I’m always banging on about the close connection between the movement of investment (expenditure on the means of production) and economic growth. In my view, the evidence is overwhelming (The profits-investment nexus) that it is investment that is the main swing factor in booms and slumps, not personal consumption as many Keynesians focus on. And it is also a key factor in the long-term growth of labour productivity.
A new analysis by the Levy Forecasting Center, an institute that follows closely the views of Keynes, Kalecki and Hyman Minsky, also confirms this view. The report comments that “unsurprisingly, net fixed investment is strongly related to growth.”
The slowdown in real GDP growth since the end of the Great Recession is clearly connected to the slowdown in business investment growth
Business investment in the US has ground to a halt and the age of the existing means of production has risen as ageing equipment and technology is not replaced.
As Levy puts it: “In 2009, net investment as a share of the capital stock fell to its lowest level in the post-World War II era and the nominal capital stock even declined. Although net investment has rebounded somewhat in the recovery, its level as a share of the capital stock remains well below the historical average and it declined slightly in 2015.”
Levy points out that investment growth contributes to labour productivity growth most directly through capital deepening—the increase in capital services per hour worked. “That had added nearly 1 percentage point a year to labor productivity growth in the post-war period to 2010. But since 2010, capital deepening has subtracted from productivity growth and contributed slightly more to the slowdown from 1948-2010 to 2010-15 than did the slowdown in total factor productivity growth.” In other words, it was just the slowdown or cutback in the sheer amount of investment that did the damage, even more than any slowdown in the use of new techniques.
However, the Levy Institute then fails to explain this investment slowdown. It argues that “this broad-based investment slowdown is largely associated with the low rate of output growth both in the United States and globally”. This is a circular argument. The slowdown in economic growth is due to the slowdown in business investment, and that in turn is due to the slowdown in growth!
This is close to the argument of the Keynes-Kalecki thesis (espoused by the Levy Institute) that it is investment that creates profit, not vice versa. This nonsensical view should be countered with the realistic one that is the movement in profitability and profits that moves business investment. And as I and others have shown empirically, this is what happens in a capitalist economy.
For example, Andrew Kliman and Shannon Williams have shown that the fall in US corporations’ rate of profit (rate of return on investment in fixed assets) fully accounts for the fall in their rate of capital accumulation. And they conclude that “Since a long-term slump in profitability, not diversion, is what led to the trend towards dis-accumulation, it is unlikely that the trend can be reversed in the absence of a sustained rebound of profitability”.
Indeed, if we delineate the rate of profit in the non-financial productive sectors of the economy, we find that profitability has struggled to rise since the 1980s and so along with it, business investment growth has slowed. Anwar Shaikh, in his latest book, Capitalism, adjusts the official data for measuring the US rate of profit and shows that profitability has stagnated at best since the early 1980s, rising to a modest peak in 1997 before slipping back to a post-war low by 2008.
Similarly, Australian Marxist economist Peter Jones has shown that if the ‘fictitious’ components of profitability are removed from the calculation of the US corporate rate of profit, then the ‘underlying’ rate of profit has never been lower (http://gesd.free.fr/jonesp13.pdf). Profitability of productive capital consolidated during the 1990s but then dived to post-war lows just before the Great Recession, with little recovery since.
The US rate of profit (excluding ‘fictitious profits’) %
The Levy analysis also makes the valid argument that high corporate debt is impeding new investment. Non-financial corporate sector debt relative to ‘value-added’ (i.e. sales revenue) is at a historically high level and this is weighing on capital spending.
US business investment in the first quarter of 2017 had a slight uptick after falling for four quarters. That followed a return to positive territory for corporate profits in the second half of 2016 after going negative in early 2016.
Does this mean that investment and economic growth is set to pick up finally? Not according to Levy. Levy interestingly (in opposition to its own Kalecki thesis) note that “looking back, the capex decline in 2015-16 and the subsequent rebound lagged the profits decline and recovery.” But Levy reckons that the “corporate profits recovery is likely to stall by mid-year and capital spending will follow with a lag”. If that happens, the US economy will be heading down, not up, by the end of the year.
Michael Roberts Blog 
“Similarly, Australian Marxist economist Peter Jones has shown that if the ‘fictitious’ components of profitability..”
Here’s what I don’t get– if surplus value is the source for interest, rent, and profits, then other than theft, ponzi schemes, cooking the books etc., how can interest and rent be excluded as “fictitious components”??
If the claim is that capitalism is nothing but a ponzi scheme, well then we can stop wasting time with Capital, vols 1-3, can’t we?
Jones does not exclude rent and interest but profit from the purchase and sale of government bonds.
OK, profit from sales of government bonds. How is that “fictitious capital” or “fictitious profit”? How does that differ from profit from the sales of non-government bonds? Equities? Credit-default-swaps? Leveraged buy outs?
It does not differ. Jones does not account for these in his measure. If he did that might make a further change to his measure. Government bonds are by the far the biggest market though.
What is made or lost on the sale of government bonds, equities etc. is not “profit”. It is a capital gain, or loss. But, as Marx says, apart from inflationary gains, there can be no net capital gains or losses, because what is a capital gain for the seller of an asset is a capital loss for the buyer, and vice versa. As Marx puts it, its just a transfer of wealth from one hand to another.
If there were to be any net capital gain, it could only arise because of a drain from actual profit, i.e. from a drain from produced surplus value, and so for the purposes of calculation of the rate of profit should not be deducted.
I just think we’re better off eschewing all discussion of fictitious capital or fictitious profit as an “explanation” for either, both capital expansion and capital contraction.
Better to restrict the discussion to the ROP in manufacturing, utilities, construction, mining (including oil and gas)– and then analyze the growing importance of the FIRE sector, and the government, as a mechanism for distributing the total surplus value.
I agree that looking at the productive sectors is best. In way, that is what Jones was trying to do. It’s just that the official data require massaging to find that. Jones makes one attempt; Carchedi starts with your approach and I’m working on some more analysis
The first graph is compelling. I would suggest that comparing real business investment to net value added would result in an even tighter fit because of the distortions around depreciation. In any case net investment should be compared to net value added as both are net figures. Valuing produced assets is a real problem as well because of PIM. All efforts to modify the BEA’s valuation I find inadequate and having crunched whole series of numbers, produced assets for all its faults, but excluding I.P., provides a baseline over which to measure the rate of profit.
We tend to concentrate on gross value added not gross output. Yet the amount of circulating capital is amplified by the number of turnovers when we use gross output. In the case of manufacturing where turnover is around five and gross output more than three times that of value added, any movements in the gross output side will be magnified, and any linkages more apparent. I will be looking into this over the next few months. I am of the opinion that the gross output side could shine a clearer light on the reciprocal relationship between profit and investment.
I should have added that circulating capital is more responsive to changes in profitability. Fixed assets often have a gestation period of years. Hence it is in the realm of circulating capital that the answer should lie. In support of Michael’s argument, the fall in turnover times post 2014 results in reduced profits as well as an immediate increase in the amount of circulating capital required to achieve a given output. It is an immediate spur to reduce capital expenditure from the fixed side.
“In support of Michael’s argument, the fall in turnover times post 2014 results in reduced profits as well as an immediate increase in the amount of circulating capital required to achieve a given output. It is an immediate spur to reduce capital expenditure from the fixed side.”
I think you mean results in reduced rates of profit/profit margins. But, reduced turnover time/higher rate of turnover simultaneously and necessarily means a release of capital, and higher annual rate of profit, and consequently higher general annual rate of profit.
And, as Marx sets out, it is the annual rate of profit not the rate of profit/profit margin that is the determinant of accumulation. In other words, if the rate of turnover rises, so that less capital has to be advanced, relative to the capital laid out, then any given amount of profit will represent a larger amount of advanced capital.
For example, if a capital consists of £100,000 and turns over once during the year, so that all of the £100,000 is advanced, and the profit is 10% or £10,000, it will enable an accumulation of 10%. However, if the capital turns over twice during the year, so that only £50,000 of capital is now advanced, the annual profit of £10,000 will enable an accumulation of 20%, or double what it was previously.
There are plenty of reasons to be sceptical about this article. Net investment as a proportion of national income was highest during the recession of the 1980s, i.e. the period of lowest profitability. High wages (as a proportion of national income) then, meant that business replaced workers with machines even though profits were low.
Prior to the that investment as a proportion of national income was low during the 1950s, i.e. the peak years of the post war boom, when profits were high and machinery was cheap.
As for more recent history, there is no downward trend in profitability. The studies cited above have no reasonable estimate of the value of the fixed capital stock, exclude profits hoarded abroad, and have no estimate of turnover etc. They are completely unreliable not to say, misconceived and wrong.
Its perfectly easy to explain why investment as a proportion of national income has fallen recently in the US as a consequence of the growth of services, the movement of manufacturing abroad, and the low price of fixed investment.
“The studies cited above have no reasonable estimate of the value of the fixed capital stock, exclude profits hoarded abroad, and have no estimate of turnover etc. They are completely unreliable not to say, misconceived and wrong.”
Uhh… yeah they do, using BEA valuations of fixed assets as the marker, the index, to the value of fixed capital. What counts is the trend, that’s why you can use markers and develop an index over time. That’s one.
Two: Profits “hoarded” are irrelevant, once they are hoarded. The analysis deals with profits earned, or reported. A hoard comes from past profits (and revenues). Two trillion dollars held offshore the United States is not a current profit and has no relevance to calculations of the rate of profit.
US corporations due report profitability and revenues derived from operations outside the US –“rest of the world”–in the BEA parlance; and the trend over a long time is the growth of those “non-domestic” revenues; a trend “matched” in the short-term by results of the last quarter as reported by BEA where non-domestic contributions to corporate profits increased, and the domestic portions declined.
There are indeed estimates of turnover, however, the mechanisms of capital absorb those variations into the formation of the general or average rate of profit.
“They are completely unreliable not to say, misconceived and wrong”
That’s good to know. However if those reports are unreliable, then there should be away to empirically, practically show and calculate the rate of profit reliably and show the differences between the reliable and unreliable rates, and do the same thing with the misconceived/appropriate, wrong/right rates. But we never get that. In all of Boffy’s talk about turnover rates offsetting the decline in annual rates of profit, I have yet to see any calculation produced by Boffy or any other partisan of the proper, reliable, appropriate analysis of profitability, of a “right” rate of profit.
If the argument is that the rate of profit is irrelevant, that’s swell, or not, because then there is the correlation, coincidence of declining rates of profit (as crudely calculated as they may be) and various stresses and impairments in the accumulation of capital. This really requires some sort of explanation, other than “wrong” or “misconceived,” or “pure chance.”
Besides, I think Bill was busy arguing a couple of years ago that the maritime transport industry was not in the midst of a serious period of bankruptcy, contraction, brought on by overproduction and declining profitability, but actually, according to Bill, in the midst of a boom period. My memory isn’t what it was (influenced I’m sure by the Sessions appearance yesterday), so if I’m confusing Bill with someone else, I apologize. But I think I got that right, and that pretty much sums up the accuracy of Bill’s conception, appropriateness, and correctness in evaluating the bourgeoisie’s economy.
Bill,
I think you are right. Investment was relatively high in the 1980’s, for the reason that Marx describes that its when wages are high, and profits are squeezed that capital has an incentive to develop new labour saving technologies, so as to replace wages, create a relative surplus population, and thereby reduce wages, and raise the rate of surplus value.
“Improvements, inventions, greater economy in the means of production, etc. are introduced not at times when prices rise above their average level, but when they fall below it, i.e., when profit falls below its normal rate.”
(Theories of Surplus Value,II, Chapter 8, p 26 – 7)
Its for this reason, as Marx sets out in Theories of Surplus Value, Chapter 18, as against Ricardo, that the net product/revenue can rise even as the gross product/revenue falls, but may also rise even as the gross product/revenue may also rise.
In other words, the gross revenue may fall, as net revenue rises, as Ricardo correctly says, as against Smith, because the quantity of labour employed falls, wages fall, and profits rise. But, Marx says, that the net revenue can rise even where the gross revenue product rises, because the quantity of labour employed can fall, and wages fall, where that labour is replaced by machines. Revenue is then converted into capital, and in addition the additional profits can also be used to increase luxury consumption by capitalists and landlords.
Its important to note here that the situation that Marx is describing, and what arises during the 1960’s/70’s is a fall in the rate of profit of the type described by Adam Smith, and as Marx describes in Capital III, Chapter 15. In other words, its not a result of the law of the tendency for the rate of profit to fall, but is a result of a squeeze on profits caused by rising wages, and a fall in the rate of surplus value. That is what prompts the drive for the introduction of labour saving technologies. The fall in the rate of surplus value as a cause of a falling rate of profit is the opposite of the conditions that lead to the law of the tendency for the rate of profit to fall, which is premised upon rising productivity, and a rising rate of surplus value.
I think you are also right about the unreliable estimates of profits, and rate of profit. I’m tempted to say that no estimate of the rate of profit is better than a fallacious estimate of the rate of profit. As I’ve described before, even the data for GDP is wrong, as Marx describes in Capital II, III, and in Theories of Surplus Value, because its based on Adam Smith’s “absurd dogma” that the value of commodities is resolvable solely in revenues, and consequently that Gross National Output and Gross National Income are identical.
They clearly are not, as Marx describes, because the value of commodities, and so of National Output also includes the value of constant capital, which forms a revenue for no one. The National Income data is only data for revenues (v +s), i.e. only for the new value created by labour during the year. Consequently calculating a rate of profit on the basis of it is only a rate of surplus value, let alone an annual rate of surplus value, let alone a rate of profit!
Then as you say, particularly in the US, there is the question of the preponderance of multinational corporations, each of which has an incentive to minimise its stated profits in the US, and to hide them away in Ireland or Luxembourg or other countries with low rates of Corporation tax compared to the 35% rate in the US, and also because of the penalties faced by US corporations if they repatriate those profits.
Then there is the question of the failure to take account of the rate of turnover of capital, so that at best all we get is a sort of profit margin figure, which surprise surprise tends to fall over time, as the volume of output expands faster than the growth of variable capital, so that even as the annual rate of profit, and mass of profit rises, the profit margin falls.
Its a bit like saying that Tesco is about to go bust, and is unable to accumulate capital, because it only has a tiny profit margin, whilst the corner shop has a large profit margin, whilst in the process neglecting the fact that Tesco’s small profit margin is spread across billions of items it sells, whereas the corner shops larger profit margin is over only a few thousand.
I should also have said that estimates of the rate of profit based on manufacturing industry is pretty pointless in economies where manufacturing now accounts for only a small proportion of value and surplus value creation, and where it is service industries that account for around 80% of value and surplus value production.
Given the nature of service industries, and their reliance on labour and very little on the processing of circulating constant capital, and given that fixed capital investment in such spheres tends to be chunky, its no wonder that we see large profits but historically low levels of capital investment, in constant capital, at the same as continued accumulation of variable capital, and continued rises in employment.
“I think you are right. Investment was relatively high in the 1980’s”
Sources please. Where was investment relatively high in the 1980s? Not in the US. Investment in non-residential private fixed assets in the US doubled 1960-1969; tripled 1970-1979; increased only 75% 1980-1989; expanded 85% 1990-1999; then expanded only 28% 2001-2007 before turning negative such that the total increase 2001-2009 measures only 9 percent. So….except for the post 2001 period, the 1980s saw the lowest levels of investment.
Should we go through the same inquiry for Britain? or the EU? I’m willing, but maybe Boffy should provide some real data, or real sources. For once.
“Corporation tax compared to the 35% rate in the US, and also because of the penalties faced by US corporations if they repatriate those profits.”
Corporations don’t pay a 35% tax rate in the US. That’s a max rate, unadjusted for deductions, allowances, etc. The actual average rate paid by corporations fluctuates between 12 and 18 percent.
Secondly, corporations face absolutely no penalties if they repatriate profits. There is no penalty for repatriation. The amounts repatriated are subject to the general tax rates applied to other income. That’s all. And the allowances that will reduce that rate also apply.
US corporations pay zero US income tax on profits earned outside the United States, until such time as the profits are returned to US jurisdiction.
Finally Boffy talks a good game about rate of turnover, yet he has never provided a mechanism for evaluating what those rates really are, in the real world, with real corporations engaged in real production and real circulation. Consequently, Boffy has no idea what the actual rates of turnover are and how they might have changed, and how that change has impacted the general rate of profit.
Bill,
The data for the share of investment in GDP is also interesting when examined on a yearly basis, from the perspective set out, because it shows precisely the point of a rise in investment as a percentage of GDP at that point of the long wave cycle where labour supplies have become tight, and wages had risen leading capital to seek out new labour saving technologies.
It rose sharply from around 1968 (the point Mandel argues marks the start of the end of the post war boom), before falling sharply with the onset of the 1974 crisis, and oil price spike. But, it then rises even more strongly through the late 1970’s, for the reasons I set out that capital seeks to introduce this new labour saving technology, so as to create a relative surplus population, and drive down wages/increase the rate of surplus value.
It peaks at 20.5% of GDP in 1979, before falling again as the recession of the early 1980’s struck, before rising again, reaching a peak in 1984 of 20.3%. At the point that the rate of profit starts to rise again then in the late 1980’s, the share of gross investment actually starts to fall again.
this chart from the St Louis Fed, illustrates the point.
“this chart from the St Louis Fed, illustrates the point”
The problem with THAT chart is that it is a chart of gross private domestic investment, and thus includes real estate, rental and leasing– i.e. investment in homes, apartments etc.
Of course it’s just one of the many problems Boffy has with assessing reality.
The reason that the BEAs estimates of the value of the fixed capital stock are unreliable is straightforward, they are based on the revenues earnt by capital in other words they are neo-classical.
Therefore, they vary directly with changes in the mass of profit. As profits rise, so does the estimate of the value of the fixed capital stock, and so the rate of profit does not change.
This is hardly unimportant, and yet it is not considered (as far as I can tell) in the estimates presented above.
In fact the turnover period of the fixed capital stock has significantly fallen during the period of globalisation, due to the proportion of investment in software, which is now around a third of all investment, but is depreciated in just two years, and yet it is claimed the turnover of capital has slowed how?
Furthermore the price of machinery has fallen by around a quarter in real terms over the last two decades.
The rate of profit is estimated only against capital advanced, once the capital is fully depreciated that capital is no longer advanced, even if the ownership of the capital continues to earn its owner a rent. Estimates of the life of capital investments presented by the BEA in their estimates of current cost fixed capital stock, measure this period.
While there is obviously a relationship between the rate of profit and investment this needs to be treated cautiously net investment as a proportion of national income was at its highest during the recession of 1980-82 as is clear from the first chart in this article. The overall level of investment does not only depend on the general level of profits, but the price of capital, structure of production etc.
Profits hoarded abroad are “irrelevant” to the BEA, irrelevant in terms of the estimates of the rate of profit presented here, but hardly irrelevant to the corporations that own them. If annual declared profits are say around $2 trillion, if a further $2 trillion are hoarded abroad, this is obviously enough to obliterate the claimed downward trend in the rate of profit, even without including the other points made above.
The reason that the BEAs estimates of the value of the fixed capital stock are unreliable is straightforward, they are based on the revenues earnt by capital in other words they are neo-classical”
First off, the fluctuations in the valuation of the aggregate non-residential fixed investment as determined by “earning power” is precisely what Marx indicated occurs with capital, and the necessary devaluation of capital when profitability declines, so Bill is arguing that the problem with the BEA assessment is that it reflects what Marx explained….. too faithfully.
That the assessed value of the stock of private fixed investment actually declines during economic contractions is a very real, non neo-classical, occurrence, right in line with Marx’s necessary devaluation of capital that helps “correct” and “restore” capitalism to profitability.
This is the initial reason why we look at the trend of private fixed asset valuations over long periods of time– TRENDS.. i.e. the general pattern of capital accumulation..
