The idea is also described by Marx in Capital Volume III.
“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”
In fact, there is a natural causal relation between the two periods. As Marx describes in the same chapter,
“Given the necessary means of production, i.e. , a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.”
If the size of the working population is more or less given, then as the economy expands, on the basis of a given level of technology, and productivity of labour, these labour reserves get used up. As the supply of labour-power declines relative to the demand, wages are raised, and profits are squeezed. That provides an incentive for capital to begin to seek out new labour saving technologies.
“Take, for example, the rise in England of agricultural wages from 1849 to 1859. What was its consequence? The farmers could not, as our friend Weston would have advised them, raise the value of wheat, nor even its market prices. They had, on the contrary, to submit to their fall. But during these eleven years they introduced machinery of all sorts, adopted more scientific methods, converted part of arable land into pasture, increased the size of farms, and with this the scale of production, and by these and other processes diminishing the demand for labour by increasing its productive power, made the agricultural population again relatively redundant. This is the general method in which a reaction, quicker or slower, of capital against a rise of wages takes place in old, settled countries.”
(Marx, Value, Price and Profit)
A period of extensive accumulation, thereby creates the conditions under which the need for the introduction of new labour-saving technologies are required, so as to create a new relative surplus population, to reduce wages, and thereby to increase the rate of surplus value. Initially, however, the consequence of this investment in new labour-saving technology, as Marx describes above, is to establish the conditions for the operation of The Law of The Tendency For The Rate of Profit to Fall. By raising productivity, it also raises the organic composition of capital. On the one hand, the proportion of the value of output accounted for by both fixed capital and labour-power declines, whilst the proportion accounted for by materials increases. The proportion accounted for by fixed capital declines, because one new type of machine replaces several older types of machines, and because, even if the absolute cost of the new machine is greater, its output is proportionately greater still, so that the amount it transfers by wear and tear to each unit of output declines. The proportion of labour declines, because the more productive labour processes a much greater quantity of material.
“The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease. Owing to this falling tendency, the other portion of the value representing raw material increases proportionally, unless this increase is counterbalanced by a proportionate decrease in the value of the raw material arising from the growing productivity of the labour employed in its own production.”
(Capital III, Chapter 6)
The Tendency for the Rate of Profit to Fall is not the cause of crises of overproduction, but rather is one of the means of overcoming such crises.
“The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.”
(Capital III, Chapter 15)
A rise in wages, as labour supplies get used up, during a period of extensive accumulation, can make overproduction more likely, because squeezed profit margins, are more likely to turn negative, if wages rise further, or input prices rise, which cannot be passed on in higher market prices.
“This shows again how a rise in the price of raw material can curtail or arrest the entire process of reproduction if the price realised by the sale of the commodities should not suffice to replace all the elements of these commodities. Or, it may make it impossible to continue the process on the scale required by its technical basis, so that only a part of the machinery will remain in operation, or all the machinery will work for only a fraction of the usual time.”
If the market price of the end product is already high, it may not be possible to pass on any rise in the price of materials fully, because to do so would lead to a fall in demand, which would reduce the scale of operation beneath “its technical basis”. So, the increased cost of production is absorbed out of surplus value, thereby squeezing the profit margin further. Each enterprise seeks to overcome this situation individually by reducing its costs, and raising its rate of surplus value through the introduction of new labour-saving equipment.
Although each individual capital may at first obtain this objective, the more firms adopt this new labour-saving technology, the more the social value of the commodities in that sphere of production are reduced, and the rate of profit along with it. The other consequence of this is that the existing fixed capital suffers a moral depreciation, as the new technology increasingly becomes the standard. By these means The Law of The Tendency for the Rate of Profit To Fall, creates the conditions for overcoming the crisis of overproduction, and for a rise in the rate of profit.
“While implying a real increase in population, this does not signify an increase in the actual working population. But it affects the relations of the labourer to capital in the same way as an increase of the number of actually working labourers would have affected them. On the other hand, the fall in prices and the competitive struggle would have driven every capitalist to lower the individual value of his total product below its general value by means of new machines, new and improved working methods, new combinations, i.e., to increase the productivity of a given quantity of labour, to lower the proportion of variable to constant capital, and thereby to release some labourers; in short, to create an artificial over-population. Ultimately, the depreciation of the elements of constant capital would itself tend to raise the rate of profit. The mass of employed constant capital would have increased in relation to variable, but its value could have fallen. The ensuing stagnation of production would have prepared — within capitalistic limits — a subsequent expansion of production.”
(Capital III, Chapter 15)
As the period of intensive accumulation proceeds, it goes through different phases. Firstly, it is only a few innovative firms that introduce the new technologies. That means they are unable to determine the social value of commodities in their sphere of production, and it is for this reason that they enable these innovators to enjoy higher profit margins, as the individual value of their production is lower than the social value. As other firms are thereby forced to adopt these methods or close down, so the social value falls, and the original profit advantage disappears.
In mature industries, the consequence may be that labour is shaken out, with output only rising marginally. In newer industries, the intensive accumulation may itself be also extensive, so that output expands more rapidly, and additional labour is taken on. The most obvious case of that is an entirely new industry, based upon some new technology, where by definition every new piece of equipment introduced, is also an additional piece of equipment. It may be that as this expansion proceeds, additional economies of scale may arise, so that further reductions in the prices of these commodities are obtained, facilitating a further rise in demand for them. A look at the industry that has developed around genetic sequencing, is a good example of that.
As these new industries form a growing share of the total social capital, this is one means by which the general annual rate of profit is increased and the basis for a new period of boom is established. At a certain point, what was new technology, is no longer being introduced merely to replace existing technology, but itself becomes the standard technology. A firm that previously had six manually operated lathes, for example, may as each wore out, have replaced them with CNC lathes. As each was replaced, its capacity may have been greater than each of its old lathes, and it would have required less labour. But, when it has eventually converted all of its lathes to CNC lathes, any additional investment it makes, will no longer be intensive in nature, but will be extensive. It will go from 6 lathes to 7 and so on. The increases in productivity it obtained, by going from manual lathes to CNC lathes will not be lost, but no additional gain in productivity will be achieved as a result of adding an additional lathe. Only an addition to output, and the mass of profit will be obtained.