modern capitalist society. But this law is more or less counteracted by other facts, which act in a contrary sense more or less transitorily. Thus the fall is only _a tendency_.

In order that our study may be clear, it is above all necessary to distinguish the two groups of facts, or the two stages in the same capitalist society which Marx confused and embraced in a single somewhat obscure view.

The first stage is marked by the fact, pure and simple, of a technical improvement. Now technical improvement, among its logical, or what is the same thing, its necessary effects, in no way includes that of an increase in the amount of total capital employed, nor that of leaving the quant.i.ty of total capital unchanged. It has rather exactly the opposite as its necessary and immediate effect: _i.e._ that of _limiting the capital employed_. It is unnecessary to warn the reader that we are here treating of economic science and that increase and decrease refer always to _economic values_. In its simplest form, supposing the quant.i.ty of objects produced to be constant (200 shoes are required, and there is no reason to increase the production), technical progress will consist, purely and simply, in a saving of social expense: the same production at less expense. And since all cost, in Marx's hypothesis resolves itself into social labour, there will be the same production with less social labour. If it were not so, it would not be worth while to introduce this technical innovation; there would be, economically, no improvement but either the _status quo ante_ or a regression. We must not take into account the other effects which would arise to increase production, greater consumption, increase of population, etc: additional and extraneous facts which are not considered here, since we are concerned with the single fact of technical improvement, all other conditions remaining unchanged. And, in such a case, we cannot represent technical improvement with the increasing series of total capital which Marx employs, viz. 150, 200, 300, 400, 500, etc., but with this decreasing one, 150, 140, 130, 120, 110, etc. And to keep to the ill.u.s.tration used above, if we suppose that the given technical improvement has caused a decrease of 1/10 in the total social labour required, we shall have in place of the original capital of 1,000 a capital of 900, no longer made up of 500 fixed and 500 floating, but of 450 fixed and 450 floating. The decrease must affect proportionally every part of the capital since all of it is, in the final a.n.a.lysis, a product of labour. Of the 100 original labourers, 1/10, _i.e._ 10 of them will remain unemployed: a fraction of the original capital will remain unemployed; the quant.i.ty (or utility) of the goods produced will remain the same.[90]

When the description of the facts is thus corrected, there is no doubt that the smaller total capital employed, supposing on the one hand, the rate of surplus-value to remain unchanged, and, on the other, 10 of the original labourers to be working no longer, would absorb an amount of surplus-value of 450. But the rate of profit would not on this account be changed; or rather, just for this reason the rate of profit could not be altered and would be expressed by 450/900 (as at first 500/1000), _i.e._ it would be as at first, 50 per cent.

This simplest case does not then give us Marx's law, but this other law; 'Technical improvement, supposing all the other conditions remain unchanged, causes a decrease in the _amount_ (not the _rate_) of surplus-value and of profits.' This law a.s.sumes that the 1/10 of the labourers left unemployed become entirely superfluous. These ten labourers are henceforth to be a dead weight supported by the charity of others, or to die of starvation, or to emigrate--to a new world.

Let them be left to their fate. Social production will remain at its former level, thanks to the technical improvement, but accomplished without their help. This is the hypothesis; but given this hypothesis, of what importance is the law? To see this clearly it will suffice to push the hypothesis yet further, as we are ent.i.tled to do, and suppose that the technical improvements continuing, the employment gradually becomes superfluous, not only of 1/10, but of 1/4, 1/3, 1/2 of the labourers, _i.e._ that the employment of labourers tends to become = 0. In this case capitalist society as such would come entirely to an end, since the utility of labour, on which it is based, would come to an end. Where there is nothing the King loses his rights; and where labour has no utility the capitalist loses his. The ex-capitalists would have no more workmen to impoverish, but would be changed into the owners of automatic fountains of wealth; like those fortunate mortals in the fable enriched by charmed knives, by wonderful lamps, by gardens producing with instantaneous and spontaneous energy all G.o.d's gifts. In other words the law here resolves itself into a _truism_.