Secondly, levels of private fixed asset investment are not determined by earnings.
BEA determines non-residential fixed investment, the “bulk of which consists of capital expenditures by private business” by including investment in structures, investment in equipment, investment in software and research and development.
That’s the second reason that we look at both the valuations and the increments of expansion over longer periods of time, the TREND, and why we can observe the TREND become its opposite at certain critical junctures, as occurred with the bust in the maritime transport shipping industry.
“In fact the turnover period of the fixed capital stock has significantly fallen during the period of globalisation, due to the proportion of investment in software, which is now around a third of all investment, but is depreciated in just two years, and yet it is claimed the turnover of capital has slowed how?
Furthermore the price of machinery has fallen by around a quarter in real terms over the last two decades.”
The proportion of private non-residential fixed assets consisting of intellectual property, R&D, software, etc. was 15.1% in 2008 and 15.8% in 2015. Hardly a momentous shift, nor hardly one that significantly impacts the the turnover of the entire mass of fixed assets necessarily deployed in aggregate for production, but realized only partially in valorization.
And of course we might ask have depreciation rates as a portion of total private non-residential fixed assets (exempting as always, real estate, rental, and leasing) increased?
“Profits hoarded abroad are “irrelevant” to the BEA, irrelevant in terms of the estimates of the rate of profit presented here, but hardly irrelevant to the corporations that own them. If annual declared profits are say around $2 trillion, if a further $2 trillion are hoarded abroad, this is obviously enough to obliterate the claimed downward trend in the rate of profit, even without including the other points made above.”
Profits from past production, hoarded abroad and not deployed in further investment in production are indeed irrelevant. Two trillion held in overseas investment accounts has impact on profits to the degree that any investment has an impact, but the mere existence of 2 trillion has no meaning. Say the 2 trillion is sitting in accounts yield 1% interest; what is the impact on profitability– the 2 trillion or the 20 billion?
“Secondly, levels of private fixed asset investment are not determined by earnings.”
I mean that the levels of PFI are not VALUED by the earnings accruing to physical stock.
Bill,
I gave an indication of the effect of the increase in the rate of turnover on the rate of profit in my book Marx and Engels Theories of Crisis.
I have estimated there, using the rate of productivity growth as a proxy for the annual increase in the rate of turnover that the rate of turnover of capital today is around 3 times what it was in 1950. In other words, if the rate of turnover in 1950 was 20, today it is 60.
The annual rate of profit and so general annual rate of profit is essentially the rate of profit multiplied by the rate of turnover of capital.
Engels in Capital III, comments, that in the mid 1800’s, the rate of turnover was approximately 8. If the rate of profit in the mid 1800’s was then say 20%, the general annual rate of profit would have been 160%. If the rate of profit in 1950 was say 15%, in line with the law of falling profits, the general annual rate of profit would be 300%. Similarly, if say the rate of profit in 2015 had fallen to 10%, the general annual rate of profit would be 600%.
Engels setting out the importance of the rate of turnover on the general annual rate of profit says the following, in relation to the role of communications.
“The chief means of reducing the time of circulation is improved communications. The last fifty years have brought about a revolution in this field, comparable only with the industrial revolution of the latter half of the 18th century. On land the macadamised road has been displaced by the railway, on sea the slow and irregular sailing vessel has been pushed into the background by the rapid and dependable steamboat line, and the entire globe is being girdled by telegraph wires. The Suez Canal has fully opened East Asia and Australia to steamer traffic. The time of circulation of a shipment of commodities to East Asia, at least twelve months in 1847 (cf. Buch II, S. 235 [English edition: Karl Marx, Capital, Vol. II, pp. 251-52. — Ed.]), has now been reduced to almost as many weeks. The two large centres of the crises of 1825-57, America and India, have been brought from 70 to 90 per cent nearer to the European industrial countries by this revolution in transport, and have thereby lost a good deal of their explosive nature. The period of turnover of the total world commerce has been reduced to the same extent, and the efficacy of the capital involved in it has been more than doubled or trebled. It goes without saying that this has not been without effect on the rate of profit.”
As I set out in my book, a similar thing can be seen to have happened in relation to the introduction of containerisation. I also set that out in my series of blog posts on Marx’s Law of the Tendency for the Rate of profit to Fall, and in particular I noted, the World Bank Report using data from the McKinsey Report on containerisation.
“the productivity in 1965 of dock labour (prior to containerisation) was 1.7 tons per hour. Post containerisation, in 1970, that had risen to 30 tons per hour. The average ship size went from 8.4 GRT to 19.4 GRT, insurance costs fell from £0.24 to £0.04, and capital tied up in transit halved from £2 per ton to £1 per ton. Today, 90% of goods are transported by container, in an integrated road, rail and sea system. As the report suggests, the reduction in cost and increase in speed has also had a significant effect in stimulating the circulation of commodity-capital”
But, as I also note in that blog post, the effect of the Internet in speeding up communications, electronic payments and so on, especially in a global economy where service industry is now predominant – think of global downloads of music, video etc – is probably even more significant. I also noted the role of the creation of Customs Unions and single markets like the EU, and the role of the Schengen Agreement in dismantling borders and other such restrictions on the free movement of goods and services.
I’ll give another reference to these in a separate post to avoid it being blocked due to hyperlinks.
I have dealt with this in more detail here. It also includes a hyperlink to another report by McKinsey on the role of the Internet.
In this further post in that series I estimated that the average rate of turnover for capital in car production is around 52. But, for the reasons described even that is rising, and is far from the highest rate of turnover of capital.
Variable capital is being turned over every few minutes in a fast food restaurant, for example. In fact, given that workers are always paid in arrears, the variable-capital advanced to production, is turned over many times before the workers themselves even receive any wages!
One of the problems with Boffy’s account, using “productivity” as a surrogate for turnover time, is that it ignores the most important factor in the increase in productivity and that is increased investment in fixed capital.
It’s all well and good to point out how containterization improved productivity, and how that led to improved circulation and reduced turnover. It’s not well and good to leave out the incredible expansion of fixed capital, bound up in ships, ports, cranes, containers, LNG units, dry bulk carriers in the calculation of turnover rates. That’s the key for Marx, as Marx identifies in the Grundrisse and other portions of the Economic Manuscripts. The turnover of the aggregate capital slows as proportionately less new value is aggrandized.
Example, case in point, SLOW steaming for chrissakes.
For a “counter” example, look at what Boffy quotes from Engels: “The Suez Canal has fully opened East Asia and Australia to steamer traffic. The time of circulation of a shipment of commodities to East Asia, at least twelve months in 1847 (cf. Buch II, S. 235 [English edition: Karl Marx, Capital, Vol. II, pp. 251-52. — Ed.]), has now been reduced to almost as many weeks.”
Is there anything more incomplete, more naive, than arguing, as Boffy does that the turnover time of all the capital deployed has been reduced WITHOUT including the VALUE of the capital embedded in the Suez Canal itself? The value that embedded in the expanding fixed capital of greater number of ships, of a greater size, and greater value? You cannot measure turnover of capital simply by the circulating capital.
Boffy, your figure for 52 is surely based on assembly time. It means that every 6 days, working capital turns over. So clearly, from your perspective, the car companies only pay for parts when they are delivered. In turn 6 days later they are paid for the completed cars which are collected from the end of the production line by dealers who buy them C.O.D. Actually, at the moment, car inventories are about 100 days compared to a usual 73 days which is spread between car manufacturers and dealers. If we take the capitalist formula of current assets/current liabilities we get a figure of about 7.8 turnovers which believe it or not coincides with the figure obtained for the car industry by the turnover formula. This independent figure of 7.8 is provided by Wall Street analysis who crunch individual balance sheets. If you want to look for the link between investment and profits the first place is the most responsive place, circulating capital. Any slowdown in turnover, and I publish the figures quarterly, has the simultaneous effect of increasing the need for capital while reducing the production of profit. Capitalists are not fools. Faced with having to fork out more capital for the same output, in return for less profits, they cut back on production. Superficially this appears as trimming inventories in order to increase the sales to inventory ratio which has fallen. If severe enough this involves fixed capital at a later stage because in order to reduce inventories you have to slow down production making part of the means of production redundant. Hence the link to fixed investment.
You say,
“Superficially this appears as trimming inventories in order to increase the sales to inventory ratio which has fallen. If severe enough this involves fixed capital at a later stage because in order to reduce inventories you have to slow down production making part of the means of production redundant. Hence the link to fixed investment.”
The real link to fixed investment here is to depreciation. If the fixed capital is not being fully utilised, it depreciates. Depreciation, as opposed to wear and tear, of capital represents a capital loss.
In other words, if fixed capital is being used extensively, which would be expected in a period of rapid economic activity, and higher rate of turnover, it will lose a greater proportion of its use value, and value in wear and tear, during any given period of time, because of its more extensive/intensive use, though on average it will theoretically transfer only the same amount of value in wear and tear to each unit of output (only theoretically because in practice the amount of wear and tear will not be proportionally greater).
But, if the fixed capital is under used, not only may this result in inefficient use of capital, causing unit costs to rise, but it will mean that the fixed capital may suffer increased depreciation, which is a function of time not usage. That is particularly the case where machinery etc. is left unused.
The wear and tear of fixed capital is transferred to the value of its output, but the depreciation of fixed capital is not. It is a pure capital loss, as though the machine etc. had been damaged, stolen etc. That is why firms try to ensure that fixed capital is used as extensively and intensively as possible, so as to minimise the capital losses from depreciation.
The other point about the fixed capital here is the effect on raising productivity and thereby raising the rate of turnover. Engels in Chapter 13 sets out the role of rising amounts of fixed capital as capital accumulation proceeds, in raising the level of productivity and thereby raising the annual rate of profit at the same time as the rate of profit/profit margin falls.
He says,
“Let us take three different conditions of an industrial capital.
I. A capital of £8,000 produces and sells annually 5,000 pieces of a commodity at 30s. per piece, thus making an annual turnover of £7,500. It makes a profit of 10s. on each piece, or £2,500 per year. Every piece, then, contains 20s. advanced capital and 10s. profit, so that the rate of profit per piece is 10/20 = 50%. The turned-over sum of £7,500 contains £5,000 advanced capital and £2,500 profit. Rate of profit per turnover, p/k, likewise 50%. But calculated on the total capital the rate of profit p/C = 2,500/8,000 = 31¼%
II. The capital rises to £10,000. Owing to increased productivity of labour it is able to produce annually 10,000 pieces of the commodity at a cost-price of 20s. per piece. Suppose the commodity is sold at a profit of 4s., hence at 24s. per piece. In that case the price of the annual product = £12,000, of which £10,000 is advanced capital and £2,000 is profit. The rate of profit p/k = 4/20 per piece, and 2,000/10,000 for the annual turnover, or in both cases = 20%. And since the total capital is equal to the sum of the cost-prices, namely £10,000, it follows that p/C, the actual rate of profit, is in this case also 20%.
III. Let the capital rise to £15,000 owing to a constant growth of the productiveness of labour, and let it annually produce 30,000 pieces of the commodity at a cost-price of 13s. per piece, each piece being sold at a profit of 2s., or at 15s. The annual turnover therefore = 30,000×15s. = £22,500, of which £19,500 is advanced capital and £3,000 profit. The rate of profit p/k then = 2/13 = 3,000/19,500 = 15 5/13%. But p/C = 3,000/15,000 = 20%.
We see, therefore, that only in case II, where the turned-over capital-value is equal to the total capital, the rate of profit per piece, or per total amount of turnover, is the same as the rate of profit calculated on the total capital. In case I, in which the amount of the turnover is smaller than the total capital, the rate of profit calculated on the cost-price of the commodity is higher; and in case III, in which the total capital is smaller than the amount of the turnover, it is lower than the actual rate calculated on the total capital. This is a general rule.”
Engels sometimes here talks about advanced capital where he actually means laid out capital, but those instances are obvious from the context. In example 1, the level of development is low, and the amount of fixed capital is low, leading to low levels of productivity and a low rate of turnover. The laid out capital in this case is, therefore, less than the total advanced capital, so the annual rate of profit (p/C) is lower than the rate of profit/profit margin (p/k).
In example II, the laid out capital and advanced capital are both £10,000, giving a rate of profit profit margin (p/k) of 20% the same as the annual rate of profit (p/C). That is because here the additional fixed capital causes a rise in productivity, and rise in the rate of turnover.
In example III, the laid out capital exceeds the value of the advanced capital because the fixed capital has increased the level of productivity, so that the circulating capital turns over much faster. Now the annual rate of profit exceeds the rate of profit/profit margin. The more capitalism develops, and the more fixed capital is introduced, which raises the rate of productivity and rate of turnover of capital, particularly as this process also reduces the value the fixed capital stock via moral depreciation, the more the annual rate of profit rises, even as the rate of profit/profit margin declines.
That is why as Engels describes these huge developments that took place in production and communication such as the opening of the Suez Canal, or the development of the Bessemer Process for steel production, bring about these sharp rises in the annual rate of profit, even as the rate of profit falls. This is another aspect of the process that Marx describes whereby this rise in productivity continually diminishes the proportion of fixed capital value in total output, because even though the fixed capital stock grows, not only is it continually devalued by moral depreciation and revolutions in technology and productivity, but the growth of output significantly outpaces the growth of fixed capital.
As marx says in Capital III, Chapter 6
“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.”
It is the fact that the proportion of fixed capital as well as of labour declines within the value of total output that causes the proportion of raw material value to rise as a proportion of output value. It is this continually rising share of material value in total output that Marx says represents the rise in the organic composition of capital that leads to the falling rate of profit/profit margin.
However, as I’ve written previously, if the nature of modern capitalism is dominated not by manufacturing and the processing of materials, but by service production, this tendency of a rising share of material value in total output no longer applies, and so, the basis for the law of the tendency for the rate of profit to fall disappears along with it.
Here’s Boffy, twisting and twisting the night away, trying to thread the eye of his needle with a camel:
“The real link to fixed investment here is to depreciation. If the fixed capital is not being fully utilised, it depreciates. Depreciation, as opposed to wear and tear, of capital represents a capital loss”
In a word: Baloney. The US BEA defines depreciation thusly:
“Depreciation, also known as Consumption of Fixed Capital,/5/ is a charge for the using up of private and government fixed assets located in the United States, which is defined as the decline in the value of the stock of assets due to wear and tear, obsolescence, accidental damage, and aging.”
Depreciation is NOT opposed to wear and tear, depreciation IS wear and tear. Depreciation is calculated over the entire mass of value embedded in the entirety of the fixed asset capital regardless of it being used “fully” or “partially.”
The difference in “use rates” of the fixed capital matters not so much to the depreciation of the assets, but rather how much of that depreciation can be captured, offset, reimbursed by the commodities yielded up in the production process. If Ford Motor has fixed capital of 4X and produces 2 million automobiles of which it sell 1.5 million, is that depreciation in mass or rate significantly different than if it sold all 2 million? Of course not.
And if Ford only produces and sells 1 million, when its fixed assets can support production of 2 million, then it takes longer to recover the capital embodied in the fixed assets– and moreover, if new more efficient machinery is introduced into production by GM, or Toyota, then, while the depreciation of the Ford fixed assets will be accelerated, its ability to circulate the value embedded in those old assets, to recover the depreciation amount will deteriorate, slow down, and the fixed assets will face devaluation– Ford goes into its very own recession.
““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.”
Yes, Marx says that, but he does not say that fixed capital forms an ever decreasing portion of the production process. On the contrary, the very notion of the accumulation of capital means, explicitly for Marx, the accumulation of the means of production as capital– the expulsion, displacement of living labor, by accumulated labor as embodied in the machinery of production, of which fixed capital is, in Marx’s words “the most perfect form” of capital. Marx does say that the value of fixed capital is required in its entirety for the production, but is only recaptured incrementally by the valorization process.
Precisely because the value of fixed capital accumulates “disproportionately” to the value of labor power engaged in production, less new value makes up the value of the circulating capital; precisely because the value of fixed capital accumulates more massively and more efficiently, it gives up less and less of its accumulated value to any individual commodity, to all commodities, in each production period, in all production periods, AND the turnover of the ENTIRE capital slows down. The turnover for the capital necessary to the production process cannot be realized quickly enough in the valorization process. Capital confronts the limitation that is immanent to itself; that IS itself.
The figure of 52 was for both the production time and circulation time. As I wrote in that further blog post,
” In short, on average the capital advanced for car production can turn over on average around 52 times a year, although the Internet is changing this too, as it means increasingly, consumers will be able to order their cars directly from producers, and have them delivered directly to their home. But, even assuming the average turnover period for such industrial capital, is a week, this compares badly with the situation for these new forms of capital.”
You also say,
“So clearly, from your perspective, the car companies only pay for parts when they are delivered. In turn 6 days later they are paid for the completed cars which are collected from the end of the production line by dealers who buy them C.O.D.”
But, the advanced capital has nothing to do with the payment for the elements of that capital as far as the turnover time is concerned. What is measured is the actual capital value, when it is thrown into circulation, and when that capital value returns. Otherwise, as indicated you arrive at ludicrous conclusions.
For example, suppose a firm employ 10 workers who are paid £70 per week in wages, in arrears. The workers produce ice cream each day, which they then sell. If we ignore the constant capital value, and assume a rate of surplus value of 100%, each day £10 of variable capital produces £20 of new value. But, what actually is the rate of surplus value if we take your assumption that the start of the period of turnover is the point that the capitalist actually pays for this labour-power, i.e. pays wages?
At the end of day 1, the capitalist receives £20, but how much capital have they laid out at this point? On your basis 0, and so the rate of surplus value/profit would be infinity! That is why Marx calculates the rate of turnover not on the basis of when the capital is actually paid for – materials obtained from a supplier on the basis of commercial credit would be in the same position – but from the point that the actual capital value is itself advanced to production.
Just in Time production and stock control systems, as I have set out, facilitate this, because the circulating capital, which, as Marx and Engels set out is what the turnover time is based upon, is reduced to a minimum of what is required to be advanced to production at any one time. It is only the circulating capital that is relevant for the turnover time, as marx and Engels set out, because it is only this circulating capital that has to be continually reproduced. The fixed capital value is advanced to production, but as fixed capital does not have to be continually reproduced, only its wear and tear is continually reproduced in the value of the output. That is why the fixed capital value in total is included and relevant to the calculation of the annual rate of profit, but not the rate of profit/profit margin, where only the wear and tear is relevant.
I don’t think the figure for inventories is relevant. It looks at things back to front. Let me give an example. In the 1970’s, I worked in the marketing department of a large ceramic company. From the time a large retailer placed an order, to the time they received the goods, might be say six weeks. But, did this mean that the turnover time for the capital consumed in the production of those goods was six weeks? Absolutely not. The reason it took six weeks was simply down to the fact that the company was working on orders for other companies during most of that time.
In fact, depending on what the order was for, they might get it quicker or slower than that, depending on what was already in stock,
what was work in progress, and what production runs were taking place. The fact was that every single day, clay was coming in one door, being processed, and pushed out of the door at the other end. The main restriction on the turnover time was the physical time required for firing in the kiln. Apart from that, the production process was on such a scale that the working period was in no sense really restricted by the need to produce some minimum quantity prior to shipping.
As I’ve written in another of those blog posts about car production and turnover time, you can now order your car directly online with the car producer, specify the particular requirements you have for it, and watch its progress up to where its delivered to your door. The time it takes to get to you has nothing to do with the turnover time of capital, again because the main factor here is how many other people’s cars the company is in the process of producing before it gets to yours!
