Sunday, 10 March 2013

Big Capital Projects Not The Way To Growth

There has been a lot of talk recently about the idea that the Government should engage in some large capital spending programmes, in order to kick start growth in the economy. That would be a mistake. Such a programme might cause a reduction rather than a boost to growth, depending upon the nature of the projects undertaken. The reason is provided by Marx, and was also discussed by Bukharin.

In the 1920's, the USSR had to discuss how to go about industrialising its economy. One problem it had was the lack of Capital. This led to the idea developed by Soviet Economists such as Yevgeni Preobrazhensky of the need for “primary socialist accumulation”, similar to the process of primary capital accumulation discussed by Marx in Capital. The idea was that just as Capitalism had generated the Capital resources required for industrialisation, by depriving the peasants of their means of production, the USSR would have to transfer resources from the countryside, in order to be able to build its industry, which in turn would be able to provide the machinery and consumer goods needed by the peasants.

However, Bukharin also pointed out that a balance needed to be struck between investment of capital in consumer goods and capital goods. Basing himself on Marx's analysis of the Rate of Turnover of Capital, he argued in “The Economics OF The Transition Period” (1920) that if too much investment was undertaken in very large capital projects, that would take long periods to complete, this would suck value out of the economy without returning any value to it. The consequence could then be, that instead of a process of expanded reproduction, what is set in place is a process of contraction.

In order to understand this, it is necessary to recognise that the way bourgeois economics and accountancy calculate the Rate of Profit, is essentially fraudulent, and acts to hide the true extent of exploitation.

Marx divides Capital into two parts constant capital and variable capital. The Variable Capital is what produces the surplus value, which is the basis of profit. The total of the Constant Capital, plus the Variable Capital, plus the Surplus Value is what comprises the total Value of the output. Actually to put it this way is misleading, because this suggests that the Value of the output is made up of simply summing these three together, which would mean that the Surplus Value/Profit was simply an increment to the costs of production. It isn't.

In fact, the Value of the output is comprised of the total labour-time required for its production. Some of that time, is the time required to produce the Constant Capital. The other time is the time required by the workers who are employed to turn these means of production into the new products. So, if the Constant Capital used up in production is equal to 100 hours, and the workers take 100 hours to turn these means of production into the new commodities, these new commodities will have a value of 200 hours. The Surplus Value will in fact, be determined by the difference between the 100 hours of new value created by the workers, and the Value of the workers Labour-power, used in production, and paid to them as wages, say the equivalent of 50 hours labour.

So we would have in terms of hours:

C 100 + V 50 + S 50 = E 200.

E = the exchange value of the new commodities. On this basis a number of other ratios can be calculated. First the Rate of Surplus Value = the proportion of Surplus Value to the Variable Capital. It tells us directly how much the workers are being exploited, because it is the proportion of unpaid to paid labour. Here it is 50/50 = 100%. Secondly, the Rate of Profit is equal to the proportion between the Surplus Value, and the Capital advanced to produce it. Here it is 50/150 = 33.3%.

Bourgeois economics and accountancy essentially also calculates the Rate of Profit on this basis i.e. Profit/Capital Advanced. However, Marx shows why this measure is totally misleading. Let's take another example like the above setting out the totals for a 12 month period..

C 10,000 + V 2,000 + S 2,000 = E 14,000.

Here the Rate of Profit calculated as above is 2,000/12,000 = 16.66%.

But, these figures can be made up in many different ways, that in reality give massively different figures for the Rate of Profit. The figures give the total spent in a year for raw materials, wear and tear of machinery, and for wages. But, the products that are made with these inputs may appear on the market quickly or slowly. A firm making a battleship, for example, will not get its product on to the market for many years. As a result, it will not get paid for that ship for many years either. For all that time, it will have to keep advancing more and more capital to pay for materials and wages.

By contrast, a firm making chocolate bars, will get them on to the market very quickly, and get paid for them quickly. As a result, instead of having to advance additional capital, it will cover its costs for materials, and wages etc. out of the proceeds of these sales.

So, the above gives the rate of profit where both the Constant and Variable Capital turn over once during a year, but see what happens when the Capital turns over more frequently than that. Suppose, the Constant and Variable Capital turn over at the same rate. Suppose, the above represents 10,000 units of means of production, and 4,000 hours of labour-power. Assume now that instead of taking a year to produce the product and sell it, it takes just a month. In that case, 2000 hours of Surplus Value will have been made in the month. Let's say that 1 hour = £1. But, now over a year, 12 x £2,000 = £24,000 of profit will have been produced.

But, if we look at how much Capital has been advanced, over a year, we see that it is still only C 10,000 and V 2,000, because each month, the sale of the product, brings in £14,000. £2,000 is accumulated as profit, whilst £10,000 goes into the bank to cover next months costs of means of production, and £2,000 goes into the bank to cover wages. So here, the Rate of Profit is actually £24,000 / £10,000 + £2,000 = 200%!

But bourgeois economics and accountancy would still measure the profit here as 16.66%, because it would total up the amount laid out for means of production during the year £10,000 x 12 = £120,000, and for wages £2,000 x 12 = £24,000. On that basis it would calculate profit as £24,000/£144,000 = 16.66%.

China produces a lot of consumer goods
that have short turnover times, which means
 a relatively limited amount of capital goes a
long way.  It means, its economy can grow
But, its clear using Marx's method described above that this is a totally false picture. Marx sets this out in Capital III, Chapter 4. Using actual data, Marx shows that the real Rate of Profit was many, many times what bourgeois accounts portrayed. The real Rate of Profit, is given by multiplying the amount of Surplus Value, by the average number of times the Capital turns over during a year, and dividing this figure by the Capital paid out for Constant and Variable Capital.