But Marx did not think of this _truism_. He wished to determine exactly the organic law of the variations in the rate of profits. In fact--as is seen in the ill.u.s.tration given--he does not at all suppose that the energy of labour may become superfluous; but rather that the labourers will find fresh employment with an increase in the original fixed capital. Given technical improvement and production also will be increased; this is the second stage which he considers. The 100 labourers are still all working, the fixed capital with which they work must be increased from 500 to 700, and the total has hence become 1200. The law which he deduces, of the fall in the rate of profits (in the ill.u.s.tration, from 50 per cent. to 41 per cent.) is not a _truism_; on the contrary it presents itself with all the importance and originality of a scientific discovery. All den ends on seeing whether in the scientific discovery we have indeed--the truth.

The crux of Marx's proof lies in the statement; that the labourers who would have had to remain unemployed, find on the contrary employment, but with a capital _increased by so much_ (= 200) over the original.

Is this statement correct? On what does Marx base it?

To this fundamental proposition my _criticism_ refers, itself equally fundamental. If it is admitted it amounts to _a most complete denial of the truth of the Marxian law_. Nevertheless I state my idea in the form of a _criticism_ and _doubtfully_, because, in dealing with a thinker of Marx's rank, it is necessary to proceed cautiously, and to remember (which I do not forget) that several times errors ascribed to him have been explained as mistakes of his opponents.

For what reason, I ask myself, do the ten un-occupied labourers, in order to be employed afresh, require a constant capital larger than the original?

The technical improvement has not diminished the natural _utility_ of the production (also in our hypothesis it has not increased it either, but has left it unchanged); but it has only diminished its _value_.

There will be then, with the improved technical organisation, raw materials, tools, clothing, foodstuffs, etc., of the same total natural utility as at first. The economic value of all these products is diminished, because in them (to employ the metaphor chosen by Marx), is congealed a smaller quant.i.ty of labour, _i.e._ less by the work of ten labourers. But from the point of view of power to satisfy wants, the raw materials, the tools, the clothing, the means of sustenance, etc., remain, in virtue of the technical improvement, of the same rank as at first. If then capitalists and workpeople have remained as temperate as before, and their standard of life has not risen (and this is in the hypothesis), the production will offer as at first means of employment and means of sustenance for the ten labourers left unoccupied. By re-employing them, _i.e._ maintaining them with the original means of subsistence, and setting them to work on the original raw materials or their new products, the capitalists will increase their production, or--what is the same thing--will improve its quality. But since we know that, economically, the value of that capital has _diminished_, it will come about that a capital _economically smaller_ will absorb the same energy of labour as formerly, _i.e._ _the same amount of profits_; and an equal amount of profits with a smaller total capital means an _increased rate of profits_. Exactly the opposite to what Marx thought it possible to prove.

Turning to our ill.u.s.tration, the ten labourers will find employment with a capital which, like the utility, has remained the same, but economically has decreased to 900. This means that the rate of profits has increased from 500/1000 to 500/900, _i.e._ from 50 per cent. to about 55 per cent. As to the rate of surplus-value, since the entire value of the total capital is reduced, it must no longer be calculated, as before the technical improvement, as 500/500, nor as in the first stage we considered (in which the technical improvement had made a portion of the labour entirely superfluous) as 450/450, but as 500/450, _i.e._ it will no longer be 100 per cent., but will have risen to about 111 per cent.

To this criticism of mine I have found no answer, either explicit or implicit, in Marx's work. Only in one pa.s.sage, where he speaks of the counteracting causes, and in particular of surplus population (Chap, XIV., -- iv.), he hints at the case where labour power may be re-employed with a minimum capital. It may be said that here Marx pa.s.sed close to the difficulty, without striking upon it, _i.e._ without becoming aware of its importance. And, if he had struck on it, I doubt whether he would have overcome it and pa.s.sed on; I think rather that his theory would have gone to pieces.

