The law of the tendency of the rate of profit to fall
Initially, as they use the advantage they have from their innovation, they sell more toasters. More toasters sold, even at a lower price, means the mass of their profit grows. Meanwhile, the effect of accumulating new technology increases the productivity of labour and the mass of profits grow even more. With more machines to do the work, less workers are needed so, to further increase their profit margin, unnecessary workers are made redundant and let go. Of course, other competing capitalists are always starting up something brand new or breaking into an already established market so, some of the newly unemployed workers will find work elsewhere as the mass of production increases.
About here is where things start to go pear shaped. This is because as capitalists use more of their profits to invest in those speedy and efficient new machines that increase workers productivity, they accumulate more and more fixed or constant capital. Not only do they now own many more toasters which they must sell, they also own more machines that are continueing to produce with relatively less workers. The result of this is less variable capital in relation to constant capital and it causes the rate of profit to fall.
In what can be described as none other than a classic dialectical contradiction underlying capitalist motion, we see a simultaneous growth in the mass of profits while the general rate of profit falls. Put another way, as each individual capitalist uses all of the methods described above for increasing the exploition of its workers so as to extract more profit and potential profit, ironically and unbeknownst to the capitalist, the effect of this individual exploitation of labour by applying machines to increase productivity, causes a fall in the aggregate profits of the capitalists generally and it is this phenomenon that leads to crisis.
A declining profit rate is basically the effect of capitalists, in aggregate, owning more constant capital relative to variable capital and as we know, only the variable kind of capital produces surplus value. So, while the mass of profits of one individual capitalist is growing at the expense of another capitalist, he is blissfully unaware of the effect he is having on the aggregate rate of profit. Eventually, as we have seen happen in the hugely mechanized car industry, they ended up producing too many cars that could not be sold at a sufficient profit to continue producing (without a huge government bailout that is!). With an increasingly globalized capitalism and world finance this phenomenon eventually, despite many tactics and strategies to suppress it, becomes generalized and we get a deep and devastating crisis like the Great Recession.
Rate of profit
A lover of math would say mathematical formulas are just a different, succinct way of expressing complicated real-life processes. This is definitely true for Marx?s formulation of the falling rate of profit because the interaction of its component parts reflects the class struggle itself. The struggle, or contradiction is that a whole class of human beings that represent a better system of social production, was born from the current system and simultaneously, is fighting to supersede it [viii].
It should be noted that once again, Marxists use different categories in formulating profit rates as well as using different methods for determining profits.[J4] This is key to understanding why the bourgeois economists are blind sided every time a crisis hits and are unable to rationally explain why it hit.
Marxists arrive at a profit rate first by looking at a finite period of capitalist production and measuring the surplus value otherwise known as the rate of exploitation. This is how quickly a worker replaces the value of their wages compared to how much time they spend ? unpaid ? producing values solely for the capitalist. It is determined by taking the value of the toasters produced and comparing it to the value of the wages of the workers who produced them (even if it is just one worker who presses the start button of the robot). The end result is the mass of surplus-value.
The next step, is to take this figure and compare it to the TOTAL value of capital invested or owned by the capitalist. That is, the total value of their constant capital (money, plant, raw materials, tools, robots, toasters) plus the value of variable capital (wages).
So the formula for the rate of profit is: s/c+v: the mass of surplus value divided by constant capital+variable capital. The rate of profit is basically how much profit a capitalist gets compared to how much capital they invested or ended up owning within a finite period of production.
The organic composition of capital
If during this period there is an over production of values that fall in the category of constant capital and less values are being produced by the variable part of capital as occurs in the capitalist mode of production described above the ratio of constant capital to variable capital changes in what Marx called a rising of the organic composition of capital.
The nature of the capitalist mode of production is such that capitalists are always compelled to increase productivity and this means that the ratio of constant to variable capital is always going up. Because this ratio is a key component part in the formula that determines capitalist profit rates, there is neccessarily a constant downward pressure on the aggregate rate of profit.
Because this phenomenon is a constant feature of capitalism, Marx called it a law. Their particular mode of production that leads to falling rates of profit is always at work as long as capitalists are in charge of social production.
Of course, considering things in motion and how they effect and are effected by other things, the student of Marxism will notice the various stratagies capitalists employ to try to counteract the negative pressures of falling profit rates. With the first sign of falling profits (no one will buy the toaster at the price originally set for it because there are cheaper ones of equal quality available so the capitalist is forced to lower their price). The individual capitalist tries to compensate for this by increasing the intensity of exploitation of his workers. The capitalist may not want to but they have to because the rate of exploitation is a key component of the profit rate formula (a formula which expresses a complex real-life process) and if they want to keep profits up, they do what ever they can in order to stay competitive. The way capitalism is organized, based on private property, they are not allowd to manipulate values related to constant capital (any commodity other than human labour power) because that would mess with the bottom line of other capitalists! They just can?t go back in time and somehow change the price they paid for that robot! The deal is already done and dusted. But the deal with workers is always ?negotiable? under capitalism.
Capitalists aren?t all bad
There are all different sizes and qualities of capitalists at varying points of growth and decline (in terms of profits). Those at the stage of making super profits from the discovery of a new gadget, innovation or cartel dominance of a market can be considerate and even generous to their workers. Depending on their mood, they might even put some effort into reducing the impact they have on the environment by deciding to pay for greener techniques and technology! Why not? They can afford it. At times when profits are high (generalized high profits throughout the economy is called a boom) plays a role in determining when capitalists make consessions to the demands and needs of their workers (also part of the class struggle). There have been periods when workers have fought and won the right to form unions, accessible or free school tuition, abolish child labour, good universal health care to name a few. But, the general rule is, depending on the level of the class struggle, capitalists are compelled to squeeze out every last cent or lose their market position. Because, as we said before, under capitalism workers are percieved pretty much like any other commodity needed for a production process in their hunt for profits. But, eventually, other capitalists begin to nip at their toes, infiltrate their market, head hunt their personell, steal their ideas, eat into their profit margins and replicate and improve upon their innovations. When things become acute, and products cannot be sold at the same profit, the first thing they cut are experimental green technologies that slow down and complicate production. Then, there are no more Christmas parties for the workers let alone paid holidays! Eventually, they have cut all the ?fat? until they are forced to speed up production, sack workers and extend the working day of the remaining workers.
Because of the way the capitalists do their accounting, they always think increasing productivity by bringing in more machines is a good idea for possible profits. But, unfortunately, every other capitalist is thinking the same thing and there ends up too much constant capital compared to variable and they are unable to produce enough surplus value to replace the value of their contant capital. They never see it coming because they are lulled by the fact that this same mode of production is increasing the mass of profit. Growth, growth growth as they say.
How the working class fights against these efforts to protect itself, whether consciously or not, is the essence of the class struggle.