“Much more important than appreciation is the question of capital depreciation. In my view, capital appreciation and depreciation have neither an equivalent nor symmetrical impact on profit rates. The devaluation of capital values - either as a result of Marx’s ‘moral depreciation’ or in an economic crisis - is not simply cancelled out. Capitalists as a whole can lose - aggregate exchange value can be wiped out and this has an impact on the aggregate economy.”
Once more, as with Nick's inability to defend his position in relation to the valuation of commodities, this smacks of running away from the argument. Marx in Capital Volume III in discussing the effects of price fluctuations on the Rate of Profit discusses both appreciation and depreciation, and does so in the same terms. If Nick's argument cannot be sustained in relation to appreciation, but only depreciation, then his theory falls. Having said that, he is correct that there is a difference between appreciation and some forms of depreciation. It is not a difference that undermines Marx’s approach of calculating the Rate of Profit based on current reproduction costs, as opposed to historic costs. Once again the difference comes down to an analysis based on Capital as opposed to Nick's analysis based on individual Capitalists.
The fundamental tenet of Nick's argument in the above statement, is not merely flawed, but it is quite clearly empirically falsified. Put simply, we can look at numerous examples, in history whereby Capital was devalued, and the immediate result was not the kind of crisis for Capital that Nick envisages, but the exact opposite. In fact, as stated earlier, one of the basic tenets of Marxist analysis, and indeed of the argument put forward by Andrew Kliman in his book -
“Yet the destruction of Capital value would indeed be a solution to the systemic problems I have outlined – unless it led to revolution or the collapse of the system. A massive wave of business and personal bankruptcies, bank failures, and write-downs of losses would solve the debt overhang. New owners could take over businesses without assuming their debts and purchase them at fire sale prices. This would raise the potential rate of profit, and it would therefore set the stage for a new boom.” (Andrew Kliman – The Failure of Capitalist Production p 4.) -
is that it is the devaluation of Capital, which provides the basis for a sharp increase in the Rate of Profit, which in turn spurs Capital investment!
|Cobden & Bright|
It is precisely for that reason that Marx argues that Capital continually tries to devalue, i.e. reduce the price of, capital, be it Constant or Variable Capital. It was for that reason that Capital sought to abolish the Corn Laws so as to reduce the price of food, so as to reduce the value of Labour Power, but alongside the abolition of the Corn Laws went the abolition of duties on a range of imported raw materials too, like cotton. The consequence of this devaluation of Capital was not the problems for Capital that Nick envisages, but a large rise in Surplus Value production consequent upon the cheapening of Variable Capital, and a rise in the Rate of Profit consequent upon the cheapening of Constant Capital! It led not to the crisis Nick envisages, but to a boom!
If we look at the period after WWII, we see something similar. The introduction of a range of new technological developments brought about a “moral depreciation” of large swathes of existing Capital. The consequence once again was not the kind of crisis that Nick envisages, but one of the most powerful, and long lasting booms that Capital has so far experienced, based on a sharply rising Rate of Profit.
The Marxist Theory also supports the empirical evidence. If we look at the situation described above we have:
C 1000 + V 1000 + S 1000 = E 3000.
Let us assume then that instead of there being appreciation, we have depreciation as requested by Nick. Let us assume that the labour-time required to produce C halves. In that case on Marx’s method we have:
(3) C 500 + V 1000 + S 1000 = E 2500.
Now, the rate of profit is 1000/500+1000 = 66.6%. How exactly, does Nick believe that this is a bad result for Capital? The rate of profit has risen considerably as a consequence of the devaluation of the Capital! The benefit for capital is easily seen by the fact that the Surplus Value of 1000 can now buy twice as much Constant Capital as it could before its price fell. Now, of course, from Nick's subjectivist viewpoint, which focusses on the fortunes of individual Capitalists rather than on Capital itself, this situation could indeed be rather disastrous. That is the case, if the particular Capitalist borrowed the Money from a Money Capitalist in order to make the initial investment. In that case, this Capitalist will need to recover in the price of the final product an amount equivalent to the Money Capital they borrowed. But, because the Value of the Constant Capital now passed into that product has halved, they will find this impossible. Moreover, because the Value of this Capital has fallen, if they shut up shop and sell this Capital, they will make a Capital Loss on its sale, or if they are unable to pay, the Money Capitalist, who lent the money will make that loss.
|Industrial Robots are an example of how new innovations|
bring about a "moral depreciation" of existing Capital, thereby
making possible a higher rate of profit on the reduced
Capital Value laid out.
However, this is only the reverse of the situation that affected individual Capitalists in the case of an appreciation of Capital, as opposed to the position of Capital itself. The reality is that some new Capitalist can now purchase this devalued Capital at its current Value, and as a consequence will make the new higher rate of profit on it. In the previous case of the appreciation of Constant Capital the owner of this Constant Capital made a Capital Gain that was cancelled by the Capital Loss of the Money Capitalist who bought it from them. Here, the Capital Loss consequent upon the depreciation of the Constant Capital, is cancelled by the Capital Gain made by the Money Capitalist who subsequently buys it. Once again when we stop trying to analyse Capitalism in terms of the individual fortunes of Capitalists, and instead analyse it in terms of Capital itself, the real situation is revealed. In fact, in Volume III of Capital, Marx describes precisely this situation. Moreover, demonstrating the falsity of Nick's argument in trying to present the situation in respect of Capital in General as different, he writes,
“Appreciation and depreciation are self-explanatory. All they mean is that a given capital increases or decreases in value as a result of certain general economic conditions, for we are not discussing the particular fate of an individual capital. All they mean, therefore, is that the value of a capital invested in production rises or falls, irrespective of its self-expansion by virtue of the surplus-labour employed by it.”