The circuit of capital is M.C…P…C*.M*. In other words what concerns Marx is the two sales that constitute the circuit of capital, the first, the purchase which opens it and the second, the sales, which concludes it. Money goes out and new money comes in containing the surplus. You like quoting from Book 3. Engels in editing Marx describes the elements of working capital. Included is credit given and credit taken as well as inventory. The issue of credit deals with your working experience. The BEA is also aware of the confounding effect of credit on sales or more precisely when to document the sale. Fortunately because we are talking about aggregated sales mounting to tens of millions in each quarter for each industry, there is an averaging out of credit given and taken. So the formula remains accurate. Inventory is decisive regardless of what you say. The only time working capital can fall below inventory turnover is when credit is received from suppliers but no credit is given because the goods are sold for cash. That only happens in retail and the turnover formula reveals correctly the turnover of capital is faster than the turnover of inventory. So no surprise there. Your issue of ordering a car on the internet is instructive. If it is fully paid for by the time it is produced, working capital in this case would be zero. A better example would be private education which can be paid at the beginning of term.
You say,
“The circuit of capital is M.C…P…C*.M*. In other words what concerns Marx is the two sales that constitute the circuit of capital, the first, the purchase which opens it and the second, the sales, which concludes it. Money goes out and new money comes in containing the surplus.”
No it isn’t, as Marx sets out in Capital II. The circuit M.C…P…C*.M*, as Marx makes clear is only the circuit of newly invested money-capital. As he also makes clear that is also the case with the newly invested realised profit.
“… it is the form of capital that is newly invested, either as capital recently accumulated in the form of money, or as some old capital which is entirely transformed into money for the purpose of transfer from one branch of industry to another.” (p 61)
But, as he sets out in Capital, and what is central to the analysis of the rate of turnover of capital, is that for all existing capital, the circuit is P.. C’ – M’. M – C … P. The extended form of that is P … C’ (C = c) – M’ (M + m). – M – C… P. Only in the case of the accumulated m is the circuit M – C…P…C’ – M.
“The circuit of productive capital has the general formula P … C’ — M’ — C … P. It signifies the periodical renewal of the functioning of productive capital, hence its reproduction, or its process of production as a process of reproduction aiming at the self-expansion of value; not only production but a periodical reproduction of surplus-value; the function of industrial capital in its productive form, and this function performed not once but periodically repeated, so that the renewal is determined by the starting-point.” (p 65)
The same is true for commercial capital. Its circuit is C’ – C’.
“Consequently if simple reproduction takes place in this form, the C’ at the terminal point is equal in size to the C’ at the starting-point. If a part of the surplus-value enters into the capital circuit, C”, an enlarged C’, appears at the close instead of C’. This is merely a larger C’ than that of the preceding circuit, with a larger accumulated capital-value. Hence it begins its new circuit with a relatively larger, newly created surplus-value. In any event C’ always inaugurates the circuit as a commodity-capital which is equal to capital-value plus surplus-value.” (p 90)
The reason is that what is turned over is the actual productive-capital.“ The money representation (M) is simply that a money equivalent of the capital value, expressed in money, Marx says purely as unit of account, as the only rational way of performing the calculation. What must be replaced is not some amount of money – which is what the proponents of historical pricing suggest – but the physical elements of the productive-capital, and thereby their current capital value. (M) here merely signifies that the current money equivalent of that capital value. As Marx sets out in Capital III.
“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale.” (p 835)
In other words, for all existing capital the turnover starts from the productive capital (labour and means of production) in the hands of the capitalist. It is advanced to production, and at the end of the production period, it results in commodities part of which represent the value of the productive-capital used in their production, and the other part representing the surplus product. This starts the circulation period of the capital. It is metamorphosed into Money-Capital, one part representing the money equivalent of the consumed productive capital, the other representing surplus value.
The money capital (M) is then metamorphosed once more into the commodities that represent the productive-capital previously consumed in production, and these now once more engage in production, the turnover of the capital then being completed.
“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness.” (Chapter 49, p 849)
“In the reproduction process of capital, the money-form is but transient – a mere point of transit.” (Capital II)
It is not at all the start and finish point of the circuit.
In 2016 US companies hoarded an estimated $2.5 trillion in profits abroad, a total growing by around $250bn a year.
http://www.cnbc.com/2016/09/20/us-companies-are-hoarding-2-and-a-half-trillion-dollars-in-cash-overseas.html
This materially effects estimates of the rate of profit, as this massive amount of money is not included in the BEAs total for the mass of profit. As profits are around $2 trillion a year, this lowers the total of profit, not by the revenue of the hoard, but by the amount of the hoard not repatriated, i.e. by around 12%.
The BEAs estimates of the fixed capital stock are based on a method developed by Bohm-Bawerk (as they acknowledge). This values the fixed capital stock as a discounted total of its future revenues, so as profits rise so does the estimated value of the fixed capital stock, so the rate of profit does not change. (This is the tautology criticised in the Cambridge Capital Controversy). Capitalists owe their social power to their monopoly of the means of production which means that they can extract a surplus value from the working class, but the rate of profit is not estimated on this but on the actual amount of capital advanced. But under the BEAs chained measures the “value” of the fixed capital stock can even rise above the purchase price as it varies with the change of revenues.
There are different turnovers of capital, but the key one of for the rate of profit, is the turnover of variable capital as after the first turnover the capitalists do not have to advance the capital for wages. Therefore, to use the mass of variable capital overstates the amount that capitalists advance in wages by a factor of between 5 to 8.
BEA table 5.3.5 Private fixed investments by type line 16 intellectual property products divided by non-resident private fixed investments line 2 rises from 1947 7.8% to 1990 22.2% to 2000 27.4% to 2016 32.8%.
Profits from non-domestic operations must be reported. They are exempt from tax if the reporting party declares them “indefinitely invested abroad.” BEA includes profit from non-domestic sources, operations in its calculations of corporate profits, and for example, in 1Q of 2017, those profits from non-domestic sources increased, while profits from domestic operations declined.
“There are different turnovers of capital, but the key one of for the rate of profit, is the turnover of variable capital as after the first turnover the capitalists do not have to advance the capital for wages. Therefore, to use the mass of variable capital overstates the amount that capitalists advance in wages by a factor of between 5 to 8.”
Of course, we could say that not only of the variable capital, but also the constant capital as the successful completion of the circuit recaptures all the capital advanced, but not all the capital invested. So what Bill is telling is not that big revelation. Yes, the wage is recuperated in the circuit, and then that recuperation of the advanced wage is then used to pay subsequent wages. Same for the cost of electricity, and iron ore, so so what? As long as that “accounting” is constant and consistent, we can measure the trend and observe the immanent tendencies of capitalism as they become manifest in the increased or decreased masses of profit, increased or decreased rates of profit, increased or decreased accumulation of fixed assets, increased or decreased rates of capital expenditures.
Re depreciaton. I would recommend everyone take a look at the tables produced by the US Department of Commerce in its Quarterly Financial Report of Mining Manufacturing and Service Industries. Check out table 1.1 which gives the figures for property and equipment, and for accumulated depreciation, depletion and amortization. You can access data back to 1996. I think you’ll find that 1996-2000, accumulated depreciation actually declines as portion of total property and equipment from 53% to 51%. .
For 2003 to 2016 the ratios are pretty consistent, varying between 55% and 57%. Now these may not be precise measures, but again it’s the TREND that matters, and the consistency in the ratio would indicate that the growing level of software, intellectual property, etc. investment and capitalization is not dramatically altering depreciation, particularly since capital spending between 2009 and 2016 has been constrained.
The BEA measures corporate profits from tax return data, at least after initial estimates. For non-domestic profits – if not repatriated to avoid paying US tax – they have to use company reported financial data. This will be subject to accounting rules, but the ‘flexibility’ of them is even greater than under tax rules.
BEA measures corporate profits from BOTH tax return data and corporate financial statements. Profits earned overseas are NOT exempt from being reported to the IRS. They are exempt from taxis, but not the reporting requirement, as long as they are “indefinitely invested abroad.”
Mere technicality, I’m sure.
https://www.forbes.com/sites/danielfisher/2012/10/25/foreign-tax-reserves-are-crack-cocaine-for-earnings-manipulation-study-says/#4877da4641c0
“The Internal Revenue Service code allows companies to shield foreign earnings from U.S. corporate taxes as long as they don’t repatriate them as dividends to the parent. Accounting rules allow companies to avoid reporting a tax liability for these earnings if they plan to leave them overseas indefinitely. Those earnings, called Permanently Reinvested Earnings, or PRE, need only be identified in a footnote on financial statements with the Securities and Exchange Commission. Last year PRE amounted to $1.5 trillion, up 42% from 2009.”
Click to access i1120sm3.pdf
Bit more than a footnote is required. IRS Schedule M3 is supposed to capture the information.
“Capitalists owe their social power to their monopoly of the means of production which means that they can extract a surplus value from the working class, but the rate of profit is not estimated on this but on the actual amount of capital advanced.”
But, as Marx and Engels indicate in Capital III, even by the end of the 19th century, the majority of capital was not private capital, but socialised capital, mainly in the form of Joint Stock Companies, but also in the form of co-operatives – in the UK, the Co-op was the biggest retailer, for example, and was expanding into other areas, becoming the biggest farmer, and so on. Private capitalists, as Engels says in his critique of the Erfurt Programme, and Kautsky extends this in “The Road To Power”, were not the OWNERS of the bulk of means of production, therefore. Private ownership of means of production/capital, by then existed only for the small capitals, which as Marx says, increasingly themselves came into conflict with this large scale socialised capital.
Instead, as Engels sets out in his Supplement to Capital III, the majority of private capital took the form not of means of production/industrial capital, but of fictitious capital – shares, bonds, property, from which they drew interest and rents, and obtained capital gains from speculation. The control that these capitalists exerted came from their continued political power, exerted through parliament and the state, arising from their enormous paper wealth, which allowed them to continue to exercise control over capital they did not own.
For example, their is no more reason that shareholders should be entitled to appoint Boards of Directors and executives to look after their interests and determine company policy than bondholders, or a bank that makes a loan to a company, or an equipment company that loans equipment to a company. All are merely owners of loanable money-capital, which is loaned to the company, and in return for which they are paid interest. In Germany, that right of shareholders is partially restricted by the co-determination laws that enable workers to elect half the members of company supervisory boards, though for the reasons Trotsky described, such arrangements always continue to allow the shareholders to exert majority control.
There is no economic or juridical basis for shareholders exercising control over capital they do not own. As lenders of money-capital to a company they do not own its productive-capital, they only own shares, which are nothing more than paper certificates saying they have loaned that money, and on which they are entitled to the market rate of interest. They exercise control only as Kautsky says, as a consequence of political power. The real capital itself as socialised capital belongs to the company itself as a legal and economic corporate entity in its own right, and as Marx sets out in Capital III, it can only be considered to be the property of the associated producers within that particular firm. It is they not shareholders that should appoint boards, and so on, and exercise control over the capital.
If they did so, then we would not have had the situation seen over the last thirty years or so described by Andy Haldane of the Bank of England, where dividends as a share of realised profit have risen from around 10% to around 70%. Many of those dividends have gone to once more bid up the prices of existing bonds and shares, which leads to a further inflation of asset prices, which squeezes yields, but which in turn induces those same representatives of shareholders to vote through increased levels of dividends.
“There are different turnovers of capital, but the key one of for the rate of profit, is the turnover of variable capital as after the first turnover the capitalists do not have to advance the capital for wages. Therefore, to use the mass of variable capital overstates the amount that capitalists advance in wages by a factor of between 5 to 8.”
The rate of turnover that Marx and Engels describe is the rate of turnover of the circulating capital, circulating constant capital (materials) and variable capital. In effect as Marx and Engels describe, the two are essentially identical, because the materials advanced to production are processed by labour advanced to production, and once combined into a product, they necessarily proceed to be realised as money-capital at the same time. The only difference as Marx sets out in Capital II, and in Theories of Surplus Value Chapter 17, is any difference their might be in metamorphosing the realised money-capital back into labour-power or materials.
Indeed, as he sets out in those discussions this is one cause of crises. The major instance referred to, is that given in Capital III, whereby realised money-capital could not be metamorphosed into replacement materials, because the US Civil War stopped the supply of cotton to lancashire textile factories.
It is only the circulating constant capital that is relevant to the rate of turnover, and not fixed capital, for the reason marx and Engels set out, which is that it is only the circulating capital that has to be constantly reproduced, in order for production to continue on the same scale, i.e. the consumed materials and labour-power have to be physically replaced, which can only happen when their value has been reproduced in the end product, and metamorphosed into money-capital. That is not the case with fixed capital, and in fact, as Marx sets out, the longer its turnover time the better, because it only has to be physically replaced when it is worn out, (unless it is morally depreciated to zero, by some new technology), whilst its value is continually being reproduced and returned to be hoarded in the form of the value transferred to the end product via wear and tear.
In fact, as Marx says, for some very large elements of fixed capital such as canals, the major element is not the accrual of this value in respect of wear and tear, because the capital itself can be thought of as more or less of unlimited life, but is the amount regularly expended for repairs. And as Marx says, the nature of this fixed capital is that at each stage is it gets larger and more technologically sophisticated, not only does it tend to have longer duration, but its cost relative to the output it produces continually falls. Larger more sophisticated machines are not proportionally more expensive than their less productive predecessors, for example. The huge container ships, or oil tankers, for example that now transport the worlds goods around the globe do not cost proportionally more than smaller ships that carry less cargo, and which are slower, thereby carrying less cargo in weight/miles per year. The Internet enables communications at a much faster pace than earlier forms of communication, but its cost is only a fraction of the cost of the previous forms of fixed capital that themselves were only capable of undertaking a fraction of the communication that the Internet now facilitates in a year.
“Therefore, to use the mass of variable capital overstates the amount that capitalists advance in wages by a factor of between 5 to 8.”
Its not what is advanced as wages that is the relevant metric, for the reasons that Marx sets out, or the periodicity of wage payments, for the reasons I set out above. Wages are always paid in arrears, so it is always a case of workers advancing labour to the capitalist, not of the capitalist advancing wages to the worker. The worker has always created the value in advance that is reproduced in the end product, whose value is realised by capital, an then returned to the worker in the form of wages. If the payment of wages, or the periodicity of wages were the determinant then the rate of turnover would be infinity.
The turnover period is rather as marx sets out from the point at which the actual capital itself is advanced to production, i.e. the point when the labour-power is hired, and starts producing. The close of that turnover period comes when that labour-power has produced the required amount of commodities that constitute the minimum for the working period, when those commodities are then put into circulation, sold, and finally the realised money-capital been used to hire and set to work the consumed labour-power.
If we take a worker in a fast food restaurant. The labour is advanced as soon as the worker takes the customer order, the burger is produced, and handed to the customer, and the turnover period ends as soon as the customer has paid for it. All in all, the turnover of this capital, on average amounts to only a matter of minutes. By contrast, a worker in shipbuilding advances labour over a period of maybe two years, before the ship is completed, and sold, before the firm realises the value of the ship, and is able to use it to once more reproduce its circulating capital.
That is why, as Marx sets out in discussing the average rate of profit and prices of production, those capitals that have a longer than average turnover period, have lower annual rates of profit, whilst those with shorter than average turnover times have higher annual rates of profit, and this results in the price of production of the former being higher than the exchange value, whilst the latter’s price of production is lower than its exchange value (discounting the effect of the different organic compositions in both cases). It is why those capitals with longer turnover times have higher rates of profit/profit margins, and those with shorter turnover times have lower rates of profit/profit margins.
But, in fact, the average rate of turnover is much greater than 8. In Capital III, Engels gives a practical example of the turnover time of capital in the mid 1800’s. And he shows that the rate of turnover then was already around 8.5.
“The weekly advance of circulating capital therefore was 358c + 52v = 410. In terms of per cent this was 87.3c + 12.7v. For the entire circulating capital of £2,500 this would be £2,182 constant and £318 variable capital. Since the total expenditure for wages in one year was 52 times £52, or £2,704, it follows that in a year the variable capital of £318 was turned over almost exactly 8½ times. The rate of surplus-value was 80/52 = 153 11/13. We calculate the rate of profit on the basis of these elements by inserting the above values in the formula p’ = s’n (v/C) : s’ = 153 11/13, n = 8½, v = 318, C = 12,500; hence:
p’ = 153 11/13 × 8½ × 318/12,500 = 33.27%.” (Chapter 4)
And, as Engels says the major influence on the rate of turnover is the rise in social productivity, which not only reduces the production time, but also the circulation time. As Engels says,
“The chief means of reducing the time of production is higher labour productivity, which is commonly called industrial progress. If this does not involve a simultaneous considerable increase in the outlay of total capital resulting from the installation of expensive machinery, etc., and thus a reduction of the rate of profit, which is calculated on the total capital, this rate must rise. And this is decidedly true in the case of many of the latest improvements in metallurgy and in the chemical industry. The recently discovered methods of producing iron and steel, such as the processes of Bessemer, Siemens, Gilchrist-Thomas, etc., cut to a minimum at relatively small costs the formerly arduous processes. The making of alizarin, a red dye-stuff extracted from coal-tar, requires but a few weeks, and this by means of already existing coal-tar dye-producing installations, to yield the same results which formerly required years. It took a year for the madder to mature, and it was customary to let the roots grow a few years more before they were processed.
The chief means of reducing the time of circulation is improved communications. The last fifty years have brought about a revolution in this field, comparable only with the industrial revolution of the latter half of the 18th century. On land the macadamised road has been displaced by the railway, on sea the slow and irregular sailing vessel has been pushed into the background by the rapid and dependable steamboat line, and the entire globe is being girdled by telegraph wires. The Suez Canal has fully opened East Asia and Australia to steamer traffic. The time of circulation of a shipment of commodities to East Asia, at least twelve months in 1847 (cf. Buch II, S. 235 [English edition: Karl Marx, Capital, Vol. II, pp. 251-52. — Ed.]), has now been reduced to almost as many weeks. The two large centres of the crises of 1825-57, America and India, have been brought from 70 to 90 per cent nearer to the European industrial countries by this revolution in transport, and have thereby lost a good deal of their explosive nature. The period of turnover of the total world commerce has been reduced to the same extent, and the efficacy of the capital involved in it has been more than doubled or trebled. It goes without saying that this has not been without effect on the rate of profit.”
On the basis of the rapid growth in productivity since the time Engels was publishing Capital III, I think that a conservative estimate of the rate of turnover today is around 60, which, as Engels says, has a correspondingly marked effect on increasing the general annual rate of profit, whilst tending to reduce profit margins/rate of profit.
In relation to the fixed capital, and the wear and tear transferred to the value of the end product, as opposed to the depreciation of fixed capital, I should have made the other obvious caveats, and clarifications. As Marx points out depreciation is not the same thing as wear and tear. This is a distinction between Marx’s analysis and bourgeois accounting practices, which are geared to enabling capitalists to get back their costs via the tax system.
If a new machine is introduced, which is twice as efficient as its predecessor, but only has the same price, then the older machine is morally depreciated to half its value. None of this loss of value can be recouped by the capitalist in the products that machine produces. In other words, because this machine only produces half the number of units of output as the newer machine, it would have to transfer twice as much in the value of wear and tear to recover its value. Competition prevents that, so that its value is halved.
The same thing occurs where rises in productivity enable the machine to be produced with less labour-time. The reduction in the capital value of the machine by such depreciation is purely a capital loss that cannot be recovered via a transfer of wear and tear to the end product. It is as though the machine had been damaged or stolen. This applies also to materials that might become depreciated as a result of being lying around for some time, and thereby lose some of their use value.
The exception to this Marx describes in Capital II is in relation to agricultural equipment. In agriculture, the seasonal nature of production means that equipment is necessarily left unused for weeks or months, during which it loses value due to depreciation, rather than wear and tear from use. But, because in this instance, this is a necessary element in its specific use this cost is recovered in the value of the end product. Marx compares this unusual situation with the example he gives in relation to cotton waste. That is a proportion of cotton used in spinning never gets transferred to the end product, it forms waste, but because this wastage is an inevitable element of the production process, the value of the entire cotton consumed is included.