I foresee that it may be said: you have a.s.sumed that, owing to the technical improvement, not only would a number of labourers remain unemployed, but also a fraction of the original total capital, _i.e._ of means of production and means of subsistence; and when the labourers are re-employed, it is true that during the new cycle of production, other fractions of unoccupied capital will not unite with the original fractions, but precisely for this reason the quant.i.ty of production which will result will be increased, and in the next cycle of production a still greater fraction of unoccupied capital will add itself, unless the ten labourers do not continue to be re-employed, in which case the un-occupied fraction will be smaller, but the increase will become constant. Now all these means of production and of sustenance will not be consumed (or will be partially consumed and partially saved), by the capitalist cla.s.s, and hence there will be an increasing acc.u.mulation. The quant.i.ties of goods saved, owing to the impulsion of economic interest will not remain un-used in warehouses or strong boxes, but will be thrown on the market as capital seeking employment. This will increase the rate of wages, and hence will have a depressing effect on the rate of profits. Very good, but in such a case we are outside the Marxian law. The _factor_ here considered, is no longer technical improvement taken by itself, but _saving_, which may be, as stated, encouraged by technical progress, but cannot be _inferred_ from it. For it is true that, if we suppose the case of extravagant capitalists, saving, in spite of technical improvement will not take place. And as technical improvement encourages saving, so the latter, in its turn, by increasing wages, encourages the increase of population, and hence the reduction of wages, and once again a rise in the rate of profits. But, when saving and the increase of population come upon the scene we are already within the sphere of the law of demand and supply, _i.e._ of ordinary, accredited economics, which Marx despised as vulgar, and out of dislike of which he devised his law of the fall in the rate of profits yielded by the above combination of capital owing to the effect of technical improvement. I, indeed, believe that only the ordinary law of demand and supply can explain the variations in the rate of profit: but to return to it is not indeed to defend Marx's thesis, but rather to ratify its condemnation.

However it is regarded, this thesis seems to me indefensible; and even more indefensible if, leaving aside for a moment logical trains of reasoning and arithmetical calculations, we look at it with the clear intuition of common sense. See here--to follow the strict hypothesis set forth by Marx--on one side a capitalist cla.s.s, and on the other a proletarian cla.s.s. What effect does technical improvement have? It increases the wealth in the hands of the capitalist cla.s.s. Is it not intuitively evident that, as a result of technical improvement, the capitalists can, by antic.i.p.ating commodities _whose value is continually decreasing_, obtain _the same services_ which they obtained at first from the proletariat? And that hence the relation between value of services and value of capital will change in favour of the former, _i.e._ that the rate of profits will increase? When commodities (capital) are antic.i.p.ated, which formerly were reproduced by five hours of labour and now are reproduced by four, the workman will continue to work ten hours. Formerly with five there were ten; now with four there is similarly ten. The sponge costs less, but the quant.i.ty of water with which it is saturated is the same. How could Marx suppose that after technical improvement, the expenses of the capitalists would always increase, so that proportionally profits would be in a state of perpetual decline, and would end by making, in face of the total costs, a most wretched figure?

Marx's mistake has been that he has inadvertently attributed a _greater value_ to the fixed capital, which after the technical improvement is worked by the same labourers as before. Certainly anyone who looks at a society in two successive stages of technical development, will find in the second stage a greater number of machines and of tools of every kind. _This is a question of statistics, not of economics._ Capital (and Marx appears to have neglected this point for the moment) is not estimated by its physical extension, but by its economic value. And economically that capital (supposing all the other conditions remain constant) _must be worth less_; otherwise no technical improvement would have taken place.

