Crisis Theories: Falling Rate of Profit

I mentioned earlier that the insufficient surplus value family of crisis theories can be divided into two sub-families: the profit squeeze school and the falling rate of profit school.

The profit squeeze school sees the cause of crises as rooted in the fall in the rate of surplus value that develops as the demand for labor power rises during a boom, creating more favorable opportunities for the workers to struggle against capitalist exploitation. The fall in the rate of exploitation eventually reduces the rate of profit so much that a crisis results. 

But there is another version of the insufficient surplus value school. This school traces the cause of crises to the fall in the rate of profit brought on by the rise in the organic composition of capital. This is the famous law of the tendency of the rate of profit to fall. 

These crisis theories are not mutually exclusive, because boom conditions not only put downward pressure on the rate of surplus value but at the same time encourage a growth in the organic composition of capital. The lower the rate of surplus value, the more the industrial capitalists will attempt to economize on labor power, or what comes to exactly the same thing, the more they will substitute constant capital—or dead labor—for variable capital—or living labor. 

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