The organic composition of capital is a concept developed by Karl Marx in his theory of capitalism, which simultaneously represented his critique of the political economy of his time. The concept was derived from Marx's core concepts of "the composition of capital value" and "the technical components of capital." He discussed it in detail in Chapter 25 of Volume 1 of his work Capital, under the title "The General Law of Capitalist Accumulation."
The "technical components of capital" measure the relationship between elements of constant capital (factories, machinery, and materials) and variable capital (wage laborers). It is considered "technical" because it does not involve any estimation or conjecture. In contrast, "the composition of capital value" refers to the ratio between the value of the constant capital elements involved in production and the value of labor power.
Marx found the concept of the "organic composition of capital" useful in analysis, as it assumes that the relative values of all elements of capital remain constant.
The Organic Composition of Capital and Crises
The value of the organic composition of capital is important in Marxist crisis theory due to its impact on the average rate of profit. The effect of an increase in the organic composition of capital is summarized in the decline of the rate of profit. For each new increase in surplus value, realized as profits from sales, there is a corresponding need for a greater increase in capital investment.
However, as Marx argues, this is merely a phenomenon, because the decline in the rate of profit can be counterbalanced by opposing effects, including:
- Purchasing fixed capital inputs at lower costs.
- Increasing the rate of exploitation and productivity of the workforce (including labor intensity).
- Reducing the cycle time of fixed capital inputs.
- Reducing wages and labor costs.
- Providing large amounts of cheap labor, domestically or abroad.
- Foreign trade that reduces fixed capital input costs.
- Technological innovations that reduce fixed capital input costs.
- The qualitative distribution of surplus value, such as profits, interest, taxes, fees, and the division between distributed and undistributed components of newly added value.
- Expanding the market (more sales in less time).
- Monopoly pricing or raising product prices in a costly and artificial way.
- Reducing the tax burden.
- Criminal methods to reduce costs and increase sales and profits.
Given the many different factors that can affect profitability, the overall effects of an increase in the organic composition of capital on the average industrial profitability should truly be evaluated empirically over a longer period, such as 20-25 years.
Marx argues that as much as the course of capitalist development is driven by the quest for surplus value, the economic fate of the system can be summarized as an interaction between the tendency of the rate of profit to fall and the factors that counteract this tendency. In other words, it is the perpetual struggle to reduce costs, increase sales, and raise profits.
The ultimate theoretical outcome of an increase in the organic composition of capital is the complete automation of the production process, at which point labor costs would approach zero. This signals the end of capitalism as a profit-generating economic system for capitalists, and as a social system, because the capitalist system does not include any method of income distribution other than that based on labor, and full automation would eliminate the concept of exploitation. However, automation may also lead to the displacement of labor and its shift toward the service sector. If there is enough income to purchase services, the service economy could, in turn, grow.
Marx and Ricardo
The different organic compositions of capital across various industries posed a problem for the traditional economic framework of David Ricardo and others, who could not reconcile the labor theory of value with the existence of differences in the organic composition of capital, which implicitly means different profit rates across industries. Also, while market competition determines the prevailing price level of a particular product, different firms will use fewer or more workers to produce it. For these reasons, the values produced and the prices achieved by producers vary quantitatively.
Historical Phenomena
There has been a long theoretical and statistical debate among Marxist economists about whether the organic composition of capital actually tends to rise, or if it should historically rise as Marx predicted, or in other words, whether technological progress has a "tendency to save labor" and results in a decline in the average rate of profit.
Among the questions raised here is why capitalists would introduce new technology if it specifically leads to a decline in the rate of profit on invested capital. Marx’s response was:
When a new technology or successful product is first introduced into the market, leading producers typically receive additional (or extraordinary and large) profits. However, as the use of this new product or technology spreads and is produced on a larger scale, profitability declines for all producers. Competition among capitalists forces them to adopt and innovate new technologies, whether they want to or not, because the productivity gains achieved by competitors threaten to push them out of business or reduce their market share. While the average rate of profit on invested capital may decline as a result, profit margins (or profit volumes) will increase because more goods and products can be produced and sold within a specific accounting period using the new technology (which implies lower unit costs of the products and goods produced). There is no doubt that statistical and historical evidence regarding Kondratieff cycles of capitalist development since the 1830s and beyond is favorable and supportive of Marx’s theory concerning the increasing organic composition of capital.