An external circ.u.mstance which might serve to explain Marx's error is the fact that the third book of _Das Kapital_ is a posthumous work, some parts of which are hardly sketched out, and amongst these that of the _law of the rate of profits_, which, moreover, does not relate to the _establishment of principles_, but, being a consequence and an application or these, was perhaps not worked out to the same extent as the fundamental or central part of the theory.[91] It is probable that the author, if he could have gone over his rough draft again, would have materially modified it or entirely discarded it. But perhaps some internal reason could also be found for this strange mistake, in that Marx always misused the comparative method without disclosing any distinct knowledge of his procedure. And it might be that, as already in his earlier investigations, he perpetually transferred labour-value from a hypothetical society to the actual capitalist society, so in this new problem he has been led to estimate the worth of the technical capital in a more advanced society at the rate of value of that in a less advanced society. In this impossible attempt his method has here broken in his hands.

As we have disputed the actual basis of the Marxian law, it seems indeed superfluous to follow out its further developments, which are advanced in a form worked out with but little care. It is enough to remark that in these developments, as in general, throughout _Das Kapital_, there is a continuous medley of theoretical deductions and historical descriptions, of logical and of material connections. The defect, however, becomes in this instance an advantage, because many of the observations made by Marx, understood as historical descriptions of what usually happens in modern society, will be found to be true and can be saved from the shipwreck, as regards the theory of the law, with which by chance they are feebly connected. And it would even be possible to make such an investigation in respect to that very portion which we have disputed, _i.e._ to enquire what _facts_, actually observed by him, could have impelled Marx to construct his law, _i.e._ to give of these facts an explanation which is theoretically unjustifiable.

Marx attributed the greatest importance to the discovery of the _law of the fall in the rate of profits_. Herein lay for him 'the mystery over which all economists from Adam Smith onwards have toiled'; and in the different attempts to solve the problem he saw the explanation of the divergence between the various schools of economists. Ricardo's bewilderment in face of the phenomenon of the progressive decrease in the rate of profits seemed to him fresh evidence of the earnestness of mind of that writer, who discerned the vital importance of the problem for capitalist society. That the solution had not been found before his, Marx's, time, appeared to him easily explicable, when it was remembered that until then political economy had sought gropingly for the distinction between fixed and floating capital without succeeding in formulating it, and had not been able to explain surplus-value in distinction from profits, nor profit itself in its purity, independently of the separate fractions of it in compet.i.tion amongst themselves; and that, in the end, it had been unable to a.n.a.lyse completely the difference in the organic composition of capital, and much less, the formation of the general rate of profits.

His explanation being now rejected, a double problem presents itself.

The first question relates to fact. It is needful to ask: does the fact spoken of actually exist, and how does it exist? Has a gradual decline in the rate of profits been ascertained? And in which countries, and in what circ.u.mstances? The second question relates to the cause: since, whilst we have seen that there could only be one economic reason for the phenomenon, (the law of demand and supply), there may be several historical causes, and these may vary in different cases. The decline in the rate of profits may happen owing to a nominal increase in wages due to an increase in the rent of land, or it may happen owing to a real increase in wages due to stronger organisation among the workpeople, or it may happen owing to an increase, also real, in wages resulting from saving and from growing acc.u.mulations, which increase the capital in search of employment.

This investigation must be made without prejudices, whether optimistic or pessimistic, apologetic or controversial; and economists have sinned but too often in all these ways. The listeners have seized upon the result of limited and qualified investigations, now in order to sing a hymn to the spontaneous force of progress, which will gradually cause the disappearance of capitalists or reduce interest to 1/2 per cent.; now in order to terrify their audience by a spectacle no less fantastic, of landed proprietors as the sole owners of all the goods of society![92]

May 1899.

FOOTNOTES:

[89] See chaps. III. and IV.

[90] We here suppose a series of productive periods already rapidly pa.s.sed through, which may suffice to replace the whole of the total capital by the new technical processes. It is evident however, that as fixed capital is replaced in successive portions, in a first stage, goods are used as capital, whose cost of _reproduction_ no longer corresponds to their original cost of _production_, _i.e._ whose actual social value no longer corresponds to the original one. But to consider the separate stages would here cause a useless complication.