There could hardly be a clearer refutation of Nick's position, or in fact of the TSSI.
But, further refuting Nick's position, Marx continues.
|The individual Capitalists that owned Northern Rock|
went bust. A new individual Capitalist, Richard Branson,
was able to lay out the now much reduced amount of
Capital to operate the business at a profit.
“After machinery, equipment of buildings, and fixed capital in general, attain a certain maturity, so that they remain unaltered for some length of time at least in their basic construction, there arises a similar depreciation due to improvements in the methods of reproducing this fixed capital. The value of the machinery, etc., falls in this case not so much because the machinery is rapidly crowded out and depreciated to a certain degree by new and more productive machinery, etc., but because it can be reproduced more cheaply. This is one of the reasons why large enterprises frequently do not flourish until they pass into other hands, i. e., after their first proprietors have been bankrupted, and their successors, who buy them cheaply, therefore begin from the outset with a smaller outlay of capital.”
The fact is that whether the Capitalist themselves employed their own Money Capital to purchase the Constant and Variable Capital, or whether they borrowed it from the bank, the situation facing Capital as opposed to the individual capitalist remains the same. Suppose the Capitalist had borrowed the money from the Bank, and could not repay the loan. Suppose then the bank takes possession of the firm, and becomes the new owner. What situation does it face. Certainly, its original sum of Money Capital has disappeared, but that disappeared as soon as it was used to buy productive capital, just as the money spent by a worker to buy food disappears as soon as they buy the food. The worker buys food not to make a Capital Gain on it, but to reproduce their Labour Power. Capital buys means of production and labour power, not to make a Capital Gain on it, but to reproduce and expand Capital. It can only do that by being able to exploit more abstract labour, and thereby create more Surplus Value. As Marx makes clear in Volume I of Capital, the condition for that is not at all dependent upon the Value of the Constant Capital employed, but upon its physical quantity! That is with a given technical relation – say 1 worker to 4 machines, or 1 worker to 100 kilos of cotton – the number of workers that can be employed depends upon the number of machines employed, the quantity of cotton to be processed. Has the depreciation of the Constant Capital made this harder or easier? As set out above it has made it easier! It is no different than for the worker who sees falling food prices. There is no point crying over spilt milk in response to the higher price they paid for last week's food, instead they celebrate that next week's food bill will be lower, meaning they can buy more food!
The bank having taken over the firm now faces the production function described in (3) above. Although, the actual amount of Surplus Value remains constant compared to the situation prior to the devaluation of the Capital, the Rate of Profit has risen from 50% to 66.6%. The importance of this can be seen if we look at the situation in the next production cycle.
Had the Capital not been devalued then the 50% profit, if all of it had been accumulated, would have resulted in production function,
(4) C 1500 + V 1500 + S 1500 = E 4500.
However, after the depreciation it is,
(5) C 833 + V 1666 + S 1666 = E 4165
In other words, not only has the Rate of Profit risen as a a consequence of the depreciation of the Constant Capital, but as a direct result of that the accumulation of capital increases, and the actual amount of Surplus Value created also now rises from 1500 to 1666! Yet according to Nick the depreciation of the Constant Capital represents a loss to Capital!
There is a situation whereby depreciation does represent a loss to Capital as opposed to the Capitalist. It is where depreciation occurs not due to the introduction of better machines (moral depreciation) or a reduction in the labour-time required to produce it, but purely as a result of age, or lack of use. In that case, the current replacement cost of this Capital remains unchanged, but its cost cannot be recovered in the value of the end product, because the depreciated Constant Capital can only pass its depreciated value on to it. In this case, it is as though someone has simply stolen or destroyed a portion of the Capital, and taken it out of the circuit of Capital altogether.
Another capitalist who bought this depreciated Capital would only buy it at its current value, reflecting the fact that its Use Value was depreciated (Marx gives the examples of machines that have rusted, or material that has become deteriorated). But, when they come to reproduce this Constant Capital they will have to add additional Capital of their own, to purchase this replacement. As Marx describes it is to avoid this depreciation that Capital seeks to use up Constant Capital as quickly as possible. It is one reason for firms introducing Just In Time systems. But, this does not at all help Nick's argument, because the relevant Rate of Profit calculation here is not based on the historic cost of this depreciated capital – either that paid by the original capitalist or the one who buys it from them – but on the cost of its replacement! That is illustrated by the fact that, the Capitalist who buys it is still unable to cover the loss suffered by its depreciation, and in order to replace it, therefore, has to inject their own additional capital!
The same thing is true about the destruction of Capital due to an economic crisis. No one doubts that under such conditions Capital is destroyed – though properly speaking as Marx and Engels describe a crisis of overproduction, the Capital overproduced was never Capital in the true sense to begin with. But, this is not at all the same as the question under discussion of whether to calculate the Rate of Profit based on historic cost, or current replacement cost. In fact, even under these conditions, the relevant measure remains the current replacement cost, because it is this, which will determine how much Capital can be bought given the current volume of profit!