In Capital II, Marx makes similar comments in relation to other such costs. For example, capitals involved in shipping have to cover the eventuality of ships sinking for various reasons. The loss of a ship, as with depreciation, is a capital loss, and the value comprises no part of the end product. However, Marx says, shipping firms will try to minimise the effect of such capital losses, by taking out insurance. In order to make average profit, these insurance costs have to be recovered. Its not a contributor to value, but ends up as a deduction from surplus value, as the cost of insuring against these capital losses is spread across all capital. Marx gives a similar example, in Capital II, of farmers who have to build grain silos etc. to protect the harvested grain from suffering a depreciation due to bad weather or being eaten by vermin. The labour-time required to produce these silos etc. adds nothing to the value of the grain, and thereby cannot be reproduced within it. But, the silos are a necessary expense, to avoid greater capital losses from depreciation, and so this cost is recovered in the price as part of the process of forming an average rate of profit. It is again a deduction from total surplus value.
“The labour-time required to produce these silos etc. adds nothing to the value of the grain, and thereby cannot be reproduced within it. But, the silos are a necessary expense, to avoid greater capital losses from depreciation, and so this cost is recovered in the price as part of the process of forming an average rate of profit. It is again a deduction from total surplus value.”
Marx made a lot of comments, particularly about agriculture, and some of them are just flat out wrong.
This may have been excusable in Marx’s time, but is inexcusable now. Grain silos built on a farmers own property by the farmer himself/herself are part of the capital expenditures, fixed assets, and like any other building used in the production process transfer their value incrementally over the number of production cycles, until the use value of the structure is depleted.
Today, when separate corporations build and operate the silos, there most certainly is an expropriation of surplus value from the labor power of those building the structure, and an addition to the value embedded in the product, How do we know that? See what you get on the market for mildewed grain; grain with rat droppings in it, vs. grain that is properly stored and transported. The difference is attributable to the greater socially necessary labor time it takes to properly store and transport the grain.
Put the silo on wheels, which is what a railroad utilizing covered grain hoppers to move the grain from farm to market, is essentially. Marx specifically identifies such “non-production” elements as “productive labor” and as expanding value. Is that a “deduction from surplus value”? If it is it blows the hell out of Boffy’s theory about how the means of transport have accelerated the extraction of surplus value, doesn’t it?
If the silos and storage are “non-productive”– deductions from surplus value, then every bit of the maritime shipping industry, coal wharfs, the entire transport network, warehouse, and delivery systems should be a deduction from surplus value and industry profits, rather than, according to Boffy, the greatest advancement in enhancing the realization of surplus value.
Pipelines give up their value over time to the products transported via the pipeline. Railroads do so. Structures used to support inventory or the final products are part of the constant capital.
The other important point about the fixed capital, and capital losses due to depreciation of various kinds, and of accidents is set out in Capital III, but is also referred to in the Critique of the Gotha Programme, in relation to that portion of the total product that must be set aside as an insurance fund to cover such losses, and which will apply under Socialism too.
In other words, that part of the total output that must be set aside as such an insurance fund is a deduction from surplus value, because it does not add to the existing capital (either the fixed capital or circulating capital, for example, if a warehouse full of cotton is destroyed in a fire, or is damaged by damp, this represents a capital loss, and the replacement of this loss from the insurance fund is thereby a reduction in the surplus value that could otherwise have been utilised to accumulate fixed or circulating capital).
This is essentially the distinction that Marx makes in relation to these necessary costs that add nothing to value, but which are necessary as a means of minimising capital losses, or for facilitating the realisation of already produced value. In that sense they are a bit like the labour of commercial workers, and for the same reason that both represent a deduction from surplus value, it is always in the interest of capital to minimise the labour-time expended upon them.
It goes without saying, as its Marxist Economics 101, that these expenditures on storage etc. and costs of circulation are completely different to the cost of transport, as Marx sets out in Capital II, just as he distinguishes the costs of marketing commodities, by commercial capital from the value of transporting commodities to market, even where that transport is organised by commercial capital itself, e.g. where a supermarket chain uses its own fleet of delivery lorries to transport commodities from factories, etc. to its stores.
As marx puts it,
“It is not necessary to go here into all the details of the costs of circulation, such as packing, sorting, etc. The general law is that all costs of circulation, which arise only from changes in the forms of commodities do not add to their value. They are merely expenses incurred in the realisation of the value or in its conversion from one form into another. The capital spent to meet those costs (including the labour done under its control) belongs among the faux frais of capitalist production. They must be replaced from the surplus-product and constitute, as far as the entire capitalist class is concerned, a deduction from the surplus-value or surplus-product, just as the time a labourer needs for the purchase of his means of subsistence is lost time. But the costs of transportation play a too important part to pass them by without a few brief remarks…
Quantities of products are not increased by transportation. Nor, with a few exceptions, is the possible alteration of their natural qualities, brought about by transportation, an intentional useful effect; it is rather an unavoidable evil. But the use-value of things is materialised only in their consumption, and their consumption may necessitate a change of location of these things, hence may require an additional process of production, in the transport industry. The productive capital invested in this industry imparts value to the transported products, partly by transferring value from the means of transportation, partly by adding value through the labour performed in transport. This last-named increment of value consists, as it does in all capitalist production, of a replacement of wages and of surplus-value.
Within each process of production, a great role is played by the change of location of the subject of labour and the required instruments of labour and labour-power — such as cotton trucked from the carding to the spinning room or coal hoisted from the shaft to the surface. The transition of the finished product as finished goods from one independent place of production to another located at a distance shows the same phenomenon, only on a larger scale. The transport of products from one productive establishment to another is furthermore followed by the passage of the finished products from the sphere of production to that of consumption. The product is not ready for consumption until it has completed these movements.
As was shown above, the general law of commodity production holds: The productivity of labour is inversely proportional to the value created by it. This is true of the transport industry as well as of any other. The smaller the amount of dead and living labour required for the transportation of commodities over a certain distance, the greater the productive power of labour, and vice versa.
The absolute magnitude of the value which transportation adds to the commodities stands in inverse proportion to the productive power of the transport industry and in direct proportion to the distance traveled, other conditions remaining the same.”
I’m not talking about insurance. Silos, storage facilities are not insurance. Take it out of the farm, put it into a factory. The machinery used in production transmits its value to the final product. So do the buildings housing the machinery, as do the buildings housing the intermediate products, as do the vehicles used to transport intermediate products through the entire process, as do the buildings used to house the vehicles, as do the parts used to repair the vehicles, etc. etc.
“It goes without saying, as its Marxist Economics 101, that these expenditures on storage etc. and costs of circulation are completely different to the cost of transport, as Marx sets out in Capital II, just as he distinguishes the costs of marketing commodities, by commercial capital from the value of transporting commodities to market, even where that transport is organised by commercial capital itself, e.g. where a supermarket chain uses its own fleet of delivery lorries to transport commodities from factories, etc. to its stores.”
Priceless. First off, there is no such thing as “Marxist Economics” not 101 or 404 or any combination. Marx’s analysis is not economics– it is the critique of capital, of the social condition of labor that constitutes the basis for value production. That’s one.
Two: ” it goes without saying that the cost of circulation are completely different to the cost of transport…..” No, it doesn’t go without saying since the cost of transport, and reducing the cost of transport, and improving the productivity of labor in transportation is precisely the way of reducing circulation times, and increasing turnover as Boffy himself is only too happy to point out, when it suits his purpose of obscuring the role fixed capital plays in the tendency of the rate of profit to decline as the productivity of labor increases.
The buildings used to protect stores during and after the production process are no different in function or process than the movement of the final products to market. They are components making up the socially necessary labor time of production, and pass their exchange value incrementally to the product until their use value is depleted.
An energy generating plant has pipelines to provide natural gas to the turbines. Do those pipelines transfer their value to the commodities? The commodity is moved, so clearly, it seems the answer is “yes.” The same plant has a tank for storing the natural gas before moving it through the pipeline. But the tank doesn’t transfer any value to the gas? That’s just nonsense. It may transfer a minute amount, as the use value of the tank can last for decades, but that is precisely the “conundrum” that fixed capital brings to valorization.
It is precisely this aggregation of fixed capital that constitutes both the accumulation of capital, providing for more frequent turnovers, but, at the same time, slowing the total turnover of the accumulated capital. For example, look recently at the ports of LA and Long Beach and the impact of the 15,000 + TEU (twenty foot equivalent units) container ships (Maersk Triple E class) on unloading times, and turnaround times for ships trying to access those ports.
Boffy I would like to return to the discussion as to the starting point of the circuit of capital. I do not dispute the importance of tracing the circuit from P…P, however that does not describe the ratio between the capital advanced and the profit received, nor does it describe the length of time between the laying out of money and the replenishing money coming in . Firstly the capitalist employer requires sufficient working capital to tide them over until new money comes in. That occurs only when commodities newly produced or purchased are sold or credit given is extinguished. If we measure it from P to P it says that the capitalist employer must have enough working capital to tide them over from one production period to another. The key question is the sum of working capital the same. The answer is no. In the case of M to M* their is a purchase period, a production period and a sale period. In the case of P to P there is a production period, a sale period followed by a purchase period. At first this appears superficially the same, three periods in each. But the difference is this. In the case of M to M* they belong to the same circuit of money capital. In the case of P to P they belong to two circuits. This means that the conditions in the second circuit can change. For example let us say that M to M* lasts six months and during those 6 months the price of raw materials change, it means the outlay of M in the second circuit needs to exceed the outlay of M in the preceding circuit. Hence the surplus produced in the initial circuit now has to be measured against more capital because of rising prices in the second circuit. The reason Marx uses P to P is not to measure turnover, but to point out that the amount of working capital may and does vary between production periods. Therefore that capitalists must have sufficient working capital not only to tide them over till new money comes in but sufficient to fund the following production period should conditions change. Finally that the amount of capital the productive capitalist can withdraw is not only predicated by the amount of money returned, but by the money that has to be set aside to fund the next round of production.
My biggest issue with measuring produced assets has to do with depreciation and its effect on net profit. Firstly, as a function of the rising technical composition of capital, depreciation should rise relative to the net value added as relatively more means of production are employed compared to living labour. Secondly as science and technique develop means of production should have a longer economic life. We have seen depreciation rising relatively and we have seen an increase in the average age of equipment and structures. What we have not seen is an increase in the years depreciation is taken. Hence depreciation is far too rapid which means that the means of production are undervalued, profits are reduced, but not the all important corporate cash flow on which share-buybacks are based, and of course tax take is reduced. Finally we have the debacle over I.P depreciation which is double counted. Firstly, the value of R&D (the biggest component of IP) is amortised in the final selling price of the product which it is incorporated in. It is firstly depreciated by the seller because R&D is now treated as capital not as a cost. Then it is depreciated by the buyer whose depreciation correctly is based on the selling price (or buying in) price. The seller of course can ascribe a higher capital value to R&D depending on the future stream of income they expect which is always a get out of jail card for the creative capitalist.
“Boffy I would like to return to the discussion as to the starting point of the circuit of capital. I do not dispute the importance of tracing the circuit from P…P, however that does not describe the ratio between the capital advanced and the profit received, nor does it describe the length of time between the laying out of money and the replenishing money coming in .”
It does describe the relation between the capital advanced and the surplus value produced, though, because the surplus value, the expansion of the capital is precisely the result of this production process. It doesn’t explain the ratio of the capital advanced to the profit received, only because the surplus value produced, is not necessarily the profit that is realised, for a variety of factors, e.g. the condition of demand.
It does describe the length of time between money being laid out, and coming in, because that is a function of the production time and circulation time, but the point is that this is subordinate to the circuit of the productive-capital. As Marx says, M is only a moment within the circuit of that productive-capital. The point for capital is not to increase the amount of M, but to increase the amount of productive-capital advanced because that determines how much labour is employed, and consequently how much surplus value is produced, which in turn determines how much capital can be accumulated.
The M that Marx uses in the analysis of the expansion of capital, he makes clear is only the money equivalent of the capital value of the productive-capital, i.e. it is merely money as unit of account, in order to perform calculations. Now to take your point about the money-capital required in different production periods due to changes in market prices, that does not then really change anything, because the capital value advanced is the capital value advanced. The period of advance of capital is taken as the whole period of turnover from P..P, i.e. not just the period where capital is advanced for the production period, but also for the circulation period.
If, the production period is 6 weeks, and circulation period 4 weeks, and 100 kilos of cotton are processed each week, and the price of cotton starts as £1 per kilo in week 1, but rises to £1.20 per kilo in Week 7, this doesn’t really change anything, because the value of the cotton is determined by its current reproduction cost. The capital advanced is £1200 not £1000, or even 6 x £100 + 4 x £120 = £1080.
When all of the output is sold in week 8, the price of the output as a whole will be based upon the price of cotton of £1.20 per kilo, even though 60% of the cotton bought was bought at only £1 per kilo. Now if you are saying that at the start of this turnover period the capitalist only has £1,000 of money capital available, and this cannot be extended, by the addition of more money-capital, or by the use of credit, then I agree that, in reality, the amount of actual productive-capital that could be advanced is reduced according, in the proportion of 100:108.
And, indeed, this is one of the potential causes of crises set out by Marx, which is that the realised money-capital is not sufficient to replace the consumed capital, if between the point of sale of the commodity-capital, and the purchase of the replacement productive-capital, the price of the latter rises. In that case, the circuit of the productive capital P…P cannot be completed.
However, you are really here abstracting from reality. This is a problem where, as marx described, the turnover time of capital was extremely prolonged with shipments from Britain taking many months to reach India and China, and payments also taking long periods to complete. That is why credit was useful in bridging such gaps.
And, of course, the credit itself is in some ways just a reflection of the underlying reality. Take the situation above where the turnover period is 10 weeks. If there are ten firms engaged in this production, each of whom started business at different times, the fact is that for the industry as a whole, a turnover period for some capital ends each week, each week capital flows back, as money-capital, and yet, not all of this money-capital has to be laid out each week, and so it is available as credit.
For example, if we take out first firm, it may buy sufficient cotton for the whole 10 week period of its turnover. In that case, the question of the price rise does not arise. It buys 10 weeks supply of cotton at £1 per kilo. It appears to obtain a capital gain of £0.20 per kilo as a result of the price rise in week 7, but as Marx indicates it is purely nominal, because when it sells this cotton as part of its output of yarn in week, at £1.20 per kilo, what it thereby obtains is only sufficient to reproduce the consumed cotton, at its new price of £1.20 per kilo. In fact, as Marx indicates, its precisely for this reason that the rate of profit must be based on a value of the productive-capital defined by its current reproduction cost, and not its historic price, so that this replacement on a like for like basis is achieved.
Alternatively, it may buy cotton each week, in which case if the price of cotton rises in week 7, it will not have sufficient money to buy the required cotton for the remaining four weeks, and pay for wages. But, it also does not thereby pay out all of the £1,000 of capital it has as money-capital in one go either. From week 1 it could throw its dormant money-capital into the money-market. Other capitals can then borrow it, to make up their own deficiencies in money-capital over the period, and in turn, this capital would be able to borrow in the money the deficient £80 it requires to be able to purchase all of the cotton required for its 10 week turnover period.
Put another way, if the industry as a whole were taken, it would be seeing the completion of a turnover each week, and money-capital would be flowing back to it, on the basis of realised values that are determined by the current reproduction cost of cotton, and which thereby are sufficient for its replacement at the new higher price. In reality this is rarely a problem in this respect because the majority of purchases of inputs are based upon commercial credit, and with turnover times being short, the capital can be turned over in time to pay the suppliers based on the current market prices.
“The reason Marx uses P to P is not to measure turnover…”
Except that Marx does specifically state that the turnover period is the turnover of the productive-capital, and its is on this turnover of the productive-capital that the rate of profit is to be calculated.
“Finally that the amount of capital the productive capitalist can withdraw is not only predicated by the amount of money returned, but by the money that has to be set aside to fund the next round of production.”
Except that because M is merely the money equivalent of the capital value, if the capital value/market price of an input such as cotton rises, during the turnover period, this is reflected in the value of the final product when it comes to be sold, so that this higher price then replaces the consumed physical capital on a like for like basis, leaving the surplus value unchanged in quantity. What does change is the rate of profit, precisely because this quantity of surplus value will buy less of the cotton at its new price. In other words, the mass of surplus value remains the same, but the higher value of constant capital reduces the rate of profit – this is quite different, of course, to where the value of that capital is based upon the lower historic price, which thereby gives an inflated rate of profit. This is one reason that given that generally social productivity rises and so the value of constant capital falls, calculations of the movement of the rate of profit based on historic prices overstate past rates of profit and understate current rates of profit.
Of course, that is the situation in relation to the production of surplus value, but as Marx sets out in Capital III, Chapter 6, and in Theories of Surplus Value Chapter 17, the reality of the realisation of that surplus value is quite different. For example, as he sets out in Chapter 6, if the price of cotton rises sharply – perhaps because of the US Civil War, or because there is a boom, which raises the demand for textiles, and so of cotton – this should simply be reflected in the price of cotton textiles, so that the higher cotton price is then reproduced. However, if the higher price of cotton is reflected in the higher value of textiles, the higher market price of these textiles will cause demand to contract at least to some degree. Depending on the price elasticity of demand for cotton textiles, it may not be possible to pass on this higher cotton price, and so the realised profit may then be lower than the produced surplus value, because the firm has to absorb some of the higher cotton price from its surplus value. That is one potential cause of crises. Textile manufacturers may not be able to cut back their production of cotton cloth to the new lower level of demand, and still produce at efficient levels, for example.
Machinery, may then lie idle or underused. As marx describes, the difference between depreciation and wear and tear of fixed capital, is that depreciation is a function of time, where as wear and tear is a function of use. Depreciation represents a capital loss that is not recovered in the value of the commodity, whereas wear and tear is simply an indication of the piecemeal transfer of the value of fixed capital into the commodity in whose production it takes part. A machine that lies idle does not participate in production,a nd so suffers no wear and tear that is being recovered in the value of its output. But, it does suffer depreciation as a result of standing idle. It depreciates because standing idle it rusts, etc. or simple as a result of time it becomes devalued relative to newer machines or to newly produced versions of itself that are produced at lower value. That depreciation is a capital loss that the firm cannot recover. The same is true of any material that depreciates because it stands around for too long without being used. It loses part of its use value through non-use, and so loses part of its value along with it.
I’ll come back to the rest of your comment shortly.
On your second paragraph, excuse me for being brief, but I am pressed for time. Firstly, again you are conflating depreciation with wear and tear. Secondly, the rise in the technical composition of capital that lies behind the law of falling profits is a rise in the proportion of circulating constant capital to labour resulting from a rise in social productivity, which itself arises from the introduction of more and better fixed capital. It is not about more fixed capital to labour.
In fact, as Marx sets out in Capital III, Chapter 6, the proportion of fixed capital in total output continually falls, not only the share of labour. The reason is that the rise in productivity massively increases the quantity of material processed relative to both. The longer fixed capital endures, i.e. the greater the durability of fixed capital, the more that is the case. If a machine with a value of £1,000 produces 1,000 metres of cloth per year, then if it last for ten years it will have produced 10,000 metres of cloth, and thereby transferred £0.10 of its value to each metre. If the value of cloth is £1 per metre, it will constitute, 10% of the value of total output. But, if the machine lasts for 20 years, it will have produced 20,000 metres of cloth, with a value of £20,000, and will only have contributed £0.05 per metre, or will account for only 5% of the total output value.
As I pointed out in my replies to Maito some time ago, on my blog, the growth of fixed capital does not at all necessarily means a growth relative to living labour. It may or may not. As Marx says, in Capital III, Chapter 15, there are whole periods where the same technology is simply rolled out on an extended basis. It might be expected even during such periods to rise to some extent as against labour, because of economies of scale resulting in rises in productivity.