[91] The explanation of the way in which the average rate of profit arises belongs to the fundamental part of the third book of _Das Kapital_, and Marx must have thought it out together with the fundamental chapters in the first book.

[92] This is the case contemplated by Ricardo in the celebrated -- 44 of chapter vi, _On Profits_: Marx appears to attach little importance to this case, having complete faith in the continued technical progress of agriculture, not to speak of other counteracting causes.

It is necessary to add that Marx in conformity with his law, maintains that the rent of land also has a tendency to fall, although it may increase its total amount, or its proportion in reference to industrial profits: see vol. iii, 223-4.

_CHAPTER VI._ ON THE ECONOMIC PRINCIPLE

TWO LETTERS TO PROFESSOR V. PARETO

I

_Need for more comprehensive definition of the economic principle: Reasons why the mechanical conception erroneous, economic fact capable of apprais.e.m.e.nt: Cannot be scale of values for particular action: Economic datum a fact of human activity: Distinction and connection between pleasure and choice: Economic datum a fact of will: Knowledge a necessary presupposition of will: Distinction between technical and economic: a.n.a.logy of logic and aesthetic: Complete definition of economic datum._

_Esteemed Friend_,

On reading the little paper, which you were courteous enough to send me, on how to state the problem of pure economics,[93] I at once felt a desire to discuss the subject with you. Other occupations have obliged me to defer the satisfaction of this wish until now; and this has been fortunate. The extracts from your new and still unpublished treatise on pure economics, which came out in the March number of this Review,[94] have obliged me to abandon in part the scheme of thought which I had in mind; for I saw from them that you had modified some of those points in your thesis, which seemed to me most open to dispute.

I have on several occasions heard something like a feeling of distaste expressed for the endless discussions about value and the economic principle which absorb the energies of economic science. It is said that if this splitting of hairs over the scholastic accuracy of its principle were abandoned, the science might throw light on historical and practical questions which concern the welfare of human society.

Apparently you have not allowed yourself to be alarmed by the threatened distaste of readers; nor indeed am I. Can we silence the doubts which disturb us? Could we have a.s.surance whilst silencing these doubts that we were not endangering just those _practical_ issues which the majority have at heart? Issues which we ourselves have at heart since we are certainly not able, like the monks of old, to free ourselves from interest in _the affairs of the age_. May not science be, as Leibniz said, _quo magis speculativa, magis practica_?

We must then go our way, and endeavour to satisfy our doubts, with all the caution and self-criticism of which we are capable; since they cannot be suppressed. On the other hand we should endeavour also not to offer our solutions to the public except when our knowledge,--wide if it may be so (yet necessarily imperfect)--of the literature on the subject, gives us some confidence that we are not repeating things already stated. Unless indeed, other considerations make us think it opportune to repeat and to impress things which have been stated, but without sufficient emphasis.

The new school of economic thought, of which you are such a worthy representative, has a merit of no small significance. It has reacted against the anti-scientific tendencies of the historical and empirical schools, and has restored the concept of a science of _pure_ economics. This means indeed nothing more than a science which is science; the word pure, unless tautologous, is an explanation added for those who are ignorant or unmindful of what a science is.

Economics is neither history nor discussion of practical issues: it is a science possessing its own principle, which is indeed called the _economic principle_.

But, as I had occasion to remark at another time,[95] I do not consider that this principle whose fundamental character is a.s.serted, has. .h.i.therto been grasped in its individuality, nor conveniently defined in relation to other groups of facts, that is to the principles of other sciences. Of those conceptions of it which seem to me _erroneous_, the chief ones can be reduced to four which I will call the _mechanical_, the _hedonistic_, the _technological_ and the _egoistic_.