This is important here, because the Rate of Profit is crucial for determining how quickly Capital can expand. If the total Capital in the economy is considered on the basis described above, the Rate of Profit becomes the rate at which this economy can use the Surplus Value to invest in increased output i.e. to grow the economy.

An economy that looks like the first example, where the Capital turns over just once during a year, will be able to grow at only 16.66% a year, whereas an economy that looks like the second, will be able to grow at 200% a year. That can be seen by looking at the example again. Suppose we are looking at two companies here. Both have £12,000 of Capital to use. The first will, in fact, only be able to use £1,000 of that Capital for production each month. Because, it will not get paid for its production until the end of the year, it can only finance its purchases, and wages out of its existing Capital. But, company 2 will be able to throw the whole of its Capital into production in month 1, because by the end of that month, it will have sales of £14,000, and this money will more than cover its next month's purchases. As a result it is able to operate at 12 times the scale of the first company, with the same amount of Capital, and to make 12 times as much profit.

On this basis, it can be seen straight away, what is wrong with very big Capital projects as a means of encouraging growth. Even though the State itself, might not be selling the output of such a project, the project itself will have Value (or should have if it is well considered) which will re-enter the circuit of Capital. The longer it takes for a project to be completed, the longer it is before this Value enters the Circuit of Capital. It, therefore, becomes a drain on growth rather than a stimulus to it.

Suppose, the State proposes to build a bridge. It will cost £1 million. When the bridge is completed, it will save Capital in the country, £200,000 a year in transport costs. In order to cover its costs, the State taxes Capital. If the bridge is completed in a year, Capital will save £200,000, which can be used for investment in other projects, or to purchase additional labour-power rather than petrol, and will then make profits on this new investment. But, if it takes 5 years to build, then that is five years during which Capital is diverting resources that could have been used elsewhere, and during which time it is seeing no return for its expenditure in the shape of lower transport costs.

If the intention is to undertake Capital projects to stimulate growth, therefore, the emphasis should be not on large or very large scale projects, but on projects that can be completed as quickly as possible, whose benefits can be quickly realised, and consequently where the resources used to undertake them can be recovered to be used for yet further projects. In fact, the best expenditure for that purpose may not be Capital Spending at all, but Revenue Spending that facilitates the employment of people on projects the benefits from which can be realised quickly.

Suppose, for example, you paid out £10 million to employ lecturers, who could train, 5,000 people within 6 months to become computer games producers. If these 5,000 people then were employed, and in the next 6 months produced computer games worth £100 million, then it can be seen how the proceeds could be used to continue the scheme. Out of this £100 million, £50 million might go to wages, whilst the other £50 million goes to surplus value. This is £100 million of value put into circulation that otherwise would not have happened. But, at the end of this six month period, out of this £100 million, the State only needs to raise 10% in tax from it, to cover the £10 million for wages for lecturers, who can then train a further 5,000 people and so on.

Of course, that assumes that these 5,000 people could find employment, but areas such as games production are a growing industry, so there is less difficulty in that respect than if people were being trained for other jobs. But, in that respect, the type of spending suggested by Cable, of house building could offer a solution, because the State could directly invest to produce Council Housing. That could be combined with taking on additional lecturers to train workers as electricians, brickies, plumbers and so on. If conducted on a large enough scale, it could also enjoy economies of scale, and having the added benefit of reducing house prices. The problem is that such programmes usually get bogged down a mire of bureaucracy, so large amounts of funding could be set aside for housebuilding that could be used elsewhere, but not actually get into circulation for several years.

Far better actually, would be to ensure that money went out to complete all of the minor roadworks, etc. that need doing, and which would have an immediate benefit in speeding up traffic. The other area, where a rapid benefit could be obtained would be in developing an ultra-fast broadband network across the country. The government's proposals are woefully inadequate both in terms of timescale, and the speeds they are proposing. One village frustrated with the pace has already clubbed together, and laid its own fibre optic cable giving villagers 500 mbps. In the modern economy, value is produced via these kinds of industries. A concerted drive could establish this kind of broadband across the whole country inside two years, and would be creating new value in the economy immediately.

But, on the basis of the incompetence demonstrated by the Liberal-Tories so far, and their dogged determination to stick with failing ideological policies, there is little hope they will get it right. Those villagers had it right. We shouldn't rely on the Capitalist State or bourgeois governments, we should start providing the solutions ourselves.

1 comment:

David Timoney said...

Politicians tend to have an inflated sense of their own historial importance, hence the tendency to prefer "legacy" projects like new roads or railways or bridges. You'll get better results filling in potholes than building new roads. Not only is this quicker to deliver, but a higher percentage of spend goes to labour and is thus recycled into additional demand.

Similarly, insulating/damp-proofing existing homes, and repairing derelict or unfit homes, should be prioritised over new builds. While the fibre upgrade for broadband is strategically worthwhile, you'd also do well to spend on local loop upgrades (i.e. the wire into the home), as many areas "upgraded" by BT to FTTC (fibre to the cabinet) actually have spotty coverage due to old pole wiring.

There's an object lesson from history that politicians regularly misrepresent, namely the experience of the public works programmes in the USA in the 1930s. Despite a huge investment in both short (WPA) and long-term (PWA) projects, the immediate impact was palliative at best, shown by the recession that resulted after the premature scaling back of investment in 1937. The real benefit was that the WPA schemes tided workers over till the rearmament boom in the late 30s created new jobs, while the big PWA schemes (roads, schools, dams and bridges) provided the world-class infrastructure that underpinned the US boom in the 40s and 50s.