But, take the example I cited to Maito. When my wife first started work as a mainframe computer operator, in the early 1970’s, she worked on an ICL 9000(?) series computer whose value was more than £1 million (its hard to get an actual value as nearly all such machines were actually leased rather than bought). She worked for the local water board, and the computer was used to produce water rates for consumers, and to run payroll and accounts. There were two operators, a couple of programmers, and about four data input clerks as I recall.
By, the mid to late 1980’s when I ran my own small IT consultancy business, everything that was done on the ICL mainframe could be done on a decent PC. Most of my work involved transferring small and medium sized businesses accounts and payroll systems on to such PC’s. But, such a PC at that time had a value of around £500. In other words, the £1 million of the mainframe computer of the 1970’s, which employed around 8-10 people, would by the late 1980’s, buy around 2,000 PC’s, each with the same processing capacity, and each employing at least 1 operator to do payroll and accounts.
In other words, the quantity of fixed capital, in the form of 2,000 PC’s, as opposed to 1 mainframe computer had risen, but the actual value of that fixed capital, at £1 million is the same. The difference being that the mainframe computer set to work just 8-10 people, producing surplus value, whereas the 2,000 PC’s set to work 2,000 people producing surplus value!
Moreover, as Marx points out in Capital I, there is a big difference between existing workers being replaced by, machines, and machines being introduced where no workers currently exist. PC’s introduced into offices to undertake work on accounts and payroll may replace workers who might have been undertaking those functions by manual methods, but more frequently, machines are introduced to increase the range of work and quantity of work undertaken, so that they replace labour relatively even as the amount of labour employed grows absolutely.
Take another example. The giant tunnel boring machines used to construct the channel tunnel, each replace the labour of say 5,000 men. But, each machine also itself employs say 50 men to operate it. The fact is that, had the Channel Tunnel relied on manual labour, of men with picks and shovels for its construction, it would never have been built, because the cost of production would have been so great that it would never have been possible for any company to recover the capital involved in that production.
By the development of the tunnel boring machines, the cost of drilling such tunnels is reduced massively to a level where it becomes a viable proposition, and so employment is provided for workers in that construction, which otherwise would not have existed, and in addition it provides additional employment in a range of other industries and activities that would not have been possible without the existence of the tunnel.
The same applies with genomics. Because the technology involved in decoding the genome has been revolutionised, it became possible, and the cost of decoding DNA has now fallen from around $3 billion to just $1,000. As a result a whole industry has now developed on that basis providing employment. In addition, we now have more industries developing based on the use of this technology to develop gene therapies and so on.
The more the value of fixed capital is depreciated as technology improves, the more it becomes possible for the same value of fixed capital to employ larger and larger quantities of living labour, and thereby to produce additional surplus value.
Apparently, Boffy’s profound understanding of Marx’s critique does not include an understanding of what Marx called the general law of capitalist accumulation…. or maybe Boffy just never read Chapter 25 of Vol 1 of Capital.
Here’s how Marx puts it:
“But whether condition or consequence, the growing extent of the means of production, as compared with the labour power incorporated with them, is an expression of the growing productiveness of labour. The increase of the latter appears, therefore, in the diminution of the mass of labour in proportion to the mass of means of production moved by it, or in the diminution of the subjective factor of the labour process as compared with the objective factor.
This change in the technical composition of capital, this growth in the mass of means of production, as compared with the mass of the labour power that vivifies them, is reflected again in its value composition, by the increase of the constant constituent of capital at the expense of its variable constituent. ”
Compare that to Boffy’s ass-backwards “special law” (applies only on planet Boffyf):
“The more the value of fixed capital is depreciated as technology improves, the more it becomes possible for the same value of fixed capital to employ larger and larger quantities of living labour, and thereby to produce additional surplus value.”
Reply To UCANBPOLITICAL
I’m sorry I had to cut my reply to you short the other day, but, as I said, I am a bit pressed for time, at the moment. Now I have a free period, however, I’d like to just come back to some of the points discussed in a bit more detail.
First in relation to the turnover period of the productive-capital. The important point to note here is that the starting point is the existence of the productive-capital. In the 1970’s, when it was still relatively easy to find employment and move jobs, I worked for a number of companies. I worked for a small protective clothing manufacturer, then, before the days of double glazing companies, I worked for a glaziers that cut glass and sent out teams of glaziers to fit the glass into windows on new housing developments, then I worked for a large pottery manufacturer.
The point being that all of these capitals at all times were in possession of, and continually advancing their productive-capital. They had means of production in the shape of fixed capital, i.e. instruments of labour such as buildings, machines, and tools, and of circulating constant capital, in the form of materials. In addition they also had productive-capital in the shape of a workforce. It was not a question, therefore, of advancing an amount of money at the start of a cycle to acquire these things, so that production could take place, and then the commodities sold. The capital value already existed in the form of productive-capital described above, and each day it was engaged in production, turning those means of production into commodities.
Marx describes this process, however, as being continuous precisely because it is simultaneous. Marx insists that it is not different capitals existing in the form of money-capital, productive-capital and commodity-capital, but of all these capitals existing as one capital simultaneously in each of these forms.
At any one time, at the clothing company, for example, we had a stock of raw material in the shape of cloth of different materials and colours. It was continually being turned into overalls and other apparel. In the same way, each day when the cutter came into work, he would have cloth to cut for processing, and the machinists would have work in progress to complete, whilst other garments were being finished and packed up for sending out. In the meantime, the material, the yarn and so on that was being used up in this production, was being simultaneously replaced, because I was placing order for such materials to replace that consumed in the orders that were being fulfilled.
It is this process, starting with the existing productive-capital, the means of production and labour-power that forms the start point and end point of the turnover of capital. At the start point, the capital as means of production in the shape of raw materials is usually already there, having already been replaced in previous turnover cycles ready to be used. Often you would have more material than required for a standard turnover period, unless some large order was won that required additional materials to be ordered. Nowadays, with Just in Time Production and Stock Control, the materials are only delivered in the exact quantity, and at the precise time required for the production run to take place, that in turn is geared to what is about to be shipped, so that what comes in is geared precisely to what is going out, over the production period.
Its on this basis that Marx defines the rate of turnover, and also the rate of profit, as the degree to which this capital can be accumulated. For example, in all of the firms I worked the accumulation of capital could be seen not only in the accumulation of materials, as larger stocks were held to cover larger quantities of material being require in any production period, but was also manifest in the accumulation of productive-capital, as the number of workers retained as part of the workforce was increased. Its important here to note also the point that Marx makes about the true nature of variable-capital, which is accumulated as the other side of this. The true nature of variable-capital Marx says is in the means of consumption accumulated to meet the needs of the workers. The money wages paid to workers are merely its money equivalent, but as the productive-capital is accumulated in the form of additional workers, so the variable-capital is accumulated for the total social capital in the mass of means of subsistence required for the reproduction of that labour-power.
And, this is the true nature of accumulation, as this productive-capital is physically enlarged so that more labour is set to work, which in turn produces greater masses of surplus value. As Marx says
“And the additional labour, through whose appropriation this additional wealth can be reconverted into capital, does not depend on the value, but on the mass of these means of production (including means of subsistence), because in the production process the labourers have nothing to do with the value, but with the use-value, of the means of production.” (Capital III, Chapter 13, p 218)
And,
“It therefore follows of itself from the nature of the capitalist process of accumulation, which is but one facet of the capitalist production process, that the increased mass of means of production that is to be converted into capital always finds a correspondingly increased, even excessive, exploitable worker population. As the process of production and accumulation advances therefore, the mass of available and appropriated surplus-labour, and hence the absolute mass of profit appropriated by the social capital, must grow.” (ibid p 218-9)
Its on this basis, that Marx demolishes the catastrophist versions of the Law of the Tendency for the Rate of Profit to Fall, developed by Smith, Malthus and Ricardo, and instead demonstrates that this falling rate of profit not only coincides with but necessitates a growing mass of employed labour, and growing mass of surplus value.
“The number of labourers employed by capital, hence the absolute mass of the labour set in motion by it, and therefore the absolute mass of surplus-labour absorbed by it, the mass of the surplus-value produced by it, and therefore the absolute mass of the profit produced by it, can, consequently, increase, and increase progressively, in spite of the progressive drop in the rate of profit. And this not only can be so. Aside from temporary fluctuations it must be so, on the basis of capitalist production.” (Capital III, Chapter 13, p 218)
And one factor in that is the increased cheapening of the fixed capital either in absolute or relative terms. In other words, if two machines can be bought for the price of one, then two workers can be employed to operate these machines (especially as the wages are paid in arrears). But, by doubling the rate of production, the working period is halved, increasing the rate of turnover of the capital, consequently, the capital advanced for the turnover period (if we ignore the circulation period), doubles. The consequence then is that the two machines, two workers, and double the amount of material only amounts, during this turnover period, to the same amount as was previously advanced, but the surplus value in this turnover period is also the same as before, despite the fact that this turnover period is half the duration. Consequently, the same value of advanced capital now turns over twice as many times as previously, and the mass of surplus value doubles, doubling the annual rate of profit along with it.
But, the same is true if the price of the fixed capital falls relatively rather than absolutely. Suppose a firm employs a machine that employs 1 worker, and produces 1,000 units per working period. It is replaced by another machine that costs the same but now produces 4,000 units per working period. Let’s even assume that this machine requires 2 workers for its operation. The reality will be that the value of fixed capital contained in the value of output will fall to a quarter of what it was previously, whilst the value of labour contained in the value of output will be only half what it was before, proportionally (half because this machine employs 2 workers rather than 1). But, the nature of accumulation, of the rise of the proportion of means of production relative to labour, i.e. of the rise in the organic composition of capital, is manifest in the fact that the proportion of means of production in the form of materials has risen considerably.
Assume the machine costs £10,000, and each unit of output requires £20 of means of production in the form of raw and auxiliary materials. Wages amount to £5,000 per worker per working period. Assume the machine loses 10% of its value per working period, i.e. £1,000. Initially, then fixed capital accounts for £1,000 of the total output value of £26,000, equals 3.85%. Materials account for 76.92%. Wages account for 19.23%.
Now with the new machine, the fixed capital amounts to £1,000, the materials amount to £80,000, and wages amount to £10,000. Total output value is £91,000. Fixed capital constitutes 1.10%, Materials constitutes 87.91%, and wages constitute 11.11%.
In the first case the total means of production amount to £1,000 for wear fixed capital, and £20,000 for materials, whilst wages are £5,000. That gives an organic composition of capital of 21:5, or 4.2:1. In the second case, the means of production amounts to £1,000 for wear and tear of fixed capital, and £80,000 for materials, with wages of £10,000. That gives an organic composition of 8.1:1.
On this basis, its easy to see how the mass of profit rises, as a result of this accumulation of capital, and rise in productivity, and yet the rate of profit/profit margin falls. I don’t have time to develop it further at the moment, but it should also be seen from what I have also said above that this rise in productivity brought about by this new fixed capital, means that the turnover time could also be reduced so that the advanced capital could be reduced accordingly, so that even as the rate of profit falls, the annual rate of profit rises. If I have time I will come back to that later.
Incidentally, in calculating the rate of profit/profit margin here, I have used the definition used by Marx in TOSV.
“{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay.”
Reply to the non-reply:
“And, this is the true nature of accumulation, as this productive-capital is physically enlarged so that more labour is set to work, which in turn produces greater masses of surplus value. As Marx says..”
As Marx says in chapter 25, volume 1 of Capital:
” With the advance of accumulation, therefore, the proportion of constant to variable capital changes. If it was originally say 1:1, it now becomes successively 2:1, 3:1, 4:1, 5:1, 7:1, &c., so that, as the capital increases, instead of ½ of its total value, only 1/3, 1/4, 1/5, 1/6, 1/8, &c., is transformed into labour-power, and, on the other hand, 2/3, 3/4, 4/5, 5/6, 7/8 into means of production. Since the demand for labour is determined not by the amount of capital as a whole, but by its variable constituent alone, that demand falls progressively with the increase of the total capital, instead of, as previously assumed, rising in proportion to it. It falls relatively to the magnitude of the total capital, and at an accelerated rate, as this magnitude increases. With the growth of the total capital, its variable constituent or the labour incorporated in it, also does increase, but in a constantly diminishing proportion. The intermediate pauses are shortened, in which accumulation works as simple extension of production, on a given technical basis. It is not merely that an accelerated accumulation of total capital, accelerated in a constantly growing progression, is needed to absorb an additional number of labourers, or even, on account of the constant metamorphosis of old capital, to keep employed those already functioning. In its turn, this increasing accumulation and centralisation becomes a source of new changes in the composition of capital, of a more accelerated diminution of its variable, as compared with its constant constituent. This accelerated relative diminution of the variable constituent, that goes along with the accelerated increase of the total capital, and moves more rapidly than this increase, takes the inverse form, at the other pole, of an apparently absolute increase of the labouring population, an increase always moving more rapidly than that of the variable capital or the means of employment. But in fact, it is capitalistic accumulation itself that constantly produces, and produces in the direct ratio of its own energy and extent, a relatively redundant population of labourers, i.e., a population of greater extent than suffices for the average needs of the self-expansion of capital, and therefore a surplus population.
Considering the social capital in its totality, the movement of its accumulation now causes periodical changes, affecting it more or less as a whole, now distributes its various phases simultaneously over the different spheres of production. In some spheres a change in the composition of capital occurs without increase of its absolute magnitude, as a consequence of simple centralisation; in others the absolute growth of capital is connected with absolute diminution of its variable constituent, or of the labour power absorbed by it; in others again, capital continues growing for a time on its given technical basis, and attracts additional labour power in proportion to its increase, while at other times it undergoes organic change, and lessens its variable constituent; in all spheres, the increase of the variable part of capital, and therefore of the number of labourers employed by it, is always connected with violent fluctuations and transitory production of surplus population, whether this takes the more striking form of the repulsion of labourers already employed, or the less evident but not less real form of the more difficult absorption of the additional labouring population through the usual channels. [14] With the magnitude of social capital already functioning, and the degree of its increase, with the extension of the scale of production, and the mass of the labourers set in motion, with the development of the productiveness of their labour, with the greater breadth and fulness of all sources of wealth, there is also an extension of the scale on which greater attraction of labourers by capital is accompanied by their greater repulsion; the rapidity of the change in the organic composition of capital, and in its technical form increases, and an increasing number of spheres of production becomes involved in this change, now simultaneously, now alternately. The labouring population therefore produces, along with the accumulation of capital produced by it, the means by which it itself is made relatively superfluous, is turned into a relative surplus population; and it does this to an always increasing extent. [15] This is a law of population peculiar to the capitalist mode of production; and in fact every special historic mode of production has its own special laws of population, historically valid within its limits and only in so far as man has not interfered with them.”
and later..
“The law by which a constantly increasing quantity of means of production, thanks to the advance in the productiveness of social labour, may be set in movement by a progressively diminishing expenditure of human power, this law, in a capitalist society — where the labourer does not employ the means of production, but the means of production employ the labourer — undergoes a complete inversion and is expressed thus: the higher the productiveness of labour, the greater is the pressure of the labourers on the means of employment, the more precarious, therefore, becomes their condition of existence, viz., the sale of their own labour power for the increasing of another’s wealth, or for the self-expansion of capital. The fact that the means of production, and the productiveness of labour, increase more rapidly than the productive population, expresses itself, therefore, capitalistically in the inverse form that the labouring population always increases more rapidly than the conditions under which capital can employ this increase for its own self-expansion.”
The non-replier replies, quoting Marx:
““It therefore follows of itself from the nature of the capitalist process of accumulation, which is but one facet of the capitalist production process, that the increased mass of means of production that is to be converted into capital always finds a correspondingly increased, even excessive, exploitable worker population.”
Apparently Boffy doesn’t understand what a)excessive means b) doesn’t understand what exploitable– as in the superfluous population is precisely what makes the class as a whole “exploitable.”
Boffy you provide useful insights both theoretically and from personal experiences. I was the purchasing manager of a large PLC and visited thousands of factories in my time and saw profound technical changes over time as well, so I appreciate your experience. However, two things. Firstly in Book 2 of capital, page 49 of the Lawrence & Wishart edition Marx describes the three phases of the circulation of capital. Two comprise circulation phase and one comprises the production phase. The first is the buying phase, the second is the production phase and the final phase is the selling phase. They follow in strict order which is why Marx begins and ends with M because M represents social labour (abstract labour if we are dealing with Books 1 & 2). Only when the metamorphosis ends with M is the unpaid labour of the employees converted into profit. That is why the circuit of capital has to be M.C….P….C*M* Your contention that it is P to P would mean four phases, unless you describe it as P…C*M* and M.C…..which does not make sense. Second point. Their is no stock taking of the fixed means of production unlike inventory. Hence there is no way for the statistical authorities to account for the actual economic life of the means of production while in use. Instead they rely on conventions that are seldom updated. Of course depreciation and wear and tear are related. As technology advances, (excluding computers), equipment generally gets more durable which means that its economic life should extend which means the annual rate of depreciation should reduce. I need to relook at some of the work I did on depreciation but I recall that in the US total depreciation net of IP now exceeds total gross investment net of IP investment. This is prima facia absurd as investment forms the basis for depreciation. If investment is falling relative to depreciation it is difficult to understand how depreciation in absolute terms, adjusted for inflation, keeps rising.
I have been trying to find time to finish my earlier replies to you, and still haven’t managed it. This again will have to be a holding response. I might have time later today to write something in more detail.
One of the things I wanted to come back on that I wasn’t happy I’d explained properly was the question of the circuit P…P, and the question of this being based on the value of the productive capital, and merely represented by the money equivalent of that current value. I wanted to respond more fully to your point about changes in market prices for inputs.
In fact, all this indicates is what Marx describes in TOSV Chapter 17, about the potential cause of crises when capital is metamorphosed from one form to another. There are two points where this can occur, Marx says, because whilst capital value is held in the form of money-capital, it cannot be overproduced. So, the two points are:
1) when the commodity-capital must be metamorphosed into money-capital, C’ – M’. That can quite easily be, because capital is overproduced, commodities are overproduced and cannot be sold at their value. There are any number of reasons why that might be. As Marx says in TOSV Chapter 17, rejecting Say’s Law,
“That only particular commodities, and not all kinds of commodities, can form “a glut in the market” and that therefore over-production can always only be partial, is a poor way out. In the first place, if we consider only the nature of the commodity, there is nothing to prevent all commodities from being superabundant on the market, and therefore all falling below their price. We are here only concerned with the factor of crisis. That is all commodities, apart from money [may be superabundant]. [The proposition] the commodity must be converted into money, only means that: all commodities must do so. And just as the difficulty of undergoing this metamorphosis exists for an individual commodity, so it can exist for all commodities. The general nature of the metamorphosis of commodities—which includes the separation of purchase and sale just as it does their unity—instead of excluding the possibility of a general glut, on the contrary, contains the possibility of a general glut.
Ricardo’s and similar types of reasoning are moreover based not only on the relation of purchase and sale, but also on that of demand and supply, which we have to examine only when considering the competition of capitals. As Mill says purchase is sale etc., therefore demand is supply and supply demand. But they also fall apart and can become independent of each other. At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”
If the commodity-capital cannot be fully metamorphosed into money-capital, it obviously cannot be fully metamorphosed into productive-capital again, so the circuit of capital is broken, and reproduction cannot follow – a crisis.
2) After the commodity-capital has been fully metamorphosed into money capital, a change in market prices of inputs means that the money-capital now cannot be fully metamorphosed into productive-capital. In other words, the capitalist has sold their output, but they then need to buy all of the raw material, and labour-power required to replace that consumed in the output they have just sold. In the example Marx gives, the US Civil War, caused supplies of cotton to be cut off. If the Lancashire textile factories then could not used their realised money-capital to buy cotton, they could not produce. The circuit once more, is broken. But, as marx says, it does not have to be that the supply is just unavailable – he also cites the instance of Russia, where supplies of material and available labour-power often led to such breakdowns of the circuit – it can be that the price of the inputs has risen sharply – the case you are citing within the turnover cycle – so the realised money-capital can be metamorphosed into productive-capital, but not on the same scale.
This is the point of the comments that Marx makes in Capital III, Chapter 6 in that regard, but he also deals with it in relation to a profits squeeze in TOSV Chapter 17 and 18. In Chapter 6, Marx says,
“We have seen in Book II [English edition: Vol. II, Part III. — Ed.] that once commodities have been converted into money, or sold, a certain portion of this money must be reconverted into the material elements of constant capital, and in the proportions required by the technical nature of the particular sphere of production. In this respect, the most important element in all branches — aside from wages, i. e., variable capital — is raw material, including auxiliary material, which is particularly important in such lines of production as do not involve raw materials in the strict sense of the term, for instance in mining and the extractive industries in general. That portion of the price which is to make good the wear and tear of machinery enters the accounts chiefly nominally so long as the machinery is at all in an operating condition. It does not greatly matter whether it is paid for and replaced by money one day or the next, or at any other stage of the period of turnover of the capital. It is quite different in the case of the raw material. If the price of raw material rises, it may be impossible to make it good fully out of the price of the commodities after wages are deducted. Violent price fluctuations therefore cause interruptions, great collisions, even catastrophes, in the process of reproduction.”
What I had set out was the condition that Marx describes of the normal reproduction cycle, and the calculation of the rate of profit on the basis of it. It was not at all to suggest that this normal reproduction continues without such disruptions, but including them just gets in the way of understanding the underlying process of reproduction and accumulation. Then the issue of breakdowns of that reproduction can be better understood, and introduced.
What you were referring to in your initial point in that regard, I think, was marx’s analysis in Book 2, where he talks about several capitals being advanced, because of different ratios of working period to circulation time. If the circulation period is particularly long relative to the working period, several capitals are advanced, because several working periods elapse before the initial capital advanced in the first working period is turned over.
Your point about changing prices during such periods, is essentially the same as Marx discusses above. What would actually have been better to have looked at in my earlier response is the situation of capital as a dynamic process, so to go back to a previous cycle of the productive-capital being turned over, and thereby already have been in place, in the way I described in my later response to you. But, Marx in the quote above also, illustrates one of the other points I put to you in my later response. The capital not only has its money-capital available for the reproduction of the materials and labour-power, it always has other reserve funds. It has its accumulation fund, from already realised surplus value, and it has its fund for the replacement of fixed capital, continually being built up, as the value of wear and tear is realised in the sale of its commodities. Whenever the market price of material inputs rises, these reserve funds are always available to make up the difference, and as the increased price of the material inputs is then reflected in the end product price, this then comes back, so that those reserve funds can be replenished.
In relation to the circuit of money-capital vis a vis the circuit of productive-capital, you have made a simple oversight. Both contain the same number of phases. The circuit of money-capital is M – C (means of production and labour-power)… P… C’ – M’. Just as for productive-capital it is P… C’ – M’. M – C… P. The only difference here is that M’.M reflects the fact that what is reinvested is not M’ but only M, the money equivalent of C within C’, i.e. it reflects the fact that the commodities that comprise the productive-capital are physically replaced on a like for like basis. Its why M’ and M are separated by a full stop.
Depreciation and wear and tear can be highly correlated where fixed capital is used up quickly, because its value is reduced by wear and tear, before any significant depreciation can occur, outside accidents etc. But, the more durable fixed capital becomes the greater the potential divergence between wear and tear and depreciation. A ship loses use value and value via wear and tear in proportion to its use. But, the longer the lifetime of a ship, the more likely it is to suffer periods of inactivity, when it will depreciate through such lack of use. Not to mention that the longer any particular ship is in use, the more chance that particular ship has of suffering accidents that depreciate its value, let alone of sinking. The same applies to machines. Moreover, the longer any particular piece of fixed capital is in existence, the greater the potential for it losing large amounts of value through moral depreciation, as rises in productivity reduce the cost of its production, and technological developments make it out of date. All of these instances of depreciation represent a capital loss that is not recovered in the value of the output, unlike wear and tear which is.
I would not be surprised to see depreciation exceed gross investment given that the revolution in technology not only means that new investments are much cheaper than their historical equivalents, but that all of their historical equivalents are thereby also morally depreciated. Moreover, as I’ve previously set out, in an economy where service industry accounts for 80% of value and surplus value production, the nature of the capital itself is changed.
Take this example. My son who works for a media production company, produced this video about mobikes for Manchester. The huge fall in media production equipment, means that many media production companies now exist, indeed my son still runs his own media production company alongside working for another. Very little fixed capital cost exists, and the issue of circulating constant capital really does not come into the equation. Huge amounts of output value is produced without any physical material being processed. The most significant elements of the capital becomes the complex labour of the workers like my son who create the new value and surplus value.
Apparently, within a few days, the video had had 2 million hits in China alone, where the company that produces the mobikes is based.
Moreover, this nature of service industries means as I said before that the accumulation of capital is lumpy, to use the term used by orthodox economics. That is a lump of investment is made in fixed capital, (a building, equipment) and it then lasts until either it breaks or some new version comes along. Little or no investment in circulating constant capital is made, and the capital outlaid is on complex labour (or in the case of fast food restaurants cheap unskilled labour), with the main form of accumulation then being accumulation of variable capital. That is why you are seeing the level of employment rising everywhere without large scale investment in capex etc.
A lot of the investment in Capex for these new service industries was already undertaken – it resulted in the overproduction of fibre optic cables etc. in 2000, the development of Internet backbones etc. There is much more of that needed, but in large part it will require state intervention to bring it about, something that has been out of favour for several years. When it happens, it will again by lumpy.
Incidentally, its crazy that its not happening. Argentina has just issued a 100 year fixed coupon bond, and had no trouble getting it away. With yields on sovereign bonds being at once in a lifetime low, it seems crazy for other states not to issue 50-100 year fixed coupon bonds, which currently they could do at around 2-3%. The reason it isn’t happening of course, is because it would push up global yields, and depress asset prices, the one thing central banks have been trying to prevent so as to protect the paper wealth of the global top 0.001%.
I’ll come back again later on the effect of the rate of turnover in relation to the example I gave earlier.
Marx identifies two sources of depreciation– wear and tear, use of the fixed capital; and what he calls “moral depreciation.”
Chapter 15 Capital, vol 1: “But in addition to the material wear and tear, a machine also undergoes, what we may call a moral depreciation. It loses exchange-value, either by machines of the same sort being produced cheaper than it, or by better machines entering into competition with it. In both cases, be the machine ever so young and full of life, its value is no longer determined by the labour actually materialised in it, but by the labour-time requisite to reproduce either it or the better machine. It has, therefore, lost value more or less. The shorter the period taken to reproduce its total value, the less is the danger of moral depreciation; and the longer the working-day, the shorter is that period. When machinery is first introduced into an industry, new methods of reproducing it more cheaply follow blow upon blow, and so do improvements, that not only affect individual parts and details of the machine, but its entire build. It is, therefore, in the early days of the life of machinery that this special incentive to the prolongation of the working-day makes itself felt most acutely.”
In volume 2: ” these instruments of labour continue to function as elements of the productive capital, doing so in their old bodily form. It is their wear and tear, the depreciation gradually experienced by them during their continual functioning for a definite period which re-appears as an element of value of the commodities produced by means of them, which is transferred from the instrument of labour to the product of labour.”
The separation of wear and tear from depreciation is an entirely false distinction, worthy indeed of Boffy.
And… one would never guess from reading anything Boffy ever writes, that in fact there are standards, tables, even schedules of depreciation for business assets. The US IRS requires calculations of depreciation according to its MACRS– modified accelerated cost reduction system– for business assets placed in service 1986.
What is the basis for depreciation? Maintenance costs? Nope. Number of “cycles”? Nope. Miles operated, like for locomotives, or container ships? Nope: TIME. Age of asset. Depreciation is calculated as a percentage of the life of the asset and the purchase price.
Corporations cannot just make up any old numbers for depreciation and submit those numbers for the deductions they would like to realize. Do corporations lie, cheat, fudge?? Of course . That’s what corporations do. But that’s why we look at the trend over the entire sectors and periods of time.
Marxists, some, and some of the time, like to attribute, or “write-off” periods of improving profitability as due to outsize allowances for depreciation. A few have tried that in the 1992-2000 period when the ROP in the US improved, along with, and based upon, significant increases in capital investment, particularly in communications and transportation.
Turns out of course, the mass of investment actually exceeded amounts being depreciated, and the accumulated depreciation as a percentage of gross property plant and equipment actually declined.
I still haven’t had time to deal with the issue of the rate of turnover previously promised, but I did want to back up what I said previously about the rate of turnover being the rate of turnover of the productive-capital, i.e. it is the circuit P..P, not M – C … P…C’ – M’, that is the subject of analysis.
It is the circuit of the Productive capital P…P that determines hte circuit and turnover of capital, and that is the basis for the calculation of the rate of profit on the advanced capital.
In Capital II, Marx writes,
“In calculating the aggregate turnover of the advanced productive capital we therefore fix all its elements in the money-form, so that the return to that form concludes the turnover. We assume that value is always advanced in money, even in the continuous process of production, where this money-form of value is only that of money of account. Thus we can compute the average.” (Capital II, p 187)
Note Marx’s terminology here. Firstly he begins by making clear that what he is talking about is “the advanced productive capital”. To make clear it is not the advance of the money-capital used to purchase that productive capital, that Marx is talking of, he then says that what he is doing is only to “fix all its elements in the money-form”. Finally, to make clear that his analysis here is one based on the actual capital-value advanced, and not on the money-capital advanced, he makes clear that the use of money here, is merely a convenience of calculation, and that he is using it essentially only in its role as “money of account”.
And in determining the rate of profit on the advanced capital, during this turnover period, marx makes the same point, M is only money of account, it is only the money equivalent of the advanced capital value of the productive-capital.
“The rate of profit must be calculated by measuring the mass of produced and realised surplus-value not only in relation to the consumed portion of capital reappearing in the commodities, but also to this part plus that portion of unconsumed but applied capital which continues to operate in production. However, the mass of profit cannot be equal to anything but the mass of profit or surplus-value, contained in the commodities themselves, and to be realised by their sale.”
(Capital III, Chapter 13)
In fact, considered logically in relation to the rate of profit on the advanced capital (for one turnover period), or the annual rate of profit when considering the rate of profit over the period of a year, rather than just a turnover period, this has to be the case, because no money-capital IS advanced in relation to the advanced fixed capital. It is only its current capital value as productive-capital that is advanced in any turnover period.
Marx makes the same point elsewhere (many times I’m sure, but this next one is one I came across recently), in TOSV 3. Marx writes,
“Since the production of exchange-value—the increase of exchange-value—is the immediate aim of capitalist production, it is important [to know] how to measure it. Since the value of the capital advanced is expressed in money (real money or money of account), the rate of increase is measured by the amount of capital itself, and a capital (a sum of money) of a certain size—100—is taken as a standard.”
If the circuit under analysis was M-M’, then to say that the value of the capital advanced is expressed in money would be meaningless, because money-capital is always expressed in money! Even less would it make sense to talk about the value of money-capital being expressed in “money of account”!
What does make sense, and what Marx actually discusses is the advance of productive-capital, and its expression in money of account. It makes sense because, as Marx also describes its only on this basis that you can actually rationally calculate the rate of expansion of that capital, i.e. the rate of profit. But, it also makes sense to express that capital value in terms of money of account, precisely because what is being expressed is the current value of the commodities that comprise the advanced productive-capital, i.e. the capital value.
It makes sense, because that capital value changes because it is determined by the current reproduction cost of those commodities, not their historic prices.
pardon me for persisting in this… but you see Boffy offers a very selective editing of portion of Marx’s supplementary remarks in Chapter 7. Perhaps a more thorough reproduction from the Penguin edition (translated by Fernbach) might help. There Marx states:
“An increase in the rate of profit always stems for a relative or absolute increase in the surplus-value in relation to its costs of production, i.e. to the total capital advanced, or from a reduction in the difference between the rate of profit and the rate of surplus value.”
Fluctuations in the rate of profit that are independent of changes in either the capital’s organic components or its absolute magnitude are possible only if the value of the capital advanced, whatever might be the form–fixed or circulating–in which it exists, rises or falls as a result of an increase or decrease in the labour-time necessary for its reproduction, an increase or decrease that is independent of the capital already in existence. The value of any commodity– and thus also of the commodities which capital consists of– is determined not by the necessary labour-time that it itself contains, but by the socially necessary labour-time required for its reproduction. This reproduction may differ from the conditions of its original production by taking place under easier or more difficult circumstance. If the changed circumstance mean that twice as much time, or alternatively only half as much is required for the same physical capital to be reproduced, then given an unchanged value of money, this capital, if it was previously worth £100 would now be worth £200 or alternatively £50. If this increase or decrease in value affects all components of the capital equally, the profit is also expressed accordingly in twice or only half the monetary sum. But if it involves a change in the organic composition of capital, the relation between the variable and the constant portions of the capital, then, if other circumstance remain the same, the profit will rise with a relatively rising share of variable capital and fall with a relatively falling share. If it is only the money that rises or falls (as a result of a change in the value of money), the monetary expression of the surplus value rises or falls in the same proportion. The profit then remains unchanged.”
The careful reader will note that the determining condition is the relation of the increase in surplus value in relation to the total capital advanced. Hence, Marx is anchoring the tendency of the rate of profit to move in a historic direction in the very accumulation of capital, in the very displacement of living labor, that is the basis of capitalist production.
Secondly, the careful reader will note the progression of Marx’s remarks, beginning with fluctuations based on no alteration in the organic composition, a fluctuation, variation, “perturbation” so to speak, and not the tendency, to in fact the tendency: ” But if it involves a change in the organic composition of capital…..the profit will rise with a relatively rising share of variable capital and fall with a relatively falling share.” Marx omits the words “rate of” before “profit” but clearly that is his focus. He is providing an explanation for the short-term, moments and moving from that to reinforce his emphasis on the tendency.
But let’s make all of this a bit concrete, regarding TSSI and rates of return or profit or whatever.
Say in 2006 I contract with Hyundai Heavy to build me a very large crude carrier, VLCC, for $100 million. It’s about 24 months to delivery, and I finance my purchase through some German Landsbanks and Hamburg brokers, with the odd hedge fund thrown in. Here comes the VLCC in 2008, just in time, for the blow out in oil prices, the collapse, and the great recession.
My competitor, bought 5 VLCC in 2006 and guess what– in 2009 goes bankrupt. My competitors VLCC, just as old as mine, are available for $40 million. Worse, brand new VLCC’s are on the market for $60 million.
OK, I’m still in business, and skillful bastard that I am, employ slow steaming, and cut my crews, and warehouse a couple of boatloads of oil at sea, and I turn a profit. Now I have to report my return on assets to my shareholders….and my bankers. Am I calculating that return on assets on the basis of the VLCC cost of $100 million (less depreciation), which I’m on the hook for with my lovable German friends, or am I calculating it on the basis of the “market values” of 40 mill, or 60 mill, and thereby jacking up my rate of return, although my actual profit hasn’t budged an inch, and the distress of all the capital involved hasn’t been eased a single bit?
I’m still too busy, at the moment, to provide the reply I wanted to give. One reason for being too busy is that I’m getting Volume III of capital ready to publish, but in the process of doing that I notices that many of the answers to the points you raised about the circulation of productive-capital, and changes in prices are covered in my Chapter 6.
You can read all of Chapter 6, as divided into parts on my blog. It deals also with the question of appreciation an depreciation of capital values, both of fixed and circulating capital, and constant and variable capital.
There is also this quote from Marx from Chapter 7, which emphasises what was said above, and also is a pretty clear refutation of the basis of the TSSI and the calculation of the rate of profit based on historic prices.
“Fluctuations in the rate of profit may occur irrespective of changes in the organic components of the capital, or of the absolute magnitude of the capital, through a rise or fall in the value of the fixed or circulating advanced capital caused by an increase or a reduction of the working-time required for its reproduction, this increase or reduction taking place independently of the already existing capital. The value of every commodity – thus also of the commodities making up the capital – is determined not by the necessary labour-time contained in it, but by the social labour-time required for its reproduction. This reproduction may take place under unfavourable or under propitious circumstances, distinct from the conditions of original production. If, under altered conditions, it takes double or, conversely, half the time, to reproduce the same material capital, and if the value of money remains unchanged, a capital formerly worth £100 would be worth £200, or £50 respectively.” (p 141)
Indeed fluctuations may occur in the rate of profit, as the profit realized by portions of the commodity capital may exceed the value– price vs. value, remember; price is the mechanism by which socially necessary value adjusts individual value.
So what. Marx is talking about these fluctuations and variations as a way of demonstrating that the TENDENCY of the rate of profit to decline over long periods of time does not occur “irrespective of changes in the organic components of capital.” Leave it to Boffy to provide the perfect refutation of his own “proof.”
I do not think any Marxist would deny that the revaluation of capital is a constant process under capitalist production, as may be confirmed by the illustrations from Marx adduced by Boffy above or by Fred Moseley in his article “The Determination of Constant Capital”, where Fred gives copious quotations from Marx to illustrate this process.
But there is more to be clarified. For example, there can be no doubt that “If the price of a raw material rises-cotton for example- …..this cotton adds a higher value to the product which it goes into as a component than it possessed originally and the capitalist paid for it”(Capital Vol. 3 p207). Now, the capitalist cannot sell his cotton, for we are dealing here with reproduction; moreover, a competitor introduces cheaper instruments of production, say costing £100 million instead of £200 million. Assuming there are only two producers in the cotton industry, we get:
c. v. s
Capitalist A. 200. 100. 100. 400
Capitalist B. 100. 100. 100. 300
What then is the value of the commodities ? Remembering that this is a social and not an individually determined value, their value must be £ 700 and not £ 600 million.
” The different individual values must be equalised to give a single social value” (Vol. 3 p 281).
” The value of the commodity is….determined by the labour which is required to produce the whole amount…… the quantity of labour by which the value of a yard of cotton is determined is therefore not the quantity of labour it contains…but the average quantity with which all the manufacturers produce one yard ( TSV Part 2 p 204). As Marx points out, some capitalists sell a yard of cotton at its value, others above and yet others below. For commodities produced under unequal conditions of production, therefore with unequal productivity of labour ”The commodity produced under more favourable conditions contains less labour-time than that produced under less favourable conditions, but it sells at the same price, and has the same value, as if it contained the same labour-time, though this is not the case” (Ibid. p 206).
Thus the introduction of a machine of a lower cost does devalue all other machines in the same branch of production, but such devaluation is a temporal and not a simultaneous devaluation.
J,
You say,
“Now, the capitalist cannot sell his cotton, for we are dealing here with reproduction”.
I think if you look at the scenarios Marx gives it depends. If the end product is yarn, if the yarn has been sold, and then cotton prices rise, the consumed cotton cannot be reproduced. If the yarn has not been sold, it depends how much is on the market waiting to be sold, as to whether the price rises in accordance with the rise in cotton prices. Yarn prices may rise in accordance with the rise in cotton prices, but then demand for yarn will fall. If yarn demand is generally rising, that may not be a problem, it only means that yarn demand rises less than it would, but yarn prices can rise in line with the rise in cotton prices. Or, the yarn producer might not be able to raise yarn prices fully in line with the rise in cotton prices, because it causes demand to fall to such a level that production could not continue on an efficient level.
Can you also clarify what you mean when you say,
“Thus the introduction of a machine of a lower cost does devalue all other machines in the same branch of production, but such devaluation is a temporal and not a simultaneous devaluation.”
Are you saying that because the one firm that introduces the new or lower value machine only accounts for a small part of total production and, thereby the social value of that commodity, the proportion of the social value of the commodity attributable to wear and tear is similarly only partially reduced, and so that means the moral depreciation of other machines is only correspondingly partial?
“Are you saying that because the one firm that introduces the new or lower value machine only accounts for a small part of total production and, thereby the social value of that commodity, the proportion of the social value of the commodity attributable to wear and tear is similarly only partially reduced, and so that means the moral depreciation of other machines is only correspondingly partial?”
Boffy has put this very succinctly, and I think it is possible to interpret revaluation in this way.
Marx’s concept of value is the main focus of bourgeois attack. In the past there was Joan Robinson, who damned the theory as Hegelian metaphysics ( Popper did the same with Darwin’s theory), though there is no evidence that she had ever read Hegel in German, and so could not have known what she was talking about. Currently there is Steven Keen’s paltry effort;but the most damaging attack has been that of Steedman. Yet Steedman was a member of the Communist Party. He asserted that Marx’s theory is false and useless. Subsequently he wrote a paper defending Ricardo against Marx’s criticisms, which is a strange undertaking from one who regards the theory of value as false; and also contributed to a Polish publication devoted to a critique of ”the ideology of Karl Marx.” Towards the end of his career he became an adviser to a religious foundation, no doubt to warn them off designating as value ”their blessed labours in the vineyards of the Lord.” Yet Steedman and his ilk have had a huge impact on self -designated Marxists, persuading them to jettison the whole theory of value-Brenner, for example. Given the work of Marxist economists over the last 30 years it is now difficult to regard Steedman and co. as other than charlatans. The fact that Marx’s work has gaps, obscurities or is in an unfinished condition does not invalidate his main theories. The same is true of Darwin’s theory of evolution, and even those biologists who share similar positions on how evolution works still have sharp disagreements. (cf for example, ”Thinking about Evolution” Cambridge 2001). Frankly, to reject Marx’s theory of value is akin to the rejection of the theory of evolution in biology. One might as well embrace creationism. Is it not Bill Jeffries who calls Sraffa’s work ‘the production of commodities by means of magic’ ?
I have just finished Fred Moseley’s “Money and Totality” , which I think is a really admirable piece of work. One of the areas of debate that Fred addresses is whether constant capital is to be revalued at ‘current’ or ‘historical’ costs. As he puts it in his disagreements with the proponents of TSSI, ” the determination of of the capital value at the end of the circuit is the actual historical costs at the time the means of production were purchased , not their current costs at the time the output is sold. I disagree … the given constant capital at the time the output is sold would be the current constant capital as evidenced by the most recent purchases of these means of production in the sphere of circulation. The constant capital that is transferred to the value of the output is a social average constant capital, and if this social average changes before the output is sold, then the given constant capital will change also (Ibid. p 287).
Now I do no think there is any Marxist who would deny that revaluation is a continuous process. Let us recall the first axiom of dialectics: ‘Everything is flowing’. My understanding of the temporalists is rather that they argue that constant capital may be continuously revalued as it enters production and is continuously consumed, but once the production circuit is completed it cannot be revalued. Would this then mean that commodities in circulation cannot be revalued retrospectively? And if they can be, how is cost price determined?
Consider for a moment Fred’s assertion that ” the given constant capital at the time the output is sold would be the current constant capital as evidenced by the most recent purchases of these means of production in the sphere of circulation.” Now if circulating capital, say cotton, has risen in value and fixed capital, say machines,have fallen, an individual capitalist could sell the former for its market price and would have to buy the latter at their market price. But this is not a realistic scenario for the industry as a whole: we are dealing with reproduction. Note Fred says ”The constant capital that is transferred to the value of the output is a social average constant capital.” But if there is an average, by definition some capitalists are selling their commodities above their value and others below. If new machines immediately devalued all old machines, they would all have the same value and it would therefore be illogical to speak of a social average.
Marx explains in TSV Part 2. Pp 204 to 206 : The value of the commodity … is determined by the labour which is required in order to produce the whole amount….The quantity of labour by which for example the value of a yard of cotton is determined therefore is not the the quantity of labour it contains…but the average all cotton-manufacturers produce one yard of cotton for the market. Now the the particular conditions under which the individual capitalists produce for example in the cotton industry necessarily fall into three categories…medium conditions…better than average conditions … below the average. Which of the categories has a decisive effect on the average value will in particular depend on the numerical ratio or the proportional size of the categories.”
Thus ”The commodity produced under more favourable conditions contains less labour-time than that produced under less favourable conditions, but it sells at the same price, and has the same value, AS IF ( my emphasis)it contained the same labour-time, though this is not the case” (Ibid. p 206).
As I understand it then, the introduction of new machinery does not immediately devalue all other machines currently in use. This is a temporal process. As new machinery comes to predominate, then a new average value for this facet of fixed capital is established. If this were not the case , how would its introduction confer any advantage? As for circulating capital, let us say again cotton, it is clear that the cotton in stock even of an individual capitalist might well be a mix of different values, since she would be unlikely to purchase all her circulating capital at the same time.
I do not recall seeing much attention paid to the above exposition by Marx in TSV passage, though I think it demonstrates a more nuanced and indeed dialectical understanding of how revaluation occurs.
Of course turnover times further complicate the issue, so I look forward to Boffy’s book on this.
J,
I have been thinking about the issues you raised, as part of a sort of background processing whilst working on other things today. Rather than starting with the issue of the fixed capital, I want to come to it via something else that you said. That is in relation to the question of socially necessary labour.
There are a number of aspects to it. The obvious first thing is that the socially necessary labour-time, is as you describe the average, and that average takes into consideration that some firms will produce at a level of efficiency above, below or at the average level.
But, Marx also takes into consideration demand. He looks at this in Capital III, Chapter 10. So, basically he says if demand is in excess of supply, the production of the more efficient suppliers will be able to determine the market value, and where supply doesn’t meet demand, the least efficient producers will be able to determine market value. Its essentially the same discussion he has over rent, and the concept of differential value. I’ve set out in discussion of Chapter 10 on my blog that I think Marx’s formulations are a bit clumsy, and that is because he was writing at a time prior to the development of marginalist analysis – in fact, Marx’s analysis of Differential Rent is the basis of marginalist analysis – so that although Marx understands and utilises the concept of elasticity of demand, he does not have the mathematical tools to calculate it. He also doesn’t have the benefit of being able to demonstrate the differences between a shift in demand, and a movement along the demand curve.
But, in Capital III, Marx also makes the point about socially necessary labour that even where commodities are produced by the most efficient means possible, so that each individual commodity unit comprises only the socially necessary labour-time, that does not mean that is the case for the total volume of those commodities produced. So, for example, if 1,000 metres of linen are produced using the most efficient means, and this is equal to 1,000 hours of labour, which we might equate to £1,000, the price of production then being £1 per metre, this does not at all mean that this 1,000 metres will find willing buyers at a price of £1 per metre. As Marx points out the seller can only control how much they send to market, not how much demand there will be for it, and this is his basic rejection, therefore, of Say’s Law, and its proponents such as Mill and Ricardo, who based themselves on it to argue that there could not be overproduction, only under-consumption, which was the consequence of an underproduction of other commodities.
So, Marx says, if there turns out to be only demand for 800 metres of linen at the price of production of £1 per metre, 200 metres were produced that were not socially needed. A commodity is only a commodity in so far as it is a use value, and it is only a use value if it is demanded at its price of production. Consequently, although 1,000 hours of labour were embodied in this 1,000 metres of linen, only 800 of those hours were socially necessary. This is one reason that Marx opposes an embodied labour theory of value, as proposed by Smith and others, and instead puts forward the concept of socially necessary labour-time. So, although this 1,000 metres of linen embodied 1,000 hours of labour, it is says Marx, only the equivalent of 800 hours of socially necessary labour, and its exchange-value is accordingly only equal to £800. This is the significance of demand in Marx’s theory that many fail to take into account.
And, of course this is also the basis of overproduction for Marx, because if this 1,000 metres of linen are sold for £800 rather than £1,000, this £800 may not be sufficient to reproduce the capital consumed in the production of the 1,000 metres. I would point out here, for reference, in relation to the question of the fixed capital, that the fact that the £1,000 cannot be recovered, and instead the linen sells for only £800, does not at all change the value of the commodities that went into the production of the linen. Marx gives one of the most succinct statements of what he means by a crisis of overproduction, in TOSV Chapter 17, where he states,
“(When spinning-machines were invented, there was over-production of yarn in relation to weaving. This disproportion disappeared when mechanical looms were introduced into weaving.)”
(Theories of Surplus Value, Chapter 17, Footnote 4)
This overproduction has nothing to do with underconsumption. On the contrary, with much cheaper yarn, it’s likely that consumption of yarn would rise. The point is it does not rise as much as the rise in supply. Nor does it have anything to do with the tendency for the rate of profit to fall. The surplus value produced in such yarn production might be greater, and the rate of profit higher than it was before. The problem is that it cannot be realised because the vastly increased production cannot all be sold.
The Ricardian response to such arguments was that whilst such partial overproduction was possible for individual commodities, it was not possible for all commodities simultaneously to be overproduced. Marx responds that this is nonsense, because if one commodity can be overproduced in this way, then all commodities can be similarly overproduced, if their supply increases massively. He comments,
“That only particular commodities, and not all kinds of commodities, can form “a glut in the market” and that therefore over-production can always only be partial, is a poor way out. In the first place, if we consider only the nature of the commodity, there is nothing to prevent all commodities from being superabundant on the market, and therefore all falling below their price. We are here only concerned with the factor of crisis. That is all commodities, apart from money [may be superabundant]. [The proposition] the commodity must be converted into money, only means that: all commodities must do so. And just as the difficulty of undergoing this metamorphosis exists for an individual commodity, so it can exist for all commodities. The general nature of the metamorphosis of commodities—which includes the separation of purchase and sale just as it does their unity—instead of excluding the possibility of a general glut, on the contrary, contains the possibility of a general glut.
Ricardo’s and similar types of reasoning are moreover based not only on the relation of purchase and sale, but also on that of demand and supply, which we have to examine only when considering the competition of capitals. As Mill says purchase is sale etc., therefore demand is supply and supply demand. But they also fall apart and can become independent of each other. At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”
So, to come now to the point about the fixed capital etc. Let me start by discussing not fixed capital but circulating constant capital such as say cotton. As Marx sets out in Capital III, Chapter 6, and many other places, the constant capital has to be valued on the basis of its current reproduction cost, and that is determinant for the value it passes on to the final product, and for the calculation of the rate of profit. Without that, in relation to the total social capital, the process of social reproduction breaks down, because the physical components of the means of production and means of consumption must be replaced “on a like for like basis”, and in conditions of changing productivity that is only possible on the basis of current reproduction costs.
But, that is only to view things in terms of value at a level of abstraction that disregards all of the above questions about demand. So, for example, Marx says,
“But it is evident — although we merely mention it in passing, since we here still assume that commodities are sold at their values, so that price fluctuations caused by competition do not as yet concern us — that the expansion or contraction of the market depends on the price of the individual commodity and is inversely proportional to the rise or fall of this price. It actually develops, therefore, that the price of the product does not rise in proportion to that of the raw material, and that it does not fall in proportion to that of raw material. Consequently, the rate of profit falls lower in one instance, and rises higher in the other than would have been the case if products were sold at their value…
If the price of raw material, for instance of cotton, rises, then the price of cotton goods — both semi-finished goods like yarn and finished goods like cotton fabrics — manufactured while cotton was cheaper, rises also. So does the value of the unprocessed cotton held in stock, and of the cotton in the process of manufacture. The latter because it comes to represent more labour-time in retrospect and thus adds more than its original value to the product which it enters, and more than the capitalist paid for it.
Hence, if the price of raw materials rises, and there is a considerable quantity of available finished commodities in the market, no matter what the stage of their manufacture, the value of these commodities rises, thereby enhancing the value of the existing capital. The same is true for the supply of raw materials, etc., in the hands of the producer. This appreciation of value may compensate, or more than compensate, the individual capitalist, or even an entire separate sphere of capitalist production, for the drop in the rate of profit attending a rise in the price of raw materials. Without entering into the detailed effects of competition, we might state for the sake of thoroughness that 1) if available supplies of raw material are considerable, they tend to counteract the price increase which occurred at the place of their origin; 2) if the semi-finished and finished goods press very heavily upon the market, their price is thereby prevented from rising proportionately to the price of their raw materials.”
The point is that if the price of cotton rises, this passes into the value of yarn. But, if the value of yarn rises, necessarily the demand for yarn falls. A quantity of labour embodied in the production of yarn becomes not socially necessary, because the demand for yarn is lower at this higher value. It requires that the supply of yarn be reduced, less capital employed in that function. But, this is a price effect following on from the change in demand. In the same way that the value of yarn was one thing when produced by the new spinning machines, but its price was another, because it was massively overproduced, so too here. Indeed, this is the basis of crises of overproduction.
Nothing in the fall in the price of yarn changes the value of the cotton that went into or goes into its production. And the same is true in relation to the fixed capital.
The value of the components of the fixed capital, as commodities is determined as with any other commodity, by the labour time required for their reproduction. Let’s take a firm that owns a lathe, which it pays £1,000 for. Tomorrow, a change in productivity reduces the value of lathes to £800. How do we value the lathe that was bought on Day 1? Well, if I was a capitalist and was valuing the company, in order to consider buying it or taking it over, I certainly would not be so generous as to value the lathe at the price the owner paid for it! Why would I, when I could buy the same lathe new, now for just £800? In fact, not only has this lathe lost £200 from moral depreciation, but it will have lost some of its value also through wear and tear.
And what applies to this lathe applies to the value of every other identical lathe. The same would be true if a new lathe came out that cost £1,000, but which was 20% more efficient than the old lathe. Again why would I value your old lathe at the £1,000 you paid for it, when I could buy a new lathe, for the same price, that was 20% more efficient.
So, in terms of the value of the fixed capital, it has nothing to do with the quantity of the old stuff compared to the new stuff, engaged in production. All of it is simultaneously devalued accordingly. And in terms of value of wear and tear that also applies. As Marx sets out in TOSV III, however, there is an offsetting factor here. Suppose, the fixed capital is £1,000, and profit is £90, so that (ignoring any other capital) the rate of profit is 9%. If the fixed capital then loses 10% of its value due to wear and tear, its current value falls to £900. Now the £90 profit is equal to a rate of profit of 10%. As the fixed capital continues to lose value through wear and tear, Marx says, so the rate of profit necessarily rises, and the greater the quantity of fixed capital involved, the more this phenomenon is pronounced. This is one factor he says which can offset the impact of new machines.
“The rate of profit would have risen, because the value of the fixed capital would have declined by one tenth as a result of wear and tear during the first year. Thus there can be no doubt that in the case of all capitals employing a great deal of fixed capital—provided the scale of production remains unchanged—the rate of profit must rise in proportion as the value of the machinery, the fixed capital, declines annually, because wear and tear has already been taken into account. If the coal producer sells his coal at the same price throughout the ten years, then his rate of profit must be higher in the second year than it was in the first and so forth. Or one would have to assume that the maintenance work, etc., stands in direct proportion to the depreciation, so that the total sum advanced annually under the heading of fixed capital remains the same. This extra profit may be equalised also as a result of the fact that—apart from wear and tear—the value of fixed capital falls in the course of time, because it has to compete with new, more recently invented, better machinery. On the other hand this rising rate of profit, which results naturally from wear and tear, makes it possible for the declining value of the fixed capital to compete with newer, better machinery, the full value of which has still to be taken into account. Finally, the coal producer sold his coal more cheaply [at the end of the second year], on the basis of the following calculation: 50 on 100 means 50 per cent profit, 50 per cent on 95 comes to 47 1/2; if therefore he sold the same quantity of coal [not for 105 but] for 102 1/2—then he would have sold it more cheaply than the man whose machinery, for example, began to operate only in the current year. Large installations of fixed capital presuppose possession of large amounts of capital. And since these big owners of capital dominate the market, it appears that only for this reason their enterprises yield surplus profit (rent). In the case of agriculture, this rent derives from working relatively fertile land, but here we are dealing with a case where relatively cheaper machinery is utilised.}”
(TOSV Chapter 23)
So, my thought would be that, the value of the machine is determined as with any other commodity by the labour-time required for its reproduction. If a new machine is introduced, or the value of that type of machine is reduced as a result of a rise in productivity, then all existing machines are instantly and simultaneously morally depreciated down to this level. Each machine, in terms of value then passes on in wear and tear the appropriately reduced amount of value, and so the value of the end product thereby also falls. However, as with the case of changes in the value of cotton and the price of yarn, whether this change in value is reflected in a change in the price of the end product is another matter.
However, the following has to be considered. If the price of the end product does not change, whilst its value has been reduced (because its value is determined by the socially necessary labour-time required for its production, which means the current value of the machines used in its production, not their historic price, then surplus profits will accrue in this sphere. Not only will the firm that introduces the new machine receive back a greater amount of value for wear and tear of their machine than, in fact, they incur, but every other producer will obtain an amount of value in terms of wear and tear greater than is required to reproduce their existing machine. In other words, if they receive £100 each year over 10 years, as part of the value of their output, they will obtain £1,000, but will now only require £800 to reproduce the machine.
Instead of incurring a notional £200 capital loss on their old machine, (notional because their replacement machine only costs £800) they will instead obtain an additional £200 of value, in excess of what is required to reproduce it. It will in fact, represent a £200 actual capital gain! Yet, it will appear as though it is an additional £200 of profit, a surplus value that has arisen not from labour but from capital. This is one reason that using historic pricing fundamentally undermines the labour theory of value, because it makes surplus value appear from capital as well as labour.
The surplus profit would, in theory, encourage additional production. Either existing producers would expand output until such time as the surplus profit disappeared, so that, in fact, prices would anyway be reduced in accordance with the reduction in value brought about by the moral depreciation of the machines, or else new capitals would enter this sphere, and these new capitals would naturally use the new machines for production, not the old machines.
That’s my thoughts on it for now anyway.
Correction:
In para 3,
“So, basically he says if demand is in excess of supply, the production of the more efficient suppliers will be able to determine the market value, and where supply doesn’t meet demand, the least efficient producers will be able to determine market value. ”
Should read,
“So, basically he says if supply is in excess of demand, the production of the more efficient suppliers will be able to determine the market value, and where supply doesn’t meet demand, the least efficient producers will be able to determine market value.”
Incidentally, I don’t know of you noticed it, but if there was ever any doubt as to whether the rate of profit should be calculated on the basis of the current reproduction cost of capital or its historic price (and in my mind there never has been any doubt), this last quote from TOSV Chapter 23 ends it, because there it is plain as day that Marx calculates the rate of profit on the current reproduction cost of the capital not on its historic price.
J,
I have only just seen your two latest comments, and I’m a bit busy at the moment to respond.
On the question of the devaluation of existing machines, I THINK your interpretation is wrong, but I will have to think about it more before I would SAY its wrong, and to say why. Basically, I think it comes down to the fact that the value of commodities is determined by their current reproduction cost, and if the value of new machines is lower than their predecessors, its this new value that is determinant. A machine in this case is no different than cotton. If the value of cotton falls because the labour-time required for its reproduction falls, then the value of all cotton falls, including that held in stock, work in progress etc, as Marx puts it it is retroactively revalued. The same with a machine, and consequently with the value it transfers to the end production via wear and tear. I think you have the arrow of causation backwards. I’ve just been reading something similar in TOSV III, but I’ll get back to you on it.
ON the TSSI I think its simply wrong in terms of Marx and the Transformation Problem, just as Steedman was wrong from a different direction. Marx and Engels clearly understood that it was necessary to transform input prices simultaneously with output prices, and Marx says so in Capital III. He says,
“The foregoing statements have at any rate modified the original assumption concerning the determination of the cost-price of commodities. We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it. It is necessary to remember this modified significance of the cost-price, and to bear in mind that there is always the possibility of an error if the cost-price of a commodity in any particular sphere is identified with the value of the means of production consumed by it. Our present analysis does not necessitate a closer examination of this point.” (Chapter 9)
And again illustrates this by pointing out that if wage goods are more expensive as a result of exchange values being converted to prices of production, then the consequence is that the worker has to work longer to reproduce their labour-power, so that necessary labour rises, and surplus labour declines, even though in fact, only the same total of social labour-time, and value has been created.
“It is therefore possible that even the cost-price of commodities produced by capitals of average composition may differ from the sum of the values of the elements which make up this component of their price of production. Suppose, the average composition is 80c + 20v. Now, it is possible that in the actual capitals of this composition 80c may be greater or smaller than the value of c, i.e., the constant capital, because this c may be made up of commodities whose price of production differs from their value. In the same way, 20v might diverge from its value if the consumption of the wage includes commodities whose price of production diverges from their value; in which case the labourer would work a longer, or shorter, time to buy them back (to replace them) and would thus perform more, or less, necessary labour than would be required if the price of production of such necessities of life coincided with their value.” (Chapter 12)
And, in fact, Engels explains that the reason that commodities no longer exchange at their exchange values, even when produced non-capitalistically is precisely for this reason. A non-capital producer buys inputs from a capitalist. The capitalist production of these inputs sells them at their price of production not their exchange value. The non-capitalist producer, thereby sells their out on the basis of an exchange value that is already modified by the fact that some of the inputs that form its cost of production were sold at prices of production not exchange values.
And, as marx points out in Capital III, and in TOSV, for agricultural production the output is sold at its exchange value not its price of production. It is that fact that enables the landlord to obtain rent, being the surplus profit, or the difference between the price of production and the exchange value. Similarly, as marx sets out in TOSV, all new capitalist production sells at its exchange value not its price of production. It is only the fact that this new production is more profitable, that it produces surplus profits, at its exchange value, that causes capital to migrate to this area, which then reduces market prices to the price of production.
But, the concept of historic prices also means that Marx’s model of social reproduction could not operate, as he sets out in the closing chapters of Capital III, and in TOSV. That social reproduction, as he says, requires that the consumed constant capital be replaced “in kind”, i.e. physically replaced “at least in effectiveness”, and as he points out that can only occur on the basis that this physical replacement is done on the basis of the current reproduction cost of the use values being replaced, to take account of changes in social productivity. The use of historic prices distorts the view of the real social surplus, and rate of profit, and leads to capital gains/losses being confused with and incorporated in the production of surplus value. It ultimately thereby destroys the labour theory of value.
Boffy, Many thanks for your thoughtful and detailed comments. I may say Alan Freeman has written an altogether more sophisticated and cogent analysis of the problem (Replacement Costs, Stocks and the Valuation of Inputs 25/04/1995), which can be downloaded from his website. Having said that, I should like to make the following observations.
1) I feel Ch 10 of Vol 3 of Capital ( the amount of labour time necessary to satisfy social demand ) complements and extends the analysis in TSV2 ChX, ( the amount of labour time socially necessary for production of a commodity). There are some excellent articles on this in ”Marx and non-equilibrium Economics” (Eds. Freeman and Carchedi), though using the kindle edition I am unable to access the exact references. One contributor however makes the pertinent observation, ” The market value would be determined by the highest productivity only AFTER the adjustment to a growth in demand. BEFORE this can happen, or before the fluctuations of demand are perceived, the market value must however be determined from the average of the individual techniques employed. The matter appears particularly clear if we suppose, as moreover happens with every technical change, supply is adjusted to demand by means of absolutely new techniques not yet in use. In such a case it is after all obvious that the market value determined by the technique developed to respond to the new demand cannot be known before the change.”
2) I feel your understanding of the necessity of transforming the inputs prices is wrong on the grounds adduced by Moseley, among others, in his “Money and Totality” (2016). In Vol 3 p121-122 Marx says, “Capital advance £500 =£400 in capital spent on means of production (PRICE of means production) + £100 in capital spent on labour ( PRICE of 666 working days i.e. wages for the same). Why should these prices need to be transformed again? I think what your quotation from Marx is saying is to bear in mind that the price of these means of production may well stand above or below their value.
3) I agree with you that the use of historic costs is false, and that the correct concept is that of current costs. Where I disagree with Moseley is his assertion that the current costs of constant capital are their replacement costs “as evidenced by the most recent purchases of these means of production in the sphere of circulation.” (”Money and Totality” p 287). Moseley does say, “The constant capital that is transferred to the value of the output is a social average constant capital.” (Ibid.) Now Fred is perfectly clear that he means only that the average value transferred must change must change, but this can only be a temporal and not an immediate or simultaneous change. What we are dealing with is a change of quantity into quality. Let us recall the second tenet of dialectics: “You cannot step into the same river twice.” This is a paradox, because being in a state of flux it is continually changing, yet it takes time for the change to assert itself.
As I have said, if the capitalist were selling e.g. their cotton, then they could sell it for a price equal to its replacement cost on the cotton market; but this is not a real option for the industry as a whole, which has to produce commodities, say, cotton socks. A few elementary figures will illustrate the point I am trying to make.
On your point 1. I would suggest reading the blog posts I have set out in respect of that question, in discussing Chapter 10.
In relation to point 2. you are taking Marx’s use of the term “Price” out of context. Marx uses price to mean merely the exchange value of a commodity as expressed in money. The quote you give is from Chapter 1, prior to Marx’s elaboration of prices of production as the transformed form of exchange values under capitalism. It would have been just the same here had Marx simply said that £400 was the exchange value of the means of production, and it is, of course, exchange value that has to be transformed into prices of production!
In relation to 3. Marx is quite clear that the current reproduction cost is the market value of the commodities that constitute the constant capital. If a new machine only requires half the labour-time to produce as its older version then that immediately reduces the value of all existing machines accordingly, and it is only this reduced value, which is then transferred proportionately as wear and tear to output.
If you read my blog posts on Chapter 10 linked to above, it will explain what is wrong with your calculations in relations to socks, which comes down to the definition of average.
Take 3 groups of capitalists producing 1000 pairs of cotton socks each.
c. v. s. cost. unit cost. individual value.
A 1000 500. 500 1500. 1.5. 2
B 750. 500 500. 1250 1.25 1.75
C 500 500 500 1000 1 1.5
Average Value 1.75 Now as Marx argues, if 80% of the capitalists are producing under the conditions represented by A, then their output determines the market value, and capitalist B and C sell their commodities below their value. Gradually as more and more capitalists introduce the conditions of capitalist C, then a new market value is established, and capitalists A have to compete or go out of business. But it makes no sense to argue, as do the replacement cost theorists, that the introduction of cheaper constant capital by capitalist C IMMEDIATELY or SIMULTANEOUSLY devalues Capitalists’ A capital to 500. How otherwise might capitalists C gain a super profit? Rather as Marx says capitalists C sell their commodities for the same price ”AS IF they contained the same labour time, though this is not the case.” A simple illustration confirms this. A new capitalist enters the market with the SAME capital, but a much more productive machine, producing 2000 pairs of socks in the same period.
D. 1000. 500. 500 1500 0.75 1
Clearly he gains a super profit from selling below value. Then if capitalists A also add this new machine to their fixed capital ( assuming a concomitant fall in the value of cotton), we get
A. 2000. 500 500 2500 0.83. 1
Even within the same capitalist enterprise it is an average value that is transferred, and this would surely still be true if a cheaper machine were introduced, so that we would have a mix of constant capital values namely the original 1000 plus the new capital of 500, i.e. total of 1500 and not 1000 i.e. a devalued capital of 500 and a new one of 500 that has immediately devalued the original advance.
Of course, turnover times complicate the whole exposition, so good luck with that!
As I said in my response above, if you read my blog posts on Chapter 10 it will deal with parts of what is wrong with your example. Essentially, if 80% of producers produce under the conditions of A, so that A accounts for 80% of total output then the market value will be close to but below 2, because the average comprises the total production divided by the total labour-time expended,a nd some of that labour-time is expended in B and C, which are more efficient. So, the average value is not 1.75.
If there are 100 producer in total, 80 in A, and 10 each in B and C, then A produces 80,000 pairs (with each producer producing 1,000 pairs), B and C produce 1,000 each, making total production of 100,000 pairs. So, total value equals 80,000 x 2 = 160,000, 10,000 x 1.75 = 17,500, 10,000 x 1.5 = 15,000 = 192,500, giving an average value of 192,500/100,000 = 1.925.
Secondly, in terms of constant capital you are lumping together fixed and circulating capital. If the constant capital is comprised entirely of cotton, then although a fall in the value of cotton will result in a capital loss on any cotton held in stock, the fall in the value of the cotton, reflected in the value of yarn etc. will be compensated by the fall in the value of the cotton to thereby be replaced on a like for like basis. As a consequence the rate of profit will also rise, because any given amount of surplus value will thereby accumulate a greater quantity of cotton.
So, in relation to your later point it does indeed make sense to say that if the value of constant capital for C falls, because the value of cotton falls, then this simultaneously affects the value of the constant held by A, in the form of cotton.
Thirdly, you have excluded surplus value from the total value of output, in calculating unit cost of production. Surplus value as Marx sets out is not a cost to the capitalist, but is a cost to society, because it represents expended labour-time.
Fourthly, if we take your argument about a cheaper or more efficient machine introduced by C, and place it in its proper context as set out above then it can be seen exactly what the situation is. Unfortunately, because you have not separated out fixed and circulating constant capital, it makes it more difficult to see.
Let’s simplify things by having just two groups A and B, with A producing 80% of output and B producing 20%. Each firm in A has a machine with a value of £1,000, which transfers 10% in wear and tear each year. It consumes £1,000 in materials each year, and labour creates £1,000 of new value.
In B, each firm has the same machine with a value of £1,000 giving up 10% in wear and tear each year. It again processes £1,000 of material, but due to greater efficiency, it employs less labour, and the new value created each year is thereby only £800.
The individual value of output in each firm in A is then £100 + £1,000 + £1,000 = £2,100 = £2.10 per unit.
In B it is £100 + £1,000 + £800 = £1,900 = £1.90 per unit.
Total production is 100,000 units, of which A accounts for 80,000 units, which equals 80,000 x £2.10 = £168,000. B accounts for 20,000 x £1.90 = £38,000. Total value is £206,000 = £2.06 per unit market value. Producers in A thereby produce at £0.04 above market value, and obtain lower than normal profit, whilst B produces at £0.16 below market value, and thereby obtains surplus profit.
Now suppose, as you say, B introduce a new machine that has a value of only £500. It continues to transfer 10% p.a. to its production in wear and tear. It is no different in relation to the machine as it would be if the value of cotton were to fall. No matter what A producers have paid for their cotton in stock, the fall in the value of cotton reduces its value, and it is that value that is transferred to final output. The same applies to their machines. Their historic cost is irrelevant to the current value of those machines, once a new machine is introduced. Their machines are immediately subject to moral depreciation, and A producers thereby suffer a £500 capital loss on the machines in their possession. Were that not the case, they would themselves obtain a surplus profit, above the average rate of profit existing across the wider economy.
Their machines are devalued to £500, and now transfer only £50 per year in wear and tear to their final output. The value of their output then falls to £50 + £1,000 + £1,000 = £2050, so that the price per unit is £2.05. For B the value of its output falls to £50 + £1,000 + £800 = £1,850 = £1.85 per unit. Total output value is 80,000 x £2.05 = £164,000, and 20,000 x £1.85 = £37,000 = £201,000, giving a market value of £2.01 per unit.
A will then produce at £0.04 above market value, whilst B produces at £0.16 below market value, so that A makes lower than normal profit, and B makes above normal profit, for the industry. The value of the machines in both A and B have to be devalued in this way, because otherwise, when A and B firms come to replace their machines, they will have recovered £1,000 of value in terms of the market value of their output attributable to wear and tear. However, it is not only B firms who will replace their machines with machines that now cost only £500.
A firms when they replace their machines will replace them with the now cheaper machines that cost only £500, but they would have accumulated £1,000 of value in their amortisation fund, as the equivalent of the transferred wear and tear. They would thereby have obtained an additional £500 of surplus value, i.e. value over and above the value of the capital actually advanced to production over the period. And that is the problem with using historic prices rather than current reproduction costs, it creates the potential for surplus value to arise from another source other than labour, which thereby undermines the labour theory of value,a nd Marx’s analysis of exploitation.
To actually, be more correct, the £500 extra profit would arise if your other proposal to have the market value determined by A were applied, because then the market value would be £2.10 per unit, creating surplus profits for both A and B.
If the market value is £2.06, then an additional amount of profit of £40,000 is created, which is equal to the 80 x £500 of value that A firms have received over and above what is required for them to reproduce the value of their machines.
Boffy, Thank you as always for your detailed and thought- provoking analysis, which I have only just noticed. I shall have to take a leaf out of your own book and say ”I will have to think about it,” or rather you oblige me to think again!
I should like however to quote Freeman :
”Marx did not share this dogma; in consequence he nowhere asserts that profit rates actually equalise and quite the contrary, is at great pains to refer to it as the ‘average’ or ‘general’ profit rate and as an ideal that exists only in the heads of the capitalists.
‘Between the spheres more or less approximating the average there is again a tendency towards equalisation, seeking the ideal average, i.e. an average that does not really exist. (Marx 1981:173, my emphasis)’
This distinction is indispensable for at least three of his objectives, without which his dynamic analysis is wrecked beyond repair.
he has to explain the motion of capital; that is, he has to explain what causes capital to migrate from one sector and process of production to another sector and process of production. This motion ceases to exist if profits actually equalise; there is no reason for capital to move. The actual motor force of capitalist development is the pursuit of superprofit or surplus profit; a profit above the average resulting from either a monopoly advantage or an advance in productivity.”
So far then I think you and he are in agreement. But in his 1999 article ( on his blog)”The Limits of Ricardian Value” he gives an altogether more sophisticated criticism of the ‘reproduction costs’ theory, but I am afraid the maths are beyond me!
J,
I was about to leave a comment on Michael’s latest post, to draw your attention to the fact I had responded here, given it had been a while before I had been able to reply.
I agree that different capitals do not actually have the same rate of profit. Different capitals within the same sphere each have different rates, because some operate at above, below or at the average level of efficiency for that sphere. Its why I have raised some objections to Marx’s theory of rent, or at least those parts of it in Capital, rather than in Theories of Surplus Value, where he assumes along with Ricardo that every capital in agriculture/mineral production must obtain at least the average rate of profit.
And, it is certainly the case that capitals on average in each sphere, do not obtain the average rate of profit, i.e. the average profit in steel production is not the same as in car production, for example, or if it is, its accidental. That does not mean that there is not an objectively discernible average rate of profit for all capital. It only means that this average is constantly changing, because social productivity is constantly changing, and it means that levels of productivity are changing in each sphere, as part of that process, so that the actual rate of profit in each sphere is changing, and in addition, because capital seeks out the highest rate of profit, capital is constantly accumulating faster in some spheres than others, so that the prices of commodities in each sphere, are constantly being adjusted up or down towards their particular price of production, so as to obtain the average profit. It is a multifaceted, never ending process.
In addition, as Marx sets out Capital III, in the closing chapters, different capitals in different spheres always obtain higher or lower rates of profit for a variety of reasons. Some obtain higher rates of profit than the average because of various “reasons for compensating”, e.g. they face higher risk factors, such as shipping; or else their are various forms of monopoly and so on. And, of course, in Chapter 14, Marx set out that the very largest capitals, those that were already by that time “socialised capital”, such as the joint stock companies, like the railway companies, did not participate in the process of formation of an average rate of profit, because the shareholders in these companies simply accepted a low rate of interest on their shares, paid out of the profits.
In those closing chapters, Marx also sets out why not all of the surplus value can be turned into profit. Some of the reasons were set out in Capital II, but Marx refers also to changes in social productivity, and so on, before tightening down his definitions to make total surplus value equal total profit.
But, none of that changes anything I have said previously. It is the very fact that if a new machine is introduced, so that if capitals involved in that sphere do not reduce their prices to reflect the lower value of wear and tear transferred, they make additional surplus profits, which leads to capital then accumulating faster in that sphere, raising the level of supply, and thereby reducing the market price of those commodities, so as to compete away the surplus profit.
If a cheaper power loom is introduced, but capital involved in producing cloth does not reduce its prices, then ALL capitals involved in that sphere will make surplus profits for the reasons I have described, not just those that introduced the cheaper looms, i.e. the proportion of the value of the cloth that all firms will have to set aside, as an amortisation fund to buy a replacement loom will fall.
The surplus profits will result in additional capital being employed to obtain it. That can take a number of forms. Firstly, the capitals that introduced the cheaper looms, will expand their production, out of their higher profits. Secondly, the firms that did not introduce the cheaper (or more productive) looms, will seek to use their existing fixed capital more intensively, to wear it out more quickly so as to be able to minimise the moral depreciation of it, so they will introduce additional shifts and so on. New capitals, able to start production with the cheaper looms, will enter production, to gain the surplus profits.
The result is that the output of cloth will rise relative to demand, and the market price of cloth will fall down towards its price of production, i.e. cost of production plus average profit.
In the case of fixed capital, and particularly the more durable forms of fixed capital, this is clearly more pronounced, because if a machine has an average lifespan of ten years, this gives a long period during which additional capital can be accumulated in that sphere, so as to bring about this reduction in market price, and competing away of the surplus profit.
Rather than being a contradiction to anything I said, it in facts confirms and strengthens it. Moreover, if you take the position as far as the total social capital is concerned, the argument I presented is clearly the only basis upon which the underlying value relations can be understood. All that competition and the phenomenal forms of these relations affect is the distribution of the value and surplus value, as described.
“Secondly, the firms that did not introduce the cheaper (or more productive) looms, will seek to use their existing fixed capital more intensively, to wear it out more quickly so as to be able to minimise the moral depreciation of it, so they will introduce additional shifts and so on. New capitals, able to start production with the cheaper looms, will enter production, to gain the surplus profits.”
Marx also covers a similar situation to this in Theories of Surplus Value. Here, the firms that did not introduce the cheaper loom, but whose replacement cost has still fallen, are able to utilise this saving in wear and tear, instead to expand their accumulation of other circulating capital. In other words, that portion of wear and tear that they no longer have to set aside in an amortisation fund, they can now use to buy additional yarn, and labour-power, so as to expand their production, and gain from the available surplus profit.
As Marx discusses such situations in TOSV, this is an instance whereby changes in social productivity result in fixed capital (wear and tear) being transformed into circulating capital. In other words, a portion of capital that previously had to be set aside as fixed capital, is now released, and is instead converted into circulating capital, in the form of additional materials and labour-power.
This comment by Marx, from Capital III, Chapter 7, I think backs up my interpretation, and also blows out of the water the use of historic prices as a basis for calculating the rate of profit.
“Fluctuations in the rate of profit may occur irrespective of changes in the organic components of the capital, or of the absolute magnitude of the capital, through a rise or fall in the value of the fixed or circulating advanced capital caused by an increase or a reduction of the working-time required for its reproduction, this increase or reduction taking place independently of the already existing capital. The value of every commodity – thus also of the commodities making up the capital – is determined not by the necessary labour-time contained in it, but by the social labour-time required for its reproduction. This reproduction may take place under unfavourable or under propitious circumstances, distinct from the conditions of original production. If, under altered conditions, it takes double or, conversely, half the time, to reproduce the same material capital, and if the value of money remains unchanged, a capital formerly worth £100 would be worth £200, or £50 respectively.” (p